the sri lankan tea industry

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Executive Summary The world tea production has been increasing by a rate of 4.2% since the year 2009 with over 4.1 million tons in the same year. Black tea output has been increasing to 5.5% as evident in the huge record prices. Furthermore, green tea output has increased by 1.9%. The growth has been due to the fact that Kenya and Sri Lanka, two of the largest tea exporters, have been able to increase their output in an efficient and effective manner. Argentina and Uganda have also exhibited a significant increase in tea export while China has remains the largest producer of tea in the entire country. China was found to have produced 1.4 million tons of tea in the year 2009. India’s contribution towards the tea market has been declining with only 0.97 million tons in the year 2009. The international tea market is highly competitive as world tea exports grew by 8.5 percent in the year 2009. The volume was estimated to be around 1.68 million tons in the year 2009. Tea consumption has been rapidly increasing as it is a major beverage in different parts of the world. Growth has been fueled with an increase demand in China due to higher per capita income levels. The tea industry has been highly dependent upon the external markets for its viability and profitability. The Sri Lankan tea industry has been facing problems because of external and internal factors. These include the lack of an appropriate development model; the undervaluing of agriculture as a development priority; the weak nature of the state; the inequitable distribution of land, which marginalizes the highly productive small farmers and negates their contribution to national production output; and an overwhelming inertia and lack of political will for change. These shortcomings are anathema to sustained national development and have sprouted a number of constraints that perpetuate underdevelopment and external dependency.

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Page 1: The Sri Lankan tea industry

Executive Summary

The world tea production has been increasing by a rate of 4.2% since the year 2009 with over 4.1

million tons in the same year. Black tea output has been increasing to 5.5% as evident in the

huge record prices. Furthermore, green tea output has increased by 1.9%. The growth has been

due to the fact that Kenya and Sri Lanka, two of the largest tea exporters, have been able to

increase their output in an efficient and effective manner. Argentina and Uganda have also

exhibited a significant increase in tea export while China has remains the largest producer of tea

in the entire country. China was found to have produced 1.4 million tons of tea in the year 2009.

India’s contribution towards the tea market has been declining with only 0.97 million tons in the

year 2009. The international tea market is highly competitive as world tea exports grew by 8.5

percent in the year 2009. The volume was estimated to be around 1.68 million tons in the year

2009. Tea consumption has been rapidly increasing as it is a major beverage in different parts of

the world. Growth has been fueled with an increase demand in China due to higher per capita

income levels. The tea industry has been highly dependent upon the external markets for its

viability and profitability. The Sri Lankan tea industry has been facing problems because of

external and internal factors. These include the lack of an appropriate development model; the

undervaluing of agriculture as a development priority; the weak nature of the state; the

inequitable distribution of land, which marginalizes the highly productive small farmers and

negates their contribution to national production output; and an overwhelming inertia and lack of

political will for change. These shortcomings are anathema to sustained national development

and have sprouted a number of constraints that perpetuate underdevelopment and external

dependency.

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The internal factors include inadequate and/or inappropriate use of technology and too much

emphasis on outdated, unable to compete traditional export products and too little on the

country’s unique non-traditional crops. There has been inadequate emphasis placed on research

and development (R&D) and lack of irrigation, especially for the farming majority toiling in the

hills. There is poor farming infrastructure, especially roads for transporting goods from farm gate

to market. Furthermore, there is high rate of crime, especially predial larceny and seemingly

intractable dependence on imported food, especially carbohydrates (i.e., rice, cornmeal, and

flour) for domestic consumption. Government policies are inadequate such that government

shortsightedness, inaction, and/or malfeasance along with government’s downgrading of tea to

prioritize tourism and services. There is also private sector apathy and dependence on

government to mobilize growth when industry, not government, should be the driver of

economic development. The government’s rapid acceptance of structural adjustment

conditionalites has marginalized agriculture while commodity marketing boards weakened by

structural adjustment commitments. There is high cost of capital due to prevailing high interest

rates which makes attaining funding for retooling prohibitive and high cost of inputs, most of

which must be imported.

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Introduction

The Sri Lankan tea industry is one of the key contributors to the country’s GDP amounting to

roughly 12% of GDP and is the world’s fourth largest exporter of tea. Tea manufacture

serves as one of the main sources of income to laborers and currently employs

approximately 1 million people directly and indirectly in Sri Lanka. This also solves the

huge employment issue in our country. The plantation companies are currently facing

challenges in meeting profit targets due to a number of reasons like increasing labor wage,

interference from trade unions, competition from other countries and lack of support from

the government. This research aims to identify these issues and find suitable solutions to

assist the companies to survive and keep the tea industry alive in Sri Lanka. One of the

reasons for fierce completion is that the strength and presence of the Kenya & Turkey in the

market place. It is evident that some of the Asian countries such as China and, India also

playing a major role in the market in terms of lower prices due to lower production cost and

higher efficiency. The unstable economic condition in the Middle East and Europe and

movements and volatility in exchange rates will play a major role in the global market in

terms of pricing the products hence forces to remain competitive to secure the export

volume.

Aims and Objectives

The following are the aims and objectives of this dissertation:

• Analyzing the external and internal factors that are impeding the development of the Sri

Lankan tea industry

• Understanding the reasons that has prevented Sri Lankan tea industry from being

profitable and competitive

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• Finding the basic problems that the Sri Lankan tea industry faces

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Literature Review

Sri Lankan Tea Market

Sri Lanka is a major exporter of tea in the entire world with an estimated 2% of its total GDP. It

generates approximately $700 million annually which means that it is a significant source of

foreign exchange for the country (Anderson & Tyers, 2009). One million people are currently

employed in this sector with over 200,000 on tea plantations and estates (Wickramasinghe &

Cameron, 2004). It is the world’s fourth largest exporter of tea in the world because of its

historical importance. Tea production has been major source of foreign exchange for the entire

country. During the 1990s, Sri Lanka had a total market share of 23% of the total tea sector in

the entire world. In recent years, this has declined because of an array of external and internal

constraints. A study conducted in the year 2009 found that the local tea industry has been beset

by poor management, rising labor costs, and increasing competition from major tea producers.

The study also found that productivity has lagged because of the absence of sound planning and

preparation in the industry (Anderson & Tyers, 2009). Sri Lanka’s humidity and cool

temperatures make it an ideal market for producing tea. It has rainfall in the central areas which

is a favorable factor for growing tea. Tea was introduced in the country in the year 1852 by

James Taylor who was a British planter. Sri Lanka’s major markets for export of tea are the

Central Asian countries as well as former Russian republics. UAE, Russia, Syria, Turkey, Saudi

Arabia, Egypt, and Japan are also major importers of Sri Lankan tea. Sri Lanka has been trying

to modernize the tea sector so that it can ensure high levels of success within a short period of

time. It has been striving to create a modernized sector which can lead to long term levels of

success by using an innovative and creative approach.

International Tea Market

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The world tea production has been increasing by a rate of 4.2% since the year 2009 with over 4.1

million tons in the same year (Nagoor, 2009). Black tea output has been increasing to 5.5% as

evident in the huge record prices. Furthermore, green tea output has increased by 1.9%. The

growth has been due to the fact that Kenya and Sri Lanka, two of the largest tea exporters, have

been able to increase their output in an efficient and effective manner. Argentina and Uganda

have also exhibited a significant increase in tea export while China has remains the largest

producer of tea in the entire country. China was found to have produced 1.4 million tons of tea in

the year 2009. India’s contribution towards the tea market has been declining with only 0.97

million tons in the year 2009 (Nagoor, 2009). The international tea market is highly competitive

as world tea exports grew by 8.5 percent in the year 2009 (Nagoor, 2009). The volume was

estimated to be around 1.68 million tons in the year 2009. Tea consumption has been rapidly

increasing as it is a major beverage in different parts of the world. Growth has been fueled with

an increase demand in China due to higher per capita income levels. The tea industry has been

highly dependent upon the external markets for its viability and profitability.

The world tea economy is highly robust and dynamic because of the distribution of plantations as

well as the consumption patterns. The demand and supply of tea is highly divergent in different

parts of the world (Ridwan et al, 1997). Trade agreements as well as policy suggestions have also

been identified as being the major factors that impact the performance of the world economy.

Studies have found that on a per capita consumption basis has not led to a corresponding increase

in production of tea in the world. Tea plantation industry is a highly export oriented industry

while the fact is that tea producing countries do not consume tea because of its inferior quality.

The tea supply is inelastic when compared with the price changes that have occurred. This is

based upon the supply demand analysis. The price elasticity has been found to be very low while

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the same conclusions have been derived for income elasticity. The slow response that has

occurred due to the supply of tea creates problems in terms of supply and price. These cyclical

fluctuations tend to cause negative implications in major countries (Amarasinghe, 1993).

