Overview The tea industry has played a crucial role in the economic development of Sri Lanka, which is a major producer and exporter of tea in the world. While its relative importance has waned over the years due to lack of dynamism and rapid growth of the nonagricultural sector, tea remains a vital industry in terms of its contribution to national output, employment, and net foreign exchange earnings. However, for the industry to continuously contribute to economic growth, it needs to sustain a healthy production level while maintaining its quality and uniqueness. This is a summary of the publication Sri Lanka Tea Industry in Transition:150 Years and Beyond—a collection of researches from the Institute of Policy Studies of Sri Lanka that discuss how the industry can be made sustainable amid domestic and global challenges. Role of Tea in the Economy The tea industry provides employment directly and indirectly to a million people, supporting livelihoods of poor communities in estates and remote rural areas of the country. At the farm level, tea is a cash crop that generates income for both the farmers and workers, paying for food, schooling, and health care. The industry also generates a significant amount of valuable foreign exchange. Tea was the highest foreign exchange earner until about the 1980s when it was overtaken by foreign employment, garments, and tourism. In 2016, 12.3% of total export earnings were from black tea. Ceylon Tea, grown in the highlands of Sri Lanka—which was formerly known as Ceylon, fetches a premium in the global market. Sri Lanka is the fourth largest tea producer in the world and contributed to 6.5% of global production after the People’s Republic of China (40.5%), India (23.3%), and Kenya (8.6%). Challenges Faced by the Industry The global tea industry is increasingly under threat on many fronts. A range of complex domestic and global issues have affected the quality and quantity of tea produced and exported while increasing international competition has had a significant impact on price and profitability. One of the key issues confronting the tea industry is the decline in productivity, notably in tea plantations of such major producers as Kenya, India, and Indonesia. The causal factors for the low productivity and production include inadequate replanting, inconsistent fertilizer applications, aging and debilitating tea bushes, soil erosion, high wages, lack of worker and staff training, shortage of labor, poor living and working environment, high cost of production, and low profitability. More tea workers are finding alternative work while the young generation aspire for upward social mobility. Tea production is also influenced by the agricultural condition of estates, the topography of the tea lands, and other environmental and climatic conditions. In recent times, climatic changes that are taking place in different parts of the world, including tea-growing areas, have changed the quality of the tea that is being produced. Changing buyer interests, increasing health and environmental concerns, and stringent regulations have increased the number and nature of standards governing the industry. Future Growth Factors Conserving natural resources and developing human capital The tea industry in Sri Lanka uses more land and labor but less capital. While the industry deploys the land for its growth, it also gradually degrades the land with pollutants associated with fertilizer, engendering soil erosion. Thus, the long-term sustainability of the industry depends on how well the land is conserved. Moreover, in a growing economy, it is difficult to retain manual labor as new generations acquire higher-level knowledge and skills, and do not wish to be engaged in manual work. Aside from mechanization, one solution is providing a pathway for the younger generation to acquire high-quality human capital, which could then be their ticket to fields or production areas where such human capital is needed. Sri Lanka plantations are also experimenting with out-grower systems, where workers receive plots of land from plantations to independently cultivate and supply green leaf to factories. This could solve various moral hazard problems associated with hired labor. Development of physical infrastructure Transport and communication networks, the most important physical infrastructures, have improved significantly over the last 2 decades because of government efforts to develop the road network. However, transport infrastructure within and between the tea-producing areas and the marketing centers still require vast improvements. Maintaining sound macroeconomic policy Macroeconomic policy is the combination of fiscal and monetary policies run by independent government institutions. A sound macroeconomic policy produces macroeconomic stability characterized by low and stable inflation, stable exchange rates, and sufficient public financing for national development. Stability is essential for the development of any sector in the economy, not just the tea sector. Adopting appropriate trade policies Trade policy determines