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Tropical exports and economic growth : the case of Ceylon Abeynayake, Chrishanthi 1972

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/ TROPICAL EXPORTS AND ECONOMIC GROWTH: THE CASE OF CEYLON by CHRISHANTHI ABEYNAYAKE B.A., Un i v e r s i t y of Ceylon, Peradeniya, 1967 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF Master of Arts i n the Department of Economics We accept t h i s t hesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA August, 1972 In presenting* th i s thes i s in p a r t i a l fu 1 f i 1'meri t of the- requi rements fo r an advanced degree at the Un ivers i ty of B r i t i s h Columbia, I agree that the L ib ra ry sha l l make i t f ree l y ava i l ab le for reference and study. I fu r ther agree that permission for extensive copying of th i s thes i s for s cho la r l y purposes may be granted by the Head of my Department or by his representat ives . It is understood that copying or pub l i c a t i on of th i s thes i s fo r f i nanc i a l gain sha l l not be allowed without my wr i t ten permiss ion. Department of Economics The Un ivers i ty of B r i t i s h Columbia Vancouver 8, Canada Date August 30, 1972 A B S T R A C T Ceylon has experienced a long period of export growth. Although export expansion led to a r i s e i n G.N.P., there i s not much ind i c a t i o n that export expansion alone was s u f f i c i e n t to cause a sustained and general i n -crease of per capita incomes. Per capita G.N.P. i s estimated to have r i s e n at the rate of 1.1 per cent per annum between 1926 and 1945. Trade also had only a l i m i t e d effect i n d i v e r s i f y i n g Ceylon's economic structure. Growth appeared to be confined to exports and immediately a n c i l l a r y services. The l a t e 1940's ushered i n a new era with the grant of Independence. Growth i n per capita G.N.P. accelerated from 1947 to 4.0 per cent per annum and was accompanied by an expansion of domestic agriculture and industry despite the fact that Ceylon also experienced a population boom since 1947. Why did exports f a i l to operate as a leading sector i n the pa r t i c u -l a r case of Ceylon? The problem i s approached by an examination of the follow-ing relevant factors: The h i s t o r i c a l background and the opening up of the economy to trade comprising an investigation of the impact of coffee plantations; some aspects of the production functions of export industries relevant to deter-mining the magnitude of foreign exchange earnings, share of l o c a l l y retained income; the scope for backward, forward and f i n a l demand linkages; the causes for inadequate response as well as the factors responsible for the acclera-tion i n growth i n la t e r years. i i i i i A theory which states that the nature of the production functions of export industries has a direct bearing on the extent to which the stimulus from exports leads to the development of related sectors would be relevant to almost any underdeveloped export economy i n which foreign trade plays a s i g -n i f i c a n t r o l e . Other factors, however, such as the shortage of c a p i t a l com-bined with the lack of credit f a c i l t i e s , the free a v a i l a b i l i t y of imports and inadequate infant industry protection, a land-based value system and the neg-ative role of the government v i s - a - v i s domestic agriculture and industry seem to have been major impediments to d i v e r s i f i c a t i o n around the export base. Acceleration i n economic growth and a greater degree of d i v e r s i f i c a t i o n i n the economic structure of Ceylon i n the post-Independence period appear to be connected with government p o l i c y , i n i t i a t i v e and assistance. TABLE OF CONTENTS Page LIST OF TABLES. . . v i i PART I: INTRODUCTION Chapter 'I. "THEOKETICXL"P ERSPECTIVE 1 Exports and Economic Growth: Enclaves as Frustrated Staples 5 Outline of Discussion 13 I I . HISTORICAL BACKGROUND 17 Bri e f Account of Early History. 17 The Colonial Economy Pr i o r to the B r i t i s h . 20 I I I . THE SHAPING OF A DUAL ECONOMY: IMPACT OF THE COFFEE PLANTATIONS 24 PART I I : TECHNICAL ASPECTS OF THE DEVELOPMENT OF TEA, RUBBER AND COCONUT AS EXPORT STAPLES IV. TEA: BACKGROUND.NOTES ON THE PRODUCTION FUNCTION, CONTRIBUTION TO RETAINED INCOME AND FUTURE PROSPECTS. . . . 51 Origin and Development of the Tea Industry i n Ceylon. . . . 51 Cul t i v a t i o n and Manufacture of Tea 52 Technical Progress and Productivity 56 The D i s t r i b u t i o n of Export Income 58 Economies of Scale 59 Small Holders i n the Tea Industry . 65 Domestic and Foreign Components i n Export Receipts From Tea 70 Post-War Problems: Price Movements and Market Structure. . 74 Marketing 78 i v V Chapter Page V. RUBBER: ASPECTS OF THE PRODUCTION FUNCTION, CONTRIBUTION TO RETAINED INCOME AND FUTURE PROSPECTS 86 Origin and Development of the Rubber Industry i n Ceylon. . 86 Rubber Cu l t i v a t i o n and Manufacture 87 Technical Progress and Productivity 94 D i s t r i b u t i o n of Export Receipts. . 96 Economies of Scale . 9 8 Small Holders i n Rubber 104 Estimate of Domestic and Foreign Components i n Export Receipts From Rubber • 108 Post-War Problems: Price Movements and Synthetic Substitutes . . I l l The Future of Ceylon's Rubber Industry 113 P o s s i b i l i t i e s for Cost Reduction i n Natural Rubber . . . . 116 VI. COCONUT: BACKGROUND NOTES ON THE PRODUCTION FUNCTION, CONTRIBUTION TO RETAINED INCOME AND FUTURE PROSPECTS . . . 120 Origin and Development of the Coconut Industry . . . . . . 120 Coconut Cul t i v a t i o n and Manufacture 122 Technical Progress and Productivity. 126 Local P a r t i c i p a t i o n . 130 Economies of Scale . 131 Estimate of Domestic and Foreign Components i n Export Earnings From Coconut . . . . . . 134 Post-War Developments and Export Prospects 136 PART I I I : EVALUATION AND CONCLUSION VII. TOWARDS A MORE DIVERSIFIED ECONOMY: THE SCOPE FOR LINKAGE EFFECTS FROM THE EXPORT INDUSTRIES 140 Spil l o v e r Effects of the Tea, Rubber and Coconut Industries 140 Backward Linkage Effects . . . . . . . . 144 v i C h a p t e r Page F i n a l Demand L i n k a g e s > 166 L a b o u r C o e f f i c i e n t s and S k i l l Components o f P l a n t a t i o n s . . 175 Fo rward L i n k a g e s 177 C o n c l u s i o n 194 V I I I . FOREIGN TRADE AND SECTORAL GROWTH: ANALYSIS OF INADEQUATE RESPONSE 196 The S t a n d a r d o f L i v i n g i n C e y l o n . 196 S e c t o r a l Growth : C o l o n i a l P e r i o d 197 Causes o f U n d i v e r s i f i e d Growth . . . 200 The Terms o f T r a d e and T h e i r E f f e c t . . 214 S e c t o r a l Growth — P o s t Independence P e r i o d . . . . . . . . . 220 APPENDIX 232 BIBLIOGRAPHY 251 LIST OF TABLES Table Page 1-1 Per Capita G.N.P 2 1-2 Percentage of Labour Force Employed i n the .Primary, .and Secondary. -Sector .... ... ..... .. ........... ,. ... ... .. .. 3 I I I - l Government- Revenue and Expenditure 1874 27 III-2 Selected Import Items 30 III-3 . The Ceylon Coffee Industry 1834-1886. . . . . 31 III-4 Coffee Exports From Ceylon. 32 III-5 Revenue From Paddy Tax 46 IV-1 Tea Production and Yields 57 IV-2 Percentage D i s t r i b u t i o n of Export Receipts From Tea . . . . 58 "IV-3 Size of "'Tea^Es'tates 60 IV-4 Average Tea Manufacturing Costs According to Size of ("... Output . . . . . 61 IV-5 Y i e l d of Green Leaf by Size of Tea United Cultivated - 1951 62 IV-6 Tea" Acreage and Average Y i e l d on Estates C l a s s i f i e d by Mean Elevation - 1951 63 IV-7 Average Colombo Auction Price of Tea Per Pound 64 IV-8 Extent of Small Holdings i n Tea 66 IV-9 D i s t r i b u t i o n of Export Receipts 1920-33 Yearly Average . . . 70 IV-10' D i s t r i b u t i o n of Export Receipts 1948-67 Yearly Average. . . 72 IV- 11 Household Expenditure on Beverages i n the U.K.. . . . . . . 78 V- l Average Price of Various Forms of Rubber (Rs) 92 V-2 Y i e l d of Rubber Per Bearing Acre 95 V-3 Percentage D i s t r i b u t i o n of Export Receipts . . . . . . . . 97 V-4 Size of Estate and Average Y i e l d Per Acre — 1951 99 V-5 Yield/Acre i n Estates C l a s s i f i e d by Size. . . . 101 V-6 The Average Cost of Manufacturing Rubber 103 v i i v i i i Table Page V-7 . 105 V -8 Yearly Average Distribution of Export Receipts 1920--1938. . . . 108 V-9 Yearly Average Distribution of Export Receipts 1952--1967. . . . 109 V-10 V - l l V-12 VI-1 VI-2 VI-3 VI-4 VI-5 VI-6 . 135 VI-7 V i l - I Export .Pxoceeds ».and Cosrts -of .P«roduG.tion ... ,..«, -. . 145 VII-2 VII-3 VII-4 Domestic Production and Requirements of Plywood Tea Chests. . . 164 VI1-5 Percentage Distribution of Plantation Expenditures. . 167 VII-6 Pattern of Plantation Expenditure 1953 and 1963 . . . 168 VII-7 VII-8 . 171 VII-9 VII-10 Local Consumption and Production of Rubber Goods. . . 179 VII-12 VII-13 Some Industries U t i l i z i n g Coconut Products as Their Main 193 VIII-1 Wheat Flour and Rice Imports VIII-2 Savings as a Percentage of Gross National Income 198 203 i x Table Page VIII-3 S t a t i s t i c s By Industry. . . . . . . . . . . . 211 VIII-4 Terms of Trade . . . . . . . 215 'VI11-5 Import Price Indices 219 VIII-6 The Terms of Trade Effect:';. . 221 VI I I-7 Export Taxation .19,25-1926 ,.to....l9£8-1969,. ... ,. .. .. . . . . . 222 " VIII-8 Value of In d u s t r i a l Production by Major Economic Categories . 225 VIII-9 Gross Rates of Return 1968... 226 VIII-10 Attachment to Selected Industries . 229 VIII-11 GNP (at current prices) 1938-1939 230 VIII-12 The Composition of Imports 1959-1969 231 A - l Tea Exports 1882-1969. . . . . . . . . . . . 233 A-2 D i s t r i b u t i o n of Export Receipts From Tea 1920-1938 . . . . . 235 A-3 D i s t r i b u t i o n of Export ..Receipts ,Fxom .Tea,„1948-19.67 .... --. -. -. 236 /.A-4 Rubber Exports 1913-1969 . . . 237 A-5 D i s t r i b u t i o n of Export Receipts From Rubber 1920-1938. . . . 238 A-6 D i s t r i b u t i o n of Export Receipts From Rubber 1952-1967. . . . 239 A-7 Coconut O i l Exports 1870-1969 240 A-8 Copra Exports. 242 A-9 Dessicated Coconut Exports 1892-1969 . . . 244 A-10 D i s t r i b u t i o n of Export Receipts From Coconut 1920-1938 . . . 246 A - l l D i s t r i b u t i o n of Export Receipts From Coconut 1944-1967 . . . 247 A-12 Index Numbers of Terms o-f Trade S248 A C K N O W L E D G E M E N T S I wish to thank my Supervisor, Dr. G. B. Hainsworth, for his encouragement and guidance throughout the preparation of t h i s thesis. I am also grateful to the Association of Un i v e r s i t i e s -and Colleges of Canada which granted-me a Commonwealth-Scholarship and the Central Bank of Ceylon which gave me leave of absence. F i n a l l y , I wish to thank Susan Aizenman for the e f f i c i e n t typing of the manuscript. CHAPTER I THEORETICAL PERSPECTIVE Ceylon has experienced a long period (over a century) of export growth. The introduction of an export sector undoubtedly enhanced the value of the national product of Ceylon. Her economy prior to the estab-lishment of plantations was a self-sufficient subsistence type which can hardly be supposed to have generated much non-agricultural investment, specialized entrepreneurship or a significant economic surplus. Trade apparently provided an outlet for the output of "surplus" resources which would otherwise have remained unused^ or not been imported. Pro-duction of exports also resulted in substantial additions to the G.N.P.: the value of total export receipts rose from Rs 91 mil in 1900 to Rs 1916 mil in 1969. Thus a sector capable of rapid expansion was introduced into the economy. Although export expansion led to a rise in G.N.P., there is not much indication that export expansion alone was sufficient to cause a sus-tained and general increase of per capita incomes. Per capita G.N.P. is estimated to have risen at the rate of 1.1 per cent per annum between 1926 and 1945 (see Table 1-1). Trade also had only a limited effect in diver-sifying Ceylon's economic structure. Growth appeared to be confined to exports and to immediately ancillary services. H. Myint, "The 'Classical Theory' of International Trade and Underdeveloped Countries," in Theberge (Ed.), Economics of Trade and  Development (New York: Wiley, 1968), pp. 1 2 TABLE 1-1 PER CAPITA G.N;P. YEAR POPULATION PER CAPITA G.N.P. YEAR POPULATION PER CAPITA G.N.P. (Mil) (Rs) (Mil) '.' . (Rs) . . . 1926 4.9 — 1955 8.7 582 1926-29 5.1 219 1956 8.9 566 1929-33 5.3 135 1957 9.2 578 1933-39 5.7 118 1958 9.4 610 1939-45 6.2 240 1959 9.6 612 1945 6.7 273 1960 9.9 635 1961 10.1 621 1947 7.0 373 1962 10.4 623 1948 7.2 411 1963 10.7 638 1949 7.5 382 1964 10.9 669 1950 7.7 486 1965 11.2 670 1951 7.9 577 1966 11.4 673 1952 8.1 566 1967 11.7 702 1953 8.3 561 1968 12.0 817 1954 8.5 527 1969 12.3 882 Population Growth Rate 1926-45 1.6% 1947-1969 2.4% Per Capita G.N.P. Growth Rate 1926-45 1.1% 1947-1969 4.0% Sources: W. Rasaputram, Influence of Foreign Trade on the Level  and Growth of National Income of Ceylon 1926-57 (Colombo: Central Bank of Ceylon, 1964), p. 73; D. R. Snodgrass, Ceylon: An Export Economy in  Transition (Illinois: Richard D. Irwin, Inc., 1966) Tables A-l, A-2, A-14. Central Bank of Ceylon, Annual Report of the Monetary Board to the Minister  of Finance 1969 (Colombo: Central Bank of Ceylon 1970), Appendix II, Table 4; Demographic Yearbook 1970 (New York: United Nations, 1971), Table 4, p. 109. *No attempt has been made to deflate G.N.P. because of the numerous difficulties involved. Official data on real G.N.P. are available from 1959-69. Even these estimates, however, are acknowledged to be "approxi-mate and tentative'.' [Central Bank of Ceylon. Annual Report of the Monetary  Board to the Minister of Finance 1962 (Colombo: Central Bank of Ceylon, 1963), p. 44]. as there are no realistic deflators. For instance, the Colombo Con-sumer's Price Index is heavily biased in favour of subsidized items. 3 Statistics with respect to the composition of G.N.P., structure of employment, share of exports i n G.N.P. and concentration i n exports i n d i -cate that Ceylon i s a "typical" underdeveloped export economy. The primary sector accounted for 33.5 per cent of G.N.P. whereas the secondary sector accounted for just 17.8 per cent of G.N.P. i n 1969. Fifty-three per cent of the total workforce found employment in the primary sector and 13 per cent i n the secondary sector i n 1963. In more developed countries the share of the secondary sector i s larger and the primary sector generally small. Table 1-2 below illustrates that in more developed countries, em-ployment afforded by the primary sector i s well below that of the secondary sector whereas the reverse is true of less developed countries. TABLE 1-2 PERCENTAGE OF LABOUR FORCE EMPLOYED IN THE PRIMARY & SECONDARY SECTOR PRIMARY SECTOR SECONDARY SECTOR U.S. (1969) U.K. (1966) Canada (1970) Australia (1966) Japan (1965) Iran (1966) W. Malaysia (1962) Pakistan (1965) Indonesia (1964-65) Thailand (1960) Philippines (1965) Ceylon (1963) 5 5 9 11 25 42 52 68 67 82 53 53 32 43 27 36 31 23 8 12 7 4 13 13 Source: I.L.O, Yearbook of Labour Statistics 1970 (Geneva I.L.O., 1971), Table 3. ~ ~ — 4 Ceylon's exports which constituted 17.5 per cent of G.N;P. in 1969 are concentrated in a few primary products. Tea, rubber and coco-nut are the major exports and they account for around 90 per cent of total export value. The percentage share of tea, rubber and coconut in total exports was 63 per cent, 17 per cent and 10 per cent respectively in 1967. Other countries which also exhibit a similar concentration in exports include Colombia where coffee accounts for 59 per cent of total exports and petroleum 10 per cent; Venezuela — petroleum 92 per cent; Panama — bananas 50 per cent, refined petroleum 27 per cent; Malaysia — rubber 33 per cent, tin 20 per cent and timber 17 per cent; Philippines — coconut products 28 per cent, sugar 17 per cent, wool 26 per cent.*' The late 1940's ushered In a new era with the grant of Independence. Growth in per capita G.N.P. accelerated from 1947 to 4.0 per cent per annum and was accompanied by an expansion of domestic agriculture and industry despite the fact that Ceylon also experienced a population boom since 2 1947. A rate of growth of four per cent, however, can hardly be con-sidered satisfactory. It is therefore important to enquire what potential there may be (or may have been) in more diversified growth based on the growth of export staples. International Monetary Fund, International Financial Statistics, July 1969 (Washington, D.C.: I.M.F., 1969). 2 The introduction of D.D.T. eradicated malaria in 1947. The drop in the death rate was immediate. In 1946, deaths per 1,000 stood at 20, in 1947 it declined to 14 and by 1949 it had dropped further to 12 per 1,000. 5 Exports and Economic Growth: Enclaves as Frustrated Staples The "staple approach" to economic development views it essentia ly as a "process of diversification around an export base."''' The spread effects of the export sector are determined by such factors as the reso rce base of the country, external demand and the production functions of th--stapies being exported. This gives us a possible line of investigation. The nature of the production function has a direct bearing on the extent to which the stimulus from exports leads ;to the development of re-2 lated sectors. The degree of factor substitutability, returns to scale, etc., are defined by the production function of the export industry and determine the demand for factors, intermediate inputs, possibilities for further processing and distribution of income. Forward, backward and final demand linkages of export industries induce investment and deter-3 mine the extent of diversification around the export base. Requirements of intermediate inputs for the export industry will encourage local production to the extent that they are needed in quantities large enough to permit a minimum efficient scale of production and provided that the necessary resources and technology are available. These requirements need not induce investment in an open economy (as im-ports are available) unless the inputs can be produced more cheaply at Hi. H. Watkins, "A Staple Theory of Economic Growth" in W. T. Easter-brook and M. H. Watkins (Eds.), Approaches to Canadian Economic History (Tor-onto: McClelland and Stewart Ltd., 1967), p. 53. 2 R. E. Baldwin, "Export Technology and Development From A Subsistence Level," Economic Journal (March, 1963), pp. 80-92. 3 Watkins, op. cit., p. 54. 6 home. Some overhead investment has to be provided domestically to f a c i l i -tate this. Watkins argues that the building of transport systems for movement of the staple is an important backward linkage i n staple-led growth.* Forward linkages result from inducements to invest in industries 2 using the exportable commodity as an input. In increasing value added In the export sector the major determinants are the economic p o s s i b i l -3 i t i e s of further processing and the nature of the foreign t a r i f f . Expenditure of the incomes accruing to factors in the export sector can also induce investment in domestic industries producing con-sumer goods. The absolute level of income and i t s distribution deter-4 mine the size of the domestic market for these goods. The shares of wages and profits w i l l vary according to whether the export industry i s more capital or labour intensive. The share of profits tends to be higher in capital intensive industries whereas the share of wages is relatively high i n labour intensive industries. This affects the pattern of demand, for where the share of wages i s high, domestic investment may be stimulated due to the enlarged demand for simple consumer goods. The distribution of income i s also important; when the distribution of income i s markedly watkins, op. c i t . , p. 55. 2Ibid., p. 55. 3 Ibid., p. 56. 4 Ibid., p. 56o 7 skewed (e.g., extremely high salaries for management and extremely low wages for labour) expenditure is on luxuries at one end and subsistence at the other. Final demand linkages tend to be higher, the higher the average level of income and the more equal its distribution: at higher average levels of income, consumers are likely to purchase a broad range of goodsand services which lend themselves to economies of mass production. On the supply side, too, expansion of exports create opportunities for investment by the supply of entrepreneurship, capital, technology, etc. Here, local entrepreneurship is a crucial factor — "the ability to per-2 ceive and exploit market opportunities." Foreign entrepreneurship may flow freely to export and import trades, but not so readily into the domestic sector. It is also suggested that plantation industries inhibit 3 entrepreneurial ability with their lack of social mobility. Even where there is an adequate supply of local entrepreneurs, their effectiveness depends on the availability of skilled labour, capi-tal and other resources. The higher the degree of processing in the ex-port sector, the greater is the training of local labour and the diffusion of generally useful skills. It might be expected that savings will be generated from profits in export industries, but foreign capital also gen-erally flows only into the export sector. The magnitude of domestic sav-Hfetkins, op_. cit., p. 56. 2 Ibid., p. 57. 3Ibid., p. 57. 8 ings is again influenced by the production functions of the export in-dustries. A skewed income distribution is sometimes alleged to lead to higher savings. Domestic savings would then be channelled into domestic investments so far as opportunities exist for profitable returns in domes-tic markets.* Investment opportunities can be provided by the forward, backward, and final demand linkage effects of export industries, as well as by the demonstration effect of export industries (i.e., local participation in export industries). Local participation in export industries can. be pre-vented by technical complexity or economies of scale requiring large i n i t i a l capital outlays. On the other hand, the demonstration effect of export in-dustries can lead to production by small-holders when there are no signi-ficant economies of scale and methods of processing are simple. Domestically retained income is an important measure of the extent to which export industries can directly contribute to local economic growth. Local payments enlarge the domestic market and also result in capital for-2 mation. The degree of local ownership, levels of local taxation and ex-port duties, and the percentage of costs of production and wages and sal-aries spent locally determine retained income. The higher the receipts from exports, the greater the expansion in the domestic market, other things ^Watkins, op_. cit., p. 58. 2 Assuming that capital formation is a function of savings and investment opportunity. 9 being equal. Technological progress, adaptation of the product to suit changing tastes are some of the means by which productivity per worker and export income might be raised. In addition to the ability of the economy to respond to exter-nal stimuli there must exist a capacity to shift to new types of exports and/or import substitutes to maintain sustained growth. The ability to shift to new foreign markets depends upon external demand and available resources: the ability to shift to the domestic market depends among other things on population and the level of per capita income that would enable the country to take advantage of the economies of scale in modern industry.^  In L.D.C.'s export staples have been confined in greater or lesser degree to enclaves, and diversification around the export base has been limited. The failure of the export sector to send strong impulses to related industries has therefore to be explained. Linkage effects of the export industries appear to have been weaker in countries where export production was superimposed on a pre-existent subsistence economy. On the demand side, the magnitude of the demand for intermediate inputs may not have permitted economic levels of production. Resources and technology for the production of inputs or for increasing value added may have been lacking on the supply side. Moreover, exporters of primary products tend to be countries with highly concentrated exports dependent on one or .two export items for their entire foreign ex-ratkins, op. cit., p. 63. 10 change e a r n i n g s , w h i c h p r e v e n t s a s h i f t t o new t y p e s o f e x p o r t s o r i m p o r t s u b s t i t u t e s . F u r t h e r m o r e , t h e skewed income d i s t r i b u t i o n p r o b a b l y r e s u l t e d i n e x p e n d i t u r e on s u b s i s t e n c e by w o r k e r s and on " l u x u r i e s " by management. L . D . C . ' s were g e n e r a l l y n o t i n a p o s i t i o n to p r o d u c e l u x u r i e s , p a r t i c u -l a r l y as t h e marke t f o r them w i t h i n L . D . C . ' s was s m a l l . In t he c a s e o f s u b s i s t e n c e a g r i c u l t u r e , i n c r e a s e s i n p r o d u c t i v i t y may have r e q u i r e d i m -provement i n t e c h n i q u e s o f p r o d u c t i o n . The d i s p e r s i o n o f new t e c h n i q u e s t o d o m e s t i c a g r i c u l t u r e , however , c o u l d o n l y have o c c u r r e d when t h e m a r -k e t p r i c e s o f t h e s e p r o d u c t s r o s e and e n a b l e d f a r m e r s t o p u r c h a s e n e c e s -s a r y c a p i t a l items"*" and a l s o compensated f o r the g r e a t e r r i s k s i n v o l v e d i n e m p l o y i n g new methods o f p r o d u c t i o n . A l t h o u g h the demand f o r a g r i c u l -t u r a l p r o d u c t s would have r i s e n w i t h the i n f l o w o f l a b o u r i n t o p l a n t a t i o n s and m i n e s , marke t p r i c e need n o t have r i s e n as i m p o r t s o f a g r i c u l t u r a l p r o d u c t s c o u l d a l s o have i n c r e a s e d . M o r e o v e r , t h e p rob l ems o f t he r u r a l s e c t o r a r e o f t e n so comp lex t h a t a h i g h d e g r e e o f government a s s i s t a n c e i s r e q u i r e d b e f o r e new t e c h n i q u e s c a n be a d o p t e d . P r o f i t s and s a v i n g s tend to f l o w o u t i n t h e ab sence o f t a x a t i o n . T h a t w h i c h rema in s w i t h i n t h e c o u n t r y i s g e n e r a l l y i n v e s t e d i n t h e e x -p o r t s e c t o r due to l a n d - b a s e d v a l u e s , e x p o r t m e n t a l i t y , e t c . The d i s -c o u n t e d r a t e o f p r o f i t i n p l a n t a t i o n s and mines may t h e r e f o r e have been R. E. B a l d w i n , Economic Deve lopment and E x p o r t G r o w t h : A S tudy  o f N o r t h e r n R h o d e s i a 1920-1960 ( B e r k e l e y , C a l i f . : U n i v e r s i t y o f C a l i f o r n i a P r e s s , 1 9 6 6 ) , p. 6 5 . 11 considered higher than domestic i n d u s t r y . Furthermore, i t i s d o u b t f u l whether the share of l o c a l l y owned c a p i t a l was l a r g e enough to f i n a n c e domestic i n d u s t r y . There could a l s o have been an absence of i n s t i t u t i o n s p r o v i d i n g long-term c r e d i t to domestic i n d u s t r y . E x t e r n a l c a p i t a l would g e n e r a l l y have been l i m i t e d to the export and import trades. "The s t a p l e theory. . . i s more than anything e l s e a theory of c a p i t a l formation and i n d u s t r i a l l o c a t i o n . " * I n the case of L.D.C.'s, however, e x t e r n a l c a p i t a l has not financed domestic i n d u s t r i e s l i n k e d to exports to any great extent. I t i s o f t e n s t a t e d t h a t there i s a shortage of s k i l l e d labour i n L.D.C.'s. This i s r e f l e c t e d i n the s a l a r i e s of f o r e i g n s k i l l e d personnel who a l s o have to be paid h i g h wages to compensate them f o r l o s s of r e l a -t i v e s and f r i e n d s , e t c . and f o r the poorer c o n d i t i o n s of h e a l t h , education . . . i n L.D.C.'s. The l a c k of e d u c a t i o n a l and t e c h n i c a l f a c i l i t i e s i n L.D.C.'s however, need not have been a f u l l y s a t i s f a c t o r y e x p l a n a t i o n f o r the shortage of l o c a l labour and the s u b s t i t u t i o n of f o r e i g n personnel f o r l o c a l labour and "one of the reasons f o r the shortage of s k i l l e d l o c a l labour seems to be a l a c k of e f f e c t i v e demand f o r i t . To a c o n s i d e r a b l e extent t h i s must be a t t r i b u t e d to the ( f a c t t h a t ) . . .there i s no v e r t i -c a l m o b i l i t y of labour i n t o s k i l l e d and managerial grades, which keeps 2 these f a c t o r s a t a premium." Entrepreneurship, a key f a c t o r i n develop-ment could a l s o have been i n short supply due to the l a c k of s o c i a l m o b i l i t y i n p l a n t a t i o n s and mines. *R. E. Caves and R. H. Halton (Eds.), The Canadian Economy (Cambridge, Mass.: Harvard U n i v e r s i t y P r e s s , 1961), p. 30. 2 H. Myint, "The Gains from I n t e r n a t i o n a l Trade and the Backward C o u n t r i e s , " i n Theberge (Ed.), Economics of Trade and Development, op. c i t . , P-12 Domestic market Imperfection, too, may have obstructed the recep-tiveness of an economy to the stimulus from exports. The economies of L.D.C.'s are characterized by such factors as price rigidity and factor immobility. This is probably due to the fact that the subsistence and plantation-economies are not fully integrated, i.e., the dualistic nature of the economy. Furthermore, internal marketing facilities tend to be poorly developed, if at all. In any case, the size of the market is so small that it is easier and may be more profitable to send exports out cf the country than to reach the individual consumer within the L.D.C.* This perhaps accounts partly for the lack of domestic production. In the case of Canada, a 'new country' which succeeded in diversi-fying around an export base, the continuous Inflow of capital, her resource base, the favourable man/land ratio and the role of the State in promoting and shaping economic development were important factors in her growth. The linkage effects of the export sector were stronger than in L.D.C.'s. For instance, when external demand and rising per capita income led to the pro-duction of wheat, it involved considerable amounts of capital. The capital intensive nature of the wheat industry stimulated investment in machinery, agricultural implements and motor vehicles which were substituted for human 2 and animal labour. The income distribution from the production of wheat G. M. Meier, International Trade and Development (New York: Harper and Row, 1963), pp. 182 and 183. Caves and Holton, op. cit., p. 43. 13 (the high average levels and widely distributed incomes of a 'commer- . cially-oriented proprietor-farmer economy1) favoured expansion of the domestic market.*" Moreover, the "role of the state i n Canada has been expansionist — pushing frontiers westward, bolstering staple exports, encouraging industrialization, promoting immigration and f a c i l i t a t i n g 2 capital inflows. . ." Canadian t a r i f f s have also been high and i t is reported that "the wheat boom f i n a l l y caused the Canadian policy of high t a r i f f s and 'all-Canada transportation' to yield the desired pay-off of 3 a large industrial sector." It i s doubtful whether the governments of L.D.C.'s played such an important role i n securing responses to staple expansion i n the early stages of export growth. Furthermore, low t a r i f f s on imports could have led to a high import content in local expenditure of L.D.C.'s. Outline of Discussion Why did exports f a i l tooperate as a leading sector in the particu-la r case of Ceylon? The problem i s examined i n this thesis i n the following manner. G. W. Bertram, "Economic Growth in Canadian Industry 1870-1915: The Staple Model," i n Easterbrook and Watkins (Eds.), Approaches to Cana- dian Economic History, op. c i t . , p. 77. 2 Easterbrook and Watkins (Eds.), "Introduction," Approaches to  Canadian Economic History, op. c i t . , pp. XIV, XV. 3 Caves and Holton, op. c i t . , p. 44. 14 In Chapter II, Historical Background, we outline the early history of the economy of Ceylon as the pre-colonial economy was a modified ver-sion of the economy as i t had existed for many centuries. The colonial economy prior to the coming of the British i s also described in Chapter II. Chapter III, The Shaping of a Dual Economy: Impact of the Coffee Plantations, comprises an investigation of the impact of the superimposi-tion of a plantation sector upon a subsistence economy; shift in emphasis of government policy away from domestic agriculture towards plantation agriculture, predominance of plantations, adverse effects on domestic agriculture, dependence on imports. . . . Part II: Technical Aspects of the Development of Tea, Rubber and. Coconut as Export Staples, comprises three chapters, Chapters IV, V and VI. Tea, Rubber and Coconut: Background Notes on the Production Function, Contribution to Locally Retained Income and Future Prospects, In each chapter there is an examination of some aspects of the production func-tion of the export industry relevant to determining the magnitude of foreign exchange earnings, share of locally retained income and linkage effects, which w i l l then be pulled together i n the subsequent section in Chapter VII. Also included i s an examination of market price movements and competition from synthetic substitutes. Part III: Evaluation and Conclusion comprises Chapters VII and VIII. Chapter VII, The Scope for Linkage Effects, examines possible link-age effects; backward, forward and f i n a l demand linkages taking into con-. 15 sideration economies of scale, equipment and skills, natural resource con-ditions. Chapter VIII, Foreign Trade and Sectoral Growth: Causes for In-adequate Response comprises: (a) effects of the interaction of the export sector on the rest of the economy during the colonial period via -standards of living, levels of production and employment and reasons for the stagnant state of domestic agriculture and industry; (b) terms of trade and their connection with development in the 20th century; (c) post-Independence: factors responsible for the acceler-ation In growth, role of government in strengthening linkage effects of export Industries. 60 " MAP I. Ceylon: Relief. Source: B. H. Farmer, Pioneer Peasant C o l o n i z a t i o n i n Ceylon: A Study i n Asia n A g r a r i a n Problems (London, New York: Oxford Univer s i t y P r e s s , 1957), p. 4. CHAPTER II HISTORICAL BACKGROUND Brief Account of Early History A people of Indo-Aryan stock settled in the Northern plains of Ceylon around the 5th Century B.C. The old Sinhalese kingdoms were feudal in structure. They were based on self-sufficient village com-munities. Ceylon's wealth lay in her rice fields and export trade con-sisting chiefly of pearls, gems, spices and elephants. In Northern Ceylon*" the rainfall is between 50 and 75 inches per annum. This region is also subject to drought during the Southwest monsoon from May to August. Paddy cultivation requires a plentiful supply of water. In the Dry Zone of Ceylon, where the old kingdoms were established, paddy fields were irrigated by a "colossal and complex sys-2 tern of interrelated dams, canals and tanks mingling the waters of rivers 3 flowing in different directions." Ceylon can be divided into two broad regions based on rainfall — the Wet Zone and the Dry Zone. The Southwest of Ceylon and its central mountains has an annual rainfall between 100 and 200 inches and forms the Wet Zone. Land outside this area forms the Dry Zone which occupies 70 per cent of the land area of Ceylon. 2 The word tank denotes reservoirs — great artificial lakes. 3 S. Paranavitana, "Civilization of the Early Anuradhapura Period," in History of Ceylon, University of Ceylon Press Board (Colombo: Ceylon University Press, 1960), pp. 97, 98. 17 18 Agriculture was a dynamic sector in the old structure, as proven by the high degree of scientific knowledge and technical s k i l l achieved by engineers in those times. For instance, one channel (the Jayaganga) was 45 miles in length, 40 feet wide and its gradient for the first 17 miles was only six inches to a mile."1" The f a l l in ancient canals was 2 generally one foot in a mile. Just as the economy was based upon agriculture, the service system was based upon caste and continued thus over the centuries. The caste system was a division according to occupation. On one side there were the agriculturists or farmers, constituting the bulk of the people, and on the other there was a multitude of professional castes such as artificers, huntsmen, fishermen, weavers of cloth, potters, etc. Ceylon's favourable location on the East-West trading route con-tributed to her development as an entrepot and she had become an important stop-over and trading point for traders from Malaya, China, Arabia and Per-sia. Cosmos Indicopleustes had written of Ceylon at the beginning of the 6th Century — "as Its position is central, the Island is a great resort of ships from a l l ports of India and from Persia and Ethiopia and in like 3 manner i t despatches many of its own to foreign ports." Hjilhelm Geiger, Culture of Ceylon in Mediaeval Times (Weisbaden: Otto Harrassowitz, I960), p. 90. 2 C. W. Nicholls, " C i v i l i z a t i o n of the late Anuradhapura Period," in History of Ceylon, University of Ceylon Press Board, op_. c i t . , p. 164. 3 Quoted in Ibid., p. 163. 19 There were colonies of merchants in the capital c i t i e s and sea-ports, most of them being foreigners. Customs duties were levied on exports and imports. Pearls and gems were a Royal monopoly. Although barter played an important role with respect to internal trade, trading and banking corporations had existed at trading centres,*" and there i s 2 evidence of coined money being used extensively. By the 12th Century, however, the kingdom failed following a per-iod of c i v i l war and Increasing pressure from South India. These kingdoms were thereafter confined to the Wet Zone area of the Southwest and Central regions of the island and there emerged a concentration of Tamils in the Jaffna peninsula. The irrigation system in the Dry Zone passed into ruin. The Wet Zone was divided into two kingdoms, Kotte and Kandy. Kotte was close to the harbour of Colombo. The rulers of the Kotte kingdom are reported to have become more conscious of the value of foreign trade than their predecessors since they received less revenue from paddy than the latter, who reigned in the North Central Province. Wet Zone areas were less suited to the cultivation of r i c e . They had encouraged foreign trade 3 especially i n cinnamon. Coconut, too, was cultivated extensively, part 4 of i t being for export. *"S. Paranavithana, op_. c i t . , p. 102. 2 I b i d . , p. 102. 3 G. C. Mendis, Ceylon Today and Yesterday, 2nd edition (Colombo: The Associated Newspapers of Ceylon Ltd., 1963), pp. 105 and 106. 4 S. Paranavithana, op. c i t . , p. 319. 20 After 1500, f i r s t the Portuguese and then the Dutch — attracted by cinnamon which grows best in Ceylon — controlled the maritime provin-ces of Ceylon. Finally these coastal areas came under the Br i t i s h in 1796 who by 1815 were i n possession of the entire island. The Colonial Economy Prior to the Br i t i s h * Before the coming of the British, Ceylon was essentially a feu-dal, self-sufficient, peasant economy. Her export trade was almost en-t i r e l y in the hands of foreign merchants, many of whom had settled i n Ceylon. A l l power was vested in a king. Governmental organization was closely tied up with the system of land tenure and revenue. ". . .the relation between ruler and ruled and between various grades of society, being based on services in return for the holding of land, interlocked with the pervasive but not too r i g i d caste system."* A village consisted of a collection of landholdings. The c u l t i -vation of paddy was the major occupation of the people. Paddy was cul-tivated in valley bottoms and also i n the h i l l s by the terracing of h i l l slopes. In addition to paddy land, each village had gardens on unirrigable high lands containing vegetables, f r u i t and coconut trees among others, and chenas — land cultivated by f e l l i n g and burning jungle and l e f t fallow for a period of years after cultivation for two or three years. Paddy cultivation required a high degree of interdependence. As Bryce Ryan observes, "each operator's plot i s separated from others by a S. A. Pakeman, Ceylon (New York: Praeger, 1964), p. 39. We confine our attention to the Kandyan kingdom as there is a dearth of information regarding the system prevalent in the maritime provinces. 20a low bund which controls the flow of water from the higher to the lower land. In maintaining these boundaries, the various operators must be in agreement. Frequently they benefit mutually by joint work i n mainten-ance and i n construction. . .Even f a i r l y uniform timing i n the various stages of cultivation is desirable from the standpoint of pest control."