Studies have also tried to find out the ways that tea industry can be improved with an emphasis

on output and cost (Amarasinghe, 1993). Technological innovations while maximum utilization

of production factors can lead to long term development in the future. Labor costs in the tea

plantation economy have been found to very high which means that machinery is needed for

reducing costs so that economies of scales can be achieved within a short period of time. The

amalgamation of small units into larger ones has also been suggested as an important one in the

development of robust features for success. Furthermore, it is through the use of innovation and

creativity that success can be attained (Amarasinghe, 1993).

Duties and taxes on tea industry machinery can also be rationalized while social overheads have

to be enhanced in order to ensure the development of the plantation economy. Empirical studies

have also found that low rate of profit together with rising costs and reduced prices have

negatively impacted the tea industry. The value of tea companies has progressively declined due

to the array of external and internal variables. Tax structures for instance have been identified as

increasing costs. Replantation along with modern technology continues to be neglected which

creates negative impact upon major tea exporting economies. Hence it is through the use of

innovation and creativity that success can be attained within a short period of time. The market is

also found to be lacking an efficient marketing strategy that can lead to stabilization. Exports

need to be promoted without curtailing domestic consumption. Furthermore, studies have argued

that it is vital for allowing small planters to work together so that they can achieve high levels of

economies of scale (Amarasinghe, 1993).

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Tea Sector Market Structure

The tea sector is very important for developing countries because it provides jobs to millions of

people. The Indian tea industry for instance is the second largest employment provider in the

country after manufacturing. The nature of the industry is such that some people work as casual

workers or in smallholdings which means that it can generate employment for millions of people.

For some countries like Kenya and Sri Lanka, tea is an important source of foreign exchange.

Tea exports contribute towards 2% of the GDP for Kenya and Sri Lanka (Sundaram, 2009).

The international market structure of the tea industry is complex because of the huge number of

actors that are involved in the supply chain management system. The system starts with workers

and smallholders who collect and select the tea leaves. Large-scale tea plantations hire these

workers because they have been the traditional source of producing tea. Smallholders have

tended to employ workers but large plantations can be larger than 8,000 hectares. Such

plantations attain economies of scale because of their ability to focus only on tea. Many such

large plantations are part of large corporations in the entire world. The process of tea

manufacturing occurs in factories that might be present in the estate or private enterprises.

Plantations that have 10-12 hectares of tea are defined to be small growers but they play a

leading role in countries like Sri Lanka and Kenya (Sundaram, 2009). In Sri Lanka, small

growers contribute towards 65% of the total production. The smallholder sector has grown

considerably because it offers an attractive option for small workers in terms of work and

income. Farmers also do not need many investments while the risk of crop failures is relatively

small. The farmers can sell the leaves to collectors and plantations. The rising price in production

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and volatile international market prices means that the smallholder tea production model is

gaining popularity in several countries.

Global tea production has created auctions where trading occurs. Private sales account for 30%

of worldwide tea production. The main auction markets are found in Sri Lanka, India, and

Kenya. China and Turkey are major tea products but they do not have auction system. The

supply chain management system in the tea sector is similar to that of a vertically integrated

production chain. Companies have the ability to control the production stages upstream and

downstream (Sundaram, 2009). The link between manufacturers and producers is direct. Tea

packers like Unilever and Tata Tea are the major players in the industry. They have the ability to

dominate the market as they can influence the transport companies while obtain supplies from

their plantations. Tea is exported with plucking and primary processing occurring in the major

tea producing countries. Blending and packaging together with marketing occur in team

companies that are found in buyer countries. The majority of profits are obtained by the

companies involved in the tea industry (Sundaram, 2009).

Comparative Studies

A number of comparative studies have been conducted about the tea sector in other countries like

Kenya. A study conducted found evidence that the Kenyan tea industry has been plagued by

rising costs of production (Jayasuriya, 2010).

Labor for instance has increasingly become expensive with the passage of time. The study found

evidence that 43% of total costs are related to labor in Kenya (Jayasuriya, 2010).

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The study also concluded that unstable global prices of tea were major problems for the Kenyan

tea industry. The price of tea in 2009 for Kenya was considered to be USD1.7 per KGS as

compared with USD 2.1 in the year 2000. Another study conducted by the University of

Michigan in the year 2009 found that some countries like China have increased their tea

production from 24% of global tea production to 29% by the year 2009 (Weerahewa, 2010).

On the contrary, Sri Lanka witnessed a steady decrease in tea production from the years 2002 till

2009. Kenya was found to witness an increase in tea production but exports continue to lag

behind the process of production. Another study conducted by researchers sought to compare

the Sri Lankan and Indian tea industries. The results were that the Indian tea industry has sharply

fallen behind as evident in the fact that it currently only produces 12% of the global tea

production. Furthermore, this is a decline from 26% in the 1980s which is very significant given

the huge nature of the Indian tea industry (World Bank, 2010).

The study found evidence that the Indian tea industry has been declining because of increased

competition, rising labor costs, and poor management in Indian tea plantations. Another study

was conducted which examined the dynamics of the international tea industry by comparing the

nature of the tea industry in the major tea exporting countries: India, China, Kenya, Sri Lanka,

and Indonesia. The study concluded that these countries produce around 80% of the total world

tea production. The countries compete with each other by reducing prices. This can impact the

tea exports of different countries (World Bank, 2010).

Another critical factor impacting the tea exporting countries is the fact that import by developed

countries has largely declined in the past few years. This is because the demand for tea is based

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upon the income elasticity of demand. The price of tea is inelastic which means that negligible

income elasticity for developed countries and high for developing countries has been found.

Globalization and Trade Liberalization

Global financial markets have emerged in different parts of the world which provide better

access to external financing for corporations and local borrowers. The creations of world

organizations which regulate the relationships between nations and protect their rights have

sprung up due to globalization. China is an amazing success story of globalization because of its

tremendous economic growth rate. In recent years China’s economy has rapidly grown. This

rapid growth of economy is the important point in the field of economic development which has

been acknowledged by the international community. The UN says that China is the

backbone of Asia’s economic development. This statement is enough to

tell that China is playing an active role in contributing to the world

economy. China’s rapid economic growth has made a huge impact on

the world’s economy in stabilizing and recovery it. China is the globe’s

best commodity market (Sundaram, 2009). Globalization has helped in the creation of an

integrated world capital market. This has been facilitated through the development of financial

instruments in a consistent manner. As a result, high quality instruments have rapidly gained

popularity by connecting industrialized and emerging economies. The European Monetary Union

(EMU) is an example of the impact that a single integrated capital market can have upon member

states. Exchange rate variations have been eradicated and interest rates have registered a

significant decline.

Theoretical Framework

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Sri Lankan tea plantations have been unable to remain competitive in the current global

environment. A theoretical framework needs to be developed which can be used to enhance the

competitive edge of tea plantations. This can be done by identifying the key strategies which

help organizations to remain successful in the global environment. Furthermore, the theoretical

model will help in creating a framework that can understand the external and internal factors that

impact the development of the Sri Lankan tea sector.

Strategic Management

Organizations must be able to develop their strategies as a means of establishing long term

targets and goals. They should be able to identify the course of action that can help them to

achieve those targets. Finally, it is essential for organizations to pool adequate resources that play

a major role in achieving key objectives. Strategy should be able to assist managers in

developing short and long term solutions to organizations that are facing financial crisis.

Managers must recognize the need for turning the organization when it is faced with critical

problems. There must be a system that can successfully integrate acquisitions and enhance

performance (Koch, 2000).

Strategy should be able to assist managers in defining the different components of the business.

These components must be upgraded that can lead to long term success. Strategy should be able

to ensure that organizations can recognize the areas that are the most profitable. Additionally,

organizations have to recognize the areas where effort and cash need to be invested in order to

ensure long term success (Levy, 1998).

Organizations should be able to utilize strategy so that any deficiencies found in the work

process can be remedied in an efficient and effective manner. Finally, strategy plays an important

role in enhancing the institutional culture and competencies so that it can become competitive in

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nature. Strategy should be employed in order to enhance the performance of business units by

implementing financial control that is based upon established methodologies and practices. Other

empirical studies argue that strategy should be with concerned about the scope of the

organizational activities. The strategic vision should be based upon integrating organizational

activities with its resource capability. Moreover, the major decisions should be based upon

adequate allocation of resources (Levy, 1998).

Strategic vision is attained only when organizations are able to craft a superior strategy that

focuses on operational decisions which are key element in order to remain competitive in the

market. Corporate leadership should be able to affect the long term direction of the organization

while they should be aware of the implications of the long term strategies.

