Economy-wide Impacts of Tariff Cuts and Productivity Improvements in Agriculture: A Computable General Equilibrium (CGE) Analysis for Sri Lanka

Abstract

This study provides a quantitative assessment of the likely economy-wide impacts of tariff cuts and productivity improvements in agriculture for Sri Lanka. A static, multisector, Computable General Equilibrium (CGE) model, using the Supply and Use Table (SUT) of 2010, was employed highlighting specified agricultural sub-sectors and their interactions with other production sectors in the economy. Constructing a CGE model entailed the development of a Social Accounting Matrix (SAM) to represent the Sri Lankan economy. The SUT, household income and expenditure survey, economic stat of the Department of Census and Statistics, and economic data library of the Central Bank of Sri Lanka were used to develop the SAM. The SAM was used to calibrate the CGE model. Coding and operationalization of the CGE model were executed using the PATH solver of the General Algebraic Modeling System software using a modified version of the standard CGE model. Production was specified as a Constant Elasticity of Substitution (CES) production function whereas consumption was specified as a Linear Expenditure System (LES). Using the HIES data, the LES was estimated using a seemingly unrelated regression model. The CGE model included a representative household, two factors of production i.e., labor and capital, commodities, activities, the government, savings, and investment and trade. Productivity improvements in the selected agricultural subsectors lead to a significant positive response in the paddy, vegetables, coconut growing, and livestock sectors. However, productivity improvements in the specified agricultural sectors lead to a decline in demand for labor because of improved primary factor productivity and the decline of market prices. A cut in prevailing tariffs in agricultural industries shows negative impacts on households as a whole.