Developing an Equilibrium Displacement Model of the Sri Lankan Tea Industry

The tea industry is an important contributor to the Sri Lankan economy, accounting for around 15 per cent of total exports and around 15 per cent of employment of the Sri Lankan people. However, the performance of the industry has slumped in recent years. The share of Ceylon tea in the world market is gradually decreasing, and its competitiveness is being challenged by emerging tea producing countries such as Kenya. Domestic consumption, while remaining stable, is primarily of low-quality tea as the best quality teas are expensive and are mostly exported to international markets. Production is declining and becoming more unstable because a number of government policies have been introduced which have disrupted the industry and led to unintended consequences. To provide a basis for examining these adverse trends, and some evidence-based data for future policy deliberations, the process of developing an Equilibrium Displacement Model of the tea industry in Sri Lanka is outlined in this paper. The relevant theory is described, input data such as market quantities and prices, and elasticity estimates, that are used in the model, are defined, and some hypothetical external shocks are imposed on different supply and demand functions. The results of those experiments verify that the model outcomes are consistent with the changes in inputs, and that the model would provide a sound basis for evaluating the expected outcomes of actual exogenous shocks or actual policy changes.