Strategy also involves having a robust and versatile plan. The strategic planning process must be

applied at corporate, operational and functional levels. Strategic planning should ensure that

goals are divided at various levels while strategies are aligned with the overall business

framework. This helps to achieve the long term goals of the organization. Strategic analysis is

another important approach because existing techniques must be used to evaluate long term

projects (Nyangito, 1999). The decision making guidelines and rules are the most important

aspect of the development process. The need for direction and focus in new activities can be

achieved only when they are matched with the current ones. Strategic decisions need to be

according to the environment. Strategy should be able to create a common thread that ensures the

direction for the institution. Studies have documented that organizations must be able to develop

strategic management because of several factors (Porter, 1990). Firstly, organizations must be

proactive in anticipating new threats and opportunities in the environment. Secondly, they should

implement effective strategic management so that the employees can have a powerful incentive

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in order to achieve basic goals. Thirdly, research in strategic management must be enhanced so

that organizations can be managed in an effective manner. Finally, strategic planning increases

the chances of success for organizations.

Empirical studies have found evidence that organizations have managed to incorporate strategic

management as part of their management programs. A corporate strategy is important for the

survival of organizations (Stevens, 2001). The benefits are that the workforce can work towards

strategic objectives in an intelligent manner. Furthermore, well-crafted strategic principles can

help to ensure that management is able to implement advanced decisions in an efficient manner.

Strategic principles help the organization to grow in an efficient manner. It helps to provide

continuity when organizations are faced with external crisis.

Trade Liberalization and Economics

Developing economies like Sri Lanka often rely on commodities for earning foreign exchange

but this can be a problem because of the fact that such industries remain vulnerable to different

types of problems. Specific types of commodities make countries vulnerable to external

economic shocks. Primary commodities are the major source of export revenues for many

countries. 95 countries in the developing remain dependent upon commodities for their export

earnings. The indigenous industries in such countries are vulnerable because of international

commodity process that remains highly volatile in the short to medium terms. Such variance can

be as much as 40% in one fiscal year (Anderson & Tyers, 2009). Price volatility has been

increasing with the passage of time. Macro-economic instabilities and complicated

macroeconomic management can be the cause that indigenous economies are unable to make

their industries competitive and profitable. Erratic movements with respect to export revenue as

well as instability in foreign exchange have been identified as the major cause. The huge share of

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primary goods that are found in exports makes it highly vulnerable to price shocks. This can

complicate the state of affairs that exists in developing countries. It can create negative outcomes

that have the potential to make indigenous sectors highly vulnerable to external fluctuations.

Vulnerability to Global Market Factors

Developing countries that sell agricultural products are vulnerable because their sectors are

unable to respond to the difficulties of the global system. Globalization has now created extreme

pressures in the form of highly competitive markets. Removal of trade barriers along with an

increase demand for higher quality products and higher standards has meant that indigenous

economic sectors are vulnerable (Anderson & Tyers, 2009).

Moreover, trade preferences have eroded while the need to comply with new trade rules means

that producers in the developing world are unable to maintain competitiveness. World market

conditions are responsible for the state of the agricultural sector in many developing countries.

The small economic size of developing countries as well as their dependence upon imports

means that they are highly vulnerable to shocks in the external environment. These problems

have increased because the real prices of commodity exports have been decreasing since the

early 1990s. This means that the incentives to modernize specific commodity sectors in

developing countries have been reduced. Additionally, the gains and economic stimulus have

been negative in the commodity sector. Globalization has therefore considered being a major

threat for developing economies because it leads to negative outcomes. It creates tremendous

pressures on developing countries that do not have the resources, capital, and technological

capability to respond to problems. Agriculture producers in the developing world are hindered by

external and internal problems according to empirical studies. These hindrances can cause

negative outcomes as they tend to limit the profitability of various sectors. Furthermore, they can

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create an impact where the organizations are unable to develop effective strategies to cope with

different types of problems. It is through the use of innovation and creativity that success can be

attained (Anderson & Tyers, 2009). Countries that are dependent upon agricultural products are

being faced with technological challenges that are designed to enhance productivity and output.

The technology employed is still at early stage while there is much potential for enhancing

productivity in an efficient and effective manner.

Importance of Technology and Innovation

Sustained growth requires a high level of technological development which can help to achieve

the goals in a proficient and dynamic manner. This means that there is the need for major

investments in irrigation as well as rural infrastructure. Other development needs to be done in

human capital and institutions. Biotechnology has increased the threat for export based growth

(Anderson & Tyers, 2009). This is because of the fact that producers in the developed world can

leverage the new technologies in order to increase productivity and therefore reduce the prices

which gives them a competitive advantage over producers in the developing world. Institutional

environment that guides the world markets has considerably changed because of the advent of

international trade. This means that trade is now occurring at a globalized context which

increases the challenges for the producers in developing economies. IMF and World Bank are

financial institutions which have also promoted the concept of ensuring that liberalization and

structural adjustment programs can be implemented in the member countries (Anderson & Tyers,

2009).

Producers in developing countries are faced with insurmountable obstacles as they have to

compete with other foreign producers. This can reduce their market share which leads to

negative outcomes. Empirical studies have identified the major problems that agricultural sector

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in developing countries face when they have to compete in the global context. There is not an

emphasis on differentiated ability of different groups to have access to new market opportunities.

Additionally, this can lead to negative outcomes in terms of accessing resources needed for

enhancing growth. Furthermore, trade policies in sectors are not nuanced which means that

agricultural sector is unable to achieve self-reliance and stimulate production. This can cause

serious problems which need to be rectified through an integrated and coordinated strategy

(Stamm et al, 2006).Liberalization also means that state support to supplies and extension

services are limited. Improvements in infrastructure are not pursued while development of

irrigation systems is neglected by states. The absence of formal institutions means that equal

access for all producers is not present in the developing world. This can deprive producers of

information about markets while creating negative problems (Anderson & Tyers, 2009). Global

supply chains need to be streamlined and automated in order to create higher levels of success.

This can help to attain long term success within a short period of time. Furthermore, there is the

need for a collaborative framework which can help to achieve long term success within a short

period of time. The development of efficiency and effectiveness is critical for success because it

leads to the development of a collaborative framework for success within a short period of time.

It is now a consensus that agriculture is the engine of economic growth and development (Stamm

et al, 2006). Early classic theory viewed economic growth as a process of reallocating factors of

production from low-productivity agriculture to high-productivity industry. Most estimates of

agricultural multiplier found large values, which determine the prominent role of agriculture in

spurring economic growth (Stamm et al, 2006). Consequently, agriculture is central not only in

promoting overall growth but also in connecting the poor to growth given its size and the impact

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of multipliers. Since the majority of the poor produce non-tradable goods and services,

agricultural growth appears crucial as a stimulant to the demand for these goods and services.

These include production of backward links in which farms demand inputs and services for

production and forward links in which farms demands services after harvest, like processing,

storage, and transport produces. There are also consumption linkages as increased rural incomes

are spent on domestically produced manufactures and services. Agriculture also contributes to

the alleviation of poverty through other indirect sectorial linkages. For example, increased food

access and farming incomes allow better nutrition and thus higher productivity (Stamm et al,

2006).

Government Initiatives

Studies have estimated the returns to alternative public investments on agricultural productivity

and poverty in rural Sri Lanka (Stamm et al, 2006). The greatest impacts on both variables

came from investment in roads and in agricultural R&D and extension, which apart from

increasing incomes, had much of their effect through wage increases and lower food prices.

Studies have decomposed growth linkage and found agricultural sector contributes the most to

overall poverty alleviation in Indonesia. Cross-sectional studies corroborate these findings on the

importance of strong agricultural growth in countries that successfully reduced poverty. On the

other hand, retarded poverty reduction could be attributed to slow progress in agriculture, even in

the case of stagnant overall growth performance. Studies have confirmed the strong link between

agricultural productivity increase due to investment in agricultural R&D and poverty reduction in

both Africa and Asia. Other empirical studies also show that growth in agricultural sector has a

more significant impact on poverty reduction than growth originated from industrial or service

sectors, suggesting the importance of sectorial priorities. Thus, we can safely conclude that

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agricultural growth is a crucial ingredient in the formula of pro-poor growth. That is because

economic growth usually has a direct impact on poverty, any contribution agriculture makes to

speed overall economic growth will directly contribute to reducing poverty in most

circumstances. Effect of agriculture on poverty reduction is relatively greater in impact on the

poorest and the distribution of income among the poor. Industrial and service sector growth has

much less effect in reducing rural poverty in most developing countries. If growth occurs leaving

the primary sector out, two onerous burdens fall on the poor population: the overall growth rate

will be much lower and poverty reduction will be missing from the picture.

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Research Methodology

Introduction

Selecting the research methodology is one of the most important aspects of dissertations because

it helps to ensure that the basic research questions and objectives can be answered in an efficient

and effective manner. Additionally, the right methodology can lead to the development of

accurate and reliable inferences. Hence it is through the use of integrated strategies that success

can be attained.

