We are still largely an agricultural society although the Western Province is highly urbanized and service oriented. If development is to benefit the people we have to improve agriculture. But we are largely a country of small farmers and average size of the land holding is small. With the increase in population these small plots have become more and more subdivided reducing their size even further. In the past we spent enormous amounts of money in developing the Dry Zone where irrigated cultivation of paddy could take place with better management of water. Rain fed cultivation is subject to the vagaries of the weather. So today much of our paddy production comes from the Dry Zone.

But many farmers do not make a sufficient income from agriculture and they sell their arable land and move to take jobs in the towns. But the urban economy is not based on manufacturing as in the traditional model of development. The Industrial Revolution has largely by-passed us and we have become a service oriented economy where 60% of the Gross Domestic Product is created by services. This is because of faulty Marxist oriented economic policies we followed in the past. The result was that direct foreign investment did not play a role in our economy as in East and South East Asian economies like Malaysia or Thailand or Indonesia.

Yet there is economic scope for the development of agriculture and any such development policies have to cope with the problem of smallness in our agricultural sector. Any development of industry will have to come from the processing of agricultural products and the processing of our mineral resources.

We have seen a transformation from subsistence agriculture to market oriented agriculture. This of course is the way forward. Farmers must produce an economic surplus which has to be maximized. But their produce must be sold in the market at remunerative prices. Government pricing policy for agricultural produce is being torn between protection for the farmer/ producer and seeking low prices for the urban consumer. We have to decide between them and refrain from importing each time that the agricultural prices rise in the market. Farmers are also driven by the profit incentive and they have to take risks in investing like every other producer. They do not know what the forward prices for their produce will be when the harvesting time comes and they will form their price expectations based on past experiences. What is required is to build a buffer stock during the plentiful years and immediately after the harvest and keep up the price level. The government is depending on its own organizations to carry out this task although over the years they have failed due to corruption, mismanagement, politicization and excessive bureaucratic forms and procedures.

The small farmer has also to obtain credit at reasonable prices paying less by way of risk premium for their borrowings. The problems of the small farmers are rooted in the lack of credit and inability to exercise any bargaining power in the free market economy.

The usual solution to these problems is the organization of farmer co-operative societies. Our co-operative movement was largely a state driven one and did not arise from local consumer or producer initiative of its members. During the Second World War Sir Oliver Gunatilleke organized the Consumer Co-operative Societies to distribute rationed consumer goods. They could never stand on their own feet without state support. They were unable to mobilize the support of their membership and came to be dominated by a few persons like the chairman and the manager of the society who abused their power for personal benefit.

What do we do to change the situation? Leftist ministers like T. B Ilangaratne and Phillip Gunawardene thought the movement should be cleansed by greater state control via the Registrar of Co-operatives and the Department of Co-operatives. So the boards of Co-operative Societies were changed wherever there were complaints against them. But the remedy for the failures of democracy is not less democracy but greater democracy, not state control but democratic control by the membership. In 1956 the political and social revolution led to the politicization of all state institutions, a tendency that is still with us. This was the direction taken by the former Communist parties of Russia, China and Eastern Europe. It has failed repeatedly but our politicians are enamored by it because it gives them power.

The Central Bank acting on the pressure from the bankers in the City who dominate the banking scene want the small banks to be consolidated with the big banks which are well capitalized. They argue that small banks are a threat to financial stability. But the recent financial meltdown showed that big banks can fail and now the U.S Congress is studying how to deal with the problem of a bank being too big to fail. They will no doubt come up with a solution. Some years ago I met an economist who was with the LTTE. He argued that the commercial banks of the south were not desirable for the north. He pointed out that these banks collect cheap deposits from the people of the North and then use the funds to lend to the corporate sector in the South.

He urged that if local banks were established, they should disburse the savings of the people of the north in the north itself. This would promote the development of the area with the savings of the people of the area. I argued that the big banks were doing such lending in the local areas from where they mobilize funds. He countered that the management of these banks is highly centralized and that the local branch managers have little discretion to lend to local enterprise. There is much validity in the argument and the answer to the problem of providing credit for the small farmers and craftsmen is not through big banks based in the capital city but through locally established banks where the management, being local, know the customers who wish to borrow.

Any lender must know the borrower and be able to assess his creditworthiness not on the basis of the collateral offered but on the basis of his income, his honesty and business acumen etc. So there is a strong case for small localized banks. Of course they have the problems arising from smallness. They cannot mobilize enough funds. But the answer to this problem is not to close them down or amalgamate them with the big banks but rather provide some link-ups with the bigger banks to obtain finance through some credit instruments and facilities which may have to be guaranteed by the Government or the Central Bank.

Unfortunately the Central Bank has instead of developing the small local banks sought to amalgamate them with the big banks. In the UK the building Societies were allowed to become banks accepting deposits and providing the usual banking functions. Earlier we had the co-operative banks. There were co-operative credit societies which drew funds from co-operative banks with the Co-operative Federal Bank at the apex. Minister Ilangaratne set up the People’s Bank by absorbing the Co-operative Federal Bank and making the Co-operative Societies the shareholders of 50% of the equity. So far so good! The Peoples Bank was meant to provide funds for the Co-operative Societies. Alas it lost its way when the minister started giving directions to the Chief Executive to give loans to the political supporters of the SLFP. Well known businessmen who supported the SLFP were provided big loans ignoring the canons of prudent banking. Several of their loans had to be written off by the People’s Bank which has seen severe erosion of its capital. The Treasury had to bail out both the state-owned banks because the non-performing loans had eroded their capital. The People’s Bank which was intended to provide credit to the Co-operative sector ended up as ‘Some People’s Bank’.

Politicization will destroy any activity whether it is banking or cricket. Look at the performance of MP Sanath Jayasuriya who represents the Sri Lankan team on the basis of political affiliation rather than cricketing ability.

The answer to the problems of the small producer who lacks market power or bargaining power is to form a larger economic unit such as a co-operative society. Such a union of small producers becomes a source of countervailing power. An agricultural co-operative, also known as a farmers’ co-op, is a cooperative where farmers pool their resources in certain areas of activity.

There are agricultural service co-operatives, which provide various services to their individually farming members, and agricultural production co-operatives, where production resources (land, machinery) are pooled and members farm jointly. Agricultural production cooperatives are relatively rare in the world, and known examples are limited to collective farms in former socialist countries and the kibbutzim in Israel.

There are two primary types of agricultural service cooperatives - supply cooperatives and marketing cooperatives. Supply cooperatives supply their members with inputs for agricultural production, including seeds, fertilizers, fuel, and machinery. A recent news report in the Lakbima referred to the Kantalai Farmers society producing and selling seed paddy to the farmers in the area. The seeds cost the farmers very much less than the price of seed paddy from the private sector.

Marketing cooperatives are established by farmers to undertake transport, packaging, distribution, and marketing of farm products (both crop and livestock). Farmers also widely rely on credit cooperatives as a source of financing for both working capital and investment.

Agricultural cooperatives are therefore created in situations where farmers cannot obtain essential services from the private sector at all or cannot do so at reasonable prices. The former situations are characterized in economic theory as market failure. The co-operative or other forms of farmer organizations allow farmers to build countervailing market power to obtain better terms in economic transactions with the private sector.