Total Factor Productivity, Efficiency, and Technical Change in Large Scale Tea Estates in Sri Lanka

Abstract

This paper applied a stochastic frontier model to measure total factor productivity growth, technical efficiency change, and technical change in tea production in the estate sector in Sri Lanka. Monthly data from 35 tea estates relating to the period 2005 to 2019 were used. Two functional forms with two distributional assumptions were tested. A Translog production frontier with the inefficiency term distributed as a truncated normal distribution was found to be the best fit for data. Results revealed that on average estate sector tea production operates 48% below the potential output indicating possibilities of increasing performance without any significant changes in inputs. Further, the overall rate of technical progress was estimated at 0.002 percent per year. The overall rate of technical efficiency change declined by 0.013 percent per year. The combined effect of slow technical progress, dominated by the fall in technical efficiency resulted in the decline in the total factor productivity in the corporate tea sector at a rate of 0.002 percent per year. This net effect of declining Total Factor Productivity raises concerns about the sustainability of the tea sector in Sri Lanka in the long run. Policies to shift up the production frontier and improvements in managerial practices to combat declining efficiency levels are recommended.