Research Questions

The following research questions will be answered in this dissertation:

1. How can Sri Lankan tea industry identify and control costs in order to ensure profitability

as well as increase the market share?

2. How can the industry strive to meet the challenges while reducing the production and

targeted costs?

3. Will the Sri Lankan tea industry challenge the competition from other countries and

retain the current position?

Research Philosophy

The research philosophy helps to provide a framework where the basic assumptions can be

elucidated in an efficient and effective manner. The philosophy helps the researcher to

successfully analyze the data in a neutral and objective manner. It provides guidance about the

need to ensure that the critical objective of the dissertation can be applied. The research

philosophy selected for this dissertation is subjectivism because it is based upon treating human

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beings as subjects that can be influenced by the external forces. Human beings in essence act

when they have to respond to the challenges in the external market. Hence individuals are

perceived to be highly rational and flexible beings that have the potential to develop unique

thoughts and processes. Subjectivism is in accordance with the objectives of this dissertation as it

uses a qualitative and quantitative mixed methodology in order to create interaction between the

researcher and subjects.

Research Purpose

The aim of this dissertation is to identify the problems faced by the Sri Lankan tea industry. It

will investigate the high production costs, economic changes, global challenges, political

challenges, market trends, and foreign currency impact upon the industry.

Research Approach

There is no detailed analysis which can identify the problems faced by the Sri Lankan tea

industry. This research aims to identify the key problems which are faced by the Sri Lankan

industry. The scope of this research is to identify the ways that the industry can remain

competitive in the context of the global tea industry. This requires a study of the market forces

which impact the entire industry. The presence of imperfections in the market structure is

responsible for the current state of the industry. Government intervention can sometimes lead to

economic inefficiency for many sectors. This is because they lack the information which can be

used to correct the market imperfections. The scope of this research is therefore about the ways

that the market imperfections in the Sri Lankan industry can be rectified through the use of an

innovative and creative strategy. It will seek to develop a collaborative framework which can be

used for attaining long term growth and development. Furthermore, it is through the

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identification of different strategies that success can be attained within a short period of time.

The limitations of the research are that it cannot study all the variables which impact the

performance of the Sri Lankan tea industry. Such an undertaking can be done by using this

research as a base for achieving future conclusions in an efficient and effective manner.

Research Strategy

Quantitative research is concerned with identifying the statistics and figures related to any

particular phenomenon. It can be used to study large population samples while general inferences

can be drawn. Qualitative research is concerned about investigating the reasons behind specific

phenomenon. It can also be used to investigate the problems behind any previous research

studies or to propose a new theoretical framework within any discipline. A mixed qualitative

and quantitative research strategy has been selected because it will help to triangulate one set of

findings obtained from a single data collection method to another different method. Statistical

data can be obtained which will be researched in a deep manner through another method. This

unique approach will be beneficial in answering the key questions in an efficient and effective

manner.

Adopted Research Strategy – Combining Quantitative and Qualitative Research Methods

John Mingers (2001: 240) suppresses that research results will be better-off and more dependable

if various research methods, if at all possible from different (existing) paradigms, are regularly

combine together instead of recommending a single substitution class, either interpretive or

positivist, or even a plurality of paradigms within the regulation as a whole. Although the

researcher here wanted quenched results, the principle for using both the methods at the same

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time was undergo to research in nature as per the phenomenon under investigation. For this

reason the third way of adductive access was engaged and the research started with the building

of loose theoretical framework, following real-life observations. It then kept on trying to find a

corresponding model of research and to expand the surviving concepts to the observations placed

on empirical find outs, says (Dubois & Gadde 2002, Kovács & Spens 2005).

Gummesson (2000: 184) says, we have so far studied that two of scientific prototypes have

different starting points, so they would have different ending points as well, so they should not

be evaluated on the basis of other counterpart. According to (Susman & Evered 1978, Aguinis

1993), action research would not be justifies on the basics of other research approaches.

Moreover it should readily justify itself with its own general laws and theories, specified is the

case stating reflectivity, data generation and the developing theories cannot be captivated

promptly by optional approaches (Schein 1987, Eden & Huxham 1996).On the other hand the

threats deployed through this method are maximum which should be confronted(Coughlan and

Coghlan 2002: 236-237),for this purpose their assumptions should be put to public trial

consciously in the action research cycles to maintain maximum period of validity (Argyris et al.

1985) this whole study enables the researcher to enquire four questions (Gummesson 2000: 184-

185):

(i) “If the investigation through this method had been accomplished by someone other than

the writer, would the equal results have been prevailed?” - Problem of replication typically

related to as dependability.

(ii) “Under the examination, does the evidence really reflect the reality?” - The validity

problem.

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(iii) “Is there any relevancy of the results with the genuine research?” - The level to which

the outcome can be comprehensive.

“To check the credibility of the research is there sufficient detail in the way the evidence was

produced?” If we follow the researcher’s journey - from questions to methods of data gathering,

interpretation and answers - do we believe him or not? - The problem of credibility.

Data Collection Methods

The qualitative research method which has been selected is a questionnaire which was sent to 20

managers working at major tea plantations in Sri Lanka. The questionnaire was emailed and

posted by mail (wherever deemed feasible) to the managers of team plantations.

A total of 20 open ended questions were designed as part of the questionnaire. The benefits of

open ended questions are that the respondents can answer in their own words. They are not

influenced by any specific alternatives which are suggested by the interviewer. Another key

benefit is that the issues which are important can be discussed in an efficient and effective

manner. It can also reveal the findings which have not been originally anticipated. The

respondents can provide answers which are based upon the strength of their opinions. Each of the

managers was working in the industry for 5-10 years. The majority of the tea company managers

were belongs to Dilmah and Bogowantalawa which are the largest tea producing countries in Sri

Lanka. Dilmah is a company that was founded in 1974 by Merrill Fernando. This brand is

available in over 92 countries. The secret of Dilmah has been its ability to achieve long term

stability as well as process innovation and growth. Bogawantalawa Tea Estates ltd (BPL Teas) is

another large company which is engaged in the cultivation, processing, manufacture, and sale of

tea. The tea products of the company include black tea, green tea, white tea, and organic tea. The

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company is also the leading supplier of iced tea to the USA. The tea managers for these

companies are between the ages of 35-50. Some of them have undergraduate degrees but many

of them have postgraduate degrees. The managers were selected based upon the size of the

companies. This is because of the fact that large companies tend to have managers who have

considerable knowledge and expertise about the local industry. This helps in ensuring high levels

of efficiency and effectiveness. Random sampling was used in order to select the 20 managers

from a total group of 100 people who are working in the industry. The data was collected by

using government statistics and official company websites. This was used in order to achieve the

highest levels of efficiency and effectiveness. This helped in obtaining an idea about the

problems that the Sri Lankan tea industry faces.

The managers have valuable expertise as they have been managing the plantations for a long

period of time. Their input will be valuable in answering the main questions of the dissertation.

The quantitative data collection method will be to use existing studies on the Sri Lankan tea

industry. Another set of reports have been selected which have been specifically conducted on

the Kenyan tea industry. This comparative study approach will be beneficial as it will help to

identify the similarities and differences of the Sri Lankan and Kenyan tea industries. This will

also help in identifying the ways that the Sri Lankan tea industry can respond to challenges in an

effective and efficient manner. The statistical data obtained from these reports will be used to

study the comparison between the tea industries in Kenya and Sri Lanka. The statistical data can

be used to identify and compare the relative strengths and weaknesses of the different

approaches.

Research techniques should be selected in accordance with the resources available to the

researcher. This approach can be beneficial as it leads to the development of a congenial

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environment for success. Moreover, the research process should be conducted in accordance with

established principles. Selecting the appropriate technique requires the presence of innovative

and creative approaches. This helps the researcher to minimize the chances of errors. Accuracy

and reliability are essential elements of the entire process as they are based upon sound

outcomes. Questionnaires have been selected because they are practical as they can be used to

understand the problems that the Sri Lankan industry faces. Moreover, large amounts of

information can be obtained in a relatively short time period. Questionnaires provide the research

with the ability to implement cost effective and reliable methods of deriving conclusions. They

also have high levels of validity and reliability which is essential during the research process.

Another key advantage is that the questionnaires can be used to collect and analyze data in an

efficient manner. It is a scientific and objective means of research as opposed to other methods.

The results from the questionnaire can be easily compared with existing research in order to

determine new findings or correlate with existing findings. There are some disadvantages of

questionnaires which need to be assessed. Firstly, the questionnaires are standardized which

means that it is not possible for the researcher to explain all the points to the respondents. This

means that some respondents might misinterpret the questions. This could lead to reduced levels

of accuracy and reliability with respect to the objectives of the dissertation. Secondly, some

respondents might not answer the questions because they might feel that they need to protect

their identity as well as confidential information. Finally, respondents might answer superficially

which can also limit the ability of the questionnaire to function as an effective research

instrument.