the degree to which a country is open for trade in goods and services. Open trade policies permit the import of goods to a country that substitutes or complements local goods, benefitting consumers, some producers, and exporters. The importation of tea into Sri Lanka does not substitute for the local tea and would not benefit local consumers since almost all Sri Lankans prefer Sri Lankan tea. It would complement exporters of blended tea since imported tea is much cheaper than Sri Lankan tea. Exporters would have the option to blend imported tea varieties with varying shares of local tea and use the phrase “packeted in Sri Lanka,” as a sign of high quality already established by the Pure Ceylon Tea brand. Thus, the Sri Lanka Tea Board (SLTB) will need to exercise some standards to maintain the quality and unique taste of tea blended in the country. Ensuring quality and enhancing competitiveness Quality and competitiveness are essential to a healthy industry. Maintaining the quality of tea is a “public service,” which is nonexclusive, requiring funding by the government or a common source. There is a need for an effective administration infrastructure to maintain quality. Otherwise, the quality of Sri Lankan tea will suffer to the detriment of the industry. Likewise, competitiveness of Sri Lankan tea increases with the quality of the product and profitability of suppliers. The higher unit price for tea indicates on average the existence of high-quality tea. Its profitability further improves when the cost of production is manageable. Strengthening the unique brand Strengthening the unique Pure Ceylon Tea brand offers the best opportunity for sustaining the tea sector. Sri Lankan tea already commands a premium price. Its availability is becoming more restricted; thus, quality and brand uniqueness are essential for it to continue to command a high price. This is a task that needs to be worked out by private and public sector stakeholders. Integrating deeper into the global value chain The global tea value chain consists of the producer, auctioneer, blender or packer, wholesaler, and retailer, who meets the consumer demand. At each stage of the chain, the value of tea increases. Sri Lanka began as a producer and later became a significantly large auctioneer and producer of value-added tea by way of packeted tea, etc. The production of value-added tea has been increasing overtime. The country should engage deeply in the global value chain through greater entrepreneurial strength of private firms and institutional support from the government. Benefitting from external economies and overcoming diseconomies of the tea industry The tea industry provides significant positive external economies mostly to the tourism sector. Some efforts have already been made to harness the colonial heritage of tea and the unique taste of Ceylon Tea, which provide additional incentives for tourists to choose Sri Lanka as a prime destination. The tea sector in turn introduces Pure Ceylon Tea to tourists. The tea lands can also be used for various other economic activities with external economies to supplement the income of the plantation and its workers. The industry also provides forward and backward linkages to many other economic activities. However, the industry also generates considerable external diseconomies to other sectors of the economy, mostly by way of soil degradation, water pollution, and enhancing the greenhouse gas effect. Many developing countries that are tea growers are keen on lowering greenhouse gas emissions through climate mitigation, and Sri Lanka has taken several major steps to reduce its carbon footprint. These efforts will ignite future demand for tea from Sri Lanka as it embraces green technologies in cultivation and production. Resource J. Wijayasiri et al., ed. 2018. Sri Lanka Tea Industry in Transition: 150 Years and Beyond. Colombo: Institute of Policy Studies Sri Lanka. Ask the Experts Nisha Arunatilake Director of Research, Institute of Policy Studies of Sri Lanka Nisha Arunatilake has extensive post-doctoral research experience in labor market analysis, education, public finance, and health. She holds a BSc in Computer Science and Mathematics from the University of the South and an MA and PhD in Economics from Duke University, United States. Follow Nisha Arunatilake on Janaka Wijayasiri Trade Specialist Janaka Wijayasiri is a trade specialist. He was a research fellow at the Institute of Policy Studies of Sri Lanka from 1999 to 2020. He holds a PhD in International Trade, focusing on standards governing the tea value chain in Sri Lanka from Monash University, Australia. Follow Janaka Wijayasiri on Institute of Policy Studies of Sri Lanka The Institute of Policy Studies of Sri Lanka is an autonomous economic research organization, established by an Act of Parliament, in Colombo. Its mission is to conduct high-quality, independent, policy-relevant research to provide robust evidence for policymaking and improve the lives of all Sri Lankans. Leave your question or comment in the section below: View the discussion thread.