Sri Lanka is staring at an economic emergency. Country’s forex reserves have dropped more than 60% from over $7.5 billion in 2019 to around $2.8 billion in July this year. Food inflation in the country has reached double digits and its currency, Sri Lankan rupee, has fallen by more than 7% against the US Dollar. Country is also staring at a massive food shortage. Consequently, Sri Lankan president Gotabaya Rajapaksa passed emergency regulations in the country last month to control the prices of essential commodities and stop hoarding.
At the root of this economic catastrophe is one man’s “vision” for making Sri Lanka the first country in the world to practice organic-only agriculture. On 29th April of this year, Rajapaksa announced that Sri Lanka will do only organic farming without consulting agriculture scientists or economists. This happened in a country where an island-wide survey suggested that 90 percent farmers rely on chemicals, only 20 percent had any knowledge to transition to completely organic farming.
The Law of Unintended Consequences
The law of unintended consequences suggests that “actions of people — and especially of government— always have effects that are unanticipated or unintended.” Vijay Kelkar and Ajay Shah in their book, In Service of the Republic, argue that “a government intervention that is intended to have a certain outcome will very often end up yielding a very different outcome.”
In the domain of public policy, we always encounter and are witness to the law of unintended consequences. What’s happening in Sri Lanka is not new. Governments all over the world, driven by different incentive structures, resort to policies which may be well-intentioned, but often cause more harm than good.
Governments tend to rely on price controls, quotas, subsidies, and import substitutions. All of these have the potential to distort markets. For instance, in India, Prohibition on liquor in states like Gujarat and Bihar, taxes and cesses on cigarettes, et al. have all had unintended second or third order effects.
The Unintended in Sri Lanka’s Organic Farming Push
The law of unintended consequences often stems from ignoring the second order effects of a problem. Focusing on the “seen” while ignoring the “unseen” as famous French economic journalist Frédéric Bastiat had described it. Let’s see in detail what were the unintended consequences in the case of Sri Lanka’s push for organic.
The unintended #1: Loss in outputs and threat to food security
The ban on organic farming has resulted in huge loss in farm outputs. On an average, crops in Sri Lanka have witnessed reduction in yields somewhere between 19% and 25%. The loss of farm outputs has also significantly hampered the exports in the island region.
Tea is Sri Lanka’s biggest export, bringing in over $1.25 billion/year. The ban on chemical fertilizers, on which more than 90% of farmers depend, will now cut the average annual production to about 150 million kg from the current production of 300 million kg. This means losing 50% of the crops.
This loss of farm outputs have caused massive food scarcity and threat to food security of the nation.
The unintended #2: Increase in input costs hurting demand and exports
Moving to organic has increased the input costs in Sri Lanka. Organic farming has exponentially higher monetary input costs due to a lack of usage of pest and pathogen-resistant chemicals, which increases manual labour. Also the processing and marketing costs are higher for organic productions. These higher input costs have hurt demand and exports, which in turn have wreaked forex havoc and currency depreciation in this island nation.
The unintended #3: Where is the required farmland?
Eminent researchers have also noted that organic farming demands an increase in farmland due to its low yields. This results in deforestation, leading to large scale extinction of species and a rise in greenhouse emissions. For Sri Lanka, being primarily a tourism driven economy, that would mean disaster.
The unintended #4: Where do we get so much organic manure?
Currently, Sri Lanka can produce 2-3 million tonnes of organic manure, generated through municipal organic waste. Organic paddy alone, however, will require 5 million tonnes and tea will require another 3 million.
Conclusion
Nobel laureate Amartya Sen argues that democracies don’t face famines as the institutions in a democracy ensure accountability of political leadership. Sri Lanka, however, has virtually one party rule now. All top 5 positions in the government are occupied by the Rajapaksa family. Unsurprisingly, the government has the ability to act dictatorially on almost all levels. This explains why such a radical move with far-flung consequences could be taken.
The important public policy lesson is that all actions have consequences, both seen and unseen. The seen effects come intuitively to most, even policy makers. The unseen, which are primarily second and third order effects, tend to appear with time. While these may be unintended, they are not necessarily unpredictable. Therefore, all policy actions should be subject to careful evaluation prior to roll out.
Read more: Basic Economics for Battling India’s Hepatitis B Crisis
Post Disclaimer
The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.
