25th January 1998

Tea: gains and challenges

In 1997 tea production reached a new peak of 265 million kilograms. This is the highest volume of tea ever produced in the country. Considering the bleak period the country's tea industry went through, particularly in the 1970s, this recovery of tea production is indeed most encouraging. Last year's production is a 33 per cent increase from the 199 million kilograms of tea produced in 1978. While the production increase in comparison with that of 1978 is very impressive, it must be recognised that the most significant gains in tea production were in the l990s. In the last 5 years tea production increased by 11.5 per cent. From 1993 onwards there has been a steady increase in production with the highest leap being between 1995 and 1996, when tea production increased from 246 million kilograms to 258 million kilograms, an increase of nearly 5 per cent for the single year, 1996.

Furthermore, the country has moved into a situation where the bulk of the country's tea is produced by smallholders and in low country areas. They produce about 60 per cent of the country's tea and their yields are higher than on estates.

Last year's fortunes for the tea industry were two-fold. The production increase was coupled with impressive price gains. The resuscitation of markets, particularly the market in the Commonwealth of Independent States (CIS), and the drop in tea production in Kenya due to bad weather conditions and dislocation of the industry, resulted in the higher prices. Sri Lanka also emerged as the largest exporter of tea last year, a position which would be difficult to hold in a normal year. Consequent on this increase in production and prices, tea export income increased from Rs. 34.1 billion to Rs. 36.4 billion. This increase also reflects the depreciation of the Sri Lanka Rupee during this period.

While we may be satisfied with the performance of the tea industry last year owing to both better management in the estates, improved productivity of smallholdings and good weather conditions, the industry faces both short-term and long-term problems immediately we may have to face up to weather conditions not being as favourable this year as in the previous few years. The Tea Research Institute (TRI) has warned of a possible drought which could affect adversely tea production in both the high elevation estates as well as in the low country. If this drought continues beyond next year, then our tea production could be affected for quite some time.

More significant are the long-term crisis the industry may have to face. Studies have shown labour shortages on the estates. Such shortages may grow as youth on these estates prefer to move out of them. There has been a long standing problem of low labour productivity on the estates. Since tea production is a labour intensive crop, low labour productivity implies higher costs of production. There are also continuous threats of strikes and indeed at times work stoppages. Estate management and labour must get together with a view to increasing labour productivity and relating increases in wages to increased productivity. By adopting a formula, which ties higher wages to productivity increases, the industry as a whole and the nation as well as the employers and employees could all gain. Else, any temporary gains by one may be to the long-term detriment of the others.

There is also a need to improve management practices further. Managers of estates must be oriented towards a more scientific cultivation of tea. The TRI at Talawakelle was the world's leading tea research institute at the time of our independence and for over a decade afterwards. It's capacity has been eroded over the years due to the brain drain resulting from unrealistic salaries and rewards. We are encouraged to note that its vision is to regain its pre-eminent position. The Tea Research Institute must be strengthened with top quality research personnel dedicated to the objectives of the Institute. The Institute should be more closely collaborative with the plantation companies and smallholders and responsive to the practical needs of tea producers.

Finally, it is also necessary that tea estates should view the land resources at their command to be utilised in the most productive manner. In many instances this implies diversified and more intensive use of land by the cultivation of other crops and development of animal husbandry.

Tea continues to be a significant source of foreign exchange earnings, provides livelihood for nearly half a million workers and absorbs a valuable land resource, which should be exploited fully for the country's benefit. There is also a need to look at tea production and the use of the tea estates from the point of view of the country's long-term interest and in relation to the preservation and improvement of the environment.

IMF policy to positively impact on poverty alleviation

The following article is based on a paper by the Expenditure Policy Division of the IMF's Fiscal Affairs Department, delivered at the Development Assistance Committee-Organization for Economic Co-operation and Development Seminar on Key Elements in Poverty Reduction Strategy, in Paris on December 4-5.

Since the late 1970s, the focus and scope of the IMF's work has broadened beyond managing aggregate demand and attaining macroeconomic stability to include a concern for high-quality growth - a key element of which is growth with enhanced equity and reduced poverty rates.

The IMF's policy advice can have a positive impact on the poor through three channels: macroeconomic policies and structural reforms, social safety nets, and public expenditures.

Structural reform

A major objective of the IMF's advice is to promote sound monetary, fiscal and exchange rate policies to achieve macroeconomic stability. In the short term, stability directly benefits the poor by reducing inflation and promoting realistic exchange rates.

More important, over the long run, a sustainable macroeconomic framework is critical for achieving the broad-based growth necessary to alleviate poverty.

Failure to correct serious macroeconomic imbalances can have high social costs. High and variable inflation hurts the poor because they usually have limited access to mechanisms that protect consumption and real income levels in such an environment.

High inflation can also erode the tax base - and consequently affect the government's ability to maintain social expenditures.

To the extent that inflation stems from monetizing government fiscal deficits, IMF policy advice calls for limiting government's access to bank credit to ensure that the private sector receives an adequate share of total credit.