^ Moreover, when streams were diverted to fields and several people shared water from a single stream, owners of land at higher elevations were not permitted to divert the stream i f such action meant that the fields below 2 were deprived of their supply of water. Then too, i f the supply of water in a tank was sufficient only to Irrigate part of the f i e l d , a portion of the f i e l d close to the tank was cultivated and each cultivator cultivated a holding in that f i e l d — the share of each cultivator being generally in 3 proportion to his original holding. The Gamsabhawa and Rajakariya were instrumental i n the regulation and carrying out of agricultural operations. The Gamsabhawa was the v i l -lage council which regulated village affairs and enforced customary law. Every agricultural operation was supervised by the Gamsabhawa — particu-l a r l y the maintenance and use of the i r r i g a t i o n system. Each cultivator *"Bryce Ryan, Sinhalese Village (Coral Gables, Florida: Univer-sity of Miami Press, 1958), pp. 16, 17. 2 Ralph Pieris, Sinhalese Social Organization: The Kandyan Period, (Colombo: Ceylon University Press.Board, 1956), p. 47. 3 This practice i s known as Bethma. 21 was assigned his share i n both the use and maintenance of the system and was punished by the council for any offences such as that of f a i l -ure to keep the works in repair. Rajakariya (i.e., service rendered to the king i n return for land tenure) was the means by which the Gamsab-hawa enforced the co-operation of the villager; i t helped maintain the irrigation works in repair. The holding of land was bound up with the performance of service or payment in kind. Prior to British times, the total world supply of cinnamon came from Ceylon. Cinnamon was grown in small gardens, i t grew wild i n the Kandyan jungles, and i t was also grown in plantations by the Dutch. From 1691 to 1794 the average annual exports of cinnamon amounted to 400,000 lbs.* The average annual export of coffee varied between 40,000 lbs and 2 3 100,000 lbs. The number of coconut trees was estimated at 10,000,000. A typical farmer would have had access to an extensive area of land. His techniques of production were suited to the land (for instance, farmers were even reported to have transplanted paddy. Furthermore, i n h i l l y areas the land was terraced for the purpose of growing paddy). 1 L . A. M i l l s , Ceylon Under British Rule: 1795-1932 (London: Oxford University Press, 1933), p. 203. 2Ibid., p. 222. 3 G. C. Mendis, Ceylon Under the Br i t i s h (Colombo: The Colombo Apothecaries' Co. Ltd., 1962), p. 51. 22 The birth rate and the death rate of the population were more or less in balance. There are no indications of a high rate of population growth — the total population was as low as 2.3 million in 1867. It i s doubtful whether the feudal system encouraged production be-yond subsistence, ceremonial and religious needs. Exports were a royal monopoly and foreign trade in the hands of foreigners. The economic sys-tem of the time does not seem to have been conducive to rapid growth. By the time of the Portuguese ar r i v a l there were three different kingdoms — those of Kotte, Kandy and Jaffna. The Portuguese ruled the kingdoms of Kotte and Jaffna. Although foreign trade expanded due to the emphasis on spices, the constant wars caused deterioration in agri-culture and the conditions of the people, thus accentuating the decline begun i n the 13th Century. The Dutch continued the prevailing feudal system, as also had the Portuguese. Sinhalese and Tamil society changed l i t t l e under their rule. The Dutch repaired ir r i g a t i o n works and encouraged agriculture. They also encouraged the cultivation of commercial garden crops. Paddy and coconut cultivation are reported to have increased considerably. They de-veloped communications and broadened the system of elementary education. The revenue of the Dutch Company gives us some idea of the magni-tude of trade In those times. The revenue from the cinnamon monopoly in late 1780 and early 1790 was estimated at 1,600,000 rix dollars. The pro-1 f i t s on a turnover of trade in merchandise of 200,000 r i x dollars amounted ; dollars refers to the Dutch currency of the time. 23 to 160,000 rix dollars (or 80 per cent). The total annual revenue from a l l sources during the same period was about 2,150,000 rix dollars.* Government by the Dutch, however, had become ineffectual and rupt by the end of the 18th Century. Colvin R. de Silva observes that the "monopolistic economic system, the engrossment by the Company, by one expedient or another of nearly every valuable a r t i c l e of trade, and the multiplication of high and very often vexatious taxes hindered the 2 prosperity of the Island and weakened the resources of i t s government." Colvin R. de Silva, Ceylon Under the British Occupation (Colombo: Colombo Apothecaries' Co. Ltd., 1953), pp. 11, 12. 2 I b l d . , pp. 13, 14. CHAPTER III THE SHAPING OF A DUAL ECONOMY: IMPACT OF THE COFFEE PLANTATIONS When the British occupied Ceylon, her economy was basically agrar-ian. The principal exports continued to be cinnamon, spices, gems, ivory and pearls. Increasing competition from inferior but cheaper varieties of cinnamon and from substitutes such as cassia combined with a high ex-port duty*" led to the decline of the cinnamon trade by the 1850's. By mid-19th Century, coffee plantations which were opened up by Bri t i s h investment and by British planters transformed the island i n -to an export plantation economy. The size of her national income came to depend heavily upon this export as did government revenue and expendi-ture, imports and investment. "Within the short space of a few years, coffee had made i t s e l f responsible for almost a third of the government's income. The stake was large enough to render i t the State's most favoured child. In the years that followed, the planter's problems came to be regarded as synonymous with those of the country, and in the quest to solve them — an undertaking to which the government lent i t s energetic support — much that was new was intro-duced with startling rapidity. Thus did Ceylon dance to the coffee growers' tune for the greater part of the 19th century."2 The Javanese export duty was only hd per lb and the Indian export duty was 3 per cent of the value of cinnamon while that of Ceylon was i n excess of 250 per cent of the value of cinnamon. Source: Lennox A. M i l l s , Ceylon Under British Rule: 1795-1932 (London: Oxford University Press, 1933), p. 215. 2 I. H . Vanden Drlesen as quoted by D. R. Snodgrass, op. c i t . , p. 17. 24 25 Government servants were among the first to open up plantations. Planters were also represented in the Legislative Council which governed Ceylon. Hence i t is not surprising that a large proportion of government expenditure contributed directly or indirectly to the development of the plantations. For instance, in 1874 around 40 per cent of government expendi-ture was on roads, railways and bridges;* this expenditure being in a 2 period when the export duty on coffee was abolished is a rough indica-tion of the extent to which everything else in the island took a sub-ordinate place. Government revenue, too, showed a similar dependence on coffee since the most important revenue items were import duties, railway receipts and receipts from the sale of land. Government revenue 3 from the import of rice was paid for mainly by the plantations since the imported rice was consumed mainly by the coolies on the estates. The railway was used predominantly by the coffee Industry. By 1871, the value of exports other than coffee — coconut o i l , cinnamon and coir — formed only around seven per cent, two per cent and one per cent respec-*Rough calculation from Table 1-1. 2 The export duty on coffee was repealed 1 January, 1870. 3 The most important articles of import were rice and cotton goods. 26 tively of total export value. The coffee industry led to the growth of commerce; the value of foreign trade rose from £521,000 in 1825 to more than double this figure by 1849 (£1,143,000).1 The Balance Sheet of Government Revenue and Expenditure for the year 1874 has been extracted from the Ceylon Directory and set out i n Table I I I - l as i t i l l u s t r a t e s well the dependence of government revenue and expenditure on the coffee industry. The most important single revenue item is the import duty. R a i l -way receipts too have contributed significantly to government revenue, so have licenses and stamps. Most of these items are connected directly to the growth of the export industry. Roads had originally been bu i l t for military and administrative reasons, but were later constructed with the main aim of transporting coffee to the port of Colombo. The Colombo-Kandy road, for example, cut 2 the cost of transporting coffee by around 80 per cent. Most of the govern-ment o f f i c i a l s bought plantations and constructed roads, especially i n the 3 direction of their estates. By the 1870.-'s Colombo and Kandy were connec-ted by road to the other major townships of the country. The costs of transporation of coffee were high due to the pressure on the roads and the insufficient number of carts which transported the *"G. C. Mendis, Ceylon Under the B r i t i s h , op. c i t . , p. 67. 2 Calculated from figures given by Mendis, op. c i t . , pp. 50, 51. "With the completion of the road to Kandy. . .a Bullock cart carried 1,200 lb. of coffee for £1, whereas earlier the transport of an equal load required 30 porters who were paid £11 15s." Ibid., p. 71. 27 TABLE III-l GOVERNMENT REVENUE AND EXPENDITURE 1874 AS PERCENTAGE ITEM Rs(OOO) OF TOTAL REVENU3" REVENUE Import Duty 2,814 21 Land Sales 723 6 Land Revenue (paddy, fine grain, etc.) : 862 7 Licenses, stamps 2,947 22 Sale of government property 1,422 11 Railway receipts 2,359 18 '< Miscellaneous 2,115 16 TOTAL 13,243 100 (approx) EXPENDITURE Civil establishments (police, railway and other public works) 3,784 31 Roads, streets, bridges 1,977 16 Military expenditure 1,300 11 Railway services and construction 1,480 12 Miscellaneous 3,891 31 TOTAL 12,432 100 (approx) The excess of revenue over expenditure^  Rs 811,000  Source: A. M. and J. Ferguson, The Ceylon Directory: Calendar  and Compendium of Useful Information: 1876-1878 (Colombo: . Cey-lon Observer Press}, pp. 271-75. The year of publication is not available. 28 coffee. As explained below, this appears to have been due to a shortage of bullock • Moreover, coffee could not be stored for long periods since delay caused deterioration in i t s quality. During monsoon periods roads became impassable and this in turn led to delays i n transportation. The transportation of rice from Colombo to Kandy caused at least a 60 per cent increase in the price of rice and hence added to the cost of planta-tions.* (Rice was imported mostly to feed the labourers on estates). By 1855, the establishment of railways became absolutely necessary because i t was f e l t that "Ceylon would cease to exist as a coffee producing 2 colony i n the face of B r a z i l l i a n and Javanese competition." The construc-tion of a railway to Kandy was begun in 1858 and completed in 1867. R a i l -ways provided the plantations with a cheaper and faster method of trans-port. Roads and railways connected the plantation areas with the Port of 3 Colombo. The Colombo harbour was also developed and made safe by the building of a breakwater, and Colombo became an important port-of-call for steamers. The tonnage handled rose from 67,710 in 1870 to 455,517 in 1878 and 5,117,902 by 1890.4 Government expenditure on health, too, had i t s beginnings in con-nection with the plantations. Medical expenditure Increased from £1000 in 1796-1815 to £50,000 in 1893.5 Plantation areas were provided by the L. A. M i l l s , op. c i t . , p. 240. 2 I b i d . , p. 255. 3 -Roads and railways constructed during the entire pericd are docu-mented by G. C. Mendis, Ceylon Under the British, op. c i t . 4 I b i d . , p. 119. 5 J . Ferguson, Ceylon in 1893.(London: J. Haddon, 1893), p. 10. 29 government with hospitals and dispensaries manned by medical officers and assistants. Plantations contributed towards expenses by a payment for labourers who received attention at such hospitals and dispensaries. However, the government spent sums far greater than that spent by estates. Government expenditure on education increased from £3,000 In 1796-1815 to £50,000 i n 1893 and the number of schools increased from 170 to 2200 over the same period as did the number of scholars, i.e., from 4,500 to 155,000.*" During this period the secondary schools turned out the clerks and minor administrators required in the new departments of 2 government service. The most important Items of import at this time were rice, cotton goods, and f i s h i n that order of importance (see Table III-2). Most of the rice was imported in order to feed plantation labour. Among the factors which led to the large-scale cultivation of coffee and i t s p r o f i t a b i l i t y i n Ceylon was the reduction i n 1835 of the U.K. discriminating duty on coffee of 6d per lb on coffee from the West Indies and 9d per lb on coffee from other sources to a uniform t a r i f f of 6d per lb on a l l imported coffees. The demand for coffee i n Europe was increasing while West Indian production was declining simultaneously due to the abolition of slavery. (The West Indies had previously been the main supplier of coffee). Ceylon took up the slack in West Indian produc-*"J. Ferguson, op. c i t . , p. 10. 2 E. F. C. Ludowyck, The Story of Ceylon, op. c i t . , p. 220. 30 TABLE III-2 SELECTED IMPORT ITEMS YEAR RICE ('000 Bushels) COTTON GOODS (£000) FISH (£000) COFFEE (£000) 1837 1845 1850 1855 1860 1865 1870 1876 650 2167 2356 2852 2813 4851 4736 5745 221 239 188 287 540 545, 977 953 7 16 36 35 56 67 79 88 2 26 17 33 25 23 53 92 ** Table greatly overestimated that year. ** Consequence of a famine i n South India. Source: A. M. and J. Ferguson, The Ceylon Directory, 1876-78, op. c i t . , p. x v i i . tion; the acreage under coffee increased sharply from 4,000 acres i n 1836 to 59,000 acres i n the early 1850's; coffee production too In-creased from 26,000 cwts in 1834 to 344,000 cwts i n the early 1850's (see Table III-3). The value of capital invested in coffee has been 2 estimated at- £3,000,000 for the period 1837 to 1845. \ . A. M i l l s , op. c i t . , p. 228. G. C. Mendis, Ceylon Under the British, op. c i t . , p. 66. 31 TABLE Iir-3 THE CEYLON COFFEE INDUSTRY 1834-1886 (Annual figures and annual averages) YEAR EXPORT VOLUME UNIT VALUE AREA PLANTED YIELD (000 cwts) (s/cwt) (000 acres) (cwts/acre) 1834 26 30 na na 1835-39 46 47 na na 1840-44 97 49 23 4.2 1845-49 260 33 51 5.1 1850-54 344 40 59 5.9 1855-59 537 48 138 3.9 1860-64 615 51 199 3.1 1865-69 939 52 243 3.9 1870-74 881 66 276 3.2 1875-79 795 108 310 2.6 1880-84 433 89 259 1.7 1885 • 316 78 139 2.3 1886 179 89 110 1.6 Source: D. R. Snodgrass, op. cit.t Table 2-1, p. 20. The coffee industry was set up under conditions of favourable world demand. Increasing quantities of coffee were exported as its price rose until the 1870's when a coffee leaf disease — Hemileia Vastatrix — appeared. By the 1880's, the disease destroyed the industry; Although large-scale plantation of coffee commenced around 1835, coffee had been introduced to Ceylon by Arab traders prior to the arri-val of the Portuguese in 1505. During Dutch times, the average annual exports varied between 40,000 and 100,000 pounds.*" Much of the coffee H,. A. Mills, op. cit., p. 22. 32 grew in the Kandyan jungles. In 1827, 1,752,448 pounds of coffee were exported from Ceylon.* It was essentially a peasant crop at this time. Although the value of exports of coffee from large-scale planta-tions came to exceed that of the peasants, Ferguson reports that one third to one fourth the total quantity of coffee shipped throughout the 2 coffee era was 'native coffee', grown on small holdings. (As B r i t i s h -owned banks and agency houses rarely lent to Ceylonese, they were not able to purchase large holdings). Most of the coffee was exported to the United Kingdom; for instance, around 80 per cent of Ceylon-grown coffee was exported to the United Kingdom in 1874. Among other custom-ers were Germany, France, U.S.A., and Austria i n that order of import-3 ance. TABLE III-4 COFFEE EXPORTS FROM CEYLON PLANTATION QUANTITY VALUE (000 cwts) (£000) NATIVE YEAR ENDING 10th October QUANTITY (000 cwts) VALUE (£000) 1850 1859 1873 219 407 860 483 1099 2322 104 195 128 174 389 256 Source: A. M. and J. Ferguson, The Ceylon Directory 1876- 78 (attachment to p. 490). op. c i t • » E. F. C. Ludowyck, The Modern History of Ceylon, op. c i t . , p. 58. 2 J. Ferguson, Ceylon i n 1893, op. c i t . , p. 66. 3 Based on A. M. and J. Ferguson, The Ceylon Directory, 1876-78, , attachment to p. 490 . 33 The coffee revolution carved out a dual economy. The export sec-tor was characterized by the use of modern methods of production, and operated in isolation from the rest of the economy where subsistence agriculture was carried out along traditional lines. Culturally, too, there were no ties between the villager who worked the paddy fields in' the valley bottoms and the European planters and Indian labourers who worked in the plantations. The two sectors remained distinct and sep-arate. The impact of Western capitalism was to create a modern sector comprising commercial, financial, transportation and other service a c t i v i -ties centred around the plantations and catering to i t s needs. It gave rise to the emergence of a money economy and created a class of immigrant wage earners*" and foreign entrepreneurs. The capital necessary for the plantations f i r s t came from abroad and later through re-investment of pro-f i t s . The only indigenous resource used extensively was land; this was 2 sold at a nominal price (five shillings per acre), mainly to Europeans. NUMBER OF IMMIGRANT NUMBER OF IMMIGRANT YEAR LABOURERS EMPLOYED (OOP's) YEAR LABOURERS EMPLOYED (OOP's) 1837 10 1865 222 1846 80 1870 253 185P 90 1875 315 1855 128 1877 380 Source: A. M. and J. Ferguson, The Ceylon Directory, 1876-78, op. c i t . , p. xvi. 2 In the eight years following 1836 (i.e., when the plantations were f i r s t being established) nearly 255,000 acres of land was sold by the govern-ment at the price of five shillings per acre, the government paying for the cost of surveying i t and accepting one tenth of the purchase price at the time of sale. E. F. C. Ludowyck, The Modern History of Ceylon (London: Weidenfeld and Nicolson, 1966), p. 59. 34 The importance of the coffee revolution l i e s i n the fact that i t set the pattern for future development. In 1955, H. A. de S. Gunasekera was able to write, "The period from the rise of coffee to the present day possesses an essential-unity i n that the basic economic structure remains unchanged.""'' After some experiments in alternate crops — cinchona and cocoa — Ceylon turned increasingly to the cultivation of tea. The acre-age i n tea rose swiftly during the late 1880's. In the early 20th Century, rubber began to be cultivated on a large scale. Cultivation of the coco-nut palm too moved up rapidly. Thus by the early 20th Century tea, rub-ber and coconut, in that order of importance, became Ceylon's major ex-port earners. The plantation industries were a l l highly labour and land intensive. The type of commodities that proved most profitable as export lines i n poor nations have generally been ones that technically required intensive use of unskilled labour or of a particular natural resource be-cause advanced nations tended to possess cost advantages in commodities produced under modern technology Involving relatively large amounts of 2 skilled labour and capital. A p l e n t i f u l supply of Crown land was sold at nominal prices to planters and cheap labour in v i r t u a l l y unlimited quantity was available from South India. Planters were exempted from the land tax of one tenth the produce from the land. A subsidy was provided by the government for *H. A. de S. Gunasekera, From Dependent Currency to Central Banking  in Ceylon (London: G. Bell and Sons Ltd., 1962), p. 8. R. E. Baldwin, Economic Development and Export Growth; A Study  of Northern Rhodesia 1920-1960, op. c i t . , p. 61. 35 the importation of Indian labour. Ceylon's climatic conditions and terrain were suitable for these crops, for which foreign markets were growing rapidly at the turn of the century. Hence foreign capital and entrepreneurship were ensured a higher rate of return than that prevail-ing i n the home country. Higher wages also compensated for poorer health and educational conditions and the separation from relatives and home country. Higher returns on capital were necessary to attract foreign capital and to compensate for the risk inherent in less developed coun-t r i e s . An example of the higher returns from the coffee plantations is given below. An estate which commenced i n July 1837 Extent of forest 1892 acres Dr. total expenditure up to December 1841, including the purchase of forest, planting 305 acres, stores, machinery, etc. v- £6938 7sh 3d. Cr. 1839 sale of seed and 42 bags of coffee £ 445 18sh 6 3/4 sale of 176 acres of forest £ 176 0 0 1840 sale of seed and 796 units of coffee £3017 10 5 1841 estimated value of 2000 cwt' shipped £8000 0 0 £11,639 8 11 3/4 * The crop of 2000 cwt was gathered off 200 acres of which only about 50 acres were in f u l l bearing. The proprietor assured us that i f he began again possessed of his present experience he would save a considerable sum in outlay. Note: the land belonging to the particular estate was not the best. Source: Observer (newspaper) May 1842, quoted by A. M. and J. Ferguson, The Ceylon Directory, 1876-78, op. c i t . (pages not numbered). 36 Ferguson, who compiled the Ceylon Directory, estimates the profits from coffee at 20 to 25 per cent on capital invested i n 1869.* Despite expansion in exports, the diffusion of new techniques and s k i l l s to the rural sector was negligible. There was l i t t l e spillover of labour s k i l l s as the plantations did not develop more than rudimentary labour s k i l l s . As Myint points out, there was no reallocation of given resources (other than some land) but new effective demand was introduced for the output of "surplus" resources which would not have been used i n the absence of trade. Plantation sectors expanded on the basis of i n -creasing supplies of cheap labour with a minimum of capital outlay. Thus the contribution of Western enterprise to the development of the country's expansion process lay largely in the improvement of transport and communications and the discovery of new export crops. These were methods of increasing the total volume of resources being u t i l i z e d rather than making a given volume of resources more productive. A significant part of the expansion cannot be attributed to revolutionary changes i n 2 techniques and increases in productivity. Although i t was to be expected that the large number of workers employed and their high average propensity to consume food and simple durable goods would lead to increased domestic production by creating a large increase in market demand, the actual course of events proved to J. Ferguson, Ceylon in 1893, op. c i t . , p. 66. 2 H, Myint, "The 'Classical Theory' of International Trade and the Underdeveloped Countries" in Theberge (Ed.), Economics of Trade and  Development, op. c i t . , p. 197. 37 be quite different. The weakness of spread effects arose from the nature of the plantation industry. The products of this sector were sold abroad and the factors of production necessary to this sector came from abroad with the sole exception of land. Almost a l l the intermediate goods used by this sector and the bulk of consumption items required by i t s workers were imported. The profits which accrued to the plantation industry were either remitted abroad or reinvested in the plantations. Of the wages that accrued to plantation labour, i t was reported by a planter that two thirds was remitted abroad to South India.*" The wealthy commercial and entrepreneur class (to which the plan-tations gave rise) had a standard of l i v i n g far higher than the rest of the community and their demands were for goods which would not be produced domestically. They formed a very small group and therefore their demand did not create a market large enough to warrant domestic production. This led to the importation of goods necessary for the high standard of l i v i n g enjoyed by this group. They became what Jonathan Levin has termed the "luxury importers." It was not only this group that consumed imported items, but the local population at large,too, grew accustomed to depending upon imports. "Forbes noted in 1836 that 'every a r t i c l e of British manufacture which natives might require or could afford to purchase was hawked through the most remote native hamlets, was offered for sale at E. F. C. Ludowyck, The Modern History of Ceylon, op. c i t . , p. 67. 38 every cabin door and might be procured at prices which would barely remunerate the importing merchant and native peddler. . ."^ By the 1870's, 30 to 40 per cent of the entire consumption requirements of rice was imported,nearly a l l the imports being for the plantation 2 sector. Why did domestic agriculture not respond to the increased demand? 3 Rice was imported from India and Burma and the Imported rice was cheap. It was probably cheaper than the locally grown ri c e . (The returns at the time being 50 to 100 fold in India and Burma, in terms of bushels of 4 grain, as against 12 to 15 fold in the best d i s t r i c t s in Ceylon. ) However, the quality of the imported rice was lower than that of the locally grown rice which was far more nutritious than the import. The import duty bal-anced the rent or tithe on internal rice cultivation. Prior to the opening of plantations by the British, irregular and/or insufficient r a i n f a l l used to cause periodic famines. This led to imports, for in good times there was a surplus practically a l l over the island, whereas In bad times there was no surplus for sale. At the ^Quoted in E. F. C. Ludowyck, The Modern History of Ceylon, op. c i t . , p. 58. 2 Percentages as estimated by A. M. and J. Ferguson in The Ceylon  Directory, 1876-78. Prior to the opening of plantations, less than *s a million bushels of rice was imported. The figures shot up to six million bushels with the development of plantations. A. M. and J. Ferguson, The  Ceylon Directory, 1876-78, op. c i t . , p. x v i i . 3 Prices of domestically produced rice are not available, but Fergu-son states that the imported rice was cheap. 4 A. M. and J. Ferguson, The Ceylon Directory, 1876-78, op. c i t . , p. x v i i i . 39 time of the opening of coffee plantations the wet zone was barely able to provide for the needs of the indigenous population since i t com-prised only a fraction of the area suited to rice production. The dry zone was under jungle at this time. Extending the area under rice pro-duction would have entailed bringing the neglected areas of the dry zone under cultivation. With the downfall of the old kingdoms, i r r i -gation works had fallen into disuse and disrepair. Since increased rice production is dependent upon an assured supply of water, extending the area under rice cultivation would have been a d i f f i c u l t task. Very l i t t l e was done by the government to bring the North Central Province into c u l t i -vation, despite the interest shown by one or two Governors.*" Not only was the water supply to these areas insufficient, but malaria added to the prob-lems. Peasant colonization schemes were only put into operation in 1930 (the f i r s t attempt to open up the jungle being the Minneriya Colonization Scheme). In the areas already under rice cultivation, agriculture was carried out along traditional lines. As the peasants produced just sufficient for their needs, the risk involved in attempting to improve their methods of production would mitigate against them doing so. They had v i r t u a l l y no access to credit or marketing f a c i l i t i e s . There were neither distribution nor marketing arrangements for the procurement and sale of local rice. The expenditure pattern of the government was such that out-side transportation and a small outlay on education and medicine, very l i t t l e else was spent on developing the economy. 40 Peasants found i t d i f f i c u l t to reach markets as they l i v e d f a r from good roads. There were no major roads i n the dry zone; moreover, i n the wet zone some of the estate roads could not be used f r e e l y by the villager.*" There i s also "the p o s s i b i l i t y that the scorched earth p o l i c y im-plemented by B r i t i s h forces i n suppressing the r e b e l l i o n of 1817-18 might have produced a set-back i n buffalo population and the technique of paddy 2 c u l t i v a t i o n with which i t was associated." Furthermore, rinderpest and other c a t t l e diseases are reported to have taken heavy t o l l of the c a t t l e population and paddy f i e l d s were often l e f t uncultivated as a resul t of 3 the loss of draught animals. Indiscriminate breeding and inbreeding of c a t t l e and the methods of rearing them made them feeble i n health and susceptible to disease. These factors led to a sharp reduction of the 4 buffalo and c a t t l e population. The few remaining animals, i t i s argued, were probably hired out at high rates and those c u l t i v a t o r s who could not afford to hire out draught animals had to resort to manpower i n ploughing th e i r f i e l d s , e n t a i l i n g a retrogression i n paddy technology. I t i s also possible that the loss of pasture land (referred to l a t e r i n this chapter) occurring almost at the same time, prevented any remedial action being taken A Plan for the Rehabi l i t a t i o n of the Kandyan Peasantry i n Central  and Uva Provinces 1955-56 to 1959-60, Ministry of Home A f f a i r s (Ceylon: Government Press, 1956), p. 13. M^. Roberts, "The Impact of the Wastelands L e g i s l a t i o n and Growth of of Plantations on the Techniques of Paddy C u l t i v a t i o n i n B r i t i s h Ceylon: A Cr i t i q u e , " Modern Ceylon Studies, Vol. I, No. 2, July 1970 (Peradeniya: University of Ceylon), p. 162. 3 I b i d . , p. 164. Ib i d . , p. 197\ to increase the c a t t l e and buffalo population of the i s l a n d . The impact of the superimposition of a modern c a p i t a l i s t - t y p e economy upon a t r a d i t i o n a l feudal economy also had adverse effects which led to a decline i n domestic r i c e production. Among the factors leading to poverty among the peasantry and a decline i n production are the following: 1. The a b o l i t i o n of Rajakariya (labour services) and the Gamsabhawa ( v i l l a g e councils) by the B r i t i s h govern-ment meant that v i l l a g e r s had neither the means nor the auth-o r i t y to tend the i r i r r i g a t i o n works and regulate and carry out other a g r i c u l t u r a l operations. When rajakariya was abol-ished, people had to pay a tax which took the form of a share of the produce of land for which services had been rendered. I t was probably hoped that labour for the plantations would be provided once the peasant was exempted from t h i s type of service. These "changes however were not welcomed. The amount of labour performed for each holding had been fixed and generally was not heavy. Now instead a landholder had to give a share of the produce to government. They had to pay more i f they extended the cu l t i v a t e d area. The c o l l e c -t i o n of the taxes was farmed out and the farmer could har-ass them i f he desired. . .And t h e i r land could now be seized for debt as i t was t h e i r personal property, while e a r l i e r a creditor had only a rig h t to t h e i r crops."* The Gamsabhaxa l o s t i t s power of punishing offenders to the courts. Judges who were ignorant of cus-toms and regulations pertaining to r i c e c u l t i v a t i o n often gave wrong decisions. 2. Loss of land by the peasantry. Due to l e g i s -l a t i o n passed at the time, peasants were l e f t with l i t t l e other than their paddy lands. Among these measures were: "Ordinance No. 12 y 1840, to make provision for the prevention of encroachment on Crown lands. Section 7 states that " a l l forest, waste, unoccupied or uncultivated land s h a l l be presumed to be the property of the Crown u n t i l the contrary thereof be proved, and a l l chenas and other. G. C. Mendis, Ceylon Under the B r i t i s h , op. c i t . , p. 48. 42 lands which can only be cultivated after intervals of several years shall, i f the same be situate'within the2 di s t r i c t s formerly comprised in the Kandyan provinces, (wherein no thombo registers have been heretofore estab-lished), be deemed to belong to the Crown and not to be the property of any private person claiming the same against the Crown, except upon proof only by such per-son. Another measure that followed was the Temple Lands Registration Ordinance, No. 10 of 1856. This dim-inished the rights of the temples by the Crown succeed-ing to ownership of large extents of forest and waste lands as temples could not pay half the survey fees in order to prepare plans which were to be deposited with the Register of Temple Lands. The Lands Resumption Ordinance No. 4 of 1887 enabled the Government Agent to resume possession of lands alienated by the Crown which had been abandoned. The Definition of Boundaries Ordinance, No. 1 of 1844 enabled the government to demand the produc-tion of deeds and documents of any person claiming lands and to make him pay the cost of survey. Even the paddy owners were caught in the net. . .for the Grain Tax Ordinance of 1878 made i t obligatory on them to pay a tax based on income, a levy which resulted in the sale ^ of land belonging to persons who were unable to meet i t . " The onus of proof was la i d upon the peasant. The forest lands, for i n -stance, provided 'common land' for the village; here cattle were grazed and chena cultivation practised. Such rights of customary usage were not considered. A l l royal property became Crown land and was sold at a nominal price to coffee planters. The villagers lost their rights to pasture as well as land for subsidiary crops. Forest land which had belonged to the king was lost under the Waste Lands Ordinance of 1840. Van Den Driesen A Plan for the Rehabilitation of the Kandyan Peasantry In Central  and Uva Provinces 1955-56 to 1959-60, op. c i t . , p. 4. 43 quoted the case of a coffee planter, who, when he took possession of his land found a prosperous village i n the middle of i t and many other plan-ters were reported by this same planter to have told the same story: the villagers had simply been driven off the land.*" ". . .rights of an individual proprietor which could be validated i n a court of law in the 1830's had never been envisaged by the custom govern-ing the use of land in the Kandyan kingdom."2 In any case, villages i n plantation areas had no means of expansion as estates closed in around them. "And some at least of the private chenas and other lands which have been sold to estates were given up by their peasant owners because they were unable to take the risk of claiming for t i t l e to be settled in their favour when presumption was i n favour of the Crown. It seems li k e l y , too, that land policy and i t s effects have contributed to a sense of hopelessness among the Kandyan peasantry."^ 3. Land clearings for commercial plantations led to s i l t i n g and floods. The perennial streams which provided a constant supply of water for the Irrigation of paddy crops were turned into "raging torrents" rushing excess water into the paddy f i e l d s . "Heavy s i l t a t i o n and water logging of the paddy land led to near suffocation of the peasants." In the process of land clearing "upper slopes of catchments were de-prived of forest cover, river banks were denuded of forests right up to the water's edge and steep land l e f t unprotected without- any regard to crucial angles of slope. Inefficient drainage was added to these destructive a c t i v i t i e s and caused Quoted by E. F. C. Ludowyck in The Story of Ceylon (New York: Roy Publishers, 1963), p. 194. 2 E. F. C. Ludowyck, The Modern History of Ceylon, op. c i t . , p. 62. 3 B. H. Farmer, Pioneer Peasant Colonization in Ceylon: A Study in  Asian Agrarian Problems (London, New York: Oxford University Press, 1951), p. 91. 44 unprecedented s i l t i n g and floods. Such new untried and unsystematic methods could be attributed to total ignor-ance of tropieal conditions i n i t i a l l y , but the devasta-tion of acre upon acre of stream reserves continued un-abated, despite severe warnings and in defiance of con-ditions imposing immediate remedial measures on lessees of Crown land. (The enormous areas which were cleared of forest for coffee planting did not return to jungle when they were abandoned but have remained as treeless patna). Rubber and coconut plantations, though confined to the lower h i l l s and coastal plains, have themselves contributed to the deterioration and erosion of vast quantities of s o i l . Cultivation practices which ensured the s t a b i l i t y of the s o i l and minimized i t s wash-way took long years of t r i a l and error before they could be implemented. Thus the practice of growing cover crops was introduced on rubber lands only in 1925 up to which year lands on which rubber was grown, were kept clean weeded. More recent innovations such as terracing the steeper slopes and the hedge planting of tea lands on the contour has yet to be translated into practice. The three-fold system of land use by the villager, i.e., paddy fields situated in the lower slopes and valley bottoms and the home gardens, together with chena cultivation and the grazing of cattle i n the forest, were particularly well adapted, to the physical environment. Peasants had been accustomed to the encouragement and help of the government. G. Mendis, a historian, refers to Bertolacci as having; ^Department of Census and Statistics, Census of Agriculture 1962, Vol. II (Ceylon: Government Press, 1966), pp. 28, 29. 2 For a discussion of this point, see B. H. Farmer, Pioneer Peasant  Colonization in Ceylon, op. c i t . 45 said that commercial and agricultural interests were dependent almost totally on the encouragement which government afforded to the cultivation of rice. But during the period under consideration, conditions had changed. In 1837 the dams at Kirama and Urubokka which irrigated large tracts of paddy land were destroyed; again during a rebellion i r r i g a t i o n works had been damaged and the government took no notice of a population that was decreasing owing to drought and disease."*" Colonial governments were interested mainly in balancing revenue and expenditure and paid scant attention to the development of domestic agriculture. The paddy tax also adversely affected the paddy cultivator. "Several witnesses before the Grain Tax Commission even stated that cer-tain mudlands were l e f t uncultivated partly because of this impost and because their owners lacked capital. Under the Commutation system there was the further influence of evictions, which led to the abandoning of 2 certain fields that had been regularly cultivated." Table III-5 shows 3 the contribution of the paddy tax to government revenue. Immigrant labour was used on estates. In the early stages of the plantation industry, villagers offered themselves for casual labour *"G. C. Mendis, Ceylon Under the Bri t i s h , op. c i t . , p. 83. 2M. Roberts, "Grain Taxes in British Ceylon, 1832-78," Modern  Ceylon Studies, Vol. 1, No. 1 (January, 1970), op. c i t . , p. 145. 3 It is not possible to calculate paddy tax as a percentage of government revenue as the data pertaining to total government revenue during these years are not available. 46 TABLE III-5 REVENUE FROM PADDY TAX (Selected Years) YEAR REVENUE FROM PADDY TAX (£) 1840 1850 1860 1870 1876 38,741 39,146 65,118 100,047 100,298 Source: M. Roberts, "Grain Taxes in Bri t i s h Ceylon, 1832-78," Modern Ceylon Studies, Vol. 1, No. 1 (Peradeniya: University of Ceylon), January, 1970, p. 116. but "villagers have so often been duped and cheated out of their due that some have given up work and others daily become more averse to work on the estates."