2.0 FORTUNES OF SRI LANKA’S TEA INDUSTRY
Sri Lanka is privileged with the cooler, mistier climate and appropriate soil and slops which suited the tea industry. Ceylon received the first tea plant from Assam in the 1939 in British times where they brought more economical, social, political and cultural changes to Sri Lanka. Not until 1867 tea could be grown commercially and it’s James Taylor who acquired basic knowledge from North India and proved on Loolecondera plantations. It is true tea crops were grown in the graveyard of coffee; where until 1860 the main crop from Ceylon was coffee. Ceylon chamber of the commerce 1839 was created the private sector to enter the economical growth in Ceylon. From thereon the private sector prominence to the coffee and tea plantations with Worms Brothers and Ceylon Company. By 1875 tea cultivation accelerated all over Ceylon. Most of the tea plantations were owned by the British, Ceylon planters bought their lands to cultivate their tea from coffee. When coffee lost its value in commercial, colonial administrators concentrated on tea cultivation. Tea substituted the use of coffee, plantations geared to grow their crops and once again Ceylon relied on their own economical status.
Resources were properly utilized where in the ‘Native Era’ (1900-1920) Ceylon directed converting the fast track lands such as Gampola. Galle, Pussallawa and Matara to tea lands. Tea crops increased in correct weather in steep angled slops. To satisfy the unlimited need these resources converted as a factor of production. Scarcity of the world tea plantations, allocation of these resource and opportunity cost of coffee was feverish to Ceylon. Initial stage of tea planting hammered for some extent to the scarcity of tea seeds. Overcoming the situation Sri Lanka was the most valuable exporter around the world. Now we are the 3rd largest tea producers in the world market and have captured 9% as a producer.
3.0 GOVERNMENT INTERVENING TO THE INDUSTRY
Mixed economy of Sri Lanka is serving to the basic need of the economic standards of the country. The resources of tea industry were properly utilized in the country with the support of private enterprises and state of plantations. Government intervention on this industry is high with the authority. Most of the productive resources are owned by the government, but as the capitalistic system the plantations and productivity is owned by the private sector. The demand for Sri Lankan tea has increased; motivating the private sector can meet the supply for them.
Nattukottei chettiars were forerunners of the finance companies now. They played the middle man character to the enterprises in Sri Lanka until 1925, but by 1930 government compelled to take the financial sector. State Mortgage bank 1937 followed by the Bank of Ceylon 1947 took place in the country providing all the financial option given from the middleman. The majority of labours were imported from India and the colonialism was spread around the plantations. Separate laws were established for constitutional and labour rights protections.
Sri Lanka Tea Board (SLTB) is the only regulatory body providing services to tea planters, exporters and manufacturers. Colombo Tea Traders Association (CTTA) and chamber of commerce hold tea auctions weekly. The government intervention to auctions of teas from the Sri Lanka tea board was an excellent work to build confidence of the buyers. Auctions at the chamber of commerce have shown a higher price in 2010 than the last year’s auction. This proves the stability and the recovery after the sink of the industry in 2008. According to ‘Mahinda Chinthanaya’ we highlight the young entrepreneurs to enter the global market. Also we stated the investment GDP rates should be increased in 10 percent. Question is how can we increase the GDP rates in the country? Encouraging the private sector is useful and likely to be increased. Sri Lanka tried to tighten the monetary policy from 2007 to face the recession but the sterilization in outflow of the Central bank high interest rates helped to decrease in the inflation and contributed to loosen the monetary policy. Loosening the fiscal policy can increase the credit demand of private sector and can invest on credits, saying that having an exit policy to government will contribute to the growth of private sector. SLTB will proceed with the direct consistence of the monetary policy to maintain the availability and economic growth.
Sri Lanka has maintained to hold the power of the tea market in the tea industry to overcome the market failures while maintaining the poverty. An allocate efficiency has seen in this industry and shown the world the public-private-people approach by providing the highest auction price. Assimilate in a tremendous pace with the private sector; government can grow profitability absorbing innovations in technology and knowledge. From the direct guidance of SLTB countries monetary policy and fiscal policy will highlight the stake holders such as dealers, importers, exporters and plantations. Bureaucratic hurdles of the industry from import restrictions, protective tariffs, taxations, will distortion by intervening of the government. Capitalistic of the private and public enterprises and blending both economies can guide Sri Lanka to a significant growth with the modern economies.
