From Plantations to Smallholder Production: The Role of Policy in the Reorganization of the Sri Lankan Tea Sector

The Sri Lankan tea sector has changed from one dominated by vertically integrated plantations to one where independent processors of black tea purchase their input (green leaf tea) from small, independent growers. This paper provides a unifying conceptual framework to characterize three major factors affecting the changes in vertical coordination arrangements (transaction, production, and management costs). Regulation and government policy have altered these determinants of organizational change. Transaction costs have been reduced by state intervention into the price for green leaf which subsequently lowered the risk of processors re-negotiating prices downward. Production costs, which continue to be dominated by labor expenses due to the lack of technological developments for harvesting, have increased more for plantations than independent producers due to union pressures.