* Other factors added to the villagers' reluctance to work on the estates. Not only did the cultivation of traditional crops permit an easier l i f e than that on the estates, but the wages offered by the estate sector were not high enough to attract labour away from the villages especially as there was no great pressure on the land at the time. Above a l l , the reluctance stems from the fact that the peasant had, in addition to his rice crop, supplementary food such as coconut, yams, f r u i t and many varieties of vegetables. This kept him Keported by a Police Magistrate; quoted i n F. C. Ludowyck, The  Modern History of Ceylon, op. c i t . , p. 66. 47 content and there was no reason why he should give up a dependable means of keeping himself i n comfort for the uncertainty of money wages on the plantations. Tradition would also have played a part in this reluctance, for the cultivator of land stood at the head of the social hierarchy i n the system which prevailed prior to the transformation of the economy. Knox observed in the 17th Century that ". ..husbandry is the great employment of the country, which is spoken of at large before. In this the best men labour. Nor is i t held any disgrace for Men of the greatest Quality to do any work either at home or i n the Field, i f i t be for themselves; but to work for hire with them i s reckoned for a great shame; and very few are here to be found that w i l l work so."^ 2 Imports of cheap consumer goods i n f i l t r a t e d the island so that the local crafts f e l l away. Imports were cheap probably due to low costs of production i n Britain arising from extensive economies of scale. Fer-guson noted i n 1893 that "native cotton spinners and weavers were at one 3 time common, but the industry is dying out. . There was no serious attempt to u p l i f t the peasantry — Sinhalese and Tamil villagers paid "with the grain tax a much larger proportion of their earnings than any R. Knox, An Historical Relation of Ceylon, 2nd edition (Dehiwela9 Ceylon: Tisara Press, 1966), p. 180. 2 The import trade was in British and Indian hands. 3 J. Ferguson, Ceylon in 1893, op. Cit., p. 62. 48 other class of persons" — or to seek means to increase rice production. Economic growth was thus unevenly distributed, being confined mainly to the plantation sector and i t s ancillary services. Many Cey-lonese found employment in connection with the export industry, espe-c i a l l y in the service sector i n such capacities as carters (before the advent of the railway), carpenters, boutique keepers, rice dealers i n stores, peddlars in the villages, and towns which sprang up around the planting areas, clerks in Colombo and timber merchants. Furthermore, with the diffusion of education and ownership, there was created for the f i r s t time a local professional and capitalist class. Prior to the establishment of plantations, the economy showed no signs of increasing specialization and capital accumulation. Entre-preneurs and investment were lacking. Therefore the economy needed a stimulus in order to induce growth beyond subsistence levels. Estate development, however, failed "to touch off any remarkable growth or trans-2 formation of the rest of the economy." *E. F. C. Ludowyck, The Modern History of Ceylon, op. c i t . , p. 121. ^D. R. Snodgrass, op_. c i t . , p. 54. PART II: TECHNICAL ASPECTS OF THE DEVELOPMENT OF TEA, RUBBER AND COCONUT AS EXPORT STAPLES Prefatory Note The next three chapters constitute something of a "technical digression" to the general discussion. They deal with tea, rubber and coco-nut respectively, taking a basically industry-study approach. This part can be omitted by the general reader, or read quickly at first reading. Each chapter examines those aspects of the production functions of the export industries which have relevance to the magnitude of export re-ceipts, distribution of these receipts among various factors and the share of income retained locally, all of which determine "linkage investment" in the manner stated in Chapter I. Post war price trends and future prospects of the exports are then also discussed. A description of methods of production and labour-use forms an introduction to each export industry. This also furnishes an idea of the labour intensity of plantation industry and the nature of skills imparted to labour.''" This is followed by an investigation of factors which have led or could lead to an expansion in export income. These involve improvements in productivity brought about by technological progress and the extent to which the product has been adapted to suit changing requirements involving new processes of manufacture. Estates have employed around 30 per cent of. the labour force be-tween 1901 and 1953. 49 5 0 The next step has been to consider f a c t o r s which a f f e c t the dis-t r i b u t i o n of export income. Costs of p r o d u c t i o n are d i v i d e d i n t o wages ard other c o s t s . The share and magnitude of wages and other costs have ir._'V c a t i o n s f o r f i n a l demand and backward l i n k a g e s a r i s i n g from expenditure on consumer goods and intermediate i n p u t s . The share of p r o f i t s i s dependent upon world market p r i c e s and c o s t s of p r o d u c t i o n . The share of p r o f i t s r e -t a i n e d l o c a l l y i s expected t o generate savings and c o n t r i b u t e to c a p i t a l f o r -mation. From the p o i n t of view of l o c a l r e t e n t i o n of p r o f i t s , the most im-portant f a c t o r i s i t s d i s t r i b u t i o n between l o c a l and f o r e i g n ownership. Hare economies of s c a l e are explored i n order to a s c e r t a i n whether l o c a l p a r t i c i -p a t i o n has been l i m i t e d by t h i s f a c t o r . P r o d u c t i o n by s m a l l holders and government a s s i s t a n c e to s m a l l holders are d e s c r i b e d , such p r o d u c t i o n being an important s p i l l o v e r e f f e c t of p l a n t a t i o n s . Small holdings are a l s o im-portant from the p o i n t of view of l o c a l r e t e n t i o n of earnings and employ-ment of l o c a l labour. F i n a l l y , the c o n t r i b u t i o n of export income to l o c a l l y r e t a i n e d income has been c a l c u l a t e d , and each chapter concludes w i t h a d i s -c u s s i o n of post war p r i c e trends, the c o m p e t i t i o n experienced from s y n t h e t i c s u b s t i t u t e s and f u t u r e prospects of these e x p o r t s . Having a s c e r t a i n e d the magnitude, d i s t r i b u t i o n and share of export income r e t a i n e d l o c a l l y , we i n v e s t i g a t e i n P a r t I I I the extent t o which l o c a l . payments may have induced investment i n r e l a t e d i n d u s t r i e s i n Ceylon. CHAPTER IV TEA: BACKGROUND NOTES ON THE PRODUCTION FUNCTION, CONTRIBUTION TO RETAINED INCOME AND FUTURE PROSPECTS Origin and Development of the Tea Industry in Ceylon When coffee crashed in the 1880's, tea was found to be the most suitable alternative crop. Tea was successfully cultivated as early as the 1860's. Ceylon was found to possess an ideal climate for the tea plant. She also possessed at this time a well-developed harbour, a net-work of roads and railways linking the coffee growing areas to the capital port of Colombo, banks and agency houses, land on which coffee had formerly been grown lying idle, and a plantation labour force. Moreover, tea had become widely popular i n the Western world in the 18th and 19th Centuries; i t had gradually displaced coffee i n England. Acreage in tea expanded rapidly from 250 acres in 1873* to 35,000 2 acres in 1883 and 255,000 acres i n 1893. Similarly, the exports of tea 3 over the same period rose from 23 lbs i n 1876 to 2,000,000 lbs i n 1883 and 82,000,000 lbs. in 1893.4 Writing i n 1893, Ferguson comments that "as was 1 J . Ferguson, Ceylon in 1893, op. c i t . , p. 79. 2 G. C. Mendis, Ceylon Under the British, op. C i t . , p. 113. 3 J. Ferguson, Ceylon in 1893, op. c i t . , p. 79. 4 D. R. Snodgrass, op. c i t . , Table A-52. 51 52 the case with coffee, the preparation of the new staple in Ceylon is in a fair way to be brought to perfection. Improved machinery has already been invented by local planters and others to save labour, to counteract the effect of unsuitable weather or to turn out teas with better flavour; and yet the industry cannot be said to be more than a dozen years old in the island I'.'1 By 1893, Ceylon's tea exports were comparable to those of India and China, the world's largest tea producers at the time. China, which had until the last quarter of the 19th Century been almost the sole supplier of tea to the West, was gradually displaced from the British market by the improved products of India and Ceylon. Demand shifted to black teas and the Chinese producers, who were less adaptable and heavily taxed, lost their position in the world tea market. By around 1910, practically a l l land available for tea in Ceylon 2 was under cultivation. Fluctuations both in the price and quantity of tea exported were a regular feature of the tea industry — see Table A-l. By 1945, Ceylon was exporting around 230 million pounds of tea valued at Rs 1.20 per pound. Cultivation and Manufacture of Tea The tea plant is an evergreen which fluorishes in a warm, rainy climate. Tea is made from the young, tender shoots of the bush — two leaves *J. Ferguson, Ceylon in 1893, op. cit., p. 82. 2580,500 acres were under tea in 1910. In 1960 there were 581,700 acres under tea. Source: D. R. Snodgrass, op. cit., Table A-37. 53 and a bud. The field work involved in growing and plucking tea is consider-able and consists of plucking, pruning, weeding, fertilizing, dusting, spray-ing, draining, maintaining roads, etc. Around 85 per cent of the labour force on tea estates is employed in these tasks.*" The average number of labourers per acre was reported to have been 2 somewhat less than one labourer in 1929. In the late 1950's, i t was esti-3 mated at 1.1 labourers per acre. The increase was probably due to the 4 higher yield per acre — see Table IV-1, The number of workers per acre has been projected to increase from 1.1 to 1.9 on replanted areas.Around 576,000 workers, were employed in tea plantations in 1960. The slight in-crease in the number of labourers per acre was necessary as there has been no mechanization of the field work. Although the tea industry has so far been labour intensive, the future prospects are for an increasing degree of mechanization of the field work. This is discussed at the end of this chapter. C. R. Harler, Tea Growing (London: Oxford University Press, 1966), Table 25, p. 154. 2 Includes both field and factory workers. 3 Great Britain Colonial Office, Report on Ceylon for 1929 (London: H.M.S.O.), p. 9. *The slight Increase in the ratio from 1942 to 1959, i.e., 1.0 to 1.1 has been attributed to replanting by Y. Lim in'Export Industries and Pattern of Economic Growth in Ceylon," unpublished Ph.D. dissertation (University of California, Los Angeles, 1965), p. 69. Prior to 1959, however, there was prac-tically no replanting. The Tea Replanting Subsidy Scheme was introduced in 1959 in order to induce estates to replant with high yielding dones. Total replanted area by the end of 1960 was only 1129 acres. Therefore we conclude that replanting could hardly have been a factor accounting for the increase in this ratio; i t seems more likely that the Increased yield per acre necessitated the increase in the number of labourers per acre. 5Ceylon National Planning Council, The Ten Year Plan (Colombo: Govern-ment Press, 1959), p. 194. 54 Tea factories are situated In tea estates as manufacture has to commence f a i r l y soon after the leaf is brought to the factory because the quality of the tea leaf deteriorates rapidly with time.* Ceylon employ-the orthodox method of manufacture; the manufactured product is obtained by withering, r o l l i n g , fermenting and f i r i n g the shoots. A newer form of manufacture, the 'unorthodox' method of nanufac-. ture has been adopted by many countries. This does away entirely with the withering operation, requires less labour than the orthodox method of manu-facture and leads to a saving in costs. "In Ceylon, however, the popularit-of the Broken Orange Pekoes and B. 0. P. fannings has survived these up-heavals and has impeded a change from the old to the new forms of manufac-2 ture." Tea manufactured according to the unorthodox method differs from tea manufactured by the orthodox method in giving a stronger liquor, a brighter infusion and a quicker brew while they lack the appearance and flavour of tea prepared according to the orthodox method. Although there may be a reluctance to switch to the unorthodox methods of manufacture, espe-c i a l l y i n the case of high grown . tea which fetches a high price, qualities such as appearance of tea are of far less importance today so that the above-mentioned properties of tea produced by the unorthodox method need not ^e Smaller estates and small holders do not possess factories. They s e l l their leaf to nearby factories. The tea leaf is reported to deter:crate in quality i n transit. Department of Census and Statistics, Census of Agricu  ture 1952, Part I, Tea Plantations (Ceylon: Government Press) 1956, p, 11. 2 Nalini Jayapalan and A. S. Jayawardene, "Some Aspects of tht: Tt;a Industry — Part III," Central Bank of Ceylon Bulletin, October 1967 (Colombo Central Bank of Ceylon), p. 24. 55 such a drawback. For example, the appearance of tea is of no consequence in the case of tea bags and instant tea — forms which are gaining popularity today. It is also reported that the tea packeting and distributing trade favours the tea produced by the unorthodox method as i t lends itself to easier packeting.* A Tea Factory Development Subsidy Scheme was introduced in 1966 and one of its purposes was to foster modernization programmes in keeping with the latest technical developments essential for effecting economies in the cost of production. Adoption of modern processes can also be ex-pected to lead to higher earnings on account of the factors mentioned in the previous paragraph. Skills acquired in the manufacturing process, i.e., technicians, engineers, foremen, etc. could be of some value in the transmission of skills to the rest of the economy. Managerial, technical and clerical per-sonnel are estimated to have accounted for 1.5 per cent of the labour force 2 in 1950 and increased to around 2.3 per cent in 1960. Hence the s k i l l component of plantation labour is fairly low. Around 8.5 per cent of the 3 labour force is employed in factory work. They probably acquire some fam-i l i a r i t y with machine operation but are classified as 'unskilled' —- any skills they acquire are for the most part specific to plantation industry. *N. Jayapalan and A. S. Jayawardene, op. cit., Part III, p. 25. 2 Based on D. R. Snodgrass, op. ci t . , Table 6-10. 3 G. R. Harler, Tea Growing, op. cit., Table 25, p. 154. 56 Although most of the estate superintendents and assistant super-intendents i n early years were Europeans, these jobs are almost completely i n the hands of Ceylonese today. Hence, Ceylonese have acquired some tr a i n -ing i n management of estates. Technical Progress and Productivity Technical progress has taken place in the tea industry almost from i t s inception i n Ceylon. There has been increasing use of f e r t i l i z e r , the development of high yielding clones by the Tea Research Institute (T.R.I.), the use of better methods of production and newer types of machinery in the factory. The increase in productivity that occurred over the years is set out i n Table IV-1. These increases are mainly due to the increased use of f e r t i l i z e r , particularly following wartime shortages. The value*" of imports r of f e r t i l i z e r rose from Rs 61 million i n 1959 to Rs 110 million in 1968 and gives an indication of the increase in f e r t i l i z e r consumption by the tea industry as this industry absorbs around half the quantity of f e r t i l i z e r imported. The quantity i s not available except for 1965 i n which year the volume of f e r t i l i z e r used by the tea industry was reported to be 160,000 tons which was around 50 per cent of the total quantity of f e r t i l i z e r a v a i l -able. Source: Ministry of Planning and Economic Affairs, Agricultural  Development Proposals 1966-70 (Ceylon: Government Press, 1966), p. 231. 57 TABLE IV-1 TEA PRODUCTION AND YIELDS (Average) AREA PLANTED (000 acres) PRODUCTION (Mil. lbs) YIELD/ACRE* (lbs) 1880-84 23 1 52 1885-89 185 17 91 1890-94 281 71 252 1895-99 388 119 306 1900-04 425 151 355 1905-09 468 175 373 1910-14 493 193 391 1915-19 498 205 413 1920-24 418 187 447 1925-29 449 236 525 1930-34 558 243 435 1935-39 497 231 465 1940-44 550 274 498 1946-49 554 295 537 1950-54 568 332 584 1955-59 571 396 693 1960-64 588 465 791 1965-69 597 492 824 This figure is an understatement as no allowance has been made for acreage replanted, acreage not i n bearing, etc. Sources: D. R. Snodgrass, op. c i t . , Table 2-5, Table 6-8, Table A-32, Table A-37, Central Bank of Ceylon, Annual Report of the  Monetary Board to the Minister of Finance, various issues. Aside from the increased use of f e r t i l i z e r , research carried out by the T.R.I, has helped develop new high yielding clones yielding as much as 6,000 lbs of processed tea per annum, whereas the yearly average is now around 900 - 1,000 lbs. per acre. The area replanted as yet is too i n s i g -nificant for i t to have had much influence on the average yield per acre, 58 total replanted acreage being 33,428 acres in 1969 compared to a total area 2 of 596,514 acres under tea. The Census of Agriculture of 1952 also men-tions that the increased yields recorded i n recent years are due partly to 3 effective control of Blister Blight — a leaf disease. Technological progress has made possible an increase i n yields from 435 lbs per acre in 1933-33 to around 1,000 lbs per acre i n the early 1970's. (The area under tea has barely increased since the 1930's). The quantity of tea exported from Ceylon has practically doubled since the 1930's and the value of tea exports has risen from around Rs 200 million in 1930 to Rs 1062 million in 1969 (see Appendix, Table A - l ) . The Distribution of Export Income TABLE IV-2 PERCENTAGE DISTRIBUTION OF EXPORT RECEIPTS FROM TEA I T E M 1920-38 1948-67 Export Receipts 100 100 Wages and Salaries 38 37 Other Costs 21 26 Export Duties 3 21 Company Taxes 1 11 P r o f i t s 38 9 Source: Table A-2 and Table A-3. Ceylon Government, Administration Report of the Tea Controller for  1969 (Ceylon: Government Press, 1970), p. J85. 2Ibid., p. J71. 3 Census of Agriculture 1952, Part I, op. c i t . , p. 9. 59 Wages and salaries are the largest items in the cost of production, which follows from the labour intensive nature and the degree of processing involved i n the tea industry. Wages and salaries are spent overwhelmingly on food and textile products. The magnitude of plantation expenditure on these items and domestic production are dealt with in the subsequent section. Other costs, too, account for a f a i r proportion of export receipts. Intermediate inputs used i n the manufacture of tea are mainly f e r t i l i z e r and packing materials, i.e., tea chests. Some part of the plantation require-ments of these items are met by local production and are dealt with i n the subsequent chapter. The share of profits retained locally depends on domestic owner-ship of the area under tea. Foreign ownership has been highest i n the tea industry. Foreign owernship of tea was put at 80 per cent of the acreage under tea by the Ceylon Banking Commission of 1934.* It seems to have de-2 clined to around 30 per cent by the end of the 1960's. Local ownership may have been limited by the economies of scale involved in tea production and manufacture; hence we turn to a consideration of economies of scale i n the production and manufacture of tea. Economies of Scale It is generally acknowledged that economies of scale i n tea produc-tion are considerable. According to Wickizier, 500 acres is the minimum size *Sir W. I. Jennings, The Economy of Ceylon, 2nd edition (Madras, New York: Oxford University Press, 1951), p. 26. 2 60 for economic operation. In Ceylon, tea companies replaced individual pro-prietorships and later merged into larger corporations by bringing together several estates.* Fifty-one per cent of the acreage under tea in 1951 was in estates over 500 acres in size (see Table IV-3 below). TABLE IV-3 SIZE OF TEA ESTATES AS PERCENTAGES OF TOTAL ACREAGE UNDER TEA 1951 1954 1959 1969 Smallholdings < 10 acres 11.9 12.2 13.4 17.4 Estates 10 - 100 acres 7.6 8.0 9.0 11.0 100 - 500 acres 29.6 28.7 27.7 24.4 > 500 acres 50.6 51.1 49.9 47.2 Sources: D. R. Snodgrass, op_. c i t . , Table A-39, Administration  Report of the Tea Controller for 1969, op. c i t . , p. J71. Economies in the processing of tea — the huge i n i t i a l sum of capi-t a l required for setting up a factory with expensive machinery can only be considered by a large estate or co-operative factory which can produce enough leaves to use i t s machinery to capacity. The cost of production declines up to a point and increases thereafter as illustrated in Table IV-4. This i s probably due to machinery being worked beyond i t s rated capacity. It is d i f -f i c u l t to assign lowest manufacturing costs to estates of a particular size *V. D. Wickizier, Coffee, Tea and Cocoa, An Economic and P o l i t i c a l  Analysis (California: Stanford University Press, 1951), p. 180. 61 range as yields vary between estates of different size. On the basis of average yields, the lowest costs of manufacture appear to be associated with estates in the range of 1,000 - 1,499 acres. TABLE IV-4 AVERAGE TEA MANUFACTURING COSTS ACCORDING TO SIZE OF OUTPUT SIZE OF OUTPUT SIZE OF SAMPLE COSTS (lbs) (Cents/lb) 0 99,999 5 34.9 100,000 - 199,999 2 27.9 200,000 - 299,999 12 31.3 300,000 - 399,999 26 27.5 400,000 - 499,999 24 26.4 500,000 - 599,999 15: 25.7 600,000 - 699,999 13 26.9 700,000 799,999 6 24.3 800,000 - 899,999 5 25.6 900,000 - 999,999 5 23.9 1,000,000 - 1,199,999 4 27.9 1,200,000 - 1,399,999 10 25.6 1,400,000 - 1,999,999 6 26.0 2,000,000 and over 5 25.3 138 26.2 Source: Y. Lim , op_. c i t . , Table VI-6, p . 77. In addition to economies in processing, economies of scale to be realized i n the f i e l d , too. The average yield per acre rises up to a point and then declines as larger units may "prove unwieldy in regard to supervision and intensity of cultivation."* Census of Agriculture 1952, Part I, op. c i t . , p. 11. 62 TABLE IV-5 YIELD OF GREEN LEAF BY SIZE OF TEA UNIT CULTIVATED — 1951 SIZE (in Acres) MATURE ACREAGE AVERAGE YIELD PER ACRE (lbs Green Leaf) Ceylon A 440,771 2,845 Under 10 ^ 235 1,123 10 - 19 896 1,629 20 - 49 7,122 1,856 50 - 99 9,942 2,072 100 - 199 20,082 2,164 200 - 499 115,099 2,709 500 - 999 169,438 3,005 1,000 - 1,499 80,587 3,059 1,500 - 1,999 21,837 2,851 2,000 and over 15,533 2,904 Figure refers to units of tea of this size in estates of 20 acres or more. Source : Department of Census and Statistics, Census of Agriculture. 1952 , Part I, £p_. cit., P. 11. The yield figures also indicate that the highest yields are asso-ciated with estates in the 1,000 - 1,499 acre range. Furthermore, subject to limitations stated earlier, average costs of production appear to be least for these estates. Thus 1,000 - 1,499 acres appears to be the optimum size for estates under the prevalent form of management as there appear to be dis-economies with respect to supervision, costs of manufacture, etc. beyond this range. It must be noted, however, that the yield per acre seems to be influenced by the elevation at which the estate is situated (see Table IV-6). 63 As large estates constitute the bulk of estates at higher elevations, while smaller holdings predominate at lower elevations,* this seems to be an added explanation of the higher yields accruing to larger estates. Hence the statements regarding optimum size have to be qualified by this fact. TABLE IV-6 TEA ACREAGE AND AVERAGE YIELD ON ESTATES CLASSIFIED BY MEAN ELEVATION « 1951 ELEVATION (feet) MATURE AVERAGE RELATIVE PERCENTAGE AVERAGE YIELD/ACRE (lbs of Green Leaf) Ceylon 440,771 100.0 2,845 Under 100 2,020 0.46 2,328 100 - 499 21,102 4.79 2,762 500 - 999 24,288 5.51 2,972 1,000 - 1,499 16,749 3.80 2,860 1,500 - 1,999 22,772 5.17 2,396 2,000 - 2,999 71,349 16.19 2,516 3,000 - 3,999 115,101 26.11 2,844 4,000 - 4,999 123,446 28.00 3,008 5,000 - 5,999 38,202 8.67 3,110 6,000 and over 5,742 1.30 3,369 Source: Census of Agriculture 1952, Part I, op. c i t . , p. 12. It is also held that the tea produced by larger estates fetches a higher price per pound due to such advantages as "the regularity of manuring, composition of f e r t i l i z e r s , pruning, plucking of tea leaves, withering, r o l l i n g , fermentation and blending. Careful supervision in minute detail of each stage N. Jayapalan and A. S. Jayawardena, Some Aspects of the Tea Indus- try, Part III, op. c i t . , p. 27. 64 is essential i n producing quality tea. The advantages of standardized pro-duction and well-organized supervision can be better secured i n a sufficient-ly large unit of production."* This seems to be only part of the explanation as the price of tea is generally associated with i t s quality and quality in turn is associated with the fine flavour characteristic of teas grown at higher elevations. We noted earlier that large estates constitute the bulk of estates at higher elevations. Table IV-7 reveals clearly that high grown teas command premium prices. TABLE IV-7 AVERAGE COLOMBO AUCTION PRICE OF TEA PER POUND YEAR HIGH GROWN MEDIUM GROWN LOW GROWN ALL TEAS 1956 2.50 1.96 1.88 2.16 1957 2.05 1.61 1.88 1.86 1958 2.11 1.51 1.48 1.73 1959 2.13 1.69 1 .67 1.85 1960 2.03 1.75 1.83 1.88 1961 1.99 1.72 1.74 1.83 1962 2.02 1.61 1.56 1.75 1963 1.90 1.54 1.53 1.68 1964 1.93 1.58 1.49 1.68 1965 1.93 1.66 1.64 1.75 1966 1.84 1.46 1.37 1.57 1967 1.82 1.47 1.20 1.50 Source: Central Bank of Ceylon Annual Report, op. c i t . , various issues. Y. Lim, op_. c i t . , p. 78. 65 Thus economies of s c a l e seem to be of s i g n i f i c a n c e mainly i n the manufacture of tea and to a l e s s e r extent i n i t s p r o d u c t i o n . Economies asso-c i a t e d p a r t i c u l a r l y w i t h manufacture are l i k e l y to have l i m i t e d Ceylonese ownership. A study o f pro d u c t i o n by s m a l l - h o l d e r s i l l u s t r a t e s d i f f i c u l t i e s encountered i n the pro d u c t i o n of tea i n years p r i o r to the 1950's, and the manner i n which some of them have been overcome i n l a t e r y e a r s . Small holders i n the Tea Ind u s t r y A s m a l l h o l d i n g i s de f i n e d as a h o l d i n g l e s s than 10 acres i n ex-t e n t . Small holdings are important from the p o i n t of view of l o c a l r e t e n t i o n of earning and employment of l o c a l l abour. Furthermore, peasant producers of export crops were able perhaps f o r the f i r s t time to o b t a i n a s u r p l u s over s u b s i s t e n c e and grew accustomed to i n v e s t i n g i n products w i t h l o n g g e s t a t i o n p e r i o d s . A tea p l a n t takes around f o u r years to come i n t o b e a r i n g and reaches m a t u r i t y around the 10th or 11th year. The normal l i f e of a t e a bush i s around 40 years. An important s p i l l - o v e r e f f e c t of p l a n t a t i o n s i s p r o d u c t i o n by s m a l l h o l d e r s . Small holders i m i t a t e p l a n t a t i o n methods and c u l t i v a t e export crops. Furthermore, they are abl e to use the pro c e s s i n g f a c i l i t i e s of p l a n t a t i o n s , when the process of manufacture i s too c o s t l y and complex f o r them to be i n a p o s i t i o n t o manufacture the f i n i s h e d product. Economies of s c a l e and the labour i n t e n s i v e nature of tea pr o d u c t i o n , however, made i t d i f f i c u l t f o r s m a l l holders t o c u l t i v a t e the crop. Small h o l d e r tea c u l t i v a t i o n never assumed the pr o p o r t i o n s i t reached i n the c u l t i -v a t i o n of c o f f e e , rubber and coconut. Small t e a producers accounted f o r around 66 12 per cent of the t o t a l acreage under tea i n 1935. This p r o p o r t i o n was h e l d u n t i l the e a r l y 1950's when i t s t a r t e d i n c r e a s i n g s l o w l y . TABLE IV-8 EXTENT OF SMALL HOLDINGS IN TEA YEAR NUMBER ACRES PERCENTAGE OF TOTAL AREA UNDER TEA 1899 n.a. 3,000 0.8 1935 69,982 65,938 11.8 1939 76,826 61,322 11.1 1946 77,668 63,158 11.4 1951 84,363 67,414 11.9 1959 92,083 77,640 13.4 1969 112,231 103,869 17.4 Sources: D. R. Snodgrass, op. c i t . , Table A-39; N. Ramachandran, F o r e i g n P l a n t a t i o n Investment i n Ceylon 1899-1958 (Colombo: C e n t r a l Bank of Ceylon, 1963), n. 163; A d m i n i s t r a t i o n Report of the Tea C o n t r o l l e r f o r 1969, op. c i t . , p. J71. Prior to the 1950's, the position of the small holder was weak on account of technical and institutional considerations. He had limited access to credit with which to purchase fertilizer or otherwise improve his land. Ee also had to rely on nearby estates to purchase his leaf as there is a tendency for the quality of the leaf to deteriorate even in transit from the field to the factory and the estate thus possessed monopoly power in its facilities. A number of measures were initiated by the government in the 1950's with a view to helping the small holder. The increase in acreage under small holdings is probably due to these measures. 67 Methods of tea planting adopted by small holders, at least u n t i l the 1950's, were less efficient than on larger estates. The result was that the average yield per acre on small holdings was below that on the estates (see Table IV-6). Furthermore, i t was also reported that they resort to overcropping which is invariably followed by declining yields.* The damage done by overcropping is great and cannot be easily corrected. The tendency to coarse plucking may have been due to ignorance regarding the advantages of finer plucking, and more importantly to low incomes of the cultivators. Small holdings of tea generally form a supplementary source of income. Peasants either owned plots of paddy lands or worked for hire on nearby estates. Hence they would probably not have paid close attention to every detail-of cultivation,, whereas production of tea requires continuous atten-tion and much care. Careless handling of the leaf between the time of pluck-ing and a r r i v a l at the withering space is said to be the chief cause of loss 2 of quality. Moreover, coarse plucking may also have arisen from their weak 3 bargaining position vis-a-vis estates; the fact that they had to accept prices fixed by estates may have led them to increase output by coarse plucking. A l l these factors would in turn induce estates to pay a lower price for leaf of poor quality. *Census of Agriculture 1952, Part I, op. c i t . , p. 11. 2 C. R. Harler, Tea Growing, op. c i t . , p. 97. 3 It was a frequent complaint that factories paid small holders un-duly low prices. 68 This state of affairs has significantly improved through the pro-visions of the Tea Control Act, which requires factories engaged in bought leaf manufacture to pay prices considered reasonable by the Tea Controller. Moreover, under the Tea Small Holder's Cooperative Scheme, the government established tea collecting depots i n order to ensure that small holders were paid a f a i r price for green leaf. It also acted as a safeguard against sub-standard plucking by rejecting coarse leaf.* In order to improve the con-dition of the small holder, the Government also started a system of co-oper-ative societies which were to provide the small holder with advice, materials, such as f e r t i l i z e r and operate processing f a c i l i t i e s . By 1957, 25 Tea Pro-2 ducers' Cooperative Societies were founded. The Tea Rehabilitation Subsidy Scheme was launched i n 1959, p r i -marily directed at holdings below 100 acres. Under this scheme, subsidies of Rs 600/acre were paid for the improvement of the agricultural condition of tea lands by the application of " f e r t i l i z e r , adoption of s o i l conservation measures and increasing the stand. From 1963, this subsidy was increased to Rs 800/acre. The success of this scheme is indicated by the fact that i n the f i r s t four years i t s e l f , applications received under the scheme exceed the target acreage of 60,000 acres la i d down i n the 10 Year Plan. A Plan for the Rehabilitation of the Kandyan Peasantry i n the  Central and Uva Provinces 1955-56 to 1959-60, op. c i t . , p. 81. D. R. Snodgrass, op_. cit., p. 141. 69 In 1964, subsidies which had been paid to estates over 100 acres (under the Tea Replanting Subsidy Scheme) for replanting old tea land with high yielding varieties of tea was thrown open to small holders on the ground that there were an appreciable number of small holders who had acquired 1 experience and technical know-how in V.P. work and were considered competent 2 to handle such operations. The Tea Rehabilitation Subsidy Scheme was superseded by the Tea F e r t i l i z e r Scheme of 1967. This scheme too was confined to small holdings and estates below 100 acres i n extent. In the case of small holders and small estate owners who have d i f f i c u l t y in transporting the f e r t i l i z e r , i t 3 is delivered at distribution centres closest to the holdings. By 1969, 4 almost 60 per cent of the area under small holdings was f e r t i l i z e d under this scheme. The positive response of small holders shows that they are wi l l i n g to give their land proper care and attention and that the main drawback hitherto had been the lack of adequate sources of finance. Field officers of the Tea Control Department "provide small holders with advice and assistance i n regard to rehabilitation and replant-ing operations to be carried out under these schemes, particularly on such measures as the contour lining of their lands, the construction of drains, the supply of vacancies and the methods of application of f e r t i l i z e r . " ^ *V.P. stands for vegetatively propogated.' 2 Agricultural Development Proposals 1966-79, op. c i t . , p. 5. 3 Administration Report of the Tea Controller for 1969, op. c i t . , p. J86. 4 Based on Ibid., pp. J87 and J71. 5Ibid., p. J88. 70 Small holders have been given the opportunity of bringing their methods of cultivation up to the standards of those practiced by larger estates; i t seems possible that they are no longer the in e f f i c i e n t producers they were at the beginning of the 1950's. The higher yield strains and the use of f e r t i l i z e r and co-operative processing f a c i l i t i e s would a l l have re-duced the relative advantage enjoyed by large estates i n growing and processing tea. Domestic and Foreign Components in Export Receipts From Tea Tea companies were not subject to any taxes (in Ceylon) u n t i l 1915, when export duties were introduced. Such duties were extremely low u n t i l 1947. Income tax was introduced in 1932 — the rate of company tax-ation between 1932-38 varied between 12 per cent and 10 per cent of before tax profits. 1920-1938 We present below a breakdown of export receipts (for details see Table A-2) from which we attempt to estimate the domestic and foreign component of export receipts. TABLE IV-9 DISTRIBUTION OF EXPORT RECEIPTS 1920-38 AVERAGE I T E M VALUE (Rs Mil) AS PERCENTAGE OF EXPORT RECEIPTS Export Receipts 164 100 Wages and Salaries 61 37 Other Costs 35 21 Export Duties 5 3 Company Taxes 2 1 Profits 63 38 Source: Table A-2. 71 Profits net of export duties and company taxes constituted 38 per cent of the value of exports. Since foreign ownership in the tea i n -dustry was put at 80 per cent, i t is l i k e l y that the greater part of these profits was remitted abroad. Savings from wages and salaries were also remitted abroad. There are no firm figures of migrants'1 transfers and private remittances, but sta-t i s t i c s for later years (1950-1969) show that the outflow of such payments 1 were around five per cent of export receipts and were equivalent to the outflow on account of investment income during these years. 2 Furthermore, at least 43 per cent of wages and salaries was ex-pended on imported goods as Ceylon imported much of her requirements of foods and textiles. Thus, at the most around 50 per cent of wages and salaries 3 may have been retained locally. Likewise, approximately 40 per cent of 'other costs' would have been spent on such imports as f e r t i l i z e r , l i q u i d fuel, machinery, etc. Export duties and company taxes from tea constituted around seven 4 per cent of government revenue for the period 1932-38. Hence local retention can perhaps be estimated at approximately 43 per cent of export proceeds for this period, and the foreign component is *Based on Central Bank of Ceylon Annual Reports, 1950-69. 2 Percentage for 1949-50 for a l l classes of workers. Source: Minis-try of Finance, Economic and Social Development of Ceylon 1926-50 (Ceylon: Government Press, 1951), p. 11. 3 Estimated on the basis of s t a t i s t i c s for 1959-66 and refers to a l l export industries — tea, rubber, and coconut. 4 Based on Economic and Social Development of Ceylon 1926-50, op. c i t . , Table XXV, and Department of Commerce, Thirty Years Trade Statistics of Ceylon 1925-54 (Ceylon: Government Press, 1955-57), Table 25. 72 estimated at 57 per cent of export earnings. Local retention is as much a matter of increasing domestic production as of domestic ownership, i.e., the outflow of exchange earnings has been due to both expenditure on imported goods as well as the remittance of profits and savings due to foreign owner-ship and labour. Post-war Estimates 1948-1967 Taxes and duties have increased sharply since Ceylon achieved i n -dependence i n 1948; they became the means by which the surplus accruing to the export sector was transferred to the rest of the economy. Proceeding as in the previous section TABLE IV-10 DISTRIBITUION OF EXPORT RECEIPTS 1948-1967 YEARLY AVERAGE I T E M VALUE (Rs Mil) AS PERCENTAGE OF EXPORT RECEIPTS . Export Receipts 942 100 Wages and Salaries 354 38 Other Costs 242 26 Export Duties 194 21 Company Taxes 108 11 P r o f i t s 82 9 Source: Appendix, Table A-3. Export duties and company taxes from the tea industry accounted for around 24 per cent* of government revenue during this period. "Based on Table A-3; D. R. Snodgrass, op_. c i t . , Table A-46 and Central Bank of Ceylon Annual Report 1969, Appendix Table 32. 73 Foreign ownership of the tea industry declined from 50 per cent to 40 per cent of the total acreage under tea during the period. The remittance of profits declined correspondingly and amounted to around four per cent* of export earnings. 2 The import content of public consumption f e l l from 43 per cent to 3 about 23 per cent from 1949-50 to 1967. Assuming that the import content of plantation wages and salaries averaged 33 per cent over the period 1948-1967, the outflow on imports i s estimated to have been around 12 per cent of export earnings. The import content of 'other costs' of a l l exports 4 was 37 per cent during the years 1959 to 1966.^ Hence the outflow on imports from this I source is estimated at 10 per cent of export receipts. The total foreign component of export earnings is thus estimated at 26 per cent-for the period 1948-67. Local retention is high at 74 per cent of export earnings and is due to greater l o c a l ownership, higher levels of taxation and domestic production and is an improvement on the figure of 43 per cent for the period 1920-38. *Based on Central Bank of Ceylon Annual Reports, various issues. 2 There are no separate s t a t i s t i c s for plantation workers, urban workers, etc. 3 Central Bank of Ceylon Annual Report 1967 (Colombo: Central Bank of Ceylon), Table II(A)9; and Economic and Social Development-Of Ceylon, 1926- 50, op. c i t . , p. 11. 4 Separate s t a t i s t i c s are not available for tea, rubber and coconut respectively. ^Based on Central Bank of Ceylon Annual Report for 1966 and Department of Census and Statistics, S t a t i s t i c a l Abstracts^of Ceylon (Ceylon: Department of Government Printing) various issues. 74 The share of exports retained locally led to the establishment c-f. domestic industry and improvement in domestic agriculture. Forward, back-ward and residentiary linkages are discussed in a separate chapter, i . - - . The Scope for Linkage Effects from the Export Industries, Chapter VII. Post-War Problems: Price Movements and Market Structure From September 1939, the Br i t i s h government controlled the bulk •>£ the world's tea trade. The international allocation of tea was terminated in early 1947. Tea prices rose with the freeing of war time restrictions. The production costs of tea also kept r i s i n g . The cost of production of a pound of tea increased from 45 cts i n 1938 to Rs 1.18 in 1948,* the main reason being the war time increase in wages. Wages on plantations rose 2 by about 50 per cent between 1944 and 1948, and by a further 44 per cent 3 between 1948 and 1951. Minimum wage legislation was introduced in Ceylon and the minimum wage rate index for tea and rubber rose from 100 in 1939 to 315 i n 1948 and 463 in 1951.4 Furthermore, both export duties and taxes kept increasing. The export duty - on a pound of tea rose from 3 cts i n 1946 to 38 cts in 1948 and further to 52 cts i n 1951.