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Findings and Discussion

Based on the results of survey and review of historical data adopted from the other studies

discussed in the literature review section, following outcomes have been draw:

The Sri Lankan tea industry has been suffering from the threat of globalization which has led to

negative problems in many ways. Not surprisingly, anti-globalization activists argue the

converse, that economic integration is creating an increasingly wide gap between the rich and

poor—both among and within countries. Trade has increased exponentially since the launch of

the General Agreement on Tariffs and Trade (GATT) in 1947. This expansion has been

particularly significant since the establishment of the World Trade Organization (WTO) in 1994

at the conclusion of the Uruguay Round of the GATT. According to the IMF, world trade has

averaged a growth of 6 percent per year over the past 20 years, prompting rapid growth of the

world economy. However, as the IMF and other multilateral trade and financial organizations

have indicated, world trade has not achieved the degree of liberalization -that is, full

liberalization manifested by free trade - which neoliberal theory advocates as the ideal state of

affairs. Almost a decade after the WTO was established; many countries still practice

protectionism and retain trade barriers. Such protectionism not only contravenes the classical

liberal conception of market efficiency, it also thwarts market performance as measured against

the yardsticks of effectiveness, equity, food security, sustainability of resource use, and people’s

livelihood. The nature and extent of trade restrictions vary from country to country and across

sectors. However, the treatment of agriculture in the multilateral trade regime has demonstrated

that free trade in farm goods is not an objective that all countries are actively pursuing.

According to the United Nations Food and Agriculture

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Organization (FAO), developing countries generally maintain low and even negative protection

of agricultural producers, whereas industrialized countries generally maintain high price and

producer-income supports.

Viewed cynically, “free” trade can be construed as an ideal held out by the industrialized

countries as an ace in the hole for securing further liberalization from developing countries in

areas of interest to the farmer. Sri Lankan tea industry has suffered because it is still natural

resource economies that specialize according to the liberal logic of comparative advantage in

primary commodity production. Agriculture, on the other hand, has been more reliable because

it is not as capital-intensive and its two most important factor endowments - land/environment

and labor - are bountiful in the countries themselves. Tea is, in a nutshell, Sri Lanka’s bread and

butter and agricultural trade their most reliable pathway to development and reduced dependence

on external assistance. The tea industry continues to suffer because of several reasons. Firstly,

because lower tariffs translate into lower food prices and greater variety of foodstuffs due to

increased imports, it assumes that liberalization fosters greater food security for importing

countries. However, this presumption is valid only if the majority of the population is consumers,

not producers - clearly not the case for natural resource economies such as Sri Lanka. Secondly,

it assumes that increased imports promote competition and efficiency. However, if the amount of

imports in poor countries overwhelms domestic farmers not privy to generous government-

funded safety nets, impoverishment, not innovation, is the likely result. Thirdly, the model

implies certain assumptions negating the influence of constraints on development, both internal

and external. It assumes that the countries will: maximize their natural factor endowments in

production; have access to and/or be able to purchase the requisite technical inputs; be able to

sell their products freely in rich country markets; and will efficiently utilize and/or invest their

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foreign exchange earnings into national development towards the achievement of reduced

external dependency.

Sri Lanka must avoid or overcome various constraints to propel the development of the tea

industry. Among the agriculture-related constraints impeding Sri Lankan development are:

internal—land tenure irregularities; neglect of the agriculture sector by national policymakers

due to rent-seeking and clientelism; inadequate technical capacity for enhancing production;

weak regional cooperation and collaboration. There are external problems like restricted access

to developed country markets; massive foreign debt; structural adjustment conditionalities

mandating too-rapid liberalization of trade and financial markets; membership in preferential

trade agreements (PTAs) encouraging specialization on a few primary commodities; subsidized

agricultural production and export; and food dumping by developed countries. All have played a

role in facilitating underdevelopment and dependency in Sri Lanka. However, two constraints—

restricted access to advanced country markets and rich country agricultural subsidization—stand

out as longstanding for change. If, after 50+ years under a multilateral trading regime, rich

countries—where poor countries must sell their exports in order to grow and develop— still

subsidize their agriculture sectors, a leading cause of food dumping in poor countries, and

impose barriers to developing country exports, agricultural goods key among these, developing

countries will remain underdeveloped and dependent on these very countries.

To be sure, if developing countries such as Sri Lanka cannot grow and develop by trading

according to the logic of comparative advantage in that which they do best, either the

(liberal/neoliberal) theory on which the international trading regime is based is flawed, or the

regime, ostensibly grounded in said theory, has in fact undermined the theory and is based on

subterfuge, privileging one group of actors—the rich and powerful—to the detriment of another,

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less powerful, group. This subterfuge, if that is what it is, will guarantee the continued

underdevelopment and dependency of developing countries like Sri Lanka unless they open their

eyes to the situation and muster the political will, both internal and external, to change the status

quo for the benefit of their masses who do not belong to the rich and powerful group. Advanced

country protectionism in agricultural trade must be obliterated as a key step towards leveling the

playing field for, and invigorating development in, the poorer countries of the world trading

regime. Liberalizing access to developed country markets for developing country exports will

give them the incentive to remedy internal macroeconomic and microeconomic obstacles to

agricultural productivity in order to boost trade capacity and competitiveness and will over time

equip them to more effectively counteract the other constraints to development. Even with the

desired supply response, tea trade is influenced by forces beyond the control of Sri Lankan

government. The movement of international prices of commodities may turn out to be

detrimental to the pace of policy reform. For many commodities, international prices depend on

the trade policies pursued by developed countries, and these are intimately related to their

domestic agricultural policies. Current difficulties faced by GATT negotiators reflect this

situation.

The resulting uncertainties have considerably slowed down the pace of reform within Sri Lanka,

thereby affecting tea producers in the country who could otherwise have gained by capitalizing

on the comparative advantage they possess. Tea occupies a special niche in the trade policy

arena. It has always been a sensitive topic in world trade negotiations. In fact, although discussed

during successive rounds of the GATT, agriculture did not come under the purview of the

multilateral trade framework until relatively recently, during the Uruguay Round which

established the WTO. Since then, agriculture has been a significant polemic between developing

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and developed countries and between certain developed country blocs, namely the US and EU.

Many trade experts agree that agriculture—not services, investment, or even intellectual property

—is the bedrock of the multilateral trade regime and the crux on which all progress rests. The

FAO forecasts that full-scale liberalization in agricultural trade would raise incomes and

decrease poverty in poor countries—particularly those in Latin America and the Caribbean—

which would enhance development and reduce external dependency. All developing country

regions, however, are estimated to improve their terms of trade, as a result of an estimated

decrease in the real prices of manufactured and equipment goods exported by OECD countries

following liberalization in their agricultural sectors.

Liberalization would increase world prices, decrease world price volatility, and increase the

volume of world trade. Most importantly for developing countries such as Sri Lanka, the

knowledge that their exports will command higher prices on international markets would

stimulate and innovate domestic production, reduce their consumption, and facilitate import

substitution for both domestic consumption and export. Development would increase and

dependency would decrease proportionally. Liberalization would therefore unleash the gains

from trade now constrained by developed country protectionism in violation of the Adam

Smith’s principle of laissez-faire and David Ricardo’s trade by comparative advantage. Yet,

despite the anticipated advantages for Sri Lanka, agricultural reform is stymied by multilateral

discord, which has slowed WTO momentum and threatens to derail the current Doha Round—a

prospect that the world trading regime can ill afford after the Seattle Ministerial debacle in 1999.

Put simply, developing countries have gotten fed up with developed country agricultural

protectionism and they are refusing to accede to any WTO negotiation that does not prioritize

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agricultural reform reducing developed country trade barriers against developing country farm

exports.

Tea’s intractability stems in large part from its importance to national food security. In addition,

farm lobbies in advanced countries tend to be very powerful and this power allows them to wield

great influence in national policymaking to secure the protectionist policies on which their

livelihood depends. In a truly free trade system, these farmers would not survive without

generous governmental support. Realizing this, developed country farmers are not hesitant to use

their power at the ballot box and their sway over public opinion to pressure their representatives

into making policy that keeps them in business despite the economic inefficiencies that underlie

such policy and distort international trade. Agricultural protectionism in whatever guise causes

tremendous dislocation in the economy, both domestic and international. High tariffs,

particularly tariff peaks and tariff escalation, distort trade by impeding the flow of goods into a

country. Other mechanisms of agricultural restriction are subsidies and quotas. Of these,

subsidies are particularly destructive. By linking payouts to production, subsidizing governments

encourage overproduction and, ultimately, the flooding of world markets with surplus capacity.

