Economies Of Scale Paradox In The Sri Lankan Tea Industry: A Socio-cultural Interpretation

This paper explores issues in the Sri Lankan tea industry, which contrary to conventional thinking on economies of scale, is dominated in production, yield, efficiency and contribution to the national economy by the newly emerged smallholder sector. Despite significant structural changes in the last decade, particularly the privatisation of large scale plantations due to underperformance as state-owned entities, the plantation sector still does not achieve expected performance, with yield and labour productivity about half that of major competitors. In contrast, the smallholding sector shows substantial contribution to the industry, and achieves at close to international standards. This scenario leads to questioning the universality of the doctrine of economies of scale. This study found that socio-cultural and political relations dominate production, and as a consequence, the theory of economics of scale has a loose interpretation in the context of Sri Lankan tea industry. The paper begins with brief overviews of the current world tea trade situation and the dual tea economy in Sri Lanka. Critical ownership phases of plantations are discussed in the historical, social-cultural and political economy context to identify causes of the performance disparity between sectors. Finally, implications and policy issues are addressed in providing some suggestions for industry enhancement.