^ The rate of company taxation (for non-resident *Census of Agriculture 1952, Part I, op. c i t . , p. 13. 2 N. Ramachandran, op. c i t . , p. 103. 3 Based on D. R. Snodgrass, op. c i t . , Table A-29. 4 Central Bank of Ceylon Annual Report 1968, Appendix, Table 45. ^D. R. Snodgrass, op. c i t . , Table 6-7, p. 135. 75 companies) increased from 15 per cent in 1937-38 to 34 per cent in 1950-51. As a result of increasing costs and taxes many companies sought new produc-tion areas in countries like East Africa where costs, taxes and duties :;ere lower, 2 3 The outflow of sterling company capital has been gradually curbed since the inception of exchange control i n 1948, when sterling companies were required to hold their surplus funds in Ceylon. The repatriation of capital was suspended in 1957. A moratorium on the transfer of dividends and profits was also instituted in August, 1964. Tea prices rose u n t i l 1955, but the good prices did not last thereafter. The price of tea began to decline continuously since 1956 (see Table A - l ) . However, the industry's p r o f i t a b i l i t y i s a somewhat different question because the increased use of f e r t i l i z e r , etc., led to increased yields. As tea alone constitutes over 60 per cent of the export earnings of Ceylon, this continuous decline in price has had serious repercussions on the a v a i l a b i l i t y of foreign exchange. Some of the causes for this de-cline are therefore examined together with their implications for the future. F.A.O. studies indicate that for several years global supply of tea has grown more rapidly than demand. Their projections, which start from "Ec onomic and Social Development of Ceylon, 1926-50, op. c i t . , Table XXV. 2 See N. Ramachandran, op. c i t . , p. 175 for details. 3 Sterling companies are companies floated with sterling capital and registered in the U.K. 76 a "state of balance" in 1961-63, indicate that while production rises at 3.2 per cent per year, demand would rise by only 2.2 per cent to 2.7 per cent per year until 1975.* Thus their projections indicate a sorplus of tea. (For developed countries, the increase in demand for tea is projected at 1.3 per cent to 1.5 per cent per year, whereas for developing countries, 2 the increase is projected at 3.3 per cent per year). A f a l l in the price of some 15 per cent to 30 per cent is predicted to be necessary to bring de-3 mand and supply into line. These studies point out that the decline in price could be moderated to some extent by "promotion campaigns and the ex-tension of the tea drinking habit to new areas."4 Although the share of developing countries is increasing, i t is doubtful whether the increase will be large enough to prevent a price f a l l . The recent turmoil in the Middle East which is the largest importer of tea after Great Britain may also prevent substantial increases in the consump-tion of tea in the area. Moreover, the F.A.O. projections do not take into consideration new forms of tea such as instant tea and tea bags. F.A.O. Agricultural Commodities — Projections for 1975 and 1985, Vol. I (Rome: Food and Agriculture Organization of the U.N., 1967), p. 251. 2Ibid., p. 246. 3Ibid., p. 252. 4Ibid., p. 244. 77 It is recognized that the main competitor to tea is instant coffee: 65 per cent of a l l marketed coffee i s reported to be in the form of instant coffee.* This has made possible i t s sale from vending machines, etc., there-2 by opening up new markets for i t . The U.K. is the world s largest importer of tea — her average annual imports between 1960 and 1964 accounted for 43.5 3 per cent of total imports of tea. She also has the highest per capita con-4 sumption of more than nine pounds per capita. But here, too, instant coffee accounts for the gradual decline i n tea consumption as i s shown i n Table IV-12. An increase in the production of instant tea may perhaps be ex-pected to lead to an increased demand for tea i n the future. Instant tea is produced in Ceylon, but i t s quantity is negligible, amounting i n 1969 to around 0.63 per cent of total tea production. Instant tea produced i n Cey-lon is different to that produced i n consuming countries as i t i s manufactured from green leaf i n factories."* (A process which cannot be done at the con-sumer end). It Is said that the flavour of the Ceylon product is closer to 6 conventional tea than the instant tea manufactured i n consuming countries. Agricultural Development Proposals 1966-70, op. c i t . , p. 14. 2 Ibid. 3 N. Jayapalan and A. S. Jayawardena, "Some Aspects of the Tea In-dustry — Part I I , " op_. c i t . , Table 2. 4 Interim Report of the Tea Commission, op. c i t . , p. 62. ^Agricultural Development Proposals 1966-70, op. c i t . , p. 14. 6 I b i d . , p. 15. 78 TABLE IV-11 HOUSEHOLD EXPENDITURE ON BEVERAGES IN THE U.K. (pence/head/week) BEVERAGES 1958 1960 1962 1963 Tea 13.92 13.54 13.15 13.14 Coffee 2.92 3.12 3.64 3.99 (a) bean and ground 0.50 0.50 0.57 0.46 (b) essences 0.48 0.49 0.36 0.35 (c) "instant" 1.94 2.10 2.71 3.18 Cocoa 0.60 0.50 0.50 0.53 Branded f r u i t drinks 0.85 0.94 0.87 0.94 Liquid milk 29.54 30.79 32.80 33.63 Fruit juices 0.60 0.86 0.94 1.02 Total 48.43 49.75 51.90 53.25 Per capita consumption of tea (lbs.) 9.9 9.8 9.6 9.5 Source: N. Jayapalan and A. S. Jayawardena, "Some Aspects of the Tea Industry, Part II," Central Bank of Ceylon, Bulletin August 1967 (Colombo: Central Bank of Ceylon), p. 32; Ceylon Parliament, Sessional Paper No. VII-1968, Interim Report of the Tea Commission (Ceylon: Government Press, 1968), p. 62. Instant tea production i s also cost-saving in that i t eliminates the unneces-sary stage of converting green leaf into black and then into powder. Marketing There has been a growing awareness that monopolistic buying practices in the marketing of tea tend to depress prices. Almost three quarters of the 79 tea available in the world market i s marketed through auctions. Most of the tea produced in Ceylon is disposed of at the Colombo and London auctions.* At the Colombo auction, two buyers accounted for one-fourth and 12 2 buyers account for just less than three-quarters of the total tea sold. In respect of low grown teas, i t was reported that there were 10 major buyers and of these, three accounted for around 50 per cent of total purchases. In the case of high growns, eight buyers dominated the auction and four of them 3 accounted for more than 50 per cent. One buying agent acts for several prin-ciples abroad and "about 80 per cent of the buying in Colombo is done on the basis of fixed price limits imposed by principals overseas, and this leaves 4 the buying agent with l i t t l e or no discretion." Notice has also been drawn to the dual function of agency houses which act both as producers' representa-tives and agents of foreign buyers. This could well be detrimental to pro-ducers' interests. The number of actively bidding participants at an auction Is thus very limited, although no direct evidence of collusion has been pre-sented. In considering the problem i n 1968, the Ceylon Tea Commissioners arrived at the following conclusions For instance, i n 1966, of a total crop of approximately 490 mil. lbs, 466 mil. lbs. was marketed through the Colombo and London auctions. 359 mil. lbs. was sold at the Colombo Auction. Interim Report of the Tea Commission, op. c i t . , p. 5. 2 N. Jayapalan and A. S. Jayawardena, Some Aspects of the Tea Industry, Part IV, Central Bank of Ceylon Bulletin, December 1967 (Colombo: Central Bank of Ceylon), p. 23. 3 Interim Report of the Tea Commission, op. c i t . , p. 8. Ibid., p. 9. Furthermore, conditions at the London auction seem to be no better: four or five buyers, large blender-packer-distributors account for about 75 per cent of total purchases, Ibid., p. 12. 80 "Under the present conditions of the tea market, i t is the buyers who determine the level of prices at auctions and although i t has been stated that producers' interests are carefully conserved, the suspicion that they suffer in the re-sult cannot be altogether dismissed as unjustified."! Although i t is argued that production has increased faster than the demand for tea, and resulted in a lowering of prices, imperfections i n the market structure may perhaps have been an additional factor aggravating the decline. In evidence given in 1952 before the Government's O f f i c i a l Com-mittee on the Tea Industry in India, i t "was alleged that the slump in tea prices which then prevailed was 'managed' by British producing interests in India who were also blenders and retailers of tea in England. It was suggested that what these firms lost by realizing a lower price in India, was made up 2 from the r e t a i l margin In England and elsewhere." The structure of the U.K. tea industry i s of relevance to a consider-ation of market imperfections. Production and manufacture of tea is carried on in primary producing countries. Manufactured tea i s blended and packeted for r e t a i l in Britain both for i t s domestic and export markets. Many British firms and agencies acquired control over the 'production, trade, transport and market-3 ing' of tea. For instance, James Finlay and Co. Ltd., has in i t s agency nine tea and rubber estates i n Ceylon. It acts as banker, agent for tea and carries out shipping and insurance business. The company's principal interests are i n ^Interim Report of the Tea Commission, op. Cit., p. 9. 2 N. Jayapalan and A. S. Jayawardena, Some Aspects of the Tea Indus- try, Part IV, op. c i t . , p. 22. 3 l b i d . , p. 24. 81 India, Pakistan and Ceylon. It has i t s holdings in tea, jute, cotton and other producing companies.'* "...there appears to have developed an elaborate interlocking mechanism with an a b i l i t y to control the tea trade formed by agency houses, holding companies and board room associations. . .Given this ramification in the owner-ship and control of the tea industry, there i s a po s s i b i l i t y of an alignment of interests of the financier, the producer, the broker, the transporter, the blender and the distributor. It is possible. . .that the view of those who own and control the trade might prevail over the national interest of the pro-ducing country. For instance, there is considerable evidence that the expatriate producing firms w i l l not obtain supplies from the cheapest source but from Ceylon agents who have 'close connections with London Agent directors of Sterling Companies' . . .It appears that i n the mind of the average consumer, the image of tea is not linked up with Ceylon or India or East Africa but with names such as "Brooke Bond," "Lyons" or even "Typhoo". . .If both prices and the product can be determined by a few large firms, then the market ceases to perform i t s conventional function of influencing the behaviour of buyers and sellers: instead the behaviour of a few firms directs the market. . ."2 If the major tea producing countries were to co-operate, they could move into marketing and blending. The results of advertising and long association could be broken with counter-advertising and a quality competitive product. Although a producing country may have l i t t l e control over prices, i t can have some effect on the costs of production. Cost saving could be effected in several ways. *N. Jayapalan and A. S. Jayawardena, Some Aspects of the Tea Indus- try, Part IV. op. c i t . . p. 24. 2Ibid ., pp. 28-29. 82 1. Yields have improved considerably with greater use of f e r t i l i z e r over the years. But even around 1966, f e r t i l i z e r consumption by the tea i n -dustry was at 80 per cent of optimum consumption.* Subsidies were given to small holders and small estates (i.e., those less than 100 acres i n extent) under the Tea Rehabilitation Subsidy Scheme of 1959, to cover half the cost of f e r t i l i z e r used for a period of five years. It i s reported that in the f i r s t four years i t s e l f , applications received under the scheme exceeded the 2 target acreage of 60,000 acres. 2. Replanting with high yielding clones has been encouraged by the Tea Replanting Subsidy Scheme of 1959, under which subsidies are paid for replanting old tea lands with high yielding varieties of tea. Clones have been developed which y i e l d as much as 6,000 pounds per acre as against the present average yield of around 900 to 100 pounds per acre. A subsidy of Rs 2500 per acre was given to estates for replanting, but due to the high cost of replanting, there was some hesitancy on the part of estates to undertake replanting. The subsidy was therefore increased since January 1963 to Rs 3750 per acre where reconditioning of the s o i l was necessary and Rs 3250 per acre where reconditioning was not necessary. Since 1964 this scheme was thrown open to small holders, too. Furthermore, since May 1969, loans up to Rs 2,000 per acre have been granted i n addition to the subsidy. The loans are granted at low rates of interest and on l i b e r a l repayment terms. The total replanted Agricultural Development Proposals 1966-70, op. c i t . , p. 23. 2 Ibid., p. 7. 83 1 2 acreage has risen from 1,100 acres in 1960 to 33,400 acres in 1969. 3. The Tea Factory Development Subsidy Scheme was introduced i n 1966. It was essentially a loan scheme for the purchase of tea machinery and the construction of new factories as i t was recognized that taxation l e f t l i t t l e retained earnings for capital investment and hence factories were working beyond rated capacities and Ceylon had not kept pace with tech-3 n i c a l developments in tea manufacture. As the capital invested i n tea fac-tory development was below optimum levels, further incentives have been granted since 1969. These incentives include outright payment of subsidies and a favourable rate of exchange for imports of raw materials and finished 4 goods required in tea factory development. 4. Mechanization of tea plucking could lead to significant cost reductions. It is also of relevance particularly i n view of the increasing popularity of "instant tea" and tea bags and the declining importance of the appearance of made tea on the one hand, and the increase i n yields expected from replanting on the other hand. The U.K. is the largest importer of tea i n the world and here too i t appears that the main demand is for low quality teas.^ Packeted tea i s p. J89. p. J88. ^Central Bank of Ceylon Annual Report 1968, op. c i t . , p. 32. 2 Administration Report of the Tea Controller for 1969, op. c i t . , 3 Agricultural Development Proposals 1966-70, op. c i t . , pp. 10-11, 4 Administration Report of the Tea Controller for 1969, op. c i t . , 5„ The majority of retailed tea costs around 7 sh/lb.; costs and mar-gins for packers and distributors are around 3sh 3d/lb. (Interim Report of  the Tea Commission, op. c i t . , p. 24). Hence the price a packer could offer 84 a blend of many varieties of tea, but i t appears that low quality teas must predominate. Hence although one of the greatest disadvantages of mechanized plucking is said to be its lack of discrimination, i.e., around 20 per cent of the pluck may be of coarse leaf,* we find that this does not constitute an important disadvantage as demand is concentrated upon low quality teas. The increase in yields from replanting is expected to lead to an increase in the labour required particularly for plucking. (As noted earlier more than half the labour force is at present engaged in plucking and the labour requirements have been projected to double with replanting). This would involve a large increase in costs of production especially as wages 2 have been rising fairly rapidly. S. J. Wright who reported on the possibility of introducing mech-anization of plucking in Ceylon came to the conclusion that "with Ceylon tea as i t is planted and organized at present, there is l i t t l e prospect of lower-ing production costs by mechanization. But given the more appropriate bush pattern that could be introduced wherever tea is replanted or new tea opened, there is every prospect that by fairly straight-forward mechanization, present 3 labour requirements of tea growing could be reduced by at least 50 per cent." for tea would be about 3sh 9d/lb. which is the price of low quality tea. *C. R. Harler, "Costs of Opening up Tea Estates," World Crops, July 1956, p. 271. 2 The minimum wages of workers have risen by around 20 per cent between 1952 and 1967. Source: Central Bank of Ceylon Annual Report 1968, Appendix, Table 45. ~~ J. Lamb, "A Note on Mechanization of Tea Cultivation in Ceylon," World Crops. May 1954, pp. 193, 194. 85 Thus even though the tea industry has so far been labour intensive, the prospects are for an increasing degree of mechanization. CHAPTER V RUBBER: ASPECTS OF THE PRODUCTION FUNCTION, CONTRIBUTION TO RETAINED INCOME AND FUTURE PROSPECTS Origin and Development of the Rubber Indus try in Ceylon Commercial trade i n rubber began in the 19th Century. Wild rubber production was unable to satisfy the ever-increasing demand for t i e product. In 1876, seeds of Herea Brasiliensis were taken from Brazil to England where they were successfully germinated. The plants were then i n -troduced to Ceylon and other British colonies i n the Far East. The c u l t i -vation of Hevea i n Ceylon commenced in 1896, the acreage planted by 1898 being 1071 acres.* Commencement of rubber plantations coincided with declining prices of tea and rapidly r i s i n g prices of rubber. The price of rubber shot up from 2sh/lb . to 4sh/lb. in 1901 and 6sh/lb. in 1904-r06, 2 when rubber assumed great importance due to the development of automobiles. Ever 3 since then, tyre and tyre products have provided the main market for rubber. Furthermore, experiments conducted by the Royal Botanic Gardens (Ceylon) during 1877-99 helped demonstrate better methods of tapping and other im-4 provements in cultivation and manufacture. *G. C. Mendis, Ceylon Under the British, op.< c i t . , p. 149. 2 L. A. M i l l s , Ceylon Under Bri t i s h Rule, op. c i t . , p. 254. 3 F. A. 0. Agricultural Commodities •—Projections for 1975 and 1985, op. c i t . , p. 314. 4 L . A. M i l l s , op. c i t . , p. 254. 86 87 Under these stimuli, the acreage under rubber rose from 2,000 acres in 1900 to 50,472 acres in 1906.* Exports of rubber increased from four 2 3 tons in 1900 to 700 tons i n 1905. Rubber plantings were also undertaken in other parts of Asia. The phenomenal development of automobiles led to an ever-increasing demand for rubber. The price of rubber fluctuated during booms and slumps. The Stevenson Rubber Regulation Agreement of 1934 represents an attempt by rubber producing countries to prevent -a price decline i n times of depression. The price of rubber declined from Rs 2.42 per pound in 1913 to 12 cents at the height of the depression of the 1930's and rose slowly to 39 4 cents per pound at the outbreak of World War II. Rubber Cultivation and Manufacture Hevea Brasiliensis i s almost the only source of natural rubber supply. It thrives i n tropical temperatures. Rubber i s obtained from the latex which issues when the bark of the tree is cut. The latex i s collected, coagulated and dried to produce crude rubber. Manufacture of crude rubber is a simpler process than the manufacture of tea. *G. C. Mendis, Ceylon Under the B r i t i s h , op. c i t . , p. 150. 2 Ceylon Parliament, Report of the Commission on the Rubber Industry in  Ceylon, Sessional Paper XVIII, 1947 (Colombo: Government Press, 1947), p. 3. 3 Ibid., p. 3. See Table A-4. 88 Unlike tea, rubber is both grown and manufactured by small holders. The proportion of rubber under small holdings is considerable at 31 per cer.t of the total acreage under rubber.* Large estates are c a p i t a l i s t i c a l l " organized and subject to systematic technological progress whereas on smalL holdings production methods are simpler and more haphazard. The rubber tree requires very l i t t l e care and is not harmed i f l e f t untapped. Practices such as clean weeding only cause damage, particu-l a r l y by their effect on s o i l f e r t i l i t y . Soil erosion was particularly marked in the h i l l y areas of Ceylon. Less f e r t i l i z e r i s used i n rubber than in either coconut or tea — the average optimum dosage being seven 2 cwts for tea, 3>h cwts for coconut and only 90 lbs. for rubber. The aver-age level of f e r t i l i z e r application on rubber lands i n the 1960's was just 3 less than one cwt per acre and was reported to be about 94 per cent of opti-4 mum consumption. The bulk of f e r t i l i z e r used by the rubber industry i s taken up by areas with young rubber, i.e., immature rubber and rubber that just comes into tapping. It has been found to assist i n the growth of the tree. In the case of mature rubber, the yi e l d increases on account of the application of manure have not been of significance — hence the older rub-ber plantations receive very l i t t l e f e r t i l i z e r . Administration Report of the Rubber Controller for 1969 (Ceylon: Government Press, 1970), p. K60. 2 Agricultural Development Proposals 1966-70, op. c i t . , p. 23i. 3Ib_id., p. 232. . 4 I b i d . , p. 231. 89 These characteristics are reflected in the lower labour require-ment for rubber than for tea. The labour requirement rose from one labourer 1 2 to three acres in 1929 to one labourer to 2.5 acres in 1959. Around 192,000 3 workers were employed in the rubber industry in 1960. As mentioned earlier, the process of manufacture differs between small holders and estates. Latex collected from rubber trees is coagulated with the use of acetic or formic acid. Most rubber is then manufactured into smoked sheet or crepe. Small holders are only able to manufacture sheet rubber. In the manufacture of sheet rubber, rubber is passed through hand or power rolls after coagulation. Large estates have batteries of power driven mills. It is thereafter passed through a marking r o l l and dried in a smoke house. On small holdings, one or two hand mangles are used in con-trast to the use of sheeting batteries and engines on large estates. Further-more, on some small holdings, the water is eliminated by pressing with hands 4 and feet and the final drying by exposing the sheets to the sun. Costs of production are therefore lower on small holdings though.the product is of course less uniform and of a lower grade.^ Great Britain Colonial Office, Ceylon Report for 1929, op. c i t . , p. 14. 2 Ceylon National Planning Cpuncil, The Ten Year Plan, op. ci t . , p. 22. 3 D. R. Snodgrass, op. ci t . , p. 297. L Great Britain Colonial Office, Ceylon Report for 1929, op. c i t . , p. 13. 5This can be seen In Table V-6. 90 Crepe rubber is manufactured by r o l l i n g the coagulated rubber into strips which are then macerated by running the sheeting r o l l s at un-equal speeds. Crepe rubber is dried i n special houses that have control] i d heat and no smoke. This form of manufacture i s gaining increasing popular-i t y i n Ceylon on account of the premium to be obtained on this type of rubber. It is generally produced on estates as small holders do not possess the capital outlay or the throughput necessary for the purchase and workiag of machinery. Ceylon has barely begun to move into the new process rubbers being produced by Malaya and Indonesia.* It is hoped that block rubber w i l l eventually replace sheet production. As Ceylon obtains high premia on sole crepe and the better grades of latex crepe which exceed the premium Standard Malayan Rubber (S.M.R.) enjoys above other grades, these types, i.e., crepe w i l l continue to be produced i n increasing quantity. The S.M.R. scheme was launched i n Malaya i n 1965 in order to com-pete effectively with the specialized forms in which synthetic rubber is manufactured to meet consumer requirements. S.M.R. is superior to conven-tional rubber i n that i t i s graded by technical standards — the key speci-fication being d i r t content. This specification ensures that rubber has a guaranteed degree of cleanliness and thereby constant quality. These improve-ments in grading, processing and presentation can be expected to contribute to ^here i s one Heveacrumb factory which was set up i n 1969. A n o c n e r factory is expected to go into production this year. Small consignments known as Standard Ceylon Rubber (S.C.R.) Technically specified, have been shipped abroad. There i s also a government proposal to establish five block rubber factories over a period of three years. John, Keell, Thompson, White Ltd., John Keell's Rubber '70 (Colombo: Carson Cumberbatch & Co. Ltd.), p. 8. 91 increases in income from rubber exports. It is also clear that block rubber production will have to replace sheet production i f Ceylon is to be able to meet world market requirements. Furthermore, this process leads to quick manufacture* and econo-2 mies of scale in processing. Any reduction in costs associated with new forms of manufacture would be valuable in view of the fact that the rubber goods manufacturing industry is increasing in importance in Ceylon. The future competitive strength of natural rubber is also tied up with reductions in the cost of production. Many sheet manufacturing estates have been producing increasing quantities of blanket crepe in recent years as pale crepe fetches attractive prices. Production of sole crepe has risen from 400 tons in 1960 to 2200 3 tons in 1970, latex crepe from 26,500 tons to 41,700 tons . Ceylon is the 4 only quality producer of thick pale crepe. No. IX Pale Crepe produced in Ceylon is technically pure and the best in the world commanding premium pri-ces. The clones planted in Ceylon produce a pure white latex which is ideal ^atex delivered to the factory in the morning Is completely processed into block form and specified within the same day. John, Keell, Thompson & White Ltd., John Kell's Rubber '70, op. cit . , p. 9. 2 See F.A.O., Agricultural Commodities — Projections for 1975 and  1985, op. cit., p. 322, for details. 3 John Keell, Thompson & White Ltd., op. cit», p. 11. 4 Ibid., p. 1. 92 for pale crepe manufacture. Furthermore, many estates in Ceylon are medium-sized, i.e., 500 - 1,500 acres i n extent and are suited to production of pale crepe. Estates larger than this have to incur heavy expenditure i n order to manufacture pale crepe.* The premium fetched by S.M.R. rubber i s only a few cents over R.S.S., whereas the price difference between R.S.S. and latex crepe was as much as 22 cts. i n 1968 and the price difference between R.S.S. and sole crepe was even greater being 75 cts. i n 1970 (see Table V - l ) . If the price of crepe con-tinues to be high, increased production of crepe rubber could enhance the value of earnings from rubber considerably. TABLE V - l AVERAGE PRICE OF VARIOUS FORMS OF RUBBER (Rs) 1968 1969 1970 Sheet No. I 0.88 1.04 0.91 Latex Crepe No. I 1.10 1.15 1.10 Latex Crepe No. IX 1.11 1.16 1.11 Scrap Crepe No. I 0.82 0.94 0.85 Sole Crepe No. I 1.20 1.53 1.67 Source: John Keell' s Rubber '70, op. c i t . , Tables 7 & 8, p. 14. ^Written communication from worker i n Rubber Research Institute, Ceylon. 93 Acquisition of skills. We assume that managerial, clerical and technical workers constitute around 2.3 per cent* of the labour force employed on rubber estates. Furthermore, factory labour accounts for about 11 per 2 cent of the total labour force. Any skills acquired by these personnel are probably of limited use in other industries. As the World Bank Report points out, the export industries "are too specialized, to have built much in the way of broad industrial experience, trained labour and technical know-how for 3 expansion into new industrial fields." The manufacture of rubber goods in Ceylon, on the other hand, offers further opportunity for training in generally useful and transferable skills. Only 29 per cent of the workers in the rubber goods manufacturing industries are termed 'unskilled.' 4 Engineers, technicians, foremen and 'skilled' workers constituted 31 per cent of the total work force.^ As these rubber goods manufacturing industries are expanding rapidly, they are a fairly important source of training and employment of skilled personnel. *The proportion for the tea industry. 2 On the assumption that the distribution of wages is representative of the proportion in which labourers are distributed between field and factory work and on the basis of statistics from the Department of Census and Statistics, Statistical Abstract of Ceylon for 1967-68 (Ceylon, Department of Government Printing, 1970), Table 58 and the accounts of one sterling company rubber estate. 3 International Bank for Reconstruction and Development, The Economic  Development of Ceylon, second printing (Baltimore: Johns Hopkins Press, 1956), p. 506. 4 Department of Census and Statistics, Survey of Industrial Production, 1968 (Ceylon: Government Press, 1970), p. 18. Ibid., p. 18. 94 Technical Progress and Productivity Technical progress i n the industry as in tea has been continuous since i t s inception — better methods of tapping, weeding, the use of modern machinery i n factories and the beginnings of new methods of processing. There are continuous measures for eradicating disease. The Rubber Research Institute (R.R.I.) of Ceylon i s reported to be taking measures towards breeding high yielding disease resistant clones.* Sulphur dusting i s compulsory for a l l rubber estates over 50 acres in extent as i t i s expected to control the d i s -ease Oidium. Moreover, there i s a government-sponsored scheme for the co-operative sulphur dusting of small holdings and small estates. Increases i n productivity between 1946 and 1969 are given i n Table V-2.. There i s hardly any increase in yields between 1946 and 1960. This is not surprising since replanting got underway after 1953 and the results of re-juvenation could not have been expected to show u n t i l around 1960. Furthermore, high yielding clones planted in 1953 would have reached maturity only i n 1965 or so. There has been a noticeable increase i n yields from 1960, reflecting the beginning of production from replanted areas. The most important and almost the single cause of this increase i n productivity noticeable since 1960 has been the replanting with high yielding clones. The total acreage under high yielding rubber is in the region of 374,000 acre's — the acreage replanted under the Rubber Replanting Scheme being 276,130 acres, accounting for 49 per cent of the actual area under rubber. 2 ^Department of Census and Sta t i s t i c s , Census of Agriculture, 1952, Part II — Rubber Plantations (Ceylon: Government Press, 1956), p. 12. 2 Administration Report of the Rubber Controller for 1969, op. c i t . , pp. K68 and K69. 95 TABLE V-2 YIELD OF RUBBER PER BEARING ACRE YEAR LBS/BEARING ACRE YEAR LBS/BEARING ACRE 1946 345 1958 415 1947 476 1959 395 1948 341 1960 418 1949 353 1961 400 1950 412 1962 434 1951 381 1963 440 1952 351 1964 450 1953 363 1965 560 1954 348 1966 609 1955 361 1967 647 1956 368 1968 671 1957 399 1969 673 Sources: D. R. Snodgrass, op_. c i t . , Table 6-12, p. 147; Central Bank of Ceylon Annual Reports, Administration Report of  the Rubber Controller for 1969, op. c i t . , p. K61. Planting of new areas i n rubber requires the sanction of the Rubber Control Department. Areas newly planted have to be planted with high yielding varieties of rubber. Permission i s also granted to plant with ordinary rubber provided such plants are budded within a specified period. The Rubber Re-planting Scheme was launched i n 1953. As noted i n Table V-12, progress under this scheme has been highest on small holdings and points to their en-thusiasm to replant. On almost the entire area replanted between the years 1953 and 1959, the average yield per acre exceed 1,000 lbs/year.* In a Administration Report of the Controller of Rubber for 1969, op. c i t . , pp. K72-K73. 96 sample of estates over 100 acres in extent, yields over 2,000 lbs/acre were recorded.* Furthermore, clones which yield 3,000 lbs/acre have been developed and as yet there is no indication that a yield limit has been reached. The Rubber Research Institute i s also taking an interest i n yield stimulation. Here the lack of suitable experimental material i s reported to 2 have been a limiting factor. This shortage may be due to lack of foreign exchange with which to purchase the necessary chemicals, the age of trees 3 planted for experiment, etc. In early years, practices such as clean weeding led to s o i l erosion. Care is now being taken to prevent s o i l erosion. Permits are granted for planting new areas under rubber on condition that s o i l conservation measures are adapted on such areas. Small holders are paid s o i l conservation grants. Distribution of Export Receipts Wages and salaries are the largest item In the cost of production as i n the tea industry. As mentioned in the previous chapter, wages and salaries are expended mainly on food and textiles. The magnitude of planta-tion expenditure on these items and domestic production are dealt with i n the subsequent section. Other costs, too, account for a f a i r proportion of Administration Report of the Controller of Rubber for 1969, op. c i t . , p. K73. 2 Research Programme of the Rubber Research Institute, from Agricul- tural Development Proposals 1966-70, op. c i t . , p. 58. 3 As no data were available regarding the shortage, the above-mentioned factors are mere speculation. 97 export receipts from rubber. The main intermediate inputs probably are acetic and formic acids and f e r t i l i z e r . Some proportion of these items are met by lo c a l production and are dealt with in the subsequent section. TABLE V-3 PERCENTAGE DISTRIBUTION OF EXPORT RECEIPTS I T E M 1920-38 1952-67 Export Receipts 100 100 Wages and Salaries 26 46 Other Costs 13 17 Export Duties 1 12 Company Taxes 1 13 Profits 55 10 Source: Tables A-5 and A-6. Rising export duties and company taxes enhanced government revenue in later years. High profits in the period 1920-38 would have been partly remitted abroad since foreign ownership i n 1934 was put at 45 -per cent.* 2 Foreign ownership declined to 36 per cent by 1954 and further to 14 per 3 cent by 1969. *Sir Ivor Jennings, op. c i t . , p. 26. 2 D. R. Snodgrass, op_. c i t . , Table A-38. 3 Administration Report of the Rubber Controller for 1969, op. c i t . , p. K60. 98 Among the factors responsible for the pattern of ownership, and in particular the relatively high proportion of Ceylonese ownership are the location of rubber growing areas in the low and mid-country. About half the acreage opened out in rubber belonged to Ceylonese who had had dealings with Europeans in the past and had money and clear t i t l e to their land.* 2 Small holders are reported to have replaced paddy and cinnamon with rubber. Other factors were the ease and low cost of production and manufacture and perhaps the fact that with the development of the tea industry, there was more capital in the hands of Ceylonese. The larger rubber companies, how-ever, were mainly British-owned sterling companies. One of the most important causes of Ceylonese ownership has prob-ably to do with the absence of significant economies of scale in the manu-facture and production of rubber. Economies of scale in rubber production and manufacture are therefore investigated in order to ascertain whether this has in fact been of importance in the relatively high proportion of Ceylonese ownership. (Ceylonese ownership in 1969 was around 86 per cent of the acreage under rubber). Economies of Scale Rubber does not show clear cut economies of scale either in pro-duction or in manufacture. *E. F. C. Ludowyck, The Modern History of Ceylon, op. cit., p. 93. 2 G. C. Mendis, Ceylon Under the British, op. ci t . , p. 150. 99 (a) Production Output per acre is dependent on numerous factors such as s o i l conditions, care and method off tapping, age of trees, climate, ele-vation, exposure to wind, disease control, the distribution and lev e l of r a i n f a l l , the type of planting material used, etc. TABLE TV-4 SIZE OF ESTATE AND AVERAGE YIELD PER ACRE — 1951 SIZE GROUP T0TAL;MATURE ACREAGE ; AVERAGE YIELD/ACRE (lbs. Dry Rubber) Ceylon — A l l Estates 301,009 383 Under 15 Acres 1,008 338 10 - 19 2,696 289 20 - 49 23,466 293 50 - 99 25,131 302 100 - 199 28,336 326 200 - 499 62,926 351 500 - 999 72,808 415 1,000 and over 84,558 450 * Figures refer to units of this size in estates of 20 acres and over. -Source: Census of Agriculture 1952, Part II — Rubber Plantations, op. c i t . , p. 10. Table IV-4 gives some Indication of the size holdings to yields. At that time, however, there was a high proportion of senile rubber — 60 per cent of a l l rubber was more than 30 years old.* Slaughter tapping during Census of Agriculture 1952, Part II — Rubber Plantations, op. c i t . , p. 13. 100 the Japanese occupation of most other rubber-producing countries i n Asia strained the Ceylon rubber plantations to the 'utmost' and l e f t them In 'derelict condition.' Furthermore with intensified tapping during the Korean War, a further portion of rubber was tapped beyond repair.** The effects of senile rubber would have been particularly marked on smaller holdings as the adverse effects of the International Rubber Regulation 2 Agreement (I.R.R.A.) and their i n a b i l i t y to replant would have led to a 3 greater degree of se n i l i t y on their holdings. ^Census of Agriculture 1952f Part I I — Rubber Plantations, op.  c i t . . pp.11, 12. 2 The I.R.R.A. seems to have caused serious hardship to small holders; for details see P. T. Bauer, The Rubber Industry: A Study in Competition and  Monopoly (The London School of Economics and P o l i t i c a l Science, Longmans, Green & Co., 1948), pp. 88-110. Small holders suffered by being under-assessed under this scheme. The estate quota was much greater than that of small holdings. Although the average yi e l d per acre by size group is not available for 1934, a comparison between the average yields of 1951 and the export quotas of 1934 indicate that small holders were i n fact under-assessed, especially in view of the fact that their yields i n 1951 were bound to be less than those of 1934 as they suffered from various handicaps mentioned by P. T. Bauer, op. c i t . Size Group Average Yield/Acre Export Quota per Acre (lbs.) (lbs.) 1951 1934 Small holdings (<10 acres) 338 195 Estates (10 - 100 acres) 295 265 Estates (>100 acres) 381 330 Sources: Census of Agriculture 1952, Part II — Rubber Plantations, op. c i t . , p. 10; N. Ramachandran, op. c i t . , p. 78. 1953. 3 Replanting seems to have been confined to large estates u n t i l 101 Subject to these limitations Table V-4 ill u s t r a t e s that estates of 500 - 999 acres and over 1,000 acres produce yields greater than small holdings. The lower yields on small holdings are also due in part to the fact that they are less densely planted than larger holdings as there was interplanting of other crops with rubber. Small holdings i n Ceylon are r even less densely planted than other countries, the average planting density being 150 trees per acre i n Ceylon as against 220 i n Malaya and 350 i n the Netherlands Indies.* A study of larger holdings undertaken i n 1953 does not i n -dicate any association between the size of holdings and yields per acre (see Table V-5). TABLE V-5 YIELD/ACRE IN ESTATES CLASSIFIED BY SIZE ACREAGE IN PRODUCTION TOTAL ACREAGE IN PRODUCTION AVERAGE YIELD (lbs/Acre) 90 - 299 2,994 502 300 - 599 7,525 498 600 - 999 13,042 502 1,000 and above 10,113 466 Source: C. Fernando, "Yields, Costs and Returns of Company Owned Rubber Estates in Ceylon," Central Bank of Ceylon Bulletin, November 1954 (Colombo: Central Bank of Ceylon), Table VII, p. 13. Knorr, World Rubber and i t s Regulation (Stanford, C a l i f . : Stan-ford University Press, 1945), p. 34. 102 (b) Manufacture In manufacture, the methods of the small holder are less costly on average than those of estates which use expensive machinery, etc. More-over, company-owned and other large estates bear heavy overhead costs as a result of their organization which stretches from tappers, weeders, factory workers, foremen, estate conductors and their labourers, estate clerks, dressers to assistant managers, managers, v i s i t i n g agents, v i s i t i n g engineers, medical officers and accountants, agency firm, secretarial firm, to board of directors and shareholders,* thus adding considerably to the cost of produc-tion. This elaborate hierarchy entails expenditure on housing, etc. It i s also possible that the Agency system of management added con-siderably to the cost of production. These agencies hired and supervised managerial staff, purchased supplies for plantations and acted as shipping agents and even controlled the policy of rubber companies under their manage-2 ment. Management fees were considerable. Moreover, they are reported to have made profits in buying and s e l l i n g stores to estates and acting as ship-ping agents. 