4.0 IDENTIFYING THE MARKET STRUCTURES
Our tea industry demonstrates the number of sellers of tea is comparatively less and entry barriers are also high because of the government regulations and taxations. SLTB will provide the authority and the auctions will decide the price. Practically there the price makers where government regulatory body of SLTB has given the exporters the stabilize quality ISO 3720 level to maintain the global quality and standards of Ceylon tea. This leads to an Oligopoly market globally for Sri Lanka’s tea industry where we have a close substitute coffee. Nevertheless to enter to the firm countries should have the natural endowment for tea industry. With few sellers and many buyers, natural resources in the producing countries lead to this market structure.
Also sellers are earning super significant profit in the long run if we consider from the view of oligopolistic market. But also when India supplies were reduced on 2009 Sri Lanka increased their supply to the world market to capture more shares and profit which contributed the countries economy. Exchange of knowledge in tea industry is processing when our plantation Minister Mahinda Samarasinghe visited Kenya and compared the both systems of the countries with the agriculture minister Dr. Sally Kosgei of Kenya. Where we can think there can be exchanges of knowledge in this industry in future with the result of joint venture of free lands for coconut cultivation from Sri Lanka in change of buying back the crops. High amount of exporters globally like Kenya, India, China and Indonesia shows the amount of firms for this structure.
Global tea production up to February compared with 2010/2009
Even though we can say in the global market Sri Lanka’s tea industry will take consists of monopolistic market structure. Because Market forces will deliberate these form of structures. Industry contradicts a perfect competition market because it is the price takers in the market. Differentiation from black tea, green tea and many brands highlights it. With only few barriers to entry in the industry such as legal factors, government regulations and natural barriers it will focus on product differentiation. Supply will be relatively high contrasting the demand in the market will show a high elastic demand. The demand for Ceylon tea has increased rapidly where the net profit US$ 1.37 billion from export tea. Meanwhile the prices will only change fairly in the global market.
We can conclude tea has a mixed structure but more in to the oligopolistic market because of the less main exporters and high entry barriers especially because of natural endowments.
5.0 SRI LANKA SEES A STRONG DEMAND
Till the end of 2010 Sri Lanka has a strong demand for Ceylon tea in the global market. We can say the shortage of crops in India and Assam in July 2010 benefited us to perform well in the global market. The demand has increased in the Colombo auctions for the drop of crops in both countries. Also Sri Lanka’s auctions price will usually go high when the demand of the market is high meanwhile when the supply is high the price will be increased too. Especially the buyers will be increase when the demand is high. Increasing auction prices will have a strong stable demand in the world market. Also the demand of Ceylon tea in the world market has increased, even though china tried to match the taste of Ceylon tea we were enabled to keep the standards of our tea in the global market. Supply of all the plantations increased the demand for Ceylon tea. Also CTC packet tea has a high demand for the drop of Assam tea. If Sri Lanka can maintain the same quality and taste, the amount of importing countries will increase rapidly. But the quality of the product should be maintained even in the erratic climate of weather. Colombo auctions help the SLTB to maintain the equilibrium of the market by exporting the market surplus of tea. Also Sri Lanka can promote more in the world market and improvements of technology can increase the demand in the global market as well as the changes on the weather and seasons can fluctuate the supply. Sri Lanka is expecting high demand in the Ramadan in July and in winter where else the supply of plantations should be high too. All the stakeholders’ plantations, brokers, SLTB, manufacturers will be looking forward and expecting the boom of this industry. Brook-bond Lipton Ltd (Unilever), Lyons Tetley, Dilmah and premier brands has the demand in the market where they keep up with the supply. New technology, fluctuating price, innovations can decline the demand. Country will always equilibrate the demand and supply with getting the highest price paid in auctions.
Tea industry of Sri Lanka has a century old history. Exporting poor quality tea can be proceed of the world market if they demanding them, to maintain the standards of the tea exports in Sri Lanka SLTB has implemented ISO 3720 to restrict the export of poor quality. Even though we have restricted exporting but not importing poor tea to the country. Somalia, Ethiopia is some countries who buy them for blending purposes. Sri Lanka will also have a chance of meeting their demand as well if we can export the poor qualities which are produced in the country. Russia and former Soviet Republics are the largest buyers of Sri Lanka tea followed by Middle East and North Africa. Also reduce in oil prices can effect the demand for our tea from the Middle East countries. Moreover the global economy can affect the demand and the supply of tea. The world’s first ozone friendly tea is produced by Sri Lanka, promoting for healthy conscious beverage can increase the demand and benefit us.