Artificially-induced price deflation is the eventual, and unfortunate, result. Consumers benefit

from low prices, but such price depression harms countries reliant on commodity exports for

their foreign exchange earnings. Moreover, more intrinsic to the logic of free trade, subsidization

to facilitate production contravenes the logic of both comparative and competitive advantage.

Surely, it is nonsensical (and pernicious) when the countries that have comparative AND

competitive advantages in agricultural production are effectively incapacitated by rich country

subsidization in their export of farm goods and their ability to earn a fair price for their labor.

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Yet, despite the evidence of economic irrationality and inequity, many developed countries

maintain entrenched systems of agricultural protection to boost the production and export of their

farm goods to the detriment of developing country production and exports. Most poor countries

like Sri Lanka cannot compete, not only because they lack the financial resources to subsidize at

similar levels but also because they are precluded from subsidization by the Uruguay Round

Agreement on Agriculture (AoA). Only those countries that subsidized farm goods prior to the

Uruguay Round were allowed to continue subsidizing afterwards, albeit at lower rates. Hence,

Sri Lanka has neglected the tea sectors, choosing instead to depend on developed country

agricultural aid and imports for domestic consumption. Many economists deride subsidization

and other forms of government largesse as not only profligate, but also counterproductive in the

grander scheme of trade liberalization.

The US is by no means the only advanced country that subsidizes its agricultural sector

excessively and, from the point of view of developing countries, unfairly. It goes without saying

that subsidization to this degree marginalizes farmers in countries like Sri Lanka that are

dependent on tea as a primary source of income. Clearly, legislators beholden to their

agricultural constituencies pass laws that are favorable to domestic farming and, in multilateral

negotiating fora, fight to entrench these preferences in the world trading regime. Farmers in

developing countries, on the other hand, tend to be very fragmented and weak.

They wield little to no influence on national policymakers and, as a result, their interests are

usually rendered secondary to other, more powerful constituencies. Their voice is even more

enfeebled by their countries’ inability to persuade advanced countries to eradicate their barriers

to agricultural products of export interest to developing countries. With little hope of selling their

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farm goods to rich countries in order to boost their GDPs, many developing country governments

have either marginalized or abandoned agriculture altogether.

This, in large part, explains why tea production has deteriorated so drastically in Sri Lanka, both

in contribution to gross domestic product (GDP) and national food security. Throughout the 50+

year tenure of the GATT, protectionism on the part of advanced country agricultural interests,

and the powerlessness of developed countries to alter the status quo substantially in their favor,

has made agriculture almost sacrosanct in multilateral trade negotiations. The battle at the WTO

has yielded clear-cut winners and losers.

Advanced country agricultural interests have grown more powerful and prosperous while

developing country farmers have been largely marginalized and squeezed out of the world trade

regime. This is not to say that some developing countries are not protectionist. Indeed, like their

developed counterparts, many impose barriers to foreign trade. The IMF’s retraction of its

endorsement of foreign investment as a panacea for developing country growth is shocking but

not surprising to people who live in the countries that effected such liberalization prior to

achieving a modicum of broad-based development—social, economic, and institutional—

following the example set by the developed countries and, more recently, India, China, and the

newly-industrialized countries (NICs) of East Asia.

High tariff barriers and entrenched non-tariff barriers such as subsidies and quotas are paramount

but are not the only problems. The controversy surrounding genetically modified food, labeling,

environmental stewardship, and sanitary and phytosanitary measures has also bedeviled

agricultural trade negotiations. Other trade impactive issues include: the relationship between

regional trade agreements (RTAs) and the WTO; the role of state trading enterprises (STEs) in

agricultural trade; the booming agricultural biotechnology industry; and the interface between

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trade and the environment. The disparate, and often polemical, positions of developed and

developing WTO members also merit special attention. Developing countries are increasingly

exercising their voice in WTO negotiations. This primarily post-Uruguay phenomenon has

altered the scope and tone of WTO negotiations and has forced developed countries to reckon

with the concerns and interests of their less affluent counterparts. China, with its hybrid

developing/developed and authoritarian/liberal economic tendencies, is proving to be another

force to be reckoned with. During the GATT prior to the creation of the WTO, the world’s

advanced countries were resolute in their determination to not include agriculture in multilateral

trade negotiations. To a large extent, the US and EU have shaped the agriculture debate and

defined the negotiation agenda. To be sure, the longstanding battle between the US and EU over

the extent to which government should subsidize and otherwise protect its farmers is a major

complicating factor in the agricultural trade debate. Ironically, although both the US and EU

staunchly endorse the logic of free trade, they brazenly flaunt their own rhetoric by maintaining

massively subsidized, tariffied, and quota-laden farm sectors. Japan, with its refusal to open its

rice and other industries to foreign competition, is another free trade delinquent. Each country

has an ostensibly sound rationale for sanctioning protectionism in agricultural trade while

endorsing open trade for industry .

Regardless, this discrepancy smacks of a double-standard that not only unfairly privileges a

select, powerful few at the expense of large segments of the world’s people who rely on farming

for basic sustenance, it also invalidates the argument for liberalized trade. Together, the US, EU,

and Japan maintain the most highly protectionist policies in the world trading regime.

Consequently, they have become the most vilified of countries in the WTO. They are routinely

castigated by countries seeking access to their lucrative but protected markets and civil society

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endeavoring to level the playing field in agricultural trade. By the late 1980s, GATT members

conceded that protectionism in agricultural production and trade had gotten out of hand. Where

they had previously avoided including agriculture in the multilateral trade framework, they

recognized the political and economic expediency of including the sector in the Uruguay Round

negotiations to arrest the spiral of protectionism.

The Uruguay Round, although significant for its breakthrough de jure incorporation of

agricultural issues into the multilateral trade framework, ultimately did not redress the distortions

that are prevalent in agricultural trade. Countries generally have not executed the reduction

commitments negotiated during the round. There is a significant divide in this regard between

two primary groups of countries: the developing countries that sought financial assistance from

the World Bank and IMF and the advanced countries that did not. As part of their structural

adjustment agreements with the World Bank and IMF—most signed prior to the Uruguay Round

—the countries of the former group surrendered their ability to restrict their trade via tariffs or

other means long before the Uruguay negotiations. By comparison, the advanced countries, not

bound by any structural adjustment conditionalities, have been free to protect their farm sectors

and restrict foreign agricultural trade, often manipulating WTO rules to their advantage. As with

dumping, the US, EU, and Japan lead the world in restricting agricultural trade. All engage in

restrictive trade practices as a matter of policy—both de jure and de facto. However, the US and

EU’s trade policies and practices have pressing implications for Sri Lanka because they are its

most significant trading partners and export markets. It is certainly understandable that a country

would want to protect its farmers.

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What is not reasonable is a country’s practice of encouraging other countries to liberalize their

agricultural regimes in the name of free trade, while said country does the reverse and maintains,

even expands, trade restrictions simply because it has the political and economic clout to do so.

The new farm bill raises the question of whether the US has abdicated the commitment to

agricultural trade liberalization which it professes so avowedly in multilateral negotiating fora to

encourage further trade liberalization in areas of interest to industrial countries—i.e., services.

Further exacerbating these adjustment effects, products of export interest to developing countries

—agricultural goods significant among these—continue to face high tariff peaks, tariff

escalation, and non-tariff barriers in key advanced country markets. Moreover, developing

countries are now facing the likely termination—in the name of “free” trade—of the commodity

arrangements under which some of their major exports are granted preferential market access

into advanced country markets. Most developing countries still lack the resources and technical

expertise necessary for competing in a “free” trade regime devoid of preferential trade access for

developing country exports yet replete with developed country subsidization, use of special

safeguards to restrict competing imports, and continued imposition of high tariffs—which,

thinking pragmatically in light of the historical record, developed countries like the US, EU, and

Japan are not likely to abandon prior to the scheduled 2005 end of the Doha Round or anytime in

the near future. Not surprisingly, given its sensitivity, the development dimension of the Doha

Round—like agriculture, another intractable and closely related issue—is being held hostage by

negotiating conflicts. Developing countries are standing their ground and insisting that developed

WTO countries recognize their unique needs, eradicate policies that restrict developing country

trade, and extend the assistance necessary to help them surmount the trade-related constraints on

development to which they are subject. Despite their allowances for meeting developing country

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needs, existing special and differential provisions have received much criticism. Critics say the

concession of allowing developing countries longer phase-in periods and reduced commitments

completely misses the point of what developing countries need and is not enough sufficient for

moderating the dislocative effects of liberalization.