3 These factors are reflected in the lower manufacturing costs of small holders (see Table V-6). P. T. Bauer, op_. c i t . , pp. 200, 201. 2 K. Knorr, op. c i t . , p. 24. 3 Ibid., p. 25. 103 TABLE V-6 THE AVERAGE COST OF MANUFACTURING RUBBER OUTPUT (lbs) SIZE OF SAMPLE COST PER POUND (Cents) 0 - 49,999 (49) 6.9 50,000 - 99,999 (15) 7.4 100,000 - 199,999 (24) 7.7 200,000 - 299,999 (10) 8.5 300,000 - 399,999 (12) 8.3 400,000 - 499,999 ( 8) 8.8 500,000 - 599,999 ( 8) 8.3 600,000-699,999 ( 8) 8.8 700,000 - .799,999 ( 5) 8.6 800,000 - 999,999 ( 5) 8.3 1,000,000 and over ( 8) 10.2 152 8.9 Source: Y. Lim, op. cit., p. 101. The estate product, however, is generally of higher and purer quality — the better grades of rubber being produced in large factories and fetching higher prices. Furthermore, small holders do not produce crepe rubber which usually sells at a premium above sheet rubber. Small holders were reported to produce 10 per cent of their crops as Grade I, 30 per cent as Grades II and III and 60 per cent as Grade IV in 1947* and thereby sus-2 tain an average loss of 10 cents per pound. This was attributed to their Report of the Commission on the Rubber Industry in Ceylon, 1947, op. cit., p. 112. 2Ibid., p. 112. 104 i n a b i l i t y to own a sheeting m i l l and a smoke house. With the growth of Co-operative Rubber Sales Societies this state of affairs i s being gradually remedied. Thus the fact that there are no clear cut economies of scale In rubber production and manufacture contributed towards a greater degree of Ceylonese ownership and to a f a i r l y high proportion of production by small holders. Production by small holders reflects a favourable demonstration effect from plantations. The position of small holders, the d i f f i c u l t i e s they encounter and government assistance to small holders are considered next. Small Holders i n Rubber Production by small holders represents an important spillover effect of introducing rubber plantations. Many small holders manufacture rubber in addition to cultivating i t . Small holders appear to have owned a f a i r proportion of the acreage under rubber from the earliest days of rubber planting. Small holders i n Ceylon rarely depend solely upon rubber growing. They are generally able to turn to the production of other food crops i n times of poor prices. Rubber land is generally interplanted with other crops. Small holders generally own paddy lands i n addition to rubber and some of them even work for hire on nearby estates. This i s made possible by the fact that rubber i s easily cultivated and costs l i t t l e to manufacture. The ^"Report of the Commission on the Rubber Industry in Ceylon 1947, op. c i t . , p. 112. 105 rubber tree does not require constant care, unlike the tea bush; even i f l e f t untapped for long periods, no damage i s done to the tree. Interplanting reduces the risks inherent i n an export crop such as rubber.* Paddy is grown for the same reason. The earnings from an acre 2 of rubber have been estimated at Rs 150 whereas those from an acre of paddy 3 work out to around Rs 112. TABLE V-7 RUBBER LAND UNDER SMALL HOLDINGS YEAR AS PERCENTAGE OF THE TOTAL AREA UNDER RUBBER 1922 13.8 1936 21.3 1946 23.1 1951 26.2 1959 28.6 1969 31.0 Sources: N. Ramachandran, op. c i t . , p. 72; D. R. Snodgrass, op. c i t . , Table A-39; Adminis- tration Report of the Rubber Controller for 1969, op. c i t . , p. K60. The price of rubber rises and f a l l s in boom and slump. 2 Asian Industrial News No. 3 1968 (New York: United Nations, 1968), p. 66. 3 Based on average yields and guaranteed prices. 106 Small holder production was traditionally of lower grade rubber and received lower prices than those produced by estates. Lower prices obtained by small holders were probably justified by the fact that their product was not uniform and sometimes incompletely cured. Co-operative factories appear to offer a solution to this problem. The Report of the Ceylon Rubber Commission of 1947 made the following recommendation: "We have considered the possibility of large, up-to-date and well-equipped factories being built in the centre of districts largely devoted to the growing of rubber, and where a large number of small holders exist. The object of these factories would be to collect latex by lorry from peasant holdings and small estates near the main roads radiating from the focal point at which the factory is to be situated. On delivery at the central factory, the latex would be taken over and manufactured under the direction of the manager of the factory into whatever type of rubber was at that time selling to the best advantage. The first Co-operative Rubber Sales Society was formed in 1952; the members were a l l small holders. The society was granted a loan of Rs 3000 by the Board of the Rubber Research Scheme which enabled i t to build a smoke-2 house, purchase rollers and coagulating pans, etc. It was reported that over 97 per cent of the rubber produced by this society was sold as Grade I rubber. Other co-operative societies have subsequently been formed on a similar pattern. Since the 1950's there have been many other government-sponsored schemes to assist small holders and bring about rigorous replanting. Small Report of the Commission on the Rubber Industry in Ceylon, 1947, op. cit., p. 113. 2Ibid., p. 112. 107 holders are paid subsidies of Rs 1500 per acre for replanting under the Rubber Replanting Subsidy Scheme. F i f t y - f i v e per cent of the total area under small holdings has been replanted under this Scheme. The subsidies are paid in installments in order to ensure that a l l the operations connected with replanting are carried out.* Each stage is inspected by the Rubber Con-trol l e r ' s Department and rubber instructors v i s i t newly-planted areas and advise permit holders on up-to-date methods of planting, s o i l conservation, according to a graded scale — steep slopes receiving the highest grants as s o i l conservation is more costly on h i l l y ground. There i s a government sponsored scheme for co-operative dusting of small holdings and small estates. Furthermore, f e r t i l i z e r i s supplied to small holders through rubber depots in such form as to enable even the smallest holder to obtain his requirements. Small holders are not required to pay cash for their f e r t i l i z e r — the cost of the f e r t i l i z e r being recovered from the replanting subsidy. ment and enabled to take advantage of the spillover effect of plantations. They have been given the opportunity of cultivating high yielding rubber and to some extent of producing high grade rubber. etc. 2 Peasant class permit holders are paid s o i l conservation g'rants Thus small holders have been assisted significantly by the govern-. R. Snodgrass, op. c i t . , p. 148. 2 Administration Report of the Rubber Controller for 1969, op. c i t p. K65. 108 Estimate of Domestic and Foreign Components in Export Receipts From Rubber (a) 1920-1938 As noted earlier i n the section on Tea, export duties were introduced i n 1915 and company taxes in 1932. These taxes were low i n early years, particularly before the late 1940's, Proceeding as i n the case of tea, we present a breakdown of export receipts from rubber (see Table A-5 for details). From this table, we attempt to estimate the domestic and foreign component of export receipts. TABLE V-8 YEARLY AVERAGE DISTRIBUTION OF EXPORT RECEIPTS 1920-1938 AS PERCENTAGE OF I T E M VALUE (Rs Mil) EXPORT RECEIPTS Export Receipts 69 100 Wages and Salaries 18 26 Other Costs 9 13 Export Duties 1 1 Company Taxes 1 1 P r o f i t s 38 55 Source: Table A-5. We follow the method adopted i n calculating the foreign and local components of export earnings i n tea. The foreign component of wages, salaries, and other costs i s put at 50 per cent and 40 per cent respectively.* The foreign component of pro-The same proportion as for the tea industry as these figures are estimated from s t a t i s t i c s which do not cover tea, rubber and coconut i n d i v i -dually. 109 f i t s i s estimated to have been around 45 per cent, which was the proportion of rubber land under foreign ownership at this time. Export duties and company taxes were negligible during this per-iod. The total foreign component is estimated at 45 per cent* and the local component at 55 per cent of the export earnings from rubber during the period 1920-38. (b) 1952 to 1967 Proceeding as before and noting that taxes and duties increased sharply since Ceylon achieved Independence in 1948, we present Table V-9 i n order to estimate the domestic and foreign component of re-ceipts from the export of rubber during this period. TABLE V-9 YEARLY AVERAGE DISTRIBUTION OF EXPORT RECEIPTS 1952-67 ITEM VALUE (Rs Mil) AS PERCENTAGE OF EXPORT RECEIPTS Export Receipts 304 100 Wages and Salaries 139 46 Other Costs 51 17 Export Duties 35 12 Company Taxes 41 13 P r o f i t s 30 10 Source: Table A-5. T:his figure i s 12 percentage points lower than the tea industry both on account of the large share of profits and higher level of local owner-ship than i n tea. 110 Export duties and company taxes from rubber accounted for around five per cent of government revenue during this period. Profits amounted to 10 per cent of export earnings. Foreign owner-ship is estimated to have averaged around 25 per cent of the acreage under rubber during this period; hence the foreign component of profits is cal-culated at this proportion.* The import content of wages and salaries and 2 other costs is put at 33 per cent and 37 per cent respectively. The foreign component of export earnings from rubber is estimated at 24 per cent for this period as against 45 per cent in the previous period. As in the case of tea, this decline in the foreign component is due to higher rates of local taxation, greater domestic production and increased local ownership of rubber lands. The foreign component of earnings from rubber during this period is almost the same as that for tea during the same period, despite greater local ownership in rubber. This is probably due to the fact that the lower share of export duties and company taxes in rubber offset the gains from pro-fits on account of higher local ownership. The share of export receipts retained locally influenced the growth of domestic agriculture and industry. Local production of rubber led to the establishment of a rubber goods manufacturing industry. Forward, backward and residentiary linkages are discussed in a separate chapter. The foreign component, however, is not equivalent to the outflow of profits as there was a moratorium on the remittance of profits during this per-iod. 2 See section on tea. Statistics are available for the export in-dustry as a whole and not separately for tea, rubber and coconut. I l l Post War Problems: Price Movements and Synthetic Substitutes When Japan seized the Malaysian rubber producing region during World War II, about 9/10ths of total world exports of crude rubber were automatically cut off from the U.S. and the U.K.* Efforts were made to expand rubber supplies from countries under the control of the A l l i e s . Producers were promised up to £45/acre for replanting 'slaughter tapped' areas. The price of rubber exported from Ceylon increased from 58 cts i n 2 1941 to Rs 1.02 in 1945. Her exports increased by about 25 per cent be-tween 1941-42, but dropped slightly thereafter due to labour shortages, the 3 effects of overtapping and adverse weather conditions. TABLE V-10 NATURAL RUBBER EXPORTS 1942-1945 1942 1943 1944 1945 Ceylon (000 tons) 116 94 103 95 Ceylon's exports as percentage of total exports 69% 56% 48% 49% Source: P. T. Bauer, op. c i t . , p. 306. The shortage of natural rubber in this period led to greatly en-hanced production of synthetic rubber i n the U.S. The production of synthetic *K. Knorr, World Rubber and Its Regulation, op. c i t . , p. 90. 2 D. R. Snodgrass, op. c i t . , Table A-52. 3 K. Knorr, op_. c i t . , p. 180. 112 rubber grew rapidly since then and became a major threat to the post-war natural rubber industry (see Table V - l l ) . TABLE V - l l CONSUMPTION OF NATURAL AND SYNTHETIC RUBBER (Mil Tons) Y E A R NATURAL SYNTHETIC 1953-1955 (Average) 1806 1292 1961-1963 (Average) 2228 2706 1969 2900 4570 Sources: Administration Report of the Rubber Con- t r o l l e r for 1969, op. c i t . , p. K67; F.A.O., A g r i c u l t u r a l  Commodities — Projections for 1975 and 1985, op. c i t . , p. 315. The price of rubber exports from Ceylon dropped from Rs 1.02 i n 1945 to 63 cts i n 1949 but with the outbreak of the Korean War, the price shot up to Rs 1.53 i n 1953 and to Rs 2.53 i n 1951. However, these prices started declining thereafter. The decline has been almost continuous since then — the F.O.B. price of a pound of rubber i n 1967 was as low as 97 cts. The cost of production was reduced despite higher wage levels from a high of 1 2 around 97 cts per pound i n 1955 to around 70 c t s . per pound i n 1967. In 1952, Ceylon entered into a b i l a t e r a l trade agreement with the People's Republic of China whereby she obtained favourable prices both for """Rough calculations from D. R. Snodgrass, op. c i t . , Table 5-5 and Table A-52. 2 S t a t i s t i c a l Abstract of Ceylon for 1967, op. c i t . , p. 98. 113 rubber and rice. According to the terms of the 1952 Agreement, Ceylon was to s e l l China 50,000 metric tons of sheet rubber and import 27,000 tons of rice per year.* These b i l a t e r a l agreements were renewed when they expired and continue in force today. Since 1957 China stopped paying a premium for Ceylon rubber, but established an aid programme by which China gave Ceylon Rs 15,000,000/year for five years — this sum being equivalent to a premium 2 of 23 cts. poer pound. The People's Republic of China continued to be Ceylon's best cus-3 tomer. She purchased 56 per cent of total rubber exports i n 1968. These b i l a t e r a l agreements have lent an element of s t a b i l i t y to Ceylon's rubber industry especially with the diminishing demand from Western countries after the Korean War boom. Furthermore, the largest future increase i n consumption of natural rubber both i n relative and absolute terms i s projected for cen-4 t r a l l y planned countries. The Future of Ceylon's Rubber Industry As noted in Table V - l l , the production of synthetic rubber has cast some doubts about the future of plantation rubber. Natural rubber pro-*D. R. Snodgrass, op. c i t . , p. 144. 2 Ibid., p. 145. 3 Central Bank of Ceylon Annual Report 1968, p. 259. 4F.A.0., Agricultural Commodity Projections for 1975 and 1985, op. c i t . , p. 314. 114 duction has risen in the 1950's and 1960's and i t s price has declined des-pite considerable expansion i n the use of a l l kinds of rubber — natural, synthetic and reclaimed. The use of synthetic rubber has expanded more rapid-ly than that of natural rubber. There are many different types of synthetic rubber. In some uses, the synthetic material i s even said to be superior to natural rubber. The product which i s most competitive with natural rubber, i.e., produced i n large quantity and the cheapest variety of general purpose synthetic rubber in S.B.R.* It i s , however, reported that S.B.R. is less resi l i e n t than natural rubber and is more l i k e l y to generate heat; properties which make i t less use-2 f u l for use i n heavy duty t i r e s . "Polyisoprene which almost exactly dupli-cates natural rubber is s t i l l produced in relatively small quantities. Never-theless i t presents the greatest potential threat to natural rubber i n those 3 end uses i n which i t has hitherto been irreplacable." Although the develop-ing pattern of elastomer usage renders this particular comparison hardly more important than that with comparable rubbers, i t appears to be a matter of time when almost exact duplicates such as polyisoprene w i l l be produced i n large enough quantity and at prices as low as those of S.B.R. F.A.O., Agricultural Commodities — Projections for 1975 and 1985, op. c i t . , p. 314. 2Ibid ., p. 314. 3 Ibid., p. 314. 115 The position of natural rubber i s being steadily eroded by synthe-t i c rubber. For instance, between 1953-55 and 1969, world consumption of synthetic rubber increased by 254 per cent while that of natural rubber i n -creased by only 61 per cent.* World consumption of a l l rubber in 1975 has been projected to be around 39 per cent to 67 per cent more than i n 1966; however, the share of natural rubber i n this t o t a l has been projected to 2 decline further to 34 per cent, on the assumption that improvements i n grad-ing, processing and presentation would slow down the rate of replacement by 3 synthetic rubber. Projections of production which take into account replanting schemes envisaging an expansion of the area under high yielding trees suggest that at 1961 to 1963 prices some 16 per cent to 18 per cent natural rubber would be 4 in excess of consumption requirements. This would mean that the price of natural rubber would decline sharply unless there i s heavy accumulation of stocks. ~* The reduction i n natural rubber prices necessary to balance produc-tion and consumption has been put at 30 per cent to 35 per cent of the level prevailing i n 1961-63.6 1From Table V - l l . 2 F.A.O. Agricultural Commodities Projections for 1975 and 1985, op. c i t . , p. 316. 3 I b i d . , p. 314. 4 I b i d . , pp. 320 and 321. 5Ibid., p. 321. 6 I b i d . , p. 321. 116 During the 20th Century, the price of natural rubber rose from U.S. $1,276.9 per metric ton in 1900 to a high of $2,267.2 in 1910 and declined almost continually thereafter to $577.5 in 1969.* The future competitive strength of natural rubber is thus intimate-ly tied up with the reduction of costs of production. The cost of producing synthetic rubber is bound to decrease further especially as labour costs do not form such a large proportion of total costs as in plantation rubber. Furthermore, synthetic rubber is capital intensive, which generally per-mits a lowering of prices over the years as long as scale economies can be exploited. Po s s i b i l i t i e s for Cost Reduction in Natural Rubber 1. The most important prospect for reducing costs i n natural rubber production i s that of extensive replanting with high yielding clones. Ceylon the average yi e l d in 1969 was 673 pounds per acre, but varieties yielding as much as 3,000 pounds per acre have been developed and as yet there are no indications of a yield l i m i t . The government launched a Rubber Replanting Subsidy Scheme in 1953. The scheme has continued in operation, with a present subsidy of 2 3 around Rs 1500 per acre. By 1968, a l i t t l e more than 262,000 acres (com-prising over one-third of the Island's acreage In rubber) had been replanted under this scheme. The total acreage under high yielding plants has been "N ew York average prices. Source: Rubber St a t i s t i c a l Bulletin, Vol. 24, No. 8 (May, 1970) (London: The Secretariat of the International Rubber Study Group), Table 56. 2 Administration Report of the Rubber Controller for 1969, op. c i t . , p. 32. 3 Central Bank of Ceylon Annual Report, 1968, op. c i t . , p. 32. 117 estimated to be i n the r e g i o n of 374,000 acres. Small holders have shown tha t the h i g h e s t response to t h i s scheme, p o s s i b l y because there was a h i g h degree of s e n i l i t y i n s m a l l h o l d e r rubber. TABLE V-12 RESPONSE TO THE REPLANTING SUBSIDY SCHEME rr , = CULTIVATED AREA PERCENTAGE SIZE GROUP AREA REPLANTED REPLANTED 1953-1969 Estates> 100 acres 264,017 117,330 43.3 Estates 10 - 100 acres 131,920 67,359 50.9 Small h o l d i n g s < 10 acres 172,696 91,449 54.8 Source: A d m i n i s t r a t i o n Report of the Rubber C o n t r o l l e r f o r  1969, op. c i t . , p. K69. Vigorous r e p l a n t i n g programmes have been launched by other rubber producing c o u n t r i e s , too, i n order t o reduce the cost of p r o d u c t i o n . Sucb re= du c t i o n s , however, cannot be r e a l i z e d i n the immediate f u t u r e s i n c e (a) a programme f o r s l a u g h t e r t a p p i n g areas to be repl a n t e d has to be c a r r i e d out three to four years i n ad-vance; (b) there I s a long g e s t a t i o n p e r i o d as the t r e e comes i n t o p r o d u c t i o n about seven years from p l a n t i n g and takes around 12 to 13 years to reach m a t u r i t y . A d m i n i s t r a t i o n Report of the Rubber C o n t r o l l e r f o r 1969, op. c i t . , p. 60. 2 A g r i c u l t u r a l Development P r o p o s a l s , 1966-70, op. c i t . , p. 21. 118 Over the period 1965-64 natural rubber has sold on average at prices two per cent above synthetic rubber.* Therefore, it is hoped that with the possibilities of cost reduction by replanting with high yielding clones, natural rubber may remain cost competitive. 2. A new development with great potential is the use of yield stimulants. In Malaya, extremely high yields have been obtained by treat-ing the bark of the tree with a chemical, "ethrel," which liberates ethy-2 lene gas and increases yields. However, the long-term effects of stimu-3 lation on growth and yields are not yet known. Furthermore, the present high cost and restricted supplies of this chemical would also limit its 4 application on a large scale. 3. As discussed earlier new methods of grading, processing and presentation make rubber more attractive to the market by ensuring constant quality according to technical specifications. Despite the possibilities for cost reduction, an important factor that has tended to increase costs over the years has been the increase in wages in keeping with a steadily rising cost of living. (The minimum wage rate index shows an increase of about 39 per cent between 1952 and 1968.^ *P. W. Allen, "The Way Ahead for Natural Rubber," in J. A. Byrdson (Ed.), Developments with Natural Rubber (London: MacLaren, 1967), p. 7. 2 John, Keell, Thompson & White Ltd., op_. cit., p. 7. 3 Agricultural-Development Proposals 1966-70, op. cit., p. 58. 4 John, Keell, Thompson & White Ltd., op_. cit., p. 7. B^ased on Central Bank of Ceylon Annual Report 1968, Appendix, Table 45. 119 Natural rubber production i s labour intensive unlike synthetic rubber; s a l a r i e s , wages and other allowances account for somewhat more than 70 per cent of the cost of producing natural rubber.* Tapping alone accounts for 2 about one-third the cost of production. I t i s not l i k e l y , however, that increases i n wages could o f f s e t the cost reductions effected by replanting with high y i e l d i n g clones. Furthermore, replanting lowers the wage cost since a tapper can handle as many high y i e l d i n g trees as low y i e l d i n g trees, and budded rubber trees are easier to tap, the only difference being the extra weight of latex a tapper has to carry to the factory. The use of trucks to transport the latex can eliminate this problem. Hence natural rubber production offers scope for cost reduction by labour saving technological progress. Based on S t a t i s t i c a l Abstract of Ceylon, 1967-68, op. c i t . , p. 98. Based on the accounts of one s t e r l i n g company rubber estate. CHAPTER VI COCONUT: BACKGROUND NOTES ON THE PRODUCTION FUNCTION, CONTRIBUTION TO RETAINED INCOME AND FUTURE PROSPECTS Origin and Development of the Coconut Industry The cultivation of coconuts i n Ceylon is a very old industry and dates back to ancient times; the earliest recorded reference being in the time of Dutu-Gemunu (C101 - 77 B.C.)** Coconut cultivation expanded con-siderably under the Dutch. By the end of the 18th Century i t was e s t i -mated that there were 10 million coconut trees in the coastal area be-2 tween Chilaw and Moratuwa. Thus the coconut industry preceded tea and rubber i n the economic development of the island. Systematic cultivation according to Western methods began from about mid-19th Century when coconut o i l was used in the manufacture of soap and margarine in Europe. Copra and coconut o i l were produced at low cost and sold at lower prices than the animal fats with which they had to compete in Europe, especially as they were not subject to the costs of 3 conversion entailed in the animal industries. Coconut palms were planted along the coast at f i r s t and later ex-tended inland. The acreage under coconut rose from 250,000 acres in 1860 to 650,000 by the beginning of the 20th Century and further to about 1.1 ^Department of Census and Statistics, Census of Agriculture 1952, Part III — Coconut Plantations (Ceylon: Government Press, 1956), p. 5. 2 Ibid., p. 5. 3 Katherine Snodgrass, Copra and Coconut O i l , Fats and Oils Studies, No. 2 (April, 1928) (California: Stanford University, Food Research In s t i -tute, 1928), p. 4. 120 121 m i l l i o n acres by B29* at which l e v e l i t has remained. The most recent 2 estimates put the acreage under coconut at 1.15 m i l l i o n acres. Coco-nut plantations cover almost the combined acreage under tea and rubber and occupy the second largest area under any single crop, the largest area being occupied by paddy. The most important coconut exports are coconut o i l , copra and 3 dessicated coconut. Re l a t i v e l y small amounts of c o i r f i b r e , c o i r yarn coconut s h e l l charcoal, fresh coconut and poonac are also exported. The export figure i s not a r e l i a b l e indicator of production as coconut i s ex-tensively used for domestic purposes. F i f t y per cent of coconut production 4 i s consumed l o c a l l y . The coconut tree i s referred to as the 'Tree of L i f e ' on account of the i n f i n i t e variety of uses to which every part of the coco-nut tree can be put. The coconut industry was mainly a peasant and small holders' indus-t r y . Small holdings of less than 20 acres i n extent covered about 70 per cent of the land under coconut i n 1 9 6 5 . S m a l l holders are generally able to manage th e i r l i t t l e coconut groves i n addition to paddy land. To them, ^Census of Agriculture 1952, Part I I I — Coconut Plantations, op. c i t . , Table 1, p. 5. 2 Administration Report of the Commissioner of Coconut and Cocoa Rehabili- tation for 1969 (Ceylon: Government Press, 1970), p. E35. 3 Coconut o i l , copra and dessicated coconuts account for w e l l over 90 per cent of t o t a l coconut exports. 4 A g r i c u l t u r a l Development Proposals 1966-1970, op. c i t . , p. 65. ~*Ibid., p. 24. 122 i t i s an important source of some basic necessities as well as cash income. Coconut Cultivation and Manufacture The coconut palm grows best i n areas with a high temperature (80°F -90°?) and a heavy and well distributed r a i n f a l l . The coconut industry i s mainly a peasant and small holders' industry. Coconut plantations, many of them below 50 acres in extent, were opened up in the 19th Century and accounted for around 32 per cent of the acreage under coconut as late as 1946.1 Coconut palms respond readily to cultivation — good cultivation practices lead to increased yields. Coconut palms, however, are less demanding of attention than either tea or rubber as they w i l l continue to grow and bear even i f neglected and nuts are picked only six times a year Without cultivation, the yield from a coconut palm i s about 30 nuts per 2 palm; with cultivation, the yield is over 80 nuts per palm. Hence c u l t i -vation of the palm lends i t s e l f ideally to small holders. Labour is used i n weeding, draining, fencing, manuring, etc. A resident labour force i s maintained for these purposes. Casual labour is hired for plucking nuts six times a year. The number of labourers required """Census of Agriculture 1952, Part III, op. c i t . , p. 6. 2 Great Britain Colonial Office, Ceylon Report for 1929, op. c i t . , p. 16. 123 for coconut planting has decreased over the years. This decrease is probably due to greater mechanization of the field work (especially in view of the fact that the use of fertilizer has increased and more attention paid to suitable cultivation practices in later years). TABLE VI-1 LABOUR REQUIREMENTS PER 100 ACRES YEAR NUMBER OF LABOURERS 1929 20 - 25 1951 11 1958 8 Sources: Great Britain Colonial Office, Ceylon — Report for 1929, op. cit., p. 15; Census of Agriculture 1952, Part III, op. cit., p. 20, The Ten Year Plan, op. cit. p. 22. There has been some mechanization of the field work. It is reported that tractor mounted ditchers and even heavy drainage machinery is used is forming drains. In manuring too, the smaller horticultural cultivator is reported to be proving popular.* The four-wheeled tractor with a rear mounted post-hole borer has found ready acceptance and this has permitted 2 the planting of seedlings at a fraction of the cost of manual methods. The *R. Wijewardena, "Mechanization on Coconut Plantations," World Crops, Vol. 10, No. 12 (December, 1948), p. 440. 2Ibid., p. 440. 124 higher level of mechanization has contributed towards a lessening of costs connected with labour in a labour intensive industry. As is the case with the other exports tea and rubber, it is essential that coconut remains cost competitive. After the coconut fruits are plucked, their kernel is dried to pro-duce copra. Copra is the most important manufactured coconut product as it is used for the manufacture of coconut oil. The production of copra is carried out by estates and small holders. Small holders as well as some estates sun dry their copra and then kiln dry it. Sun drying gives it a better appearance and a higher oil content than if it is solely kiln dried.* The process lasts about a week involving one day's sun drying and five to six days kiln drying. It was reported that in the 1930's, Cey-lon copra realized higher prices than the produce of other countries as it 2 had a better appearance and a higher oil content. But this may not hold today on account of the use of patent driers: sun-dried copra and that pro-3 duced in efficient driers are of the same standard. Sun drying is particu-larly suited to the small holder who is able to save on fuel costs. The ideal copra kiln for use by the small holder is reported to be the Ceylon-type drier with some improvement in design to make possible the production of copra "4". C. Cooke, Copra Production by the Small Holder, Part II, World  Crops, Vol. 18, No, 12 (December, 1956), p. 490. 2 Statistics and Intelligence Branch of the Empire Marketing Board, Survey of Oilseed and Vegetable Oils, Vol. II, 1932 (H.M.S.O., 1932), p. 29. 3 C. Piggott, Coconut Growing (London: Oxford University Press, 1964), p. 75: "The Ceylon drier. . .gives an excellent copra." Source: J. G. Thieme, Coconut Oil Processing, F.A.O. Agricultural Development Paper No. 89 (Rome: Food and Agricultural Organization of the United Nations, 1968), p. 34. 125 in just 2% days. Even the 'edible white' grade of copra can be produced by the small holder. Thus the small holder is able to prepare high grade copra with use of simple structures made of a few simple items including parts of the coconut palm itself. On estates which handle large quantities and rely on wage labour, 2 more mechanized methods, i.e., the use of hot air driers offer advantages. The Census of Agriculture for 1952 reports 1,134 copra kilns and 50 patent 3 driers on some 3,690 estates cultivating coconut. The number of patent driers are bound to have increased over the years. Furthermore, a large part of the processing is done in mills possessing patent driers and not on estates themselves. It is doubtful whether generally useful skills are acquired by persons growing coconut and producing copra. Planting coconut and produc-tion of copra have, however, led to the manufacture of a variety of products, notably coconut oil, dessicated coconut, coir fibre and yarn. These products are produced in modern mills as well as by small holders. Modern complexes manufacturing chemicals from oils and fats are replacing more primitive forms of manufacture. Workers in modern mills receive a training in gen-erally useful and transferable skills in capacities such as engineers and technicians. C. Piggott, op_. cit., p. 437. 2 (a) the cost of building a large installation of sun drying platforms is higher than a hot air drier; (b) there is no risk of copra spoilage during a long period of wet weather. (a) and (b): C. Piggott, op_. cit., pp. 75 and 78. (c) labour is costly and kiln drying requires more labour than hot air drying. Census of Agriculture 1952, Part III, op. cit. , p. 41. 126 Technical Progress and Productivity Productivity has risen over the years judging from the fact that annual production has increased while the acreage under coconut has barely increased. TABLE VI-2 AVERAGE ANNUAL PRODUCTION3 (ESTIMATED) YEAR (MIL NUTS) 1931-34 1,674 1935-38 1,636 1939-42 1,515 1943-46 1,638 1947-50 1,716 1951-54 2,234 1956-58 2,183 1959-61 2,372 1962-64 2,794 1965-67 2,518 Sources: Census of Agriculture 1952, Part III, op. cit., p. 13; Agricultural Development Proposals 1966-70, op. cit., p. 26; Central Bank  of Ceylon Annual Report, various issues. The figures have been presented in three and four yearly periods in order to eliminate to some extent the fluctuations in production caused by weather conditions. Although the average yield per acre is running at around 2,500 nuts an acre per annum, yields of 6,000 nuts per acre per annum are reported on exceptionally well-managed estates.* Administration Report of the Commissioner of Coconut and Cocoa Rehabil-itation for 1969, op. cit., p. E42. 126a The increase in the average yield per acre has been attributed largely to the increased use of fertilizer, especially under the Coconut Fertilizer Subsidy Scheme. Fertilizer consumption almost doubled between 1954 and 1956 when the scheme was introduced and increased four-fold by 1968.* It has been estimated that at present only about 30 per cent of 2 the acreage under coconut receives artificial fertilizer. In addition, animal manuring was also reported on 1,429 estates in 1951, although the number of cattle on these estates were reported insufficient to provide 3 the necessary manure requirements. The optimum fertilizer dosage for an 4 acre of coconut land is estimated at 3h cwt. Thus Ceylon's total acreage of coconut land requires more fertilizer than either tea or rubber.^  The Coconut Fertilizer Subsidy Scheme provides cultivators of coco-nut land with a subsidy of 50 per cent of the cost of their fertilizer. Only about 70 per cent of the fertilizer for which permits are issued are Fertilizer consumption by the coconut industry rose from 16,000 tons in 1954 to 31,000 tons by 1956 and 66,000 tons by 1968. Sources: Census of  Agriculture, 1952, Part III, op. cit., p. 16; Agricultural Development Propo- sals 1966-70, op. cit., p. 25 and Administration Report of the Commissioner  of Coconut and Cocoa Rehabilitation for 1969, op. cit., p. E4I. 2 Administration Report of the Commissioner of Coconut and Cocoa Rehabili- tation for 1969, op. cit., p. E42. 3 Census of Agriculture, 1952, Part III, op. cit. , p. 11. 4 Agricultural Development Proposals 1966-70, op. cit., p. 231. O^ptimum consumption for the present acreage under tea, rubber and coconut is estimated at 195,405 tons, 26,518 tons and 201,250 tons respective-ly. Ibid., p. 231. 127 actually taken up by the permit holders due to unstable climatic condi-2 tions, fluctuations in the price of coconut and lack of credit facilities. Only about 30 per cent of the land under coconut receives fertili-zer. In view of its importance in increasing the yields of coconut, it is clear that the use of fertilizer should be extended to a much larger area. It is reported that a scheme of credit facilities to participants 3 of the Coconut Fertilizer Subsidy has been recently formulated. Extension of the area fertilized will probably proceed at a faster pace when this scheme is implemented. Small holders are assisted by the distribution of fertilizer through co-operative societies which eliminate to some extent the prob-lems faced by small holders with respect to transport and finance. They pay for the fertilizer only when the co-operative society distributes it 4 to them and receive a 2^  per cent discount on fertilizer thus purchased. The Department of Coconut and Cocoa Rehabilitation inspects the coconut lands of those who receive fertilizer under this scheme in order to ascertain that the fertilizer distributed is properly utilized. Inspec-tors of this Department are in charge of visiting such areas and imparting information and advice with respect to manuring coconut land."' Agricultural Development Proposals 1966-70, op. cit., p. 26. 2Ibid., p. 27. 3 Administration Report of the Commissioner of Coconut and Cocoa Rehab-ilitation for 1969, op. cit., p. E39. 4Ibid.. p. E36. 5Ibid., p. E37. 128 It i s often reported that the cultivation practices and methods of management of small holders are well below the required standard. The main cause for sub-optimal practices appears to be economic as credit f a c i l i t i e s in particular are lacking. The Coconut Rehabilitation Scheme of 1956 was aimed at: 1. Improving the yields of coconut lands by the supply of f e r t i l i z e r at subsidized rates; and 2. Subsidizing the supply of selected high grade coconut seedlings for f i l l i n g vacancies, replacing low yielding palms, new plantings and replacing old coconut trees. However, as pointed out by the Commissioner of Coconut Rehabilitation, such a scheme alone i s not sufficient to overcome poor cultivation practices.* Furthermore, even the subsidies given to coconut producers are less than those given to small holders in tea and rubber. There was no systematic practice of regularly replacing old trees with new ones prior to the Coconut Rehabilitation Scheme of 1956. It i s , therefore, not surprising that the s t a t i s t i c s i n the Agricultural Census of 1952 point to a high degree of s e n i l i t y among the palms. Most of the Island's coconut palms are over 50 years. The low level of production between 1931 and 1947 was attributed to the general neglect of coconut 3 plantations, senility of palms and adverse weather conditions. Further-more, many of the coconut lands had been cultivated with 'mixed unselected 4 planting material.' Administration Report of the Commissioner of Coconut and Cocoa  Rehabilitation for 1969, op. c i t . , p. E42. 2 Agricultural Development Proposals 1966-70, op. c i t . , p. 28. 3 Census of Agriculture, Part III, op. c i t . , p. 11. 4 l b i d . , p. 11. 129 Seedlings from selected seed nuts were supplied by the Coconut Research Institute since October 1948. A considerable acreage was also replanted with seedlings produced in private nurseries. Under the ReVish • ilitation Scheme, seedlings which cost the Coconut Research Institute 92 cts to produce are sold at the subsidized rate of 25 cts each,"*"i.e. ,the cultivator receives seeds at 27 per cent of cost. Seedlings issued unde; this scheme have risen in number .from 900,000 in 1956 to 1,472,000 in 1969.2 Unlike tea and rubber, however, there is no guarantee that seed-lings cf a high yielding palm will reproduce the performance of the parent 3 tree. Thus the increase in yields is merely the beneficial effect of re-placing senile plants with younger plants. Furthermore, there is no guaran-tee that under planting has been carried out on a systematic basis and main-4 tained as required. The success of coconut under planting is dependent on operations such as fencing, gradual thinning of the old stand, judicial application of fertilizer, care of seedlings against pests, diseases, etc. and systematic weeding being carried out regularly during the early stages of planting."' If these operations are not carried out in the early stages, "^ Administration Report of the Commissioner of Coconut and Cocoa Rehab- ilitation for 1969, op. cit., p.E40. 2Ibid., p. E 4 0 . Y 3 Agricultural Development Proposals 1966-70, op. cit. , p. 28. 4Ibid., p. 29. 5Ibid., p. 29. 130 the productivity of palms will be low. The Agricultural Development Pro-posals emphasize that additional inducements (such as a subsidy of Rs 400/ acre were paid in installments) are necessary to ensure that underplantine is carried out and maintained up to accepted standards of cultivation.