6.0 GLOBAL SCENARIO FOR OUR TEA
Propagation of tea crops pioneered with British and fairy spread of plantations helped the growth of the cultivations. Other than the Black and Green tea Silver Tips tea, Golden Tips tea, Instant tea, Packet teas are some of the products we export. China, India, Sri Lanka, Bangladesh, Kenya, Tanzania, Zimbabwe are some significant tea producer countries. International trade can benefit us in the long run to the industry. European Fair Trade Organizations have 17 partners in Asia and Africa to import tea including Sri Lanka. Fair trade among the countries in the trade can benefit us in fair pricing where we can reduce the cost of production. Also countries will have a long last trusted relationship in trading. Tea fair was held in Hong Kong, china in 2009 where more of the buyers from all over the world has taken place. Sri Lanka grabbed a huge demand for Ceylon tea by attending the Tea Fair by promoting the tea exports. These are some advantages we capture from international trades.
Sri Lanka is currently under negotiation with the Iraq to increase exports in packet tea. Economic integrations with many countries will be advantage for main exporters like us to have a significant develop. Iranians are currently getting Ceylon tea in an unofficial way where this negotiation will grant the good quality tea to enter the market and the middle men will prevent from the two countries. Collaboration with the World Bank to support Sri Lanka as a middle income earned country can beneficial to us to build a firm relationship and establish, utilize the resources. I’m glad to mention even Sri Lanka is eligible for IBRD financing with the World Bank. Also Sri Lanka and Kenya had a discussion when our plantation ministry visited there and understood about the importance of the small manufacturers in both countries comparing their systems. Ministry was interested in this integration of the proposal for a joint venture with free lands for coconut cultivations in our country in change of buying the crops.
7.0 ECONOMIC INTERGRATIONS
As a member of South Asian Associations for Regional Cooperation (SAARC) the conflict between Pakistan and India influenced our Tea industry with India too. Indo Lanka free trade agreement helped to emerge new turns to the industry where TATA tea Ltd spread their plantation to Sri Lanka and industry suggested it will cater the Sri Lankan market. Economic integrations will aid us to eliminate the barriers to trade among the intergovernmental agreements. The trade blocs can be as free trade areas or preferential trade systems. The tariffs and non tariff barriers will be decreased by the countries’ free movement or goods. Sri Lanka brought employees from India to the plantations, where now we have a separate category called ‘Teas Tamils’ and spread of colonies around plantations. Sri Lanka will always seek for new friends in the world market now after the end of war to build to raise the economy of the country. End of terrorism after 43 years the attention of the world increased for us. Many exports and imports took place with no fear. Boom in the tourism sector helped us to increase the investments. The new port is being built in the Hambanthota by the Chinese government to help Sri Lanka. This will facilitate our government to ease the congestion of the ports. World Trade Organization (WTO) has the jurisdiction over tea exports. Which usually regulate commodities in the market. Also Food and Agriculture Organization (FAO) of United Nations will play a huge role in the tea industry of Sri Lanka as an exporter. Exports aid the raise the foreign currency for us. The Ethical trading Initiative (ETI) a partnership of NGO’s is mainly concerning about setting standards of labours internationally recognised. Ethical trading aims on the labour rights in the plantation and enjoy commodities. Also Tea Sourcing Partnership (TSP) formed 1997 to understand the fluctuate conditions of the plantations and validate the continues audits in the UK based Companies including R. Twining
The Impact Of Inflation On Interest Rates Economics Essay
Abstract This paper tries to explain the impact of inflation on interest rates (nominal and real interest rates). The impact of inflation on interest rates has usually positive relationship. Higher inflation rates, means higher prices, and more problems for businesses, consumers and government.