In general, the special and differential provisions are overly optimistic in their expectations of

developing countries and not sufficiently so in requirements for developed countries vis-à-vis

poorer countries. However, the developed countries do not form a cohesive negotiating bloc due

largely to their disparate histories and cultures. In addition, because they are so dependent on the

preferential market access to developed country markets, they are often susceptible to their

patrons’ request (demand?) that they cooperate on negotiating modalities of interest to the more

industrialized members of the WTO. The deficits of WTO power politics notwithstanding,

Members have pledged in the Doha “development” Round to enhance the trade opportunities of

poor countries by allowing them expanded market access whereby to sell the products they

produce competitively, particularly agricultural goods, and extending them increased technical

assistance for generating additional trade capacity and competitiveness. This action was lauded

across the globe as both the logical and humane thing to do—logical per the theory of free trade

and humane in the interest of improving the socio-economic condition of large segments of the

world’s people. To improve trade relations for developing countries, developed countries must

do more than simply treat poor countries as “special and differential,” i.e., via the

implementation of preferential trade agreements. However, using farm subsidies to sustain this

countryside, and Europe’s cultural history, has wrought too high a price: an interminable

volatility in international commodity markets due to artificially depressed prices, the

impoverishment of a majority of the world’s farmers, the destruction of rural livelihoods in many

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Third World countries, and a dependence by these countries on external food aid and imports to

meet the requisites of food security, human well being, and national development.

However, developing countries, Sri Lanka included, must harness this strength effectively to

propel meaningful change at all levels of trade— multilateral, regional, and bilateral. Since the

world’s advanced countries swear by the liberal logic of development, developing countries must

hold them to backing the theory up with action. Indeed, Sri Lanka’s plantation economy is

shaped by the conditions under which it was established. Human resource endowment is limited

by the specialization of its labor force in plantation work. The plantations allot a limited amount

of land to the peasant sector because they need to keep land in reserve and ensure access to wage

labor to preserve the plantation export economy. The economy is dependent on wage not

property income hence entrepreneurship and property ownership is limited, which limits the

national surplus and investment opportunities. The structure of demand favors imported, not

locally-produced goods. The instruments of the state are oriented toward the provision of law

and order, not the promotion of economic transformation.

The tea industry has manifested since independence as increasingly lower levels of production,

productivity, and competitiveness vis-à-vis the levels the country recorded in the decade after

independence and in comparison to other countries. Sri Lanka’s tea industry is constrained by

both externally-driven and internally-motivated factors that evolve from its longstanding position

in the world trading regime as a plantation economy and its indoctrinated self-perception as such.

However, external challenges are even more devastating than internal negligence in that they

overwhelm any product the country manages to produce in spite of its ignorance and/or

negligence.

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Consequently, this research argues that if Sri Lanka eradicates the internally-motivated

constraints on agricultural development, but current externally-driven constraints remain

unabated, domestic agriculture will be as marginalized in the world trading regime as if locally

driven constraints remained constant. While Sri Lanka must act expeditiously to remedy

internally-motivated constraints on national development, the onus is also on developed

countries and international organizations such as the World Trade Organization, World Bank,

and IMF—all controlled by developed countries—to eradicate the externally- driven constraints

that marginalize poor natural resource economies like Jamaica in the world trading regime by

denuding their comparative advantage in agriculture. Sri Lanka’s tea sector is characteristic of

other tropical developing countries. Tea provides significant foreign exchange earnings and

employs a large percentage of the population. Because Sri Lanka is a developing Third World

economy where many people still earn their living from the land, agriculture is an even more

integral part of the local economy than in the more advanced First World economies (Stamm et

al, 2006). The structure of tea production is dualistic with a large scale estate system and a small-

scale subsistence system. The former produces the bulk of the export crops while the latter

produces domestic food crops and some export crops. Applying the theory of plantation

economy to the global economy and world trading regime, Sri Lanka is one large plantation

created and supported by external forces for the purpose of serving metropolitan needs for raw

materials and cheap labor. Within Sri Lanka itself, the plantation takes the form of the large-

scale commercial estate, the agricultural sub-sector that is most externally oriented.

With the exception of the government-controlled estates, Sri Lanka’s plantation system is

dominated by wealthy, commercial elites who employ landless or land-poor farmers to work

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their estates, typically located on most fertile, arable land. In contrast, the small scale system is

dominated by ubiquitous resource-poor small farmers—many of them tied to the plantations in

order to earn regular wages—working small, hilly plots of approximately one acre. Historically

marginalized in the export economy, this sector is becoming increasingly important to tea future.

To be sure, the plantation economy typical of Third World countries renders them particularly

susceptible to an intrusion of foreign capital and control. From their beginning as colonial

territories, they were cultivated by external actors as appendages of metropolitan economies.

Countries like Sri Lanka served, and continue to serve, metropolitan entities as plantations,

feeding them the raw materials, natural resources, and cheap labor they need to grow and

develop. In the process, Sri Lanka experienced, and continues to experience, a development that

is associated with and dependent on the development attained by its metropolitan country

investors and stakeholders. Indeed, agriculture is typically the first primary economic activity

from which countries evolve. Moreover, agriculture constitutes a large percentage of Third

World economies and is still a leading employer of labor in these countries,

Sri Lanka included. Multinational corporations (MNCs), institutionalized the primary

commodity plantation economy throughout the Third World and stymied the development of

value-Added production therein. These enterprises have been in Sri Lanka and other developing

countries for years, centuries even, and have long been the locus of metropolitan country

policymaking vis-à-vis developing countries.

In Sri Lanka’s case, it must somehow muster the political will and economic wherewithal to

move into value added production for both domestic consumption and export. In today’s

globalized knowledge-based economy entrenched in the neo-liberal capitalist ethos, a country

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must innovate and diversify in order to compete and, ideally, thrive. To be sure, primary

commodity production—although an important economic mainstay for Sri Lanka given its

history and comparative advantage imbued in its favorable climate, profuse vegetation, and

underutilized labor—must be accompanied by more advanced production that adds value to a

country’s output and thus builds its human capital as well as increases its foreign exchange

earnings, which, according to classical liberal economic theory, should be reinvested into local

production to hasten the country’s progress along the capitalist path of development. External

and internal actors work symbiotically to condition the country as an appendage of the global

economy such that the power and hegemony of united foreign and local special interests, i.e.,

economic elites, is preserved and the interests of domestic elites are served. On the contrary,

although the WTO’s mission requires it to liberalize and equalize world trade, agricultural

protectionism has become even more intractable under the WTO. Developed country subsidies

and tariff barriers against products of export interest to Jamaica and other developing countries—

namely agricultural goods—continue unabated despite the commitments these countries made in

the Uruguay Round.

Trade experts posit several explanations for the agricultural failings of countries like Sri Lanka.

These explanations impugn either externally-driven or domestically motivated forces but all

relate to and evolve from Sri Lanka’s history and standing as a plantation economy in world

trade. Externally-motivated constraints on Sri Lanka’s agriculture limit access to locally

produced goods in rich foreign markets as well as pose insurmountable, unfair competition for

locally produced goods in the local market. These challenges include developed country

subsidization of their farm sectors, utilization of border tariff barriers against developing country

agricultural imports, and dumping of agricultural surplus in poor countries under the guise of

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food aid—all egregious practices that are permissible under the World Trade Organization

(WTO). Such protectionism by rich countries poses an almost insurmountable burden on

developing country agricultural production and competitiveness in both export and local markets.

Rich country agricultural subsidies and border barrier mechanisms such as tariff peaks and tariff

escalation restrict market access to developing countries’ traditional exports and dissuade poor

country diversification and industrialization. Some scholars attribute Sri Lanka’s agricultural

decline to the country’s underdevelopment and external dependency wrought by its

marginalization in and by the world trading regime. Other external challenges that have eroded

Sri Lanka’s agriculture includes the one-model- fits-all structural adjustment methodology

designed by the IMF and World Bank and implemented by Sri Lanka and other developing

countries as a precondition for securing international financial assistance. In addition, the

preferential trade arrangements that have shielded Sri Lanka’s traditional export agriculture since

independence—with both positive and negative consequences—and which are bedrock of the

country’s economy, are now threatened under the WTO.

Much to Sri Lanka and other beneficiary countries’ dismay and chagrin, other countries have

challenged these preferential arrangements at the WTO on several counts; the challengers assert

that the arrangements violate the WTO tenets of most favored nation, nondiscrimination, and

reciprocity. Sri Lanka is concerned about developed country subsidization, dumping, and tariff

barriers. However, the impending demise of the PTA is an immediate and pressing concern. Sri

Lankans, from government officials to taxi drivers, are worried that, without the PTA, Sri Lanka

will no longer be able to sell its goods due to its small size and economies of scale, high cost of

production, lack of productive and marketing resources, and the developed countries’ pervasive

utilization of protectionist trade practices like agricultural subsidization, dumping, tariff peaks,

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and tariff escalation. Notwithstanding the advantages of preferences, critics allege that these

arrangements fostered complacency, apathy, and dependency in Sri Lanka’s agriculture

community. They say the PTAs programmed Sri Lankan farmers, processors, and distributors to

accept the primary commodity plantation agriculture model as their lot, never aspiring to more

than the production and export of raw farm goods. Unfortunately, Sri Lanka’s producers became

quite content with the export outlet and income potential afforded by PTAs, so much so that the

country’s production of key export products has dropped precipitously in recent years, which has

caused the country to fall short on some PTA quotas, a completely counterproductive and

counterintuitive consequence of PTAs.