* New planting with selected seedlings and greater use of fertilizer can be expected to raise productivity further and increase the magnitude of earnings from coconut. Local Participation Local participation in the coconut plantations and in small hold-ings is greater than in either rubber or tea. The share of foreign owner-ship of the area under coconut was put at five to 10 per cent by the Banking 2 Commission of 1934. Foreign ownership of the total acreage was around 3 three per cent in the 1950's. A few British-owned mills, however, process 4 a high proportion of coconuts grown in Ceylon. The high degree of Ceylon-ese ownership of the land under coconut is probably due to the location of coconut land, i.e., areas owned by Ceylonese in which coconut was culti-vated from ancient times and the fact that a large initial capital outlay is A^gricultural Development Proposals 1966-70, op. cit., p. 31. 2 Sir Ivor Jennings, op. cit., p. 26. 3 Only 7.7 per cent of all coconut estates (i.e., including small. holdings) were reported to be foreign owned in 1951. Source: Census of  Agriculture 1952, Part III, op. cit., p. 7. D. R. Snodgrass, op. cit., p. 49. 131 not necessary. A significant factor in this connection may probably have been the fact that there were no significant economies of scale. Hence we turn to a consideration of the economies of scale in the production and manufacture of coconut. Economies of Scale Data on the cost of production by size of estate are not available. It is likely, however, that small holders who incur less costs on labour and management* produce coconut at a lower cost than estates. TABLE VI-3 YIELD BY SIZE OF ESTATE 1951 and 1961 SIZE ACREAGE COVERED AVERAGE YIELD ACREAGE COVERED AVERAGE YIELD GROUP IN SAMPLE PER ACRE IN SAMPLE PER ACRE (in acres) (Nuts) (Nuts) 1951 1951 1961 1961 Total Estates 235,423 1,850 19,265 3,042 Under 10* 1,858 984 10 - 19* 5,444 1,126 24 2,415 20 - 49 47,014 1,360 556 3,268 50 - 99 45,567 1,687 2,227 2,873 100 - 199 50,750 1,956 3,485 3,031 200 - 499 52,706 2,051 6,046 2,882 500 - 999 23,542 2,252 4,758 3,388 1,000 and over 8,560 3,106 2,169 2,800 Refers to units of coconut of this size in estates 20 acres and over. Sources: Census of Agriculture 1952, Part III, op. cit., Table XVII; Y. Lim, op_. cit., Appendix, Table VI-1, p. 222. Labour and management costs accounted for around 75 per cent of total costs in the period 1920-38; see Table VI-5. 132 The statistics point to contradictory conclusions. Whereas the 1951 data indicate substantial increasing returns to scale, the 1961 statis-tics do not indicate any significant increase between holdings of different size groups. It is also possible that the yields of holdings less than 10 acres in Table VI-3 are inaccurate as this category is badly under-represented; the acreage covered in the sample of these units is less than one per cent of the total acreage covered in the sample, whereas holdings of this size consti-tute around 30 per cent of the acreage under coconut.. Statistics in Table VI-4 indicate that the yields of holdings less than 10 acres may have been slightly above the average yield for the entire island in 1951. TABLE VI-4 COMPARISON OF YIELDS ESTIMATED AVERAGE YIELD/ACRE (Nuts) 1951 1961 All Estates and Small Holdings and Town and Village Gardens 2,000 (approx.) 2,262 Estates above 10 acres in extent 1,934 3,042 Sources: Census of Agriculture, 1952, Part III, op. cit., p. 10; Central Bank of Ceylon Annual Report for 1968, p. 34, Table VI-3/ Table VI-3 does not reveal much regarding small holdings which pre-dominate in the coconut industry. The statistics with respect to units less than 10 acres in extent are extremely scanty. From Table VI-4, we note that 133 in 1951, the average estimated yield per acre for the entire island was around 2,000 nuts. This figure is slightly greater than the 1951 Census average for estates greater than 10 acres in extent. It indicates that small holders had somewhat higher yields than estates. The 1961 data, however, seems to indicate the reverse with the average yield for estates at 3,024 nuts/acre substantially greater than the average yield for Ceylon which was just 2,262 nuts/acre. It appears that the yields of small holders depressed the average level considerably. Small holders often plant catch crops which prevent both varieties (coconut and catch crops) from giving a good yield and is unprofitable in the long run.* (It is not possible, how-ever, to compare relative efficiency with different crops due to the pau-city of data). Hence it is possible that the yields of small holders are less than those of well managed estates. Small holders suffer from having limited access to credit. They are generally dependent on a single buyer — typically the boutique keeper, who also acts as the village money lender. He is thus able to exploit them in many capacities; he buys their produce at low prices and sells goods to 2 them at high prices and charges exhorbitant rates of interest on the money he lends. This also points to the possibility of lower yields on small hold-ings due to their inability to purchase manure, etc. However, it is not *C. Piggott, Coconut Growing, op. cit., p. 56, 2 Rates of interest ranging from 12 per cent to 18 per cent appear to be most common in rural areas. Source: H. A. de S. Gunasekera, section on Ceylon in W. F. Crick (Ed.), Commonwealth Banking Systems (Oxford: Claren-don Press, 1965), p. 296. 134 possible to arrive at firm conclusions regarding economies of scale either in manufacture or production in the absence of further data. Estimate of Domestic and Foreign Components in Export Earnings  From Coconut (a) 1920-1938 We present below a breakdown export earnings from coco-nut and attempt to estimate the domestic and foreign component of these earn-ings . TABLE VI-5 DISTRIBUTION OF EXPORT RECEIPTS 1920-38 (YEARLY AVERAGE) ITEM VALUE (Rs Mil) AS PERCENTAGE OF TOTAL Export Earnings 56 100 Wages and Salaries 25 45 Other Costs 8 14 Export Duties 1 2 Company Taxes 1 2 P r o f i t s 22 39 Source: Table A-10. If the profits are divided equally between the profits for pro-cessing and those for growing, i.e., in the ratio 1:1,* the outflow on account 2 of profits can be estimated. As foreign owned mills process most of the *A rough estimate derived partly from the statistics in the Census of Industry, 1952, for coconut oil processing. 2 Approximately. 135 coconut for export, around 75 per cent of the profits from processing are estimated to have been remitted abroad. Profits remitted are estimated to have been around Rs 9 million of the total profits of Rs 22 million. Forty-five per cent of wages and 40 per cent of "other costs" are estimated to have been spent on imports. Export duties and company taxes have been extremely low. The total outflow is estimated at 41 per cent of export earnings. The proportion retained domestically, i . e . , 59 per cent, contributed to additions to savings from profits and to the demand for consumer goods such as food and textiles and intermediate inputs such as f e r t i l i z e r due to ex-penditure of wages, salaries and other costs. Many of these items are pro-duced in Ceylon — this i s discussed in the subsequent section, (b) 1948-1967 TABLE VI-6 DISTRIBUTION OF EXPORT RECEIPTS 1948-67 (YEARLY AVERAGE) VALUE (Rs Mil) AS PERCENTAGE OF TOTAL Export Receipts Wages and Salariesj Other Costs Export Duties Company Taxes P r o f i t s Source: Table A - l l . The import content of wages and 'other costs' averaged around 33 per cent and 37 per cent respectively during this period. The outflow on 234 92 33 44 65 100 39 14 19 28 136 account of wages and other costs is estimated to be around 12 per cent 2 of the export earnings. The outflow on profits is estimated to have been around 11 per cent of export earnings. Thus the total outflow for the per-iod 1948-67 was around 23 per cent of the export earnings which is comparable to that from rubber, despite the greater degree of local ownership in the area under coconut. The forward, backward and final demand linkages of the coconut industry are numerous and are discussed in the subsequent section. Post War Developments and Export Prospects Vegetable oils constitute the largest part of world supplies of all oils and fats. The other sources of oils and fats are animal and marine oils. Groundnuts, soya bean and sunflower oil together account for about 3 half of all vegetable oil supplies. The largest single item in the world 4 trade in oils and fats is soya beans and oil. Copra and coconut oil are the next most important items in international trade in oils and fats, accounting for about seven per cent of the total trade in oils and oilseeds B^y apportioning the costs of production between wages and other costs according to the data for the period 1944-54 and the data from the Census of Industry, 1952. 2 Assuming that profits are divided equally between those for growing and processing and assuming that the foreign component of the profits from pro-cessing average around 75 per cent. 3 Great Britain Commonwealth Secretariat, Vegetable Oils and Oilseeds, 1965/66,,op. cit., p. 3. Ibid., p. 10. 137 (see Table VI-7). The Philippines is predominant among copra and coconut oil exporters providing nearly three-fifths of total exports.* Hence Cey-lon's exports constitute but a minor fraction of world oils and fats. TABLE VI-7 ESTIMATED WORLD SUPPLIES OF OILS AND FATS (000 Tons) 1960 1963 1967 1. Coconut Oil 2,041 2,087 2,016 2. Total Vegetable Oil 16,776 18,470 20,824 3. Total Animal Fats 10,629 11,184 11,918 4. Total Marine Oils 731 770 1,027 5. Total Oils and Fats 28,136 30,424 33,769 6. Coconut Oil as Percentage of Total Oils and Fats 7.3% 6.9% 6.0% Source: Great Britain Commonwealth Secretariat, Vegetable  Oils and Oilseeds 1966-67, Table I, p. 9 and Table II, p. 10. In recent years the importance of coconut oil in the production of soap has declined as tallow is being widely utilized. Furthermore, the production of synthetic detergents has reduced the use of soap. It is also reported that, in the manufacture of margarine, fish oil, lard and edible tallow are becoming increasingly important items partly because Great Britain Commonwealth Secretariat, Vegetable Oils and Oil- seeds 1965-66, op. cit., p. 10. 138 of their relative cheapness. Moreover, there has been a growing use of animal o i l s reflecting consumer preference for butter over margarine espe-2 c i a l l y as butter has been relatively cheap. The use of coconut o i l i n chemical products is also reported to be threatened by synthetic products, notably petroleum based fatty alcohols and low costs of production are a l l important in this highly competitive f i e l d . It is reported that the Philip-pines is setting up an industrial complex to produce fatty alcohols, p l a s t i -3 cisers and glycerine from coconut products. Ceylon has also set up a plant in the public sector, The Ceylon Oils and Fats Corporation, consisting of an o i l milling section, a refinery, a provender plant and a fat s p l i t t i n g unit. However as Ceylon is an extremely small supplier, she stands to gain by increasing her exports of coconut products especially i f she can lower her costs of production. In recent years, increased consumption within Ceylon has lowered her exportable surplus. Thus expanding exports are tied up with both lowering costs of production and increasing yields on the existing land area. Moreover, the market for such coconut products as dessicated coconut and fresh nuts is large and growing. In addition, Cey-lon and India are the only major producers of coir products; the demand for Great Britain Commonwealth Secretariat, Vegetable Oils and O i l - seeds, 1966-67, op. c i t . , p. 35. 2Ibid ., p. 219. 3 I b i d . . 1965-66, p. 130. 4As land suitable to coconut growing is probably exhausted. 139 coir products does not appear to be diminishing. Furthermore, new uses have been found for coconut oil in the manufacturing process (for instance, its use in synthetic rubber production). It is essential that coconut oil remains cost competitive. In Ceylon the cost of production of coconuts increased by almost 256 per cent between 1938 and 1954.* It ceased to rise thereafter and remained at much the same level until 1967. The share of labour wages rose from about 11 per cent in 1938 to 40 per cent in the 1940's and further to 50 per cent 2 in 1954. The share of labour wages and salaries of management, etc. amounted to well over 50 per cent of the cost of production in the 1940's 3 and rose to over 70 per cent by 1954. Increased use of machinery in field operations should help reduce costs and increase productivity per man. As noted earlier there are indications that there is a growing use of machinery in the field. Furthermore, productivity has increased over the years mainly due to the increased use of fertilizer. C^omputed from Census of Agriculture 1952, Part III, op. cit., Tables 27 and 28. 2Ibid. 3Ibid. PART III: EVALUATION AND CONCLUSION CHAPTER VII TOWARDS A I'D RE DIVERSIFIED ECONOMY: THE SCOPE FOR LINKAGE EFFECTS FROM THE EXPORT INDUSTRIES The main objective of the present chapter will be to investigate what potential spillover effects are possible from the expansion of these export sectors to other sectors. A. Spillover Effects of the Tea, Rubber and Coconut Industries As has been shown in the chapters of Part II, the three export industries are labour intensive requiring on average 1.1, 0.4 and 0.08 lab-12 3 ourers per acre and having labour coefficients of 5.25, 5 and 4.6 labour units per Rs 10,000 worth of output in tea, rubber and coconut respective-ly. Hence wages and salaries account for a sizeable share of the cost of production and around 40 per cent of export receipts. This has resulted in expenditure on subsistence items such as food and textiles as noted in the 4 section on final demand linkages in this chapter. The skill component of the plantation labour force, however, is very low. For instance, the percentage of workers employed in factory work 1* 2 ' 3See Table VII-9. 4 Section C, Chapter VII. 140 141 and in management/clerical/technical capacity were 8.5 per cent and 2.3 per cent respectively in the tea industry. It is likely that the skill component of the labour force in rubber and coconut is no greater than in the tea industry. Training in generally useful skills is limited as skills, acquired by these work-ers are likely to be specific to plantations. The production of rubber has, however, given an impetus to the establishment and development of a rubber goods manufacturing sector. Here, workers receive a training in skills which may be transferable to other industries. Similarly, there is some training in useful skills in the coconut processing industries, particularly the modern mills. Economies of scale appear to be associated with tea estates up to the size range 1,000 - 1,499 acres under prevalent forms of production and manufacture.* This is one of the factors which explains the higher degree of foreign ownership and lower degree of land under small holdings in tea than in other export crops. Government assistance in recent years has led to the use of higher yield strains and fertilizer by smaller estates and small holders and the establishment of co-operative factories and are ex-pected to have reduced the relative advantage enjoyed by large estates in growing and manufacturing tea. Rubber can be manufactured both in modern factories using expen-sive machinery as well as by small holders using simple equipment. There is little evidence of economies of scale either in production or manufac-ture. The quality of the product, however, is an economy of scale in Subject to numerous limitations mentioned in Chapter IV. 142 processing which is generally beyond the reach of small holders. It is also easier for bigger estates to replant without incurring losses for seven years until the rubber tree comes into tapping (i.e., large estates are able to replant a portion of the area under rubber at a time, whereas a small holder may have to uproot all the rubber trees on his land). Government assistance has helped to reduce the relative advantages enjoyed by large estates. The establishment of co-operative factor-ies has improved the quality of the rubber produced by small holders. Subsidies for replanting have offset to some extent the losses incurred in the process of replanting. Furthermore, the areas in which rubber grew were owned by Ceylonese. All these factors favoured a greater degree of Ceylonese ownership of rubber land than was the case In tea and the manufacture of rubber even by small holders. Hence the proportion of profits retained locally was greater in rubber than in tea. There appear to be no clear cut economies in coconut growing and production. Coconut producers obtain the least share of government assist-ance. New plantings and the greater use of fertilizer that are likely to result from recent programmes of government assistance are likely to elimi-nate or reduce any advantages enjoyed by larger-sized estates. Coconut is processed in both small holdings and on large estates and in modern mills. Coconut growing is ideally suited to small holder production as small holders are able to tend coconut along with other crops as coconut trees do not require constant attention. The coconut paddy complex is a common phenomenon and the greater part of the land under coconut is in small 143 small-sized holdings. Small holders also resort to planting catch crops in coconut lands. Interplanting and paddy cultivation are means of insurance against fluctuations in the price of an export crop such as coconut. Coco-nut growing appears to be more profitable than any alternative crop suited to coconut lands. The earnings from an acre of coconut land have been esti-1 mated at Rs 206 whereas earnings from an acre of paddy land are around Rs 112. Prices obtained for tea have been declining due to Ceylon's inabil-ity to enter into marketing on a large scale and competition from substitutes such as instant coffee. Despite the recent decline in the unit price of tea, foreign exchange earnings from tea have risen due to expanded production. Ex-pansion of production has been made possible by increases in productivity accompanying increased use of fertilizer. New forms of manufacture which re-sult in economies in the cost of production and a product suited to present tastes have yet to be adopted on a large scale. Natural rubber faces competition from synthetic rubber and the future competitive strength of natural rubber is tied up with reduction of costs of production. The prospects for increasing foreign exchange earnings 3 from rubber are connected with increasing productivity, as well as producing Asian Industrial News No. 3, 1968 (New York: United Nations, 1968), p. 66. 2 Based on yields and guaranteed price, 1968. 3 As practically all the land suitable for rubber and not cultivated in other crops is already under rubber cultivation. 144 a larger proportion of rubber in the form of crepe and new process rubbers. Coconut o i l also faces competition from other vegetable oils, animal oils as well as synthetic substitutes and cost competitiveness is important in maintaining markets. The prospects for increasing foreign exchange earn-ings are connected with increasing productivity by the use of selected seed-lings and greater use of fertilizer both of which are subsidized by the government. Local retention of export receipts in the post-war period average around 75 p e r cent and has contributed to the demand for and development of domestic agriculture and industry. Expenditure of export receipts on in-termediate Inputs such as fertilizer, capital goods, i.e., machinery and consumer goods mainly food and textiles has resulted in local production. Furthermore, the local availability of coconut gave an impetus to further processing of coconut products. The manufacture of coconut products accounted for around 40 per cent of total industrial production in 1952. Similarly, the local availability of rubber has led to a rubber goods pro-ducing industry. Local rubber goods production has been increasing in recent years. Rs 52.8 million worth of rubber goods were produced in 1969. B. Backward Linkage Effects The .first results of production for export and its growth were the production of intermediate goods, the provision of ancillary services — banking, transport, distribution, commercial, etc. -- and some degree of processing of these products. 145 Export proceeds and costs of production are presented in Table VII-1. The costs of production have been divided into 'wages and salaries' and 'other costs' in order to separate the final demand linkages from the back-ward linkages. TABLE VII-1 EXPORT PROCEEDS AND COSTS "OF PRODUCTION EXPORT WAGES AND OTHER COMMODITY RECEIPTS SALARIES COSTS 1920-38 Tea 164 61 35 1920-38 Rubber 69 18 9 1920-38 Coconut 56 25 8 1948-67 Tea 942 354 242 1948-67 Rubber ^ 304 139 51 1948-67 Coconut 234 — 92 — Rough estimate Considering the item 'other costs', imported materials constituted 1 2 37 per cent of its total value between 1959 and 1966, the remainder com-prising the contribution of locally produced materials and the input from the service sector. The item 'other costs' represents the raw mater-ial and intermediate input content of the export industries. The ratio of Based on Central Bank of Ceylon, Annual Report for 1966 and Statis  tical Abstract of Ceylon, various issues. The percentage of imports refers to all export crops. There are no separate statistics for each crop. Accurate data are not available for other years. 146 raw materials and intermediate inputs to total export value works out to around 18 per cent for the period 1920-38 and 22 per cent for 1948-67. A l -though this ratio is fairly low, some intermediate inputs were needed in large enough quantity to stimulate local production (provided that the local requirements were consistent with a minimum efficient scale of production and that most of the raw materials were available locally. 1.. Fertilizer. Fertilizer is an important Item in 'other costs.' For instance, in tea, i t is as high as 25. per cent^"of other costs. The con-sumption of fertilizer by the three major export industries as well as paddy — the next largest consumer of fertilizer — is given in Table VI1-2. TABLE VII-2 ' CONSUMPTION OF FERTILIZER TYPE OF CROP CURRENT CONSUMPTION 1965 (tons) CURRENT CONSUMPTION AS PERCENTAGE OF OPTIMUM Tea 160,000 81.9 Rubber 25,000 94.3 Coconut 50,000 24.8 Paddy 51,350 20.3 Source: Agricultural Development Proposals 1966-70, op. cit, p. 231. -"Approximate figure based on the accounts of one sterling company estate. 147 The consumption of fertilizer has been rising rapidly during the 1960's, mainly due to the distribution of subsidized fertilizer. Further increases can be anticipated in the future as there are plans for increas-ing the distribution of subsidized fertilizer. By far the greater propor-tion of fertilizer is used by the export industries. They have provided an impetus to the establishment of a fertilizer industry in Ceylon. A small proportion of fertilizer has always been manufactured in Ceylon. Ferguson reported in 1876 that "there are so many competitors local and foreign in the field for the supply of manures to planters that there is some difficulty in selection. . ,"1 However, this statement was made at a time when the application of fertilizer had not reached anywhere near its level in later years (especially the 1950's and 1960»s). The Census of Industry, 1952, reported local production of Rs 16 million worth of fertil-izer ? There are no complete statistics for later years. Locally produced fertilizer consists mainly of poonac. Cattle manure, bones and gas lime are also used as manure. Poonac is the by-product obtained in the manufacture of coconut oil. Thus some of the fertilizer re-quired as an input for the export industries forms part of the output of the coconut industry. *A. M. and J. Ferguson, Ceylon Directory, 1876-78, op. cit., pages not numbered. 2. i n n f ,o£B?,nTtTnt ° f C 6 n S U S a n d S t a t i s t i « , Statistical Abstract "of Cey-lon tor 1963 (Ceylon: Department of Government Printing), Table 149 148 The local production of fertilizer appears to have been profitable. The gross rate of return1 in the fertilizer industry was as high as 103 per cent in 1952. In 1968, too, the category 'other chemicals' comprising fertilizer, coconut oil, etc. registered returns of 151 per cent.4 The high rate of profit- can probably be attributed to the local availability of copra."' The bulk of Ceylon's requirements of fertilizer, however, is im-ported as the principal raw materials required for the production of fer-tilizer — ammonia, sulphur, rock phosphate and potash — are not available domestically. It is also doubtful whether the demand for fertilizer even in the late 1960 s was of a sufficient scale to warrant expanded local produc-tion, particularly as costs decline with"the scale of production. Table VII-3 illustrates the growth of demand from the pre-1960 period. defers to Gross Output minus Total Payments expressed as a per-centage of Fixed Assets. There is no allowance for taxation, depreciation, etc. 2 riased on Census of Industry 1952, reported in Statistical Abstract  of Ceylon, 1963, op. cit., Table 149. .3 ihere was no separate item 'fertilizer.' and 11. 4tfased on Survey of Industrial Production 1968, op. cit., pp. 10 5ihere is no data on the price of fertilizer and it is not possible to examine whether its price fell accordingly with the high level of profits. 149 TABLE VII-3 IMPORTS OF FERTILIZER3 QUANTITY YEAR (OOO cwts) 1925 2,089 1945 1,854 1949 2,312 1954 3,680 1965/66 8,000 1968/69 26,600 Consists mainly of sulphate of ammonia, super phosphates, muriate of potash and a host of other fertilizers. Sources: Ceylon, Department of Commerce, Thirty Years Trade Statis- tics of Ceylon 1925-1954 (Colombo: Government Press, 1955-57), Table 20; Central Bank of Ceylon, Annual Report for 1969, Table II, C5. The cost of producing fertilizer domestically in LDC's is often found to be higher than purchasing an imported equivalent. For instance, it "is sometimes suggested that, instead of establishing ammonia units of smaller capacity in each country in the (ECAFE) region, a joint project should be set up in Iran to produce ammonia on a very large scale on the basis of natural and associated gasses that are flared today. The delivered price from such a unit in Iran is likely to be lower than the cost of locally pro-duced ammonia in many countries of the region."* Furthermore, the price of "'"Economic Commission for Asia and the Far East (ECAFE) , Industrial Development in Asia and the Far East. Vol. IV, Development of Key Ihdus-tries(New York: United Nations, 1966), p. 147. 150 sulphur has risen as world demand has grown at a faster rate than production. Fertilizer production is, as a general rule, a highly capital in-tensive industry and requires skilled management experience and entrepreneur-2 ship. Despite the disadvantages with respect to economies of scale, i t appears that most countries in the ECAFE region are going ahead with plans to produce fertilizer domestically. They seem prepared to accept higher 3 costs of production in order to save foreign exchange and perhaps to gener-ate employment and reduce dependency on foreign suppliers. Example (a) Sulphuric Acid. Many L.D.C.'s in the ECAFE region a l -ready produce sulphuric acid or envisage its production in the near future — t h e main demand for sulphuric acid being for fertilizer production espe-cially ammonium phosphate or super phosphates. Ceylon had installed capacity of 3,300 tons of sulphuric acid/year in the 1960's-and intended to increase this to 225,000 tons/year. Similarly, at this time, Malaya had installed capacity of 19,800 tons and Indonesia envisaged future capacity of 352,000 4 per year. ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 147. 2Ibid., p. 147. 3Ibid., p. 147. 4Ibid., p. 174. r 151 The cost of production of sulphuric acid is dependent upon the 1 type of raw material employed, the size of plant and the process used. For"instance, in India when imported sulphur was used as the raw material for the production of sulphuric acid, its cost of production dropped from $28.20 per ton with a 50 ton per day plant to $22.70 with a 1,000 ton per 2 day plant. When pyrite was used as the raw material, the production cost of sulphuric acid fell more sharply from $30.90 per ton with a 50 ton per 3 day plant to $18.10 per ton with a 1,000 ton per day plant. Furthermore, the minimum economic size required to produce sulphuric acid from gypsum 4 is even larger than in the case of sulphur or pyrite. The future increase in capacity envisaged in Ceylon calls for a fairly large-sized plant. Statistics with respect to production costs are not available. Example (b) Nitffogeneous Fertilizer. Ceylon's consumption of nitrogeneous fertilizer rose from 15,800 metric tons N in 1951/52 to 34,700 iSulphur, pyrite or gypsum. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 175. 3 Ibid., p. 175. I^bid., p. 174. 152 metric tons N in 1961/62. New capacity to be Installed in an ammonia plant was to be around 82,500 metric tons of ammonia and the production capacity of ammonia sulphate and urea plants were to be 42,000 and 18,400 metric tons 2 N per year respectively. The trend today, however, is towards 'larger and more sophisticated. 3 plants' and Ceylon's requirements are not likely to lead to the cheapeast levels of production. In Japan and Iran single train plants of 750 tons 4 and 1,000 tons per day are being established — the cost of production is estimated to decline from $50.92 per ton of ammonia to $41.80 when produc-tion capacity is increased from 300 tons per day to 900 tons per day."' Once more, with nitrogenous fertilizer, an important factor affecting the cost of production is the scale of plant. Other factors such as the raw material used and the process employed also affect the cost of production. These examples suffice to illustrate that Ceylon is not in a posi-tion to produce fertilizer cheaply in view of the level of domestic demand and the difficulty of exporting domestically produced fertilizer as other L.D.C.s are also setting up fertilizer plants. The mixing of imported fer-tilizer is carried out by the Ceylon Fertilizer Corporation. Further ferti-lizer production is expected in the near future when the State Fertilizer "*ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 183. 2 Ibid., pp. 188 and 189. 3Ibid., p. 190. 4Ibid., p. 190. 5Ibid., p. 190. 153 Manufacturing Corporation commences production based on the petro-chemical by-products of the Roil Refinery. The fertilizer plant accompanying the petroleum plant is expected to lead to considerable economies in the cost of producing fertilizer. 2. Other Agricultural Chemicals. A certain proportion of agricul-tural chemicals, such as insecticides, fungicides, weedicides and pesticides, are manufactured locally by foreign companies. There are no complete statis-tics but two reporting units produced 23,977 cwts of these products valued at Rs 2,968,155 in 1966.* The production of these chemicals may have arisen from the local availability of some by-product. However, there is no information on the factors which determine why they are produced locally. There are factors making for higher costs of producing pesticidal chemicals in general in L.D.C.'s than in advanced countries. Chemicals are produced locally to meet specific demands and as a result plants tend to be 2 operated on a less economic scale than those in advanced regions. Further-more, costs of imported machinery and raw materials are higher than they are to producers in advanced regions, and production of these chemicals In warm 3 climates entails refrigeration, etc. and adds further to the costs. Ceylon Ministry of Industries and Fisheries, Statistics of Indus- trial Production 1965-67 (Colombo: Government Press, 1968), p. 28. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 229. 3 Ibid., p. 229. There is no data on costs of production, profit-ability, etc. of the agricultural chemical industry in Ceylon. 154 3. Engineering Industries. In Ceylon, one early and favourable linkage effect touched off by the development of plantations was the estab-lishment of repair and maintenance shops. Engineering establishments engaged in the manufacture of machinery for the export industries and other foundry products are reported to have been in existence since the mid-19th Century.* These "light engineering establishments are considered to be of basic and 2 great importance for overall economic development." The Census of Industry, 1952, listed 61 engineering establishments producing a gross output of Rs 3 4 94 million accounting for 15.4 per cent of the gross value of output of all industries in that year. The number of engineering establishments rose 5 6 to over 200 and the value of gross output to Rs 226 million in 1969. The major engineering firms not only operate repair and maintenance shops, but five of them are reported to have manufactured about Rs 6 million 7 worth of machinery for the tea and rubber industries in the early 1950's. *ECAFE, Industrial Development in Asia and the Far East, Vol. II, Country Reports (New York: United Nations, 1966), p. 135. 2 United Nations, Asian Industrial Development News, No. 5, 1970 (New York: United Nations, 1970), p. 20. 3 Statistical Abstract of Ceylon, 1963, op. cit., p. 215. 4 Based on Ibid., pp. 215 and 216. S^urvey of Industrial Production, 1968, op. cit., p. 11. 2. C^entral Bank of Ceylon, Annual Report, 1969, op. cit., Table 11(b) ^I.B.R.D., The Economic Development of Ceylon, op. cit., p. 561. 155 In the 1950's and 1960's Ceylon produced about 30 per cent of the world's supply of certain types of tea machinery,'' exporting machinery to India, Australia and Africa; 60 per cent of the quantity of machinery required 2 domestically for the export industries was produced in Ceylon. Early production of machinery in Ceylon is likely to have been determined by the uncomplicated nature of the equipment such as rollers, driers, water pumps, copra kilns, etc. used in the export industries. The machinery produced was not tied specifically to either foreign owned or locally owned plantations. Machinery produced locally probably served the specific needs of plantations better than imported machinery. Further-more, engineering services had to be rendered locally as the transport cost of sending machinery abroad for repairs would have been impossibly high, whereas local labour was cheap. Most of the engineering establishments in Ceylon are small-scale 3 private establishments. There are also a large number of "small engineer-ing workshops engaged in the repair of motor vehicles and the manufacture of small parts- for machines used in the rubber and tea processing industries. I.B.R.D., The Economic Development' of Ceylon, op. cit., p. 561 and ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 135. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 135. 3Ibid., Vol. IV, p. 105. Ibid., p. 105. 156 Moreover, there are a few large engineering firms producing machinery for the export industry and two large-scale government engineering workshops. The above-mentioned engineering establishments have now reached a stage where they produce a variety of products including metal products, machinery, transport equipment and the workshops are equipped to perform major overhaul and repair of machinery. Most of the inputs used in the engineering industry, however, are imported. Local repair and maintenance facilities provided by the engineer-ing industry and the production of spare parts would have had the beneficial effect of saving capital. Poor maintenance and repair tend to lower the efficiency of installed machinery, increase the costs of production and lead to the production of lower quality goods."'" Similarly, if spare parts were imported, large stocks would have to be held in order to avoid the risk of closing down production in the event of a shortage of spare parts. A well-developed engineering industry helped Ceylon to avoid these problems and the wastage of capital involved. The rates of return in existing industry (see Table VIII-10) and plantations were fairly high and were probably made possible in part by the availability of these services. The engineering industry introduced techniques different to those used in plantations and labour skills, valuable prerequisites for more gener-alized development. Skills acquired by operatives in the engineering indus-"TJNIDO, Maintenance and Repair in Developing Countries (New York: United Nations, 1971), p. 7. 157 try are transferable and these shops thereby created positive externalities for other manufacturing industries. In 1968, the engineering industries em-ployed 470 technicians and engineers, 215 foremen and 4,465 skilled workers.* These skilled workers accounted for 53 per cent of all employees, whereas In 2 other industries the proportion was 38 per cent. Furthermore, all operatives in the engineering industry acquire some skills. The engineering industry was one of the earliest industries to be established in Ceylon and it introduced a higher level of technology. It was well suited to the factor endowment of Ceylon In being fairly labour intensive (see Table VII-9) and a relatively heavy consumer of power. (As we mention' below, Ceylon has abundant resources of hydro electric power). Furthermore, small-scale engineering establishments have been economically viable units as they tend to be more labour intensive and their capital requirements are small. The rate of return in engineering industries has 3 4 risen from 25 per cent in 1952 to 109 per cent in 1968. The engineering industry, initially connected with plantations, was later enlarged with the emergence of an industrial sector. Problems connected with the engineering industry are those commonly encountered by *Based on Survey of Industrial Production 1968, op. cit., p. 17. 2 Based on Ibid., p. 17. 3 Based on Statistical Abstract' of Ceylon, 1963, pp. 214 and 215. 4 Based on Survey of Industrial Production 1968, op. cit., pp. 10 and 11. 158 L.D.C.'s. This sector is heavily dependent on imported machinery and equip-ment and consequently in times of foreign exchange shortage (a frequent occurrence in Ceylon) the supply of imports is curtailed and machinery and equipment cannot be fully utilized. Furthermore, the domestic market for machinery and equipment is small and it is difficult for the industry to . continuously expand on the basis of the domestic market. Ceylon exports some machinery. Beyond such items which suit specific requirements of planations, high costs of production would probably limit exports from Ceylon.* It is reported that there are only a few machinery items, such as simple agricultural implements, bicycles, etc., which can be produced 2 competitively in L.D.C.'s. The percentage share of the engineering industries to total manu-facturing output of Ceylon was 14 per cent in 1969. This can be compared to the share of other selected countries as follows: 22 per cent Australia; 30 per cent Japan; 23 per cent New Zealand; 18 per cent India; 35 per cent 3 U.S. and 40 per cent U.K. 4. Power. The development of hydro electric power was closely linked with plantations. Estates built- their own plants. Private power One factor in favour of L.D.C.'s are the relatively lower wage costs. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 144. 3Ibid., p. 145. 159 generation primarily for the estate sector is estimated to have amounted to almost 80 per cent of power generated in 1939.* Even as late as 1950, power consumption by tea and rubber factories and coconut oil mills amounted 2 to 60 per cent of the total power output in that year. Total installed capacity in 1950 was 143,400 k. w. Since then, power consumed by other sec-tors of the economy has been expanding and government power generation has tended to eclipse private power generation. Total installed capacity amounted to 262,000 k.w. in 1969. It is reported that one of the favourable effects of hydro elec-tric power projects in Northern Rhodesia was the expansion in the cement 4 industry. In Ceylon, it led to the use of large quantities of cement for building dams, etc. and would possibly have contributed to the factors which led to the establishment of a Cement Corporation. 5. Cement. It is not possible, however, to attribute the produc-tion of cement to the favourable demand effect of plantations and connected activities such as power generation, etc., as the demand generated by these sectors was not of sufficient magnitude to justify economic production. Im-ports of cement amounted to 950,000 cwt in 1925, and had increased to 2,745,000 *Based on D. R. Snodgrass, op_. cit., Table A-43, p. 348. 2 Based on lb id., and I.B.R.D., Economic Development of Ceylon, op. cit.. p. 462. 3 Ministry of Finance, Economic and Social Progress 1965-69 (Ceylon: Department of Government Printing, 1969), p. 50. 4 R. E. Baldwin, Economic Development and Export Growth, op. cit., p. 180. 