Introduction The relationship between the term structure of interest rates, inflation, and real activity has long been recognized as a central to both macroeconomic and finance theory, and as a critical in formulating economic policy and in investment decision (Berardi, 2009). According to Makin (2003a), when inflation is perfectly anticipated these costs, including so called “shoe leather costs” and “menu costs” are thought to be fairly low. However, unanticipated inflation has a more deleterious effect because it arbitrarily redistributes wealth between debtors and creditors. In one of the most influential works on monetary economics, Evans and Wang (2008) suggested a positive relationship between the nominal interest rate and the growth rate of the price level. Moreover, Berument et al (2007) once more confirm the validity of the Fisher hypothesis, which establishes a positive relation between interest rates and expected inflation, for the G7 countries and 45 developing economies. In this literature review, we seek to establish a comprehensive set of information regarding the impact of inflation on interest rates.
This paper is organized as follows. Section I describes the inflation. In section II, we explain the interest rates and its impact on the overall economy. Section III contains the explanations of the impact of inflation on the interest rates, which is the aim of this paper.
Defining the Inflation Shoven and Bulow (2004) define the inflation as a continual increase in the price level which affects individual, businesses and governments. However, the empirical evidence shows that the predictability of inflation at a long horizon varies considerably across countries and both simple theory and empirical evidence suggest that these differences have been driven by differences in monetary policy (Wright, 2002). Munir at al (2009) state that the conversional view in macroeconomics holds that low inflation is a necessary condition for fostering economic growth. Chi Lo (2009), confirms this by stating that a government debt crisis is rooted in excessive fiscal spending and the economic impact can be either inflationary or deflationary. Money printing boosts demand, forcing the exchange rate to depreciate, and finally causing a debt crisis.
Defining the Interest rates Interest rates are among most closely watched variables in the economy because their movements directly affect our everyday lives and have important consequences for the health of the economy. Furthermore, they affect personal decision such as whether to consume or save, whether to buy a house, and whether to purchase bonds or put funds into a savings account (Mishkin, 2007a). According to Philipe and Setterfield (2008) interest rates are an important component of economic theory and policy. Moreover, their role and importance are not well understood and although they are used extensively by central bankers to regulate the economy, there does not seem to be a clear grasp of how interest rates actually affect economic variables such as unemployment, inflation, and economic growth. Piga (2005) has provided a formal approach to the argument raised by many authors that delegation of monetary policy into the hands of an independent Central Bank may not be a solution for eliminating the inflation bias in society. There is a difference between nominal and real interest rates according to Bhuiyan and Lucas (2007). Nominal interest rates refer to the rate of interest before adjustment for inflation. While, the real interest rates is the nominal interest rates minus the inflation rate.
Impact of Inflation on Interest Rates For several years after the onset of the high inflation in the early 1970s, nominal interest rates remained relatively stable, resulting in real interest rates then turning negative in major economies. After several prior decades of relative price stability, the high inflation regime that emerged in the early 1970s surprised borrowers, including governments running sizeable fiscal deficits (Makin 2003b). When there is a budget deficit, government find ways of financing the deficit through borrowing from commercial and merchant banks or from the non-banking public through the issue of short-term bonds and monetary instruments, A. Isenmila and O. Okolie (2008). Moreover, Besley (2008), a well known professor, argues that most of the countries experienced high and volatile inflation during the 1970s and part of the 1980s, and low and stable inflation thereafter. The experience of the past suggests that using monetary policy to support the economy in the face of negative productivity shock had a little success. Rapach and Wohar (2005) describe how the inflation impacts on real interest rates by causing structural breaks. The breaks in inflation rates and real interest rates often coincide, with increase (decrease) in the mean inflation rate as we move from one regime to the next typically associated with decreases (increases) in the mean real interest rate.
Conclusion The main focus of this paper has been explaining inflation, interest rates and finally the impact of inflation in interest rates. When there is inflation, interest rates changes by causing problems to businesses, government and consumers, Mishkin (2007b). Inflation and higher interest rates causes the budget deficit (A. Isenmila and O. Okolie, 2008). When there is a budget deficit, government find ways of financing the deficit through borrowing from commercial and merchant banks or from the non-banking public through the issue of short-term bonds and monetary instruments, A. Isenmila and O. Okolie (2008). Rapach and Wohar (2005) describe how the inflation impacts on real interest rates by causing structural breaks. The breaks in inflation rates and real interest rates often coincide, with increase (decrease) in the mean inflation rate as we move from one regime to the next typically associated with decreases (increases) in the mean real interest rate.