Sri Lanka’s tea industry – too long in adolescence, it’s time to grow up

Abstract

Tea sector wage negotiations periodically go into deadlock. There are political reasons for this situation, but also an overarching economic one: global tea prices have declined – as it periodically happens – and the industry is not geared to compete. Tea is an industry in which Sri Lanka has established a global reputation – Ceylon tea, as it is known worldwide, is considered to be amongst the best black tea in the world. This is mostly a result of Sri Lanka’s climatic and geographic conditions, which yield a quality of tea that is exceptional. Post-independence, Sri Lanka started off with an industry that was inherited. The tea plantations came not only with factories and machinery, but even workers who had been transplanted from India by the British, who served in poor and difficult conditions in the tea estates. The industry in Sri Lanka has relied mostly on its inherited position and first mover advantage in the world. Today it is in a crisis of its own brewing – the advantage of having poorly paid workers is diminishing, and the industry has not succeeded in adding to its productive value to face global competition. Currently, the average price of tea in auctions has fallen below the average cost of production. Therefore, while the more productive estates can yet be profitable, the less productive ones could be running at a significant loss. This Insight argues that there are practical solutions to the problems of the industry: unit costs can be reduced by increasing productivity and revenues can be increased by value addition.