Others blame Sri Lankans’ own lack of foresight and innovativeness. Studies argue that the

blame cannot be attributed to any intrinsic malevolence on the part of sponsoring countries

whose primary motivation for extending the arrangements was a desire to help poorer countries

develop. The international trade regime has become increasingly discriminatory against Sri

Lanka’s and other developing countries’ agricultural exports, both primary and value-added.

Despite the reforms invoked under the Uruguay Round Agreement on Agriculture (AoA) almost

10 years ago, Sri Lanka’s exports still do not have the kind of non-PTA market access in rich

country markets— particularly its two largest trading partners, the U.S. and EU—that one would

expect in an ostensibly free trade regime. Sri Lanka’s agriculture is also being undermined by an

onslaught of cheap, imported food that is flooding the Sri Lankan market and sold below cost,

which poor country governments and consumers find hard to resist .

Much of this food is produced in, and exported by, the U.S. and EU with the assistance of

massive domestic and export subsidies. Rich country domestic subsidies benefit their largest and

most prolific farmers, most of whom enjoy an above average standard of living, while export

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subsidies privilege the large agribusiness transnational corporations (TNCs) domiciled in the

U.S. and Europe that export the agricultural surpluses produced with the aid of domestic support.

Whereas the average American farmer is thriving and makes a good living, the average Sri

Lankan farmer is not so lucky. Due to dislocating import competition, many Sri Lankan farmers

are being pushed out of farming and are fleeing their rural homes for the overcrowded ghettoes

of urban areas.

With regards to internally-motivated constraints on poor country agricultural development, one

popular explanation is the modernization school theory that a country’s lack of economic

development is due to internal deficiencies that impeded its development momentum causing it

to deviate from the proper evolutionary development path that was taken by the advanced

countries.

Although modernization theory has been rightly assailed as ethnocentric and oblivious to the

complexities endemic to the particular poor country context that mitigate against growth and

development, it has some relevance to Sri Lanka in that Sri Lankans have contributed to their

country’s agricultural underdevelopment. Sri Lanka’s internal negligence is significant and

should be addressed by a tripartite coalition of government, industry, and civil society with

immediacy and urgency. Sri Lanka’s internal negligence stems from several shortcomings, all

tied to the country’s status in the world trading regime as a plantation economy, which has

fostered complacency with the status quo. These include the lack of an appropriate development

model; the undervaluing of agriculture as a development priority; the weak nature of the state;

the inequitable distribution of land, which marginalizes the highly productive small farmers and

negates their contribution to national production output; and an overwhelming inertia and lack of

political will for change.

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These shortcomings are anathema to sustained national development and have sprouted a number

of constraints that perpetuate underdevelopment and external dependency. The internal factors

include inadequate and/or inappropriate use of technology and too much emphasis on outdated,

unable to compete traditional export products and too little on the country’s unique non-

traditional crops. There has been inadequate emphasis placed on research and development

(R&D) and lack of irrigation, especially for the farming majority toiling in the hills.

There is poor farming infrastructure, especially roads for transporting goods from farm gate to

market. Furthermore, there is high rate of crime, especially predial larceny and seemingly

intractable dependence on imported food, especially carbohydrates (i.e., rice, cornmeal, and

flour) for domestic consumption. Government policies are inadequate such that government

shortsightedness, inaction, and/or malfeasance along with government’s downgrading of tea to

prioritize tourism and services. There is also private sector apathy and dependence on

government to mobilize growth when industry, not government, should be the driver of

economic development. The government’s rapid acceptance of structural adjustment

conditionalites has marginalized agriculture while commodity marketing boards weakened by

structural adjustment commitments. There is high cost of capital due to prevailing high interest

rates which makes attaining funding for retooling prohibitive and high cost of inputs, most of

which must be imported.

The public policy burdened by social concerns (i.e.,, the tea industry is artificially maintained as

the country’s largest employer of labor). There is dependence on preferential trade arrangements

as export vehicles while there is inadequate supply of primary goods to meet quotas under

preferential trade agreements (PTAs) and supply agro-processors. There are lack of effective,

integrated distribution and marketing systems. Because external challenges can overwhelm any

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product the country manages to produce with or without the presence of internally motivated

constraints, external variables are deemed to have more explanatory force. There are externally-

driven constraints like rich country tariff barriers and agricultural production and export

subsidies which encourage overproduction of surpluses that are shipped to poor countries like Sri

Lanka and sold at artificially low prices that undermine domestic production, productivity, and

competitiveness.

There is too much rapid trade liberalization under IMF/World Bank mandated programs which

imposed structural adjustment conditionalities without sufficient due diligence regarding the

potential societal and economic consequences of the liberalization. There is food dumping under

food aid programs, a corollary of rich country agricultural subsidization, which undermines poor

country production, productivity, and competitiveness. There is internally-motivated apathy and

complacent dependence on PTAs for their guaranteed high price points for primary commodity

exports. Furthermore, too little attention paid to unique, non-traditional farm products and agro-

processing as the next logical step forward beyond production/export of primary commodities

and an inappropriate development model that is based entirely on narrow structural adjustment

policy dictated by neoliberal ideals with little consideration for local particularities that

necessitate unique treatment. This development model has marginalized Sri Lanka’s tea sector,

its small farmers in particular.

Taken together, these constraints have institutionalized the plantation economy in Sri Lanka,

exacerbated its external dependency, and limited its development potential to associated

dependent development. Given the magnitude of its external dependency and underdevelopment,

Sri Lanka should realistically assess its ability to compete in the knowledge-based world trading

regime with an economy that is based largely on tourism and productive sectors grounded in

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primary production for export. Sri Lanka definitely needs to acknowledge tourism’s vulnerability

to external shocks, the inevitable exhaustion of its bauxite/alumina stores, and the challenges to

preferential trade arrangements upon which its major agricultural exports depend. To compete

more effectively in the world trading regime, Sri Lanka must build on its natural comparative

advantage in agriculture by diversifying targeted production to include niche nontraditional

products, cultivating a stronger agro-processing sector to add value to the country’s agricultural

exports and build stronger backward linkages to farmers and forward linkages to the tourist,

bauxite, and manufacturing sectors. If done properly, and if externally-driven constraints are

moderated, these efforts should increase the country’s earnings in world trade and facilitate

sustained, self-reinforcing development.

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Conclusion

The Sri Lankan tea industry needs to become competitive so that it can increase its productivity

and output. It needs to have clear and precise goals which can be used for attaining long term

growth within a short period of time. Furthermore, there is the need for a collaborative approach

which be used to ensure long term success. Productivity growth is often cited as one of the

major contributors to the continued economic growth of the postwar agricultural sector

throughout the world. Experience from Green Revolution in Southeast Asia has proved that

agricultural productivity growth is the key determinant of regional economic growth and rural

development in less developed countries. A more productive tea sector will not only help to

eliminate malnutrition and hunger, but also act as an essential factor in the fight against poverty

and unemployment. There is a convergence of professional opinion that agricultural supply

responses are restrained by many institutional and political factors, like input quality and

infrastructure, and the importance of such non-price constraints on agricultural production and

productivity growth has been universally recognized. But which of these factors is critical and

what policy best supports the achievement of external conditions for agricultural productivity

growth is still open questions. Improving tea productivity is fundamental to the sector’s

development and to the healthy growth of the overall economy. Another key reform should be in

the development of the workforce. Education is an investment in human capital. Education is

important because it can boost the skills and competencies of the workforce. It can create a

collaborative strategy for success which is based upon sound outcomes. It is through the use of

integrated and coordinated approaches that success can be attained within a short period of time.

Traditional inputs continued to be a dominant source of labor productivity growth and modern

technology has not yet had a pervasive impact on Sri Lankan tea industry. Land quality had a

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significant impact on labor productivity. Land and labor productivity should be enhanced in

order to achieve high levels of efficiency and effectiveness. It is through the use of an innovative

and collaborative approach that success can be attained within a short period of time. The

development of this approach is critical in order to ensure sound outcomes. Research and

development (R&D) are needed to increase agricultural productivity. Demand for food continues

to grow from population pressure and increased income, and this demand will have to be met

chiefly by increased production from agricultural land already in use, as there is little potential

for area expansion. Without continued funding for agricultural R&D and extension, reducing

hunger in food-insecure region while protecting the environment will not be possible. Rwanda is

a clear example. Per capita food production actually has declined in the last decade, a period in

which public sector investment in agricultural R&D stagnated while population growth at 3%.

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