Advocata’s comprehensive report on Sri Lanka’s tea industry
View(s):Advocata Institute recently released its latest report titled “Market Competitiveness of the Tea Industry of Sri Lanka” with the report authored by Sudaraka Ariyaratne, Research Consultant at Advocata Institute.
In a media release the institute said the report begins with an introductory chapter that details the historical evolution of the island’s tea industry. The report finds that the present standing of the industry in the context of the international market is not too grim, but argues that issues related to the labour market, capital investment, value addition, and quality control limit the industry’s competitiveness in the global stage. The rest of the report takes the form of four discussion papers, each on the four areas of concern listed above, that present an economic theory-based lens to approach these issues, and discuss potential solutions.
The attendance-based minimum wage model is partly responsible for the high costs of production of Sri Lanka’s Regional Plantation Companies (RPCs), and their low productivity, helping make Ceylon tea uncompetitive in the international market. In contrast, the smallholder sector, with its market-based wage model, stands out as a more efficient counterpart. Despite being billed as a guarantor of a living wage, the minimum wage model imposes a ceiling on the earnings of estate workers, and also helps preserve the traditional power structures of tea plantations, in which estate workers sit at the bottom. Discussion Paper 1 establishes an economic framework to analyse the minimum wage model, and explores the strategies that RPCs could pursue, with the help of policymakers and other stakeholders of interest, to enhance the industry’s competitiveness under the minimum wage model.
Discussion Paper 2 establishes an economic framework to discern the causes of low levels of long-term capital investments in Sri Lanka’s tea estates. The paper finds that to varying degrees, the low rate of returns, uncertainties about the appropriability of returns, and low savings prevent RPCs and smallholders from embarking on long-term capital investments into tea lands.
Discussion Paper 3 explores what it means to add value to made tea, what explains the present levels of value addition in the Sri Lankan tea industry, and how profits from value addition are distributed along the value chain. Additionally, the paper establishes an economic framework to approach value addition from a strategic point of view, with the aim of optimising returns to the local industry.
Discussion Paper 4 establishes an economic framework to understand how asymmetric information on quality negatively impacts the market for Ceylon tea. The paper also explores several strategies, both regulatory and incentive-based, that policymakers and industry stakeholders may pursue to eliminate asymmetric information from the market for Ceylon tea, in order to enhance the premiums that the industry receives.
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