The quality of fiscal adjustment is also critical: changes in expenditures or tax policy should be sustainable and have a lasting impact on the fiscal balance over the medium term.

Exchange rate policy is another important element of the policy mix. An overvalued exchange rate is likely to have a negative effect on the incomes of the rural poor who depend on agricultural exports.

In addition, structural reforms designed to sustain growth by promoting efficient resource use and providing incentives for competition and private initiative are usually needed to create conditions for economic growth.

These reforms include eliminating distortions in the fiscal system and liberalizing prices and interest rates.

Social safety nets

In the short term, some economic reforms aimed at removing impediments to long-term sustainable growth may hurt the poor.

Removing generalized price subsidies on basic commodities, reducing budgetary subsidies to state enterprises, and lowering protection following trade liberalization can cause a decline in the real incomes of the poor and losses in employment.

To limit these adverse short-term effects, many IMF-supported programs incorporate budget outlays on temporary social safety nets to transfer income or protect consumption (for example, targeted subsidies, cash compensation and improved distribution of essential commodities, such as medicine).

Safety nets can also enhance the political support for reforms. However, due regard needs to be paid to the cost-effectiveness and financial viability of these safety nets.

Expenditures

Reallocating public expenditures can benefit the poor by shifting spending to outlays - on productive capital and basic education and healthcare - that enhance growth, increase equity, and alleviate poverty, away from "unproductive" public expenditures that can be reduced without affecting policy objectives - such as distortionary subsidies and excessive military outlays. In reorienting budgetary expenditures toward capital outlays, IMF-supported programs are designed to reflect realistic expectations of the countries' capacity to implement capital projects and available external financing.

Because the productivity and benefit of education and health expenditures are highly dependent on how they are distributed, IMF policy advice has increasingly emphasized a shift in the pattern of spending toward higher spending on basic education and primary healthcare.

Programs and poor

The IMF's Enhanced Structural Adjustment Facility (ESAF) - like its precursor, the Structural Adjustment Facility (SAF) - was established to provide longer-term confessional resources to low-income countries.

A recent IMF review of 36 countries that have implemented structural adjustment policies under SAF/ESAF-supported programs during 1986-95 found substantial progress in creating the conditions for a stable macro economic environment and sustainable growth and in improving the composition of public spending.

Overall, IMF-supported programs have been most successful in ending high-inflation episodes (inflation rates of over 40 percent), but have been less successful in achieving single-digit inflation.

The review also examines the direct impact that IMF-supported programs have had on poverty rates and equity through the composition of expenditures and social safety nets.

Social Spending. Based on evidence for 23 countries, social spending in SAF/ESAF countries, on average, fared reasonably well during 1986-95 although substantially less so in CFA franc zone African countries.

A comparison of the last year for which data are available and the preprogram period (an average of six years) shows that real public spending on education increased in 17 of the 23 countries, with per capita education spending increasing, on average, by nearly 4 percent a year, as education spending as a share of GDP increased by 0.3 percentage point (see chart). Health expenditures increased in real terms in 18 of the 23 countries, with per capita spending increasing, on average, by almost 6 percent a year.

Health spending as a share of GDP increased on average by 0.3 percentage point since the start of the programs.

Increased spending on education and healthcare coincided with improvements in both education and health indicators. Although still high, the illiteracy rate was reduced by about 3 percent a year since the start of the first IMF-supported program.

Access to healthcare increased from 46 percent to 63 percent of the population, and immunization rates and access to safe water and sanitation increased sharply. At the same time, life expectancy increased by 0.3 percent a year as infant mortality fell by 2.1 percent a year.

The impact of social expenditures in reducing poverty depends largely on how these outlays are allocated. For the countries whose situations during 1986-95 were reviewed, the IMF study shows that distribution of the benefits of education and healthcare spending still disproportionately favours higher-income groups.

In the education sector, the percentage of benefits accruing to the poorest quintile of the population averaged 13 percent for a sample of eight SAF/ESAF countries, compared with 32 percent for the richest quintile. For the five SAF/ESAF countries for which health data are available, the poorest quintile received an average of just 12 percent of the benefits of total healthcare spending, compared with 30 percent for the richest 20 percent.

Although there is scope for improving the allocation of poverty-reducing social expenditures, poverty rates declined by an average of 20 pecent under IMF-supported adjustment programs in seven SAF/ESAF countries for which data are available.

For income inequality, data for the seven countries indicate that, on average the distribution of income improved.

Future challenges

The IMF's policy advice to member countries is centered on ensuring a sustainable macroeconomic framework that creates the conditions for growth and the reduction of poverty.

Further research is needed on the linkages between social expenditures and social output indicators to provide guidance for better targeting of social expenditures. Programs can be strengthened by following up more systematically on the effectiveness of social safety nets and by improved monitoring of the composition of expenditures.

The increeased emphasis on second-generation reforms to foster high-quality growth will likely have an even greater impact on the poor than in the past, which underscores the need for more work in this area.

(IMF Survey)

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