160 cwt in 1949, whereas the, minimum economic scale of production was considered 2 to be 100,000 tons per annum based on the rotary kiln process. The increased demand for cement- in the post-war years, connected with various other developments in the economy, led to the establishment of a cement factory in the latter part of 1950. The first plant was set up in the public sector with a capacity of 100,000 tons per annum (minimum economic size). Ceylon possessed the necessary raw material limestone and clay resources. The demand for cement has exceeded local production of cement 3 for imports have continued. In 1954, for instance, 82,000 tons of cement 4 were produced locally and 20,000 tons were imported. As the demand for cement continued to rise the production capacity of the factory was more than quadrupled and more cement factories were established. A second fac-tory was built in early 1970 with a capacity of 220,000 tons per year. Development programmes indicate that by early 1972, the combined output of the cement factories will be about 790,000 tons which is expected to meet domestic requirements."* """Ceylon Department- of Commerce, Thirty Years Trade Statistics, op. cit., Table 20. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 362. 3Ibid_., Vol. II, p. 144. 4 Thirty Years Trade Statistics, op. cit., Table 20. """Central Bank of Ceylon, Annual Report, 1969, op.cit., p. 71. 161 It is interesting to note that 200,000 tons per year is considered to be the minimum economic size for developing countries in which a cement industry is well established.* Costs of production continue to decline with an increasing scale of production. In West Germany, for instance, the cost difference is around $7 per ton between a capacity of 100 tons per day and 2 1,200 tons per day. "The present trend is towards 1,000 tons per day or higher capacity rotary kilns. However, in the case of developing countries where production of 1,000 tons per day is envisaged at a particular loca-tion it would be more useful to install two kilns each of 500 tons per day rather than a single kiln of 1,000 tons per day. This might add to main-tenance costs, and therefore costs of production, but the extra expenditure would be more than offset by savings resulting from continuous production of at least 500 tons per day of cement without having to provide for stoppages for repairs and making of the refractories. Furthermore, the technical skill required in operating these plants would be far less exacting." Although we would expect the costs of production and hence sales 4 prices to decrease in Ceylon with the increase in capacity, the sale price increased from Rs 183 per ton in 1966/67 to Rs 222 per ton in 1969/70 (with ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 362. 2Ibid., p. 363. 3lbid., p. 363. 4 Capacity increased from 120,000 tons in 1966/67 to 350,000 tons in 1969/70, Central Bank of Ceylon Annual Report 1969, op. cit., Table 11(c), 162 production costs being estimated at Rs 220 per ton in 1969/70). The in-crease in costs of production has been attributed to higher wage costs and 2 higher costs of imported clinker. Locally produced cement costs appreciably less than imported cement 3 4 despite the increase in price. Imported cement cost Rs 653 per ton in 1954 and costs more today,whereas locally produced cement was sold at Rs 222 per ton in 1969/70.^  Furthermore, the Ceylon Cement Corporation has registered profits although profits have decreased from 16 per cent of capital invested in 1965/66 to 10 per cent in 1969/70 with the increase in costs of produc-tion.7 6. Transport Facilities. Input requirements also took the form of transport facilities which were provided mainly by the government. Roads and railways, for example, were all built by the government. The Ceylon Government Railway employed a large number of skilled and semi-skilled work-ers; the workshop of the C.G.R. was a source of technical training for its employees. This shop turned out articles for use by other government depart-*Based on Central Bank of Ceylon Annual Report 1969, op. cit., Table II(c)6. 2 Ibid., p. 71. It is expected that local clinker will be increasing-ly substituted for imported clinker. 3 The locally produced cement is probably not of the same type or quality as the imported cement. T^hirty Years Trade Statistics, op. cit., Table 20. T^he statistics were not available. B^ased on Central Bank of Ceylon Annual Report 1969, op. cit., Table II(c)6. 7lbid. 163 merits and for private orders in addition to normal railway work. The work-shop has provided externalities to other industries and has also improved the quality of labour by training them in skills which could be used by other manufacturing industries. 7. Backward Linkage Effects Specific to Individual Export Indus- tries. (a) The tea industry. Tea chests are a major item in 'other costs' of production in the case of the tea industry. The percentage share 2 of 'other costs' expended on tea chests is approximately 20 per cent. Part of the requirements of tea chests are met domestically by the Ceylon Plywood Corporation (see Table VII-4)* The Plywood Factory was established in 1941. The project was prepared by the government. The government also offered to underwrite the full issue of shares, but there was no response from private 3 enterprise. Finally the government established the factory. Plywood is used chiefly for making tea chests in Ceylon. The large tea planters were shareholders in companies which supplied them with foreign-made tea chests and hence they were not interested in the project. It was also suggested that perhaps the shortage of trained workers and the lack of information regarding the availability of supplies of logs for the mill may "'"I.B.R.D., The Economic Development of Ceylon, op. cit., p. 643. 2 Based on statistics of one large Ceylon sterling tea company. 3 I.B.R.D., The Economic Development of Ceylon, op. cit., p. 509. 164 have discouraged private investors. TABLE VII-4 DOMESTIC PRODUCTION AND REQUIREMENTS OF PLYWOOD TEA CHESTS 1958-59 to 1967-68 (Selected Years) 1958-59 1960-61 1963-64 1965-66 1967-68 Total Domestic Requirements (mil) 3.6 4.1 4.4 4.9 5.3 Domestic Production (000's) 331 458 637 714 977 Ratio of Local to Imported Tea Chests 1:10 1:8 1:6 1:5 1:4 Source: Wiratunga, 'An Illustrative Study of the Foreign Exchange Savings Realized by Three Public Sector Corporations 1957-58 to 1967-68," Central Bank of Ceylon, Staff Studies, Vol. 1, No. 1 (Colombo: Central Bank of Ceylon, 1971), p. 50. The Industrial Products Regulation Act. (I.P.R.A.) was applied to plywood chests in August 1949 by which importers were required to purchase a specified ratio of the corresponding domestic product. By 1959, the G.A.T.T. Supplement on Basic Instruments reported that "the quality of local chests has improved considerably during the last few years and it now only met the stan-dards of the imported product, but in some respects was even superior to the quality of the imported product, insofar as the timber in the manufacture of I.B.R.D., The Economic Development of Ceylon, op. cit., p. 509. 165 local chests was pretreated for immunity against borer attack and that the bonding medium used was a plastic glue which makes the plywood water-repellent and exceedingly strong. . .whereas the market price of imported plywood chests without linings and fittings has risen from Rs 4.89 in 1955 to Rs 5.77 in 1957, the 'standard price' of the local product* has fallen 2 from Rs 6.00 to Rs 5.90 during the same period. . ." The Ceylon Plywood Corporation worked at around 85 per cent of 3 capacity in 1968-69 and 1969-70. Imported chests still have the major share of the market as the Corporation has been slow to expand due to such factors as strikes and irregularity in the supply of timber, etc. (b) The coconut industry. As noted earlier, some of the machinery used in the production of copra, coconut oil and coir fibre is produced in Ceylon. Furthermore, small holders build their own kilns, and chekkus, etc. They produce their own machinery by copying the machinery used in modern mills. Small holders are gradually turning to the use of motor driven chekkus. Containers for oil are also produced locally. Five reporting units produced steel drums and storage tanks to the value of Rs 5 million --The local product presumably had linings and fittings and hence was cheaper than the imported product. 2 General Aggreement on Tariffs and Trade, Basic Instruments and  Selected Documents, 7th Supplement, 1959 (Geneva: 1959), p. 74. 3 Based on Central Bank of Ceylon Annual Report 1969, Table II(c)3. 166 in 1967. These could probably serve (among other things) as containers for coconut oil. C. Final Demand Linkages Final demand effects are indirect and work through the increase in demand arising from the expenditure of wages. As the wages of plantation labour constitute a fairly large proportion of costs of production (e.g., 36 per cent on average in the period 1920-38), the final demand linkages arising from the expenditure of wages should have been of some importance in giving an impetus to domestic production. For a very long period, however, much of the subsistence require-ments for the immigrant plantation labour was not provided locally. Hence the direct effect of the "local" labour component was not of great import-ance from the point of view of the growth of domestic production of consump-tion goods. Expansion in domestic production in later years was mainly due to government policy and assistance. The general mechanism by which forward demand linkages works is through an increase in the price of goods — food and textiles in the case of Ceylon — demanded by plantation labour. Expansion of export industries normally result in increased wages, which in turn lead to a rise in demand for food and textiles-and this is likely to raise their prices. In Ceylon, however, such an effect could hardly have taken place as imported goods were freely available. Statistics of Industrial Production 1965-67, op. cit., p. 31. 167 TABLE VI1-5 PERCENTAGE DISTRIBUTION OF PLANTATION EXPENDITURES, 1953 ITEM PERCENTAGE Food 66.1 Clothing 9.4 Housing 0.6 Miscellaneous 21.0 Medical 0.6 Durable Consumer Goods 1.9 99.6 Source: Central Bank of Ceylon, Survey of Ceylon's Consumer Finances, 1953, op_. cit., Table 25. Wages and salaries of the tea, rubber and coconut industries in 1953 were Rs 302 mil, Rs 152 mil, and Rs 62 mil respectively. In 1963, they were Rs 414 mil, Rs 113 mil, and Rs 83 mil respectively. Using these values we attempt to compare the distribution of plantation expenditure be-tween the years 1953 and 1963. A little over 75 per cent of plantation wages was spent on food and textiles. The demand for these items is universal and the demand effect of plantation expenditure would have added to the demand for the same items from other sectors of the economy and contributed to a widening of the mar-ket for these products. Domestic production of these items has increased throughout the 1950's and the 1960's. TABLE VII-6 PATTERN OF PLANTATION EXPENDITURE 1953 and 1963 1953 1963 PLANTATION PLANTATION DOMESTIC OUTLAY DOMESTIC OUTLAY PRODUCTION AS PERCENTAGE PRODUCTION AS PERCENTAGE IMPORTS OF DOMESTIC IMPORTS OF DOMESTIC I T E M (Rs Mil) (Rs Mil) PRODUCTION (Rs Mil) (Rs Mil) PRODUCTION Rice } 521 291 30 192 517 14 Flour — — 60 j — Fish a 29 72 a (124)d c Coconut Product — 431 7 — 405 7 Vegetables a 316 ' 13 a 390 8 Sugar b 71 — a 71 8 300 Other Foods 204 227 42 253 359 59 Clothing 52 l l e 418 93 38 179 Housing — 82 6 — 179 14 Total Plantation Outlay (Rs Mil) 516 610 Included in 'other foods.' Domestic production is underestimated as processed foods are included in industrial products. Plantation expenditure on this item is not available separately in 1963. T^he value of fish production has been added to the value of other foods on account of (c) above. Under estimation as this is the value reported in the Census of Industry, 1952, which does not include small-scale production (small-scale production is common in textile production). Sources: D. R. Snodgrass, op. cit. , Table A-l; Statistical Abstract of Ceylon, 1962, p. 214; Statistical Abstract of Ceylon, 1965, p. 193; Thirty Years Trade Statistics, op. cit., Table 20; Central  Bank of Ceylon, Annual Report, various issues; Central Bank of Ceylon, Survey of Ceylon's Consumer Fin-ances t 1953 (Colombo: Central Bank of Ceylon, 1954), Table 25; Central Bank of Ceylon, Survey of Ceylon's  Consumer Finances. 1963 (Colombo: Central Bank of Ceylon, 1964), Table 85. ~~ 169 1. Rice. For hundreds of years, rice has been the staple diet of the Ceylonese. The plantation sector with its large labour force added to the demand for rice. In 1953, for instance, plantation outlay con-stituted 30 per cent of domestically produced rice. Imports of rice and wheat flour (a substitue for rice) far exceeded domestic production of rice in 1953 (see Table VII-6). A great deal of government attention was focussed on domestic agriculture in the 1950's and 1960's. It has involved the provision of credit to paddy farmers both for production and consumption purposes, colonization schemes in the dry zone, improving and extending irrigation facilities, a guaranteed price scheme, provision of fertilizer at subsidized prices, crop insurance schemes, etc. As a result of these measures output has risen by almost 300 per 1 2 cent (production rose from 22 mil bushes in 1950 to 65 mil bushes in 1969 ) 3 and yields have doubled between.1950 and 1969. Ceylon produced approximate-ly 80 per cent of her requirements of rice in 1969. 2. Sugar. Sugar is another item on which there is a fairly high percentage of plantation spending. For instance, in 1953, four per cent of *D. R. Snodgrass, op_. cit., p. 330. 2 Central Bank of Ceylon Annual Report 1969, op. cit., p. 24. 3 Based on statistics from D. R. Snodgrass, op. Cit., p. 331, and Central Bank of Ceylon Annual Report 1969, cp. cit., p. 24. \ 170 total expenditure was on sugar. This is the highest proportion of spend-ing on any single item with the exception of rice and wheat flour. Rs 71 million worth of sugar was imported in 1953 and around 30 per cent of these imports were absorbed by the plantation sector. Domestic production of sugar commenced around 1960. It is possible to grow cane profitably in Ceylon provided that processing facilities are available. The gross return possible from an acre 2 of cane, was estimated to be around Rs 1000 in 1957; it was also estimated that, to be equally advantageous an acre under paddy should yield nearly 150 bushels at the 1957 import price or more than 80 bushels at the guaran-3 4 teed price. The yields in 1957 were around 32 bushels per acre. Further-more, the returns from coconut and rubber cultivation are put at Rs 206 and Rs 150 per acre'' — though land suitable for either paddy or cane are not necessarily competitive with rubber or coconut. Imports reached a level which made domestic production possible by the late 1940*s — assuming that capacity output given in the Ten Year ''Survey of Ceylon's Consumer Finances 1953, op. cit., Table 25. 2 The Ten Year Plan, op. cit., p. 225. 3Ibid., p. 225. 4 D. R. Snodgrass, op. cit., p. 331. "'Asian Industrial Development News, No. 3, 1968, op. cit., p. 66. \ 171 Plan (1958) represented the minimum economic level of production (see Table VI1-8). The Ten Year Plan (1958) suggested the establishment of the plants noted in Table VII-8. TABLE VII-7 IMPORTS OF SUGAR YEAR QUANTITY (000 tons) 1929 1939 1949 1951 1956 11.5 13.6 22.5 25.0 189.0 Source: Thirty Years Trade Statistics, op. cit., Table 20; Ten  Year Plan, op. cit., p. 254. TABLE VII-8 SUGAR FACTORIES TO BE ESTABLISHED SUGAR FACTORY TO COMMENCE CAPACITY OUTPUT (000 Tons) Kantalai I Gal Oya Kantalai II Walawe I Walawe II 1959 1959-60 1962 1962 1965 19.2 40.0 60.0 31.5 31.5 182.2 Source: The Ten Year Plan, op. cit., p. 371. 172 Though sugar production commenced around 1960, domestic production fell far short of these levels. The Kantalaia and Gal Oya units produced a mere 10,800 tons in 1969-70.* The state-owned sugar corporation has run into problems of organization and suffered from faulty planning since its inception; production of sugar cane has also been highly variable due 2 to a shortage of water and led to the under-utilization of capacity. 3 The value of domestically produced sugar is higher than the Im-4 ported product; for instance, it was valued at Rs 1120/metric ton in 1969-70 whereas the c and f price of imported sugar was Rs 436/ton in 1969."* (In addition to sugar, the Sugar Corporation produces spirits and offsets the losses in sugar production by its profits on the sale of spirits). 3. Textile Production. Around nine per cent of plantation expendi-ture was on textiles. Even as late as 1953, however, domestic production was negligible. Textile production experienced an upsurge in the 1960's. By 1969 local textile production was valued at Rs 228 million,** well over 300 per cent of the plantation outlay on textiles in 1963. The textile Central Bank of Ceylon Annual Report 1969, Table II(c)l. 2Ibid., p. 55. 3 This is not the sale price; it is probably the cost of production. 4 Based on Central Bank of Ceylon Annual Report 1969, Table II(c)l. C^entral Bank of Ceylon Annual Report 1969, p. 233. 6Ibid. 173 industry of Ceylon passed through the usual stages of import substitution of the products most readily manufactured locally, a fairly high degree of self-sufficiency (70 per cent in 1969) and has now begun to export garments. The main obstacle to the earlier domestic production of textiles appears to have been the free flow of imports. Textile production in-creased slowly from Rs 11 mil in 1952 to Rs 19 mil in 1961. The domestic textile industry received an impetus from the imports controls imposed since 1960. By 1969, the domestic production of textiles had risen sharply and the value of textile production (Rs 228 mil) was 12 times its value in 1961. The gross rate of return in this industry rose from 37 per cent in 19521 to 92 per cent in 1968.2 3 The textile industry has the highest labour coefficient among in-dustries other than the plantation sector (see Table VII-9) and is thus well suited to the factor endowment of Ceylon. Small-scale production and the use of traditional techniques are also common features of the textile industry of Ceylon. Textile industries in Ceylon were not excessively de-manding of skilled labour. In addition, one or two modern large-scale textile concerns were established (for instance, the National Textile *Based on Statistical Abstract 1963, op. cit., pp. 214 and 215. 2 Based on Survey of Industrial Production 1968, op. cit., pp. 10 and 11. 3 This refers specifically to the industry in Ceylon and does not imply that the textile industry as a whole has fixed technical coefficients. 174 Corporation in which the capital invested was* Rs 209 million, and the Well-awette Spinning and Weaving Mills). The capital requirements of small scale establishments are not high in relation to the value of output. The capital/worker ratio in the textile industry in 1968 was around Rs 2 3230, whereas for all industries (including textiles) it was Rs 4900. Specific figures relating to different types of products or connected with the degree of finishing, etc. are not available. 3 The economic size of a cotton mill in India and Pakistan is 4 generally considered to be 25,000 spindles and 500-600 looms. In Ceylon, the National Textile Corporation planned to set up two additional mills with a capacity of 112,000 spindles between 1966 and 1975. As of 1969-70, one factory was in production and it was producing near-capacity and register-ing some profits.^  The textile industries are an important branch of industry account-ing for 14 per cent of total industrial production in 1969. There are many industries connected with textiles — handlooms, garment manufacture, etc. Other possible forward linkages are rubber coated and water-proofed fabrics.** optimum. C^ ntral Bank of C ylon Annual Report 1969, op. cit., p,2 Based on Survey of Industrial Production 1968, op. cit., pp. 10, 11, 3 It is not specified whether economic size refers to minimum or 4 ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 515. "*For details see Central Bank Annual Report 1969. 6ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 533. 175 Globally, however, the textile industry is being changed into a capital intensive industry by advanced countries, and brings with it new problems connected with high rates of obsolescence of machinery, etc. to L.D.C.'s. The impact of automation is reported to be considerable in the textile industry, though not of such proportion or as serious as in the engineering industries.* The plantation demand for textiles was fairly significant, account-ing for about one-fourth of the total demand for textiles in the 1950's and was certainly a factor responsible for the establishment of a textile in-dustry. The textile industry was established in the mid-19th Century when plantation demand for textiles must have accounted for an even greater share (than its share in the 1950's) of total demand. A traditional hand-loom sector was in existence long before the establishment of plantations, probably largely serving the needs of the subsistence sector. There is no information with respect to its size or growth/decline. D. Labour Coefficients and Skill Components of Plantations The labour coefficient of the tea, rubber and coconut industries are far above those of other industries (see Table VII-9), Thus the export industries can claim to be the most labour-intensive industries in Ceylon. Although the wages of labour expanded the domestic market for simple items such as food and textiles, subsistence was not provided locally for the pop-ulation influx. Even in the 1950's plantation labour relied on imports for ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 533. 176 over 40 per cent of their expenditures. Their impact on the development of the rest of the economy was thus l i m i t e d . TABLE VII-9 LABOUR COEFFICIENT PER Rs 10,000 OF OUTPUT YEAR I N D U S T R Y LABOUR COEFFICIENT 1960 Tea 5.25 1960 Rubber 5.08 1960 Coconut 4.63 1968 Food, beverages, tobacco 0.41 1968 T e x t i l e s , weaving apparel, leather. 1.59 1968 Manufacture of wood and wood products 1.51 1968 Manufacture of paper and paper products 0.75 1968 Manufacture of chemicals, petroleum, coal, rubber and p l a s t i c products 0.55 1968 Manufacture of non-metallic mineral products (except petroleum and coal) 0.65 1968 Manufacture of fabricated metal products, machinery and equipment 0.95 1968 Basic metal products 0.35 issues Sources: Central Bank of Ceylon Annual Reports, various ; D. R. Snodgrass, op. c i t . , Table A-12. The s k i l l component of labour employed i n the export industries rates very low i n comparison with other industries. S k i l l e d labour* com-pr i s i n g factory workers, managerial and c l e r i c a l hands constituted 2.3 per cent of the t o t a l employed i n the tea industry i n I960 (see Chapter IV) . In 2 a l l other ind u s t r i e s , the s k i l l component i s as high as 54 per cent. Lack *Note: this d e f i n i t i o n of s k i l l e d labour d i f f e r s from the more rigorous one employed e a r l i e r i n t h i s chapter. 2 Based on Survey of In d u s t r i a l Production, 1968, op. c i t . , p. 17. 177 of a pool of skilled labour meant that other industries had to incur costs involved with training unskilled labour. E. Forward Linkages The domestic availability of raw materials has given rise to an increasing degree of processing in tea, rubber and coconut.. Furthermore, the processed product, notably in rubber and coconut has been used as an input by other industries producing a variety of products. Local availabil-ity of rubber and coconut has reduced costs and increased the profitability of these other industries. 1. Tea. Instant Tea — a new type of instant tea was produced in Ceylon in 1959 by the Tea Research Institute and the Ceylon Institute for Scientific and Industrial Research. As noted earlier, this product dif-fers from other forms of instant tea available in the market and it possesses a flavour closer to that of conventional black tea than instant teas pro-duced by consuming countries. Instant tea, manufactured by Cey Tea Ltd., amounted to 30,572 lbs in 1969. The exports of instant tea rose from 90,312 lbs in 1967 to 290,128 lbs in 1969.1 Information with respect to production costs, profitability, etc. are not available. 2. Rubber. The Manufacture of Rubber Goods — at the outbreak of World War II there were a few small rubber manufacturing concerns. With the termination of the war and the availability of imports, Ceylon found it dif-ficult to meet competition from imports due to the "difficulty of obtaining Administration Report of the Tea Controller for 1969, op_. cit., p. J74. ; 178 new machinery and the necessary raw materials.""'' By 1947, six small fac-tories were reported to have been engaged in the manufacture of rubbe r 2 goods. In order that the industry be firmly established, the Commis on the Rubber Industry in Ceylon, 1947, was of the opinion that it ne .led such assistance as: (a) imposition of protective tariffs on items capable of being manufactured in Ceylon to a standard^  not markedly inferior to that of the imported article; (b) lowering of customs duties on rubber manu-facturing machinery, plant and specialized equipment and on raw materials such as chemicals, etc. essential for the manufacture of rubber goods.^  In spite of the shortage of machinery more than 100 different types of articles were produced locally in 1947.^  The share of rubber products in total industrial output was around 3.2 per cent in 1969.^  Local consumption of rubber has increased fairly rapidly in the past few years, almost doubling between 1965 and 1969 (see Table VII-10). The rate of return from the production of rubber goods was around 45 par cent in 1968.^  The comparatively low return probably has to do with the. """Report of the Commission on the Rubber Industry in Ceylon, 1947, op. cit., p. 116. 2 Ibid., p. 116. 3Ibid., p. 123. 4Ibid., p. 120. 5Ibid., p. 116. B^ased on Central Bank of Ceylon Annual Report for 1969,op.cit., p. 38. B^ased on Survey of Industrial Production, 1968, op. cit., pp. 10, 11. 179 setting up of the Tyre Corporation and the underutilization due to 'complex-ities of production.' The difference in the cost of raw rubber between a producing country and a non-producer can be as high as 25 per cent.* Although this is a favourable factor for the establishment of rubber industries in producing countries, other factors such as the need to import machinery and materials and the lack of technical know-how work against this advantage. TABLE VII-10 LOCAL CONSUMPTION AND PRODUCTION OF RUBBER GOODS YEAR CONSUMPTION (In Tons) VALUE OF RUBBER PRODUCTS (Rs Mil) 1965 1846 19.1 1966 2178 18.9 1967 2648 20.7 1968 3223 41.3 1969 3496 52.8 Sources: Administration Report of the Rubber  Controller for 1969, op. cit., p. K62; Central Bank of  Ceylon Annual Report 1969, op. cit., p. 38. The major local consumers of rubber are given in Table VII-11. The Ceylon Tyre Corporation: Tyres, tubes and flaps are manufactured by the Ceylon Tyre Corporation which commenced production in 1967. It intends to branch out into the manufacture of other rubber products. By 1970, this "'ECAFE. Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 327. 2 Ibid., p. 327. 180 Corporation supplied 55 per cent of the total domestic requirements of tyres and tubes.* The sharp increase in the value of rubber products is connected with the development of the tyre industry, as the value of 2 rubber products rose from Rs 7 mil in 1966 (before the production of tyres 3 and tubes) to Rs 41.3 mil in 1968 (after the Tyre Corporation commenced production after 1967). TABLE VII-11 PERCENTAGE OF PRODUCTION OF RUBBER GOODS 1969 Manufacture of tyres, tubes and flaps 32 Retreading tyres 31 Rubber soles and heels 12 Cycle tyres and tubes 8 Foam rubber products 6.5 Rubber toys 1.5 Other rubber goods3 9.0 Include a wide range of miscellaneous rubber goods comprising conveyor belts, chair back buffers, insole rubber sheets, rubber mats, hoses, rubberized fibre pro-ducts, etc. Source: Administration Report of the Rubber  Controller for 1969, op. cit., p. K62. *W. J. Fernando, "Export Diversification and Import Substitution,1  Central Bank of Ceylon Staff Studies, Vol. 1, No. 1, op. cit., p. 173. 2 Central Bank of Ceylon Annual Report for 1969, op. cit., p. 43. 3Ibid., p. 43. 181 The Ceylon Tyre Corporation commenced production in 1967-68 and production reached around 60 per cent of capacity in 1969-70.* The corporation intends to increase production in stages due to the complexity of the technological process and as workers have to acquire the necessary skills. Underutilization of capacity is also reported to 2 be due to delays in getting sufficient moulds. There have been delays in the arrival of tyre moulds and it is probable that the shortage of sufficient moulds may have resulted from foreign exchange shortages. In view of these difficulties, and in order to be in a position 3 to take advantage of the economies of scale, Ceylon would do well to ex-amine the possibilities of joint ventures with industrialized countries to obtain a continuous flow of technical know-how, specialized processes and methods, etc. Even more importantly, major rubber manufacturing companies have large interests in synthetic rubber production, which is a powerful factor in influencing these companies to use synthetic rubber. Association of major rubber manufacturers with rubber producing countries could have the added advantage of tying users to natural rubber on account of their vested *Based on Central Bank of Ceylon Annual Report for 1969, op. cit., Table 11(c)5. 2 Ibid., p. 66. 3 It has been estimated that in Japan, an increase in capacity in plant size from 1250 tons/month to 5000 tons/month reduces total costs by $130/ton. Source: Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 326. The Ceylon Tyre Corporation has a production capacity of 250,000 tyres, 152,000 tubes and 88,000 flaps per annum. Source: Ceylon  Bank of Ceylon Annual Report, 1969, Table II(c)5. Hence it is doubtful whe-ther the Corporation is in a position to benefit from economies of scale. 182 interested in its production. 3. Coconut. Copra, coconut oil and dessicated coconut are the most important coconut exports. In addition to these there are a number of other coconut products which are exported. They include coir fibre, coir yarn, coconut shell charcoal and poonac (oil cake). Furthermore, there are numerous other products which are not exported such as those produced from the sap, which when fermented yields toddy and when distilled produces arrack. By boiling down the toddy, a jaggery is obtained. Toddy vinegar is also produced. Coconut palms planted along the coast of the Western and Southern provinces are reported to have been mainly for the 2 supply of toddy to the arrack distilleries. 3 Copra is the most important manufactured coconut product as it Is used for the manufacture of coconut oil. Copra is reported to be one of the richest raw materials for vegetable oil extraction as It has an oil. 4 yield of up to 64 per cent. Poonac (oil cake) is a by-product in the man-ufacture of coconut oil from copra. Copra and coconut oil constitute the most important coconut exports of Ceylon accounting for about two-thirds of the value of all coconut exports between them. Production of copra is des-cribed in Chapter VI. ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 329. 2 Great Britain Colonial Office, Ceylon Report for 1929, op. cit., p. 15. 3 Copra is the dried coconut kernel. 4 J. G. Thieme, op. cit., p. 33. 183 3(a). Coconut Oil. The extraction of coconut oil from copra is one of the oldest industries of Ceylon. Coconut oil processed in Cey-lon was shipped in far greater quantity than copra in the years between 1870 and 1907 (see Tables A-7 and A-8). Thereafter (i.e., since 1908) copra was exported in larger quantity than coconut oil. However, since 1932 there was a reversal of this trend and coconut oil reverted to its former dominant position both in terms of value and quantity. We examine the prices of copra and coconut oil during these three periods in order to explain the relative importance of each product during these periods. . See Table VII-12. TABLE VII-12 PRICES OF COPRA AND COCONUT OIL COPRA OIL RATIO AVERAGE PRICE AVERAGE PRICE PRICE OF COPRA PER CWT PER CWT PRICE OF OIL (1) 1870-1907 8.63 13.95 .61 (2) 1908-1931 15.15 22.10 .68 (3) 1932-1967 34.60 47.20 .73 Source: Table A-3. The price of copra relative to coconut oil rose between periods (1) and (2), and the exports of copra rose above those of coconut oil (see Figur* 1). However, between periods (2) and (3), although the price of copra relative to oil rose still further, there was a reversal of the 184 earlier trend and exports of coconut oil took predominance over those of copra in apparent defiance of Figure 1, possibly on account of the factors listed below. LjCCCfiulr Oil Figure 1 There are various factors which favour the development of local processing. 1. The lower freightcharges for oil, lower loading charges (20 per cent less than copra) and the higher price obtained for oil. For instance, in 1959 the unit value of coconut oil was Rs 84 as against Rs 60 for copra. 2. The fact that the by-product poonac can also be exported; although the freight on both poonac and oil may well exceed that on copra, this would be offset by the higher export earnings. 3. Poonac is a valuable animal food containing 19 per cent protein — it could encourage local cattle breed-ing, poultry farming, etc. 4. The local industry leads to domestic production of soaps, oil, margarine, etc. 185 5. Oil is easier to store than copra and can also be stored for longer periods and occupies less storage space. 6. The quality of oil is less affected (than copra) by storage and transit. 7. As Ceylon manufactures dessicated coco-nut, the manufacturing parings and rejected coconuts can be used as raw material by the local oil industry. 8. Overcapacity is no problem in oil milling since most mills use expellers or hydraulic presses which are separate units that can be switched off. A certain amount of overcapacity also offers an advan-tage to the oil miller since he can adapt his output ^ to seasonal fluctuations in copra production and prices. 9. Lower wages than in industrialized countries is an advantage in favour of L.D.C.'s like Ceylon, although higher costs of imported machinery probably offset this; however, some machinery is also produced locally. 10. Oil produced from fresh copra has a lower free fatty acid content than that produced from stale copra and can therefore be refined more cheaply.2 11. Poonac is also used as fertilizer. Local fer-tilizer production has been highly profitable. ^ The gross rate of return in 1952 was around 103 per cent. 12. Furthermore, the manufacture of oil by small holders is particularly encouraging since it has been a source whereby they acquire some familiarity with the use of machinery. Moreover, some small share of the machinery needed in the industry is produced domestically. *(1) through (8) are drawn largely from J. G. Thieme, op. cit., pp. 5 and 6. 2 H.M.S.O., Survey of Oilseeds and Vegetable Oils, Vol. II, 1932, op. cit., pp. 179 and 180. 3 Based on Statistical Abstract of Ceylon, 1963, op. cit., pp. 214 and 215. 186 The predominance of coconut oil exports is in keeping with the recent trend towards processing raw materials in their country of origin. Forty per cent of the value of industrial output, in 1952 consisted of coco-nut oil milling.1 In 1963, it accounted for 25 per cent of total industrial 2 output. Exports and local consumption of coconut oil are put at 100 - 125 tons per day and a total of approximately 150,000 tons of coconut is re-3 covered by the milling industry every year. Oil milling in Ceylon has shown continuous technical advancement. The introduction in 1901 of the first continuous oil expeller led to the extension of oil milling in Ceylon, especially as the expeller equipment was better suited to the small miller than the hydraulic press which involved A a larger capital investment. "The modern trend is to have large-scale. . . seed-crushing and solvent extraction plants equipped with a refinery for refining the crude oil. Many plants also have soap manufacturing units and hydro-genation plants for the manufacture of margarine or vanaspati or hardened oils. This becomes an integra-ted oil and fat processing plant and it is much more economical to run such plants because waste and by-products of one process are utilized in another. The latest trend is to supplement the above plants with,, fatty acids splitting and distillation plants. . ." Based on Statistical Abstract of Ceylon 1963, op. cit., pp. 214, 215. 2 Central Bank of Ceylon Annual Report 1963, op. cit., p. 115. 3 ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 147. 4R. Child, "The Coconut Industry of Ceylon," World Crops, Vol 2, No. 3 (March, 1950), p. 103. "'ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 260. 187 In keeping with this trend a 'complete and integrated' unit has been set up in the public sector — the Ceylon Oils and Fats Corporation. It is the largest plant for the extraction of oil, although production h=v! been low except in the provender plant even as late as 1969-70 due to many problems such as technical defects, breakdown in machinery and shortage or raw materials, etc.* This plant comprises a milling section for the ex-traction of oil, a refinery for refining oil from the solvent extraction process, a provender plant and a fat splitting unit and glycerine recover} 2 plant. Among ECAFE countries, the manufacture of chemicals from oils and fats is reported to be developed to a full extent only in Japan and is 3 developing in Ceylon, Taiwan, India and Pakistan. Ceylon has a plant with a capacity to produce 17 tons of fatt acids per day — 6286 tons of fatty 4 acids were produced in 1968-69. In modern mills, oil expellers are used in processing, or else oil extraction is carried out by the use of solvents. Modern processes are reported to be more efficient than the chekkus. For instance, pponac obtained from rural industries contains up to 10 per cent of oil. However, chekkus with electric motors produce poonac with an oil content of only C^entral Bank of Ceylon Annual Report, 1969, op. cit., p. 54. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 147. 3Ibid., Vol. IV, p. 307. 4 Central Bank of Ceylon Annual Report, 1969, Table II(c)l. 188 three to.four per cent. Mechanically pressed oil cakes contain about four per cent and the oil content is sometimes as low as 0.5 per cent after sol-vent extraction.1 Mills using screw expellers and hydraulic presses produce much of the oil for export. Milling on a large scale is undertaken by a few modern mills. It was reported in 1963 that the installed capacity of modern expellers was for the production of up to 250,000 tons of oil per 2 year. Actual output, however, had not exceeded 68 per cent of available 3 capacity due to a number of factors. 1. Production is guided by external factors — in some years it is found more economical to export copra than to export oil on account of prices in the world market. 2. Production of coconut is adversely affec-ted by bad weather. 3. Technical defects, etc., in the largest plant for the extraction of oil. Primitive mechanical presses are also used for pressing copra. The most efficient among these is the Chekku widely used in India and Ceylon The method of extraction consists of grinding the copra in a chekku consist-ing of a wooden pestle which is turned round by bullock power to crush the op. cit., p. 147. 3 ^J. G. Thieme, op. cit., p. 19. 2 ECAFE. Industrial Development in Asia and the Far East, Vol. II, Ibid., p. 147. 4 J. G. Thieme, op. cit., p. 14. 189 copra in a mortar. A power driven engine sometimes replaces the bullock. Chekku's produce very good oil. The extraction of oil, too, is very high — a level of 62.5 per cent of the weight of copra was reported by the U.S. Tariff Commission of 1926.* In general, however, chekkus are less effi-cient than modern processes and oil processed in these mills are only used domestically for culinary purposes probably due to impurities present in 2 the oil, etc. Thus government complexes like the Oils and Fats Corporation are gradually replacing chekkus. These more economical integrated units are able to manufacture chemicals from oils and fats and use wastes and by-products of the entire process for the manufacture of many products. The chekkus are not in a position to compete with such complexes. In developed countries, modernization of equipment has resulted 3 in low operating costs and improved processing power. Morevoer, customs duties on processed products are much higher than those on raw materials. For instance, while there are no import duties on oil seeds, duties on oil 4 are reported to vary between 10 and 15 per cent. Primitive methods of ex-traction cannot survive under such conditions especially in a country which is dependent- on exports of coconut oil for a fair share of her foreign ex-change earnings. *Katherine Snodgrass, Copra and Coconut--Oil (Stanford, Calif.: Stan-ford University, Food Research Institute, 1928), p. 22. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 147. 3Ibid., Vol. IV, p. 309. 6lbid., p. 309. 190 3(b) Dessicated Coconut. A coconut growing country has a distinct advantage in producing this as the delivery of fresh nuts Is essential for success in the manufacture of dessicated coconut. Ceylon began manufacturing dessicated coconut in 1890, 632 tons being exported in 1891.1 Exports of dessicated coconut reached a peak of 2 43,641 tons in 1927. Ceylon was the leading exporter of dessicated coco-nut until the Philippines entered export markets aided by a differential U.S. tariff. Today Ceylon and the Philippines are the only major producers of dessicated coconut. Ceylon exported 1,382,000 cwt of dessicated coconut in 1968.3 3(c) Poonac. Poonac is the by-product obtained from the milling of copra. With efficient expellers, copra is reported to yield 61.5 per 4 cent of oil and 34.5 per cent of cake. Ceylon exported almost all the poonac she produced until 1939.~* The loss of her usual markets in war time dislocation compelled the use of poonac within the country. Today small quantities of poonac are exported. For instance, Ceylon produced 87,000 long tons of oil cake and exported 4,000 long tons in 1962.^  Most of the *R. Child, "The Coconut Industry of Ceylon," op_. cit., p. 104. 2lbid., p. 104. 3See Table A-9. 4 R. Child, "The Coconut Industry of Ceylon," op_. cit., p. 104. 5Ibid., p. 104. E^CAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., 191 poonac is consumed locally as animal feed and manure. 3(d) Coir Products and Fibre Yarn. The extraction of coir for foreign trade and its manufacture on a large scale are almost entirely con-fined to Ceylon and India. The export of coir was mentioned during Dutch times and it is reported that coir was first exported when the maritime provinces ofCeylon were ruled by the Dutch. By the 1840's, coir exports 2 amounted to more than 1,000 tons per year. Exports of coir products have expanded since these early years, although they do not compare in magnitude with the major coconut exports. Exports of bristle and mattress fibres amounted to about 28,000 tons and 3 63,000 tons respectively in 1968. In Ceylon, many items of manufacture such as bristle and mattress fibre, coir yarn, rope, twine, mats, matting, etc. are produced from the coco-nut husk. The most important of these products in export are bristle and mattress fibre. The value of coir fibre and coir goods produced in modern 4 mills in 1952 was Rs 25 million. Coir fibre and yarn are produced both on small holdings and in mills. Small holders have been influenced by methods of manufacture In mills. For instance, defibring is carried out with the use of machinery •*"Poonac is a source of high protein animal food. 2 R. Child, "The Coconut Industry of Ceylon," op. cit., p. 104. 3 Central Bank of Ceylon Annual Report, 1968, op. cit., p. 262. 4 Statistical Abstract of Ceylon, 1963, op. cit., p. 214. 192 in mills. The defibring machine most commonly used in Ceylon is produced locally. This machine has been copied by small holders in a crude way — and it is produced more cheaply by the small holders.* There is also a considerable amount of fibre extraction by hand. Some mills are owned by Ceylonese farmers and small holders. The few larger ones, however, are owned by large trading companies — generally British owned. Some of these products, notably coconut oil and coir products, made possible the production of many other items such as glycerine, soap, margarine, brooms, brushes, mats, etc. (see Table VII-13). Domestic self-sufficiency has been reached, in all the products indicated in this table except paints and varnishes. It is not possible to gauge the relative returns from different output compositions as there are no data on the value of inputs and the cost of labour, etc. The price per pound is highest in refined coconut oil and soap. R. Kalaw, The Coconut Industry (Manila: Burea of Printing, 1940), p. 24. TABLE VII-13 SOME INDUSTRIES UTILIZING COCONUT PRODUCTS AS THEIR MAIN INPUT3 NO. OF REPORTING VALUE OF PRODUCT PRICE PER INDUSTRY YEAR UNITS QUANTITY (Rs) LB. Refined Coconut Oil ) 1966 1967 1 2 48,160 46,709 (cwt) (cwt) 4,980,551 1,905,732 93 cts Glycerine ) 1966 1967 1 1 2,486,400 2,555,840 (lbs) (lbs) 1,252,000 2,035,000 80 cts Soap ) 1966 1967 11 16 48,712,651 54,512,372 (lbs) (lbs) 42,381,798 49,798,015 91 cts Candles 1966 8 1,851,224 (lbs) 1,474,706 80 cts Twine ) 1965 1966 7 11 n. a. 147,708 (lbs) 267,930 n.a. Brooms, Brushes, etc. ) 1967 9 number 394,335 873,756 Paints ) 1967 10 381,529 (Gins) : 10,212,308 Varnish and French Polish ) 1967 16 67,162 (Gins) 1,016,125 ^hese statistics are not comprehensive. They serve the purpose of giving an indication of some industries based on coconut products. There are numerous other industries which are not indicated in this table. Source: Statistics of Industrial Production 1965-67, Ministry of Industries and Fisheries, op_. pp. 26, 28, 31. 194 F. Conclusion Until the 1950's, when government policy began to direct the course of economic development, there was a fair degree of domestic response in the areas of input requirements of the export industries and manufacturing coconut products — it was barely noticeable in the provision of subsistence requirements for plantation labour. Export industries stimulated investment through the backward linkage mechanism. This was partly because the input requirements of the export sector were limited to transport facilities and other services pro-vided by the government, chemicals, fertilizer, a fair proportion of un-complicated machinery, power and a few other items. Related industires, such as repair and maintenance shops, power generation, etc., could be established efficiently and cheaply in Ceylon, given her resource endow-ment and the impossibility of importing repair and maintenance services. Some of the machinery produced locally was designed to meet the needs of specific export industries. Furthermore, some part of the fertilizer re-quirements were obtained as a by-product in producing coconut oil from copra. The investment stimulus provided by the forward linkage is stronger in the coconut and rubber industries than in tea on account of their greater range of manufacturing possibilities. Manufacturing possibilities in tea are limited to producing Instant tea, the production and export of which is a recent phenomenon. The coconut industry offered many investment outlets in the form of plants producing copra, coconut oil, coir products, 195 poonac, dessicated coconut, etc., which in turn stimulated investment in soap, glycerine, brooms, brushes, confectionary products, etc. Many of these industries have been in existence for a long period. Local produc-tion of rubber goods was extremely limited until the late 1960's. It is clear from these effects .that Ceylon can find profitable use for her export staples. Their limited effects to date relate to such factors as land shortage, lack of market research and promotion, the size of the domestic market, infant industry obstacles, ignorance and neglect of value-added possibilities and lack of effort by the government to assist small holders (prior to the 1950's). Final demand linkages of the export sector are limited mainly to the subsistence requirements of food and textiles on account of the low wages of plantation labour.* Until recent-times, a high proportion of these items were imported. Domestic production of food increased as a re-sult of government endeavour. Textile production rose with the imposition of import controls. h^e average wage paid to plantation labour for two months was R3 107 in 1963 as against wages of Rs 403 for the urban sector as a whole and Rs 210 for the rural sector. Source: Survey of Consumer Finance, 1963, op. cit., p. 96. CHAPTER V I I I FOREIGN TRADE AND SECTORAL GROWTH: ANALYSIS OF INADEQUATE RESPONSE The S t a n d a r d o f L i v i n g i n C e y l o n E i g h t y - f i v e p e r c e n t o f the p o p u l a t i o n was c l a s s i f i e d as r u r a l i n 1946, as a g a i n s t 89 p e r c e n t i n 1 9 0 1 . * A c c o r d i n g t o t h e P re -War R u r a l Economic S u r v e y s , 60 p e r c e n t t o 70 p e r c e n t o f t h e p e a s a n t s i n t h e low c o u n t r y v i l l a g e s s u r v e y e d had t o t a l g r o s s incomes o f l e s s t h a n Rs 20 p e r 2 month. T h i s i n c l u d e s income i n c a sh and k i n d i n c l u d i n g t h e c a s h v a l u e o f t h e i r own p r o d u c e consumed a t home. The o n l y up c o u n t r y v i l l a g e s t u d i e d had a med ian income o f l e s s t h a n Rs 10 p e r month compared w i t h Rs 15 f o r 3 low c o u n t r y v i l l a g e s . T h i s i n c l u d e s income d e r i v e d f rom d o m e s t i c a g r i c u l -t u r e , l a b o u r on e s t a t e s , r o a d s , b o u t i q u e k e e p i n g , c a r p e n t r y , e t c . O f c o n -d i t i o n s i n Kandyan v i l l a g e s , t h e r e p o r t o f t h e Kandyan P e a s a n t r y C o m m i s s i o n , 1951, s t a t e s t h a t : " T h e g e n e r a l s t a n d a r d o f l i v i n g i s low and goes down o f t e n to s t a r v a t i o n l e v e l . The income o f t h e p e a s a n t s f a l l s s h o r t o f t h e i r b a r e needs and t h e y a r e as a r u l e i n a c h r o n i c s t a t e o f i n d e b t e d n e s s and p o v e r t y . . .The o u t s t a n d -i n g f e a t u r e . . .was t h e p r o g r e s s i v e backwardnes s o f t h e p e a -s a n t r y and o f t h e i r c o n d i t i o n s o f l i f e as t h e y r e c e d e d f u r t h e r *D. R. S n o d g r a s s , o p . c i t . , T a b l e A - 1 8 . 2 B. H. Fa rmer , P i o n e e r P e a s a n t C o l o n i z a t i o n i n C e y l o n : A S tudv i n  A s i a n A g r a r i a n P rob lems (London: O x f o r d U n i v e r s i t y P r e s s , 1 9 5 7 ) , p. 92 . 3 I b i d . , p . 9 3 . 196 197 and further away from urban and municipal areas." Thus, the standard of living of the average villager was extremely low, despite almost a century of growth based on plantations — 'a stagnating, poverty-stricken domestic sector alongside a thriving export sector.* A. Sectoral Growth: Colonial Period G.N.P. classified according to industry (Table VIII-11) combined with employment data (Table VIII-1) seems to indicate that domestic industry and agriculture were rather stagnant sectors between 1901 and 1946, whereas the service sector and the export sector both expanded. The value of ex-ports rose from Rs 91 mil in 19003 to Rs 765 mil in 1946.4 The total out-flow from the export sector was slightly above half the value of export receipts during the period 1920-385 and indicates the somewhat dual nature of the economy. 1. Domestic Agriculture. The number of people employed in domes-tic agriculture declined from 623,500 in 1901 to 556,300 in 1946.6 Consid-ering rice, the most important domestic crop, we find that imports of rice "^Kandyan Peasantry Commission Report, 1951, quoted in B. H. Farmer, op. cit., p. 94. 2 Jonathan V . Levin, The Fxport Economies: Their Pattern of Develop- ment in Historical Perspective (Cambridge, Mass.: Harvard University Press, 1960), p. 184. 3 E. Gunawardhene, op_. cit., Appendix C, Table V . C^entral Bank of Ceylon Annual Report, 1966, Appendix II, Table 32. """Based on calculations in Part II, we estimate that the total out-flow of export receipts was in the region of 51 per cent during this period. D. R. Snodgrass, op_. cit., Table A-26. 198 and wheat f l o u r (which acts as a s u b s t i t u t e f o r r i c e ) have i n c r e a s e d over the years — (see Table V I I I - 1 ) . Volume f i g u r e s f o r domestic r i c e produc-t i o n are not a v a i l a b l e ; 1 a v a i l a b l e data on imports of r i c e and w h e a t - f l o u r , however, seem to i n d i c a t e that domestic r i c e p r o d u c t i o n was more or l e s s stagnant and not able to keep up w i t h p o p u l a t i o n growth. (Rice p r o d u c t i o n does seems t o have r i s e n s l i g h t l y between 1900 and 1946 as per c a p i t a imports of r i c e and wheat d e c l i n e d s l i g h t l y from 1.8 cwts per person i n 1925 to 1.4 2 cwts per person i n 1946). TABLE V I I I - 1 WHEAT FLOUR AND RICE IMPORTS (Se l e c t e d Years) (000 cwts) YEAR RICE WHEAT FLOUR 1900 5,600 n.a. 1925 8,321 320 1934 9,553 340 1939 11,675 380 1941 10,937 443 1943 2,772 4,066 1946 5,074 4,251 1948 8,188 3,373 Sources: E. Gunawardhene, op_. c i t . , p. 218; T h i r t y Years Trade S t a t i s - t i c s , op. c i t . , Table 20. I t may be assumed th a t domestic p r o d u c t i o n accounted f o r around h a l f the r i c e consumed. 2 Based on Table V I I I - 1 and D. R. Snodgrass, op_. c i t . , Table A-14. 199 Methods of c u l t i v a t i o n i n domestic agriculture remained poor. This resulted i n low incomes, which i n turn made i t d i f f i c u l t to increase production. The general import category of "food, drink and tobacco" amounted to 313 m i l , 1 representing 66 per cent of the value of domestic a g r i c u l t u r a l production i n 1946. Problems of r u r a l agriculture i n Ceylon as elsewere were manifold, connected with flooding, droughts, landless-ness, indebtedness, absentee landlordism, etc. 2. The service sector. Increasing numbers seem to have found employment i n the t e r t i a r y sector (see Table VIII-10). This sector accounted for about 37 per cent of G.N.P. i n 1945. The service sector comprised trade, transport, banking, engineering and government services such as edu-cation and health. Some of these services owe t h e i r beginnings to m i l i t a r y and administrative reasons, but as the plantation sector expanded these ser-vices were further developed predominantly to serve i t s needs. The r i s e of plantations gave an impetus to the development of these services. The government played an important role i n building up t h i s sector. Many other governments have done likewise as private investment i s not e a s i l y attracted towards such investments on account of the lumpy nature of s o c i a l overhead c a p i t a l , the long gestation period involved and the fact that the 2 returns accrue to the community and country as a whole. Social overhead Thirty Years Trade S t a t i s t i c s , op. c i t . , p. 17. W. W. Rostow, The Stages of Economic Growth: A Non-Communist  Manifesto (Cambridge, Mass.: Harvard University Press, 1968), p. 25. 200-outlay constituted around 60 per cent of government expenditure in the fis-cal year 1925-26 and around 50 per cent in 1945-46.* 3. The Industrial Sector. Industrial products accounted for just 2 four per cent of G.N.P. in 1946. Furthermore, statistics presented in the Census of Industry of 1952 indicate that around 45 per cent of industrial production consisted of the processing of coconut products. Employment in the secondary sector, as a percentage of the total number employed, declined slightly from 11 per cent to 10 per cent between 1901 and 1946 (see Table VIII-10). B. Causes of Undiversifled Growth In a general sense, the pattern of growth, i.e., the expansion of the export sector and the accompanying service sector could be seen as stemming from the nature of the production functions of the export indus-tries. The provision of overhead facilities combined with favourable de-mand and profit prospects made possible the expansion of the export sec-tor. Furthermore, although the direct contribution of the export sector to government revenue was fairly low, for instance 10 per cent in 1925-26 and declining to four per cent in 1940-41, its indirect contribution In the form of import duties was high at 29 per cent of government revenue in 1925-26, Economic and Social Development of Ceylon 1926-1950, op. cit., Table XXIV. 2 Based on D. R. Snodgrass, op. cit., Table A-l. 201 increasing to 36 per cent in 1945-46. (A high level of imports was made possible by export earnings; imports also resulted from the requirements of the plantation sector to a certain extent]). Hence government expenditure on overhead facilities was made possible to some extent by the existence of the export sector. On the other hand, as noted in the previous section, export re-ceipts were spent on many items including importantly food, textiles and some industrial products which Ceylon was in a position to produce. A pattern of growth dictated by the production functions of export industries should have included a rise in domestic agriculture-and industry to meet the demand generated by the plantations. It is therefore of relevance to con-sider factors which impeded the growth of domestic agriculture and industry. (1) Domestic Agriculture. Ceylon imported large quantities of rice and other agricultural products, although land (over three million acres) and labour were available. The process of opening up the country under plantations had adverse effects upon domestic agriculture. Institutions which regulated agriculture were abolished; it is also possible that villagers lost some of their lands; their agriculture was damaged by silting and floods caused by clearing hilly areas of forest, etc.; they had no access to credit 2 or marketing facilities. A free flow of imports prevented domestic agricul-ture from benefitting from the incentive of higher prices which normally accom-pany a rise in demand. Furthermore, the grain tax levied at the time balanced Based on Economic and Social Development of Cevlon 1926-1950, op. cit. , Tables XXIII and XXI and D. R. Snodgrass, op_. cit., Table A-65. 2 Import duties were low. For instance, they accounted for 10 per cent of the total value of imports as late as 1929. 202 the import duty. Agriculture which formerly received assistance from the government was somewhat neglected.. The Dry Zone lay under jungle and its irrigation works were in disrepair. Government expenditure on this sec-tor vas minimal and had no relevance to the vastness of the problems con-nected with domestic agriculture. Thus it appears that the state of domestic agriculture was- ad-versely affected by the introduction of plantations, the minimal assistance given by government, combined with the policy of free imports. It is not so likely that it was the nature of the production functions of the export sectors which impeded the development of domestic agriculture — rather the market for food was enlarged by the sizeable money outlay on this item — plantations being labour intensive industries. (2)Domestic Industry. Substantial growth of domestic industry dates from about 1960. The industrial sector of earlier years was limited to ex-port processing, and a few other industries.* However, imports of manufac-tured products were of considerable magnitude amounting to Rs 127 mil and 2 Rs 349 mil in 1925 and 1947 respectively and ranged from cutlery to machin-ery. These imports included products which could probably have been manufac-tured domestically — for instance, rubber goods were imported despite the 3 fact that the cost difference of raw rubber between a rubber producing See Table VIII-3. 2 Thirty Years Trade Statistics, op. cit., Table 13. 3 We assume that the cost of the raw material Is an important factor. This, however, is not the only factor of importance — other factors such as the cost of machinery and equipment, availability of skilled labour, size of the market, etc., are also of importance. 203 country and a non-producing country would have been in the range of 20 to 25 per cent.1 Absence of a broad based industrial structure and the slow growth of industry have been attributed to such factors as (a) a shortage of capital; (b) the free flow of imports; (c) low profitability, (d) short-age of skilled personnel; (e) the role of government. (a) Capital formation. Statistics with respect to gross capital 2 formation are available from 1938 and indicate a low level of capital for-mation and hence appears to establish the fact that there was a shortage of capital for industry. TABLE VIII-2 SAVINGS AS A PERCENTAGE OF GROSS NATIONAL INCOME 1938 1947 Capital Formation 5.9 5.4 Government 0.8 1.3 Private 5.2 4.1 Increases in assets abroad -3.4 -7.5 Total 2.6 -2.1 Source: Economic and Social Development of Ceylon, op. cit., p. 27. ECAFE, Industrial Development in Asia and the Far East, Vol. IV, op. cit., p. 327. 2 There is no allowance for depreciation. It has been stated that 204 Savings and investment capacity generated by the plantations was limited by the extent of foreign remittances from this sector. Estate labour brought in to work the plantations remitted their savings mostly to India. The managerial classes, too, can be expected to have remitted at least part of their savings abroad and perhaps invested the rest in plantations."'' Statistics of migrants' transfers and private remittances are not available for years prior to 1950; statistics from 1950 indicate 2 that the outflow almost equalled that of investment income. Similarly, profits accruing to the export sector were either re-invested or remitted abroad. Profits averaged around 40 per cent- of ex-3 port receipts for the period 1920-38. The outflow on investment income was reported to have averaged around 23 per cent of the total export re-ceipts between 1920 and 1945. The lucrative export-import trade, too, was in foreign hands and profits accruing to this sector would probably have been remitted abroad.^  the allowance for depreciation in an agricultural country like Ceylon would be much smaller than that for highly industrialized countries. Source: Eco- nomic and Social Development of Ceylon, 1926-50, op. cit., p. 27. M^anagement was transferred to Ceylonese after Independence. Cey-lonese labourers, too, are increasing in number. 2 The outflow on investment income and that on private transfers be-tween 1950 and 1958 were approximately equal. For instance, in 1958 the out-flow on investment income was Rs 77 mil. and on private transfers Rs 88 mil. 3 See Chapters IV, V and VI. 4Lim, op_. cit., quoting M. R. P. Salgado and Central Bank of Ceylon figures. "*The statistics would have been included under either Investment in-come or Migrant's transfers and private remittances. 205 Capital formation by the government was extremely limited (see Table VTII-2). It could, however, have been substantial had the tax base been less narrow. Neither company taxes nor export duties were imposed for almost a century. Furthermore, at the time plantations were being opened up, land was distributed free, and later at the nominal price of five shillings per acre to foreigners. This resulted in a loss of poten-tial revenue to the state. Moreover, there was a shortage of adequate credit facilities for Ceylonese. Most of the Ceylonese had to resort to the Chettiar money lenders* who are reported to have charged rates of interest ranging from 10 2 per cent to 200 per cent. The Ceylon Banking Commission of 1934 was of the opinion that "the public should have adequate financial assistance so as to enable indigenous capital and enterprise to participate more active-3 ly in the trade and industries of the country. . ." The rapid growth of trade and commerce accompanying the rise of the coffee industry created a demand for banking services. Exchange banks were established in mid-1900 in response to this demand. The exchange banks served the plantation and commercial sectors of the economy. Their lending policy was extremely conservative and limited mainly to short-term credit. •"The Chettiars were primarily Indian traders. Most of the Chetty Banks collapsed between 1925 to 1934. 2 H. A . de S. Gunasekera, From Dependent Currency to Central Banking  in Ceylon, op. cit., pp. 201, 202. 3 Report of the Ceylon Banking Commission, 1934, quoted in ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 97. 206 They served the purpose of financing the turnover of trade. Plantations obtained long-term finance from other sources such as Agency Houses and the reinvestment of profits. Ceylonese rarely obtained credit from these banks, and even when they did obtain credit, it was at higher rates than those at which it was available to Europeans.* The fact that Ceylonese bad barely any access to credit facilities from these banks was attributed to the state of the law (the complicated land law) and doubtful title to land, which made land unsuitable security for bank loans. This is disputed by H. A. De S. Gunasekera. "It does not seem likely, however, that the deficiencies of the law were an important factor in re-stricting the flow of bank credit. . .If the state of the law had in fact hampered their activities, it is reasonable to assume that some attempt would have been made to have the law revised. The fact was that the banks preferred to specialize in the finance of foreign trade. For years this sector of the economy had been in the hands of Europeans. When Ceylonese businessmen en-tered this field, the conservatism of the bankers made them reluctant to cater for this new source of demand." "The failure of foreign banks to integrate them-selves fully with the internal economy has been a common phenomenon in countries which have been the field of capi-tal investment by overseas countries. The problem arises especially in those areas where foreign capitalism has been superimposed over an indigenous precapitalist economy. Al-most identical complaints regarding the exchange banks were made before the Indian Central Banking Inquiry Committee of 1931."2 "H. A. de S. Gunasekera, op_. cit., p. 196. 2Ibid., pp. 204-205. 207 (b) Imports. The free flow of imports was undoubtedly an obstacle to the development of domestic industry. Ninety per cent of the require-ments of manufactured goods were imported from abroad.1 Even the food and textile requirements of workers were met to a large extent by imports. It appeared easier and cheaper to import these goods, as this involved using the well-organized channels of trade, rather than developing distribution and marketing arrangements domestically. It must be noted in this context that in all developed countries the "foundations for development were laid 2 either by closure. . .or by expansion of territory." Arguments for the protection of infant industry are too well known for reiteration. A surprisingly high proportion of plantation spending from wages 3 as well as other costs appears to have been on imports. There was also the customary leakage on luxury consumption from the salaries of management. 4 The level of luxury imports to total imports was 17 per cent in 1929; im-portation of luxury goods did not loom larger in Ceylon simply because she continued to import so much of her basic requirements such as food. "Middle class" demands for luxury goods also did not develop as the income distri-bution of Ceylon remained extremely skewed — a characteristic feature of "'ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 117. 2 G. Beckworth, Persistent Poverty, op. cit., p. 221. 3 For details, see Chapter VII. 4 D. R. Snodgrass, op. cit., Table 3-3. 208 less developed economies. As late as 1953, one per cent of income receivers at the highest levels received 18.2 per cent of the total income, whereas at the lowest levels 10 per cent of income receivers had only 1.4 per cent of the total income.* (c) Levels of profitability. Most of the capital belonging to Ceylonese seems to have been diverted into the export sector — there was Increasing Ceylonese ownership of the acreage under export crops, parti-cularly in the 1950's when foreign capital was repatriated. Investment also flowed into such fields as export-import trading, ownership of resi-dences and into the few existing industries. The generally held opinion is that this pattern of investment resulted from relative levels of profitabil-ity. Prior to 1951, tea and rubber shares are reported to have paid as 2 much as 20 per cent or more. A study of a random sample of Ceylon Sterling Tea and Rubber Companies, however, revealed that between 1939 and 1958 net dividends exceeded profits and dividends were hence paid to some extent out 3 of capital. Returns on export-import trading are reported to have ranged Survey of Ceylon's Consumer Finances, 1953, op. cit., p. 15. 2 ECAFE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 117. 3 Net Dividends as a Percentage of Profit — 15 Tea Companies: 1939-43: 107.8; 1944-48: 105.3; 1949-53: 85.9; 1954-58: 106.6. Dividends paid by eight rubber companies (£): 1939-43 1944-48 1949-53 1954-58 Profit/Loss 7,270 -2,687 -1,267 -16,359 Dividends 13,668 6,486 7,838 3,729 Source: N. Ramachandran, op. cit., pp. 109, 118. 209 from 10 per cent to 70 per cent. Statistics of other industries existing during this period are 2 scanty and limited to the Census of Industry, 1952. Existing data do not permit a study of rates of profit over a period of years. Table VIII-3 contains industries which had been in operation for a short period along with other industries which had been established in mid-19th Century. The processing of coconut products, i.e., coir products, coconut oil milling and fertilizers, stand out as the most remunerative industries. This is probably due to the domestic availability of raw materials and also to the fact that the raw material forms the major item in costs. The rate of return on textiles is comparatively low at 37 per cent, but does not compare too unfavourably with the returns of 20 per cent on tea and rubber shares. Barring coconut oil milling, we note that the pattern of exist-ing industries does not indicate that investment has been greatest in the most profitable industries. For instance, returns in the engineering indus-try are among the lowest, although the value of production is among the highest — its share in the total value of production was 15 per cent — the second largest industry in existence. Fertilizer, coir products, plumbago, footwear, confectionery, distilleries, breweries and matches registered the B. Stein, "Development Problems in Ceylon," printed in R. I, Crane (Ed.), Aspects of Economic Development in South Asia (New York: Secretariat, Institute of Pacific Relations, 1954), p. 86. 2 There were few restrictions on imports in 1952. Existing industries had to compete with imports.. It3 likely that most of these industries were in existence since mid-19tn Century. 210 highest returns, but together they accounted for just around 13 per cent of total industrial production. This may have been due in part to such factors as a limited supply of locally produced raw materials and narrow domestic markets. It indicates also that perhaps profit rates have been wrongly estimated... Higher profits- do not appear to be directly associated either with capital employed per person or with the net output per person employed. Furthermore, total capital employed in the coconut processing industries accounted for 14.9 per cent of capital employed in all industries, while capital employed by the other more profitable industries mentioned earlier accounted for 5.9 per cent. The share of the more profitable industries in total production was 51.per cent.* The rates of return presented in Table VIII-3 indicate that many of the industries may probably have been more profitable than tea and rub-ber. It is not possible, however, to arrive at a firm conclusion in the absence of further data. The diversion of investment into industries other than exports were probably prevented by the risks involved in domestic production in the 2 face of a free availability of imports. Furthermore, local tradition placed •"Based on Statistical Abstract of Ceylon, 1963, op. cit., Table 149. 2 The introduction of restrictions was primarily responsible for the growth of the industrial sector. Industrial products have even begun to be exported. Their profitability has also risen greatly — to be discussed later. 211 TABLE VIII-3 STATISTICS BY INDUSTRY, 1952 CAPITAL PER PERSON NET OUTPUT PER PERSON GROSS RATE OF RETURN3 GROSS OUTPUT AS PERCENTAGE OF ALL INDUSTRIES (Rs) (Rs) (%) 1. Plumbago 1,834 2,360 94 1.1 2. Salt n.a. 6,277 — 0.5 3. Milk Products 18,990 7,996 32 0.2 4. Grain Milling 8,570 2,279 18 2.1 5. Confectionery, Canning, Processing 1,834 2,621 82 : 1.2 6. Distilleries and Breweries 12,650 18,840 146 2.3 7. Aerated and Mineral Wastes 6,846 5,129 55 1.1 8. Tobacco 23,120 4,524 14 10.5 9. Textiles and Thread 7,760 3,907 37 1.8 10. Coir Fibre and Coir Goods 1,577 3,853 208 4.1 11. Footwear ( excluding rubber) 624 1,760 85 0.1 12. Plywood and Timber Sawing 3,120 2,355 41 i 1.1 13. Printing, Bookbinding, etc. 4,562 3,581 34 6.1 14. Leather, Leather Goods (excluding footwear) 7,410 2,175 13 0.2 15. Rubber Goods 4,847 4,510 59 0.8 16. Fertilizer 25,250 27,821 103 3.3 17. Coconut and Oil Milling 5,112 6,514 109 38.5 18. Soap, Glycerine, Perfumes 34,100 10,739 25 3.8 19. Matches 1,717 2,596 94 0.5 20. Bricks and Tiles 3,894 2,461 43 0.3 21. Ceramics, Glass, Cement 15,600 5,062 23 1.6 22. Engineering 5,346 26,616 25 15.0 23. Jewellery and Plastics 6,090 5,342 68 0.5 24. Electricity 33,170 12,061 29 2.6 25. Coal, Gas, Oxygen, Carbon Dioxide 21,400 10,924 42 0,8 Gross output minus cost of materials, fuel and electricity and remun-eration of employees as a percentage of the productive capital employed. There is no allowance for depreciation or taxes; company taxes have been levied since 1932 and increased from 10 per cent in 1932-33 to 28 per cent in 1950-51. Source: pp. 214, 215. Statistical Abstract of Ceylon, 1963, op. cit., Table 149, 212 land high in the scale of values both on account of the feudal system which existed prior to plantations as well as the plantation system itself. Hence the discounted rate of return in the export industries appears to have been higher than in other industries. (d) Skilled labour. It is also held that the shortage of skilled labour was an obstacle to a greater degree of industrialization during this period. The skill component of plantation labour was extremely low at 2.3 per cent. Furthermore, the quality of education at the time was purely academic and suited more to reproducing knowledge than to applying it. It is difficult, however, to attach too much importance to this factor. The engineering industry which was highly using of skilled labour was one of the first industries to be established — technicians, engineers, foremen, and skilled workers comprised 53 per cent of all employees, whereas in other industries the proportion was 38 per cent.* Moreover, there has been a fairly rapid growth of industry since 1960 despite the shortage of skilled labour. Furthermore, education was not geared to training in technical skills at least partly because there was no demand for them. It is reported that when it was first instituted, the Technical College "did not attract pupils as the courses led to no definite opening or employment. In 1887, it was reorganized to provide a training ground for recruits to the chief government technical departments such as the Public Works, the Survey, the Railway and 2 the Telegraph and In 1903 the number (of students) rose to 254." *Based on Survey of Industrial Production, 1968, op. cit., p. 17. 2 G, C. Mendis, Ceylon Under the British, op. cit., p. 166. 213 (e) Conclusion. There appear to have been many interrelated ob-stacles to the development of domestic industry. These difficulties could have been remedied by such measures as taxation, some restriction of imports, expansion of the banking sector along the lines suggested by the Ceylon Bank-ing Commission of 1934, i.e., the establishment of banks which would lend against immovable property and invest in the shares of joint stock companies, etc. The 'obstacles' seem to be connected to the negative role of the govern-ment vis-a-vis domestic industry. Kravis cites Nurkse's remark that the impact of trade sometimes produced lopsided economic development, as in the dual economies of South-east Asia, which was considered to be better than no growth, but showed the limitations of growth via external trade when other conditions of progress were absent. He (Kravis) then goes on to state that "it is the presence or absence of 'other conditions of progress' referred to by Nurkse in passing that is the crux of success 6r failure in economic growth. The 'other con-ditions' were present in the U.S. and the expansion of trade was a very help-ful but not essential factor in growth. They were absent in many other areas, and, despite the fact that some of these places shared in the expan-sion of world trade, they did not develop."* It appears that where these other conditions such as entrepreneur-ship, skilled labour, supplies of capital, etc. are absent, the government has to attempt to develop such conditions by establishing institutions which provide capital, inducing people to invest and even stepping directly . Kravis, "Trade As A Handmaiden of Growth," Economic Journal, (December, 1970), pp. 854, 855. 214 into agricultural and industrial production. The Report of Government Commer-cial Undertakings 1947 and the World Bank Report 1952 were of the opinion that the government should attempt to create an atmosphere favourable for private in-vestment.* C. The Terms of Trade and Their Effect 2 The Prebisch-Singer thesis holds that trade between developed and underdeveloped nations leads to a decline in the long run terms of trade and the transfer of income from underdeveloped to developed regions due to such factors as income inelasticity of demand for primary products, the diminished importance of raw materials in manufacturing industry on account of improved technology, the fact that labour in underdeveloped countries are not as strongly unionized as their counterparts in developed countries. Therefore, it is concluded that the existence of unfavourable market conditions which result in a deterioration of the terms of trade of L.D.C.'s, retard develop-ment of L.D.C.'s. We examine Ceylon's terms of trade with a view to ascertaining (a) whether there was a deterioration in the long run terms of trade; (b) whether there was a tendency for the terms of trade between manufacturers and pri-mary producers to turn against the latter; (c) whether there was a connection between the terms of trade and the rate of growth of per capita G.N.P. ECAPE, Industrial Development in Asia and the Far East, Vol. II, op. cit., p. 110. 2 R. Prebisch, "The Role of Commercial Policy in Underdeveloped Countries," American Economic Review (May, 1959), pp. 251-273; H. Singer, "The Distribution of Gains Between Investing and Borrowing Countries," American Economic Review, Papers and Proceedings (May,1950), pp. 473-485. 215 TABLE VIII-4 TERMS OF TRADE (1958=100) EXPORT PRICE IMPORT PRICE TERMS OF TRADE YEAR INDEX INDEX 1938 24 28 86 1948 72 70 103 1949 76 85 89 1950 103 90 114 1951 124 115 108 1952 96 114 84 1953 98 114 86 1954 109 106 103 1955 114 102 112 1956 107 102 104 1957 102 108 94 1958 160 100 100 1959 104 102 102 1960 104 102 101 1961 95 101 94 1962 93 95 98 1963 93 105 89 1964 93 107 86 1965 95 109 88 1966 90 119 76 1967 85 123 69 1968* 101* 160* 1969 101 170 61 The statistics for 1969 are not stirctly comparable to the rest of the table as the values from a later table have been spliced onto this table. Source: Central Bank of Ceylon Annual Report, 1968, op. cit., Appendix II, Table 36; Central Bank ot Ceylon Annual Report lyby, op. cit"7, Appendix II, Table 49. ; 216 Ceylon's exports increased both in terms of quantity exported and unit value, taking the 20th Century as a whole. Of Ceylon's major export industries, the tea industry commenced and began expanding toward the end of the 19th Century, rubber and coconut around the beginning of the 20th Century. Although export prices rose, so did the costs of production. For instance, the cost of production of a pound of tea rose from 45 cents in 1938 to Rs 1.15 in 1948,1 while the price of a pound of tea rose from 73 cents to Rs 1.99 over the same period. There were cyclical fluctuations in the terms of trade between 1900 and 1955,-but on the whole they did not exhibit a persistent trend either upward or downwards (see Table A-12). The post-war demand for ex-ports was fairly high and offset a pre-war decline. The good prices and firm demand of post-war years did not last. Export prices have been declin-ing continuously since 1955 as did the terms of trade (see Table VIII-4). Furthermore, the future of Ceylon's chief exports appear to be 2 3 pretty dim. Some of the reasons cited by Nurkse regarding the lagging demand for primary product exports appears to have been at work in the case of Ceylon's exports. Tea faces declining prices, rubber faces competition "'"Census of Agriculture, Part I, 1952, op. cit., p. 13. 2 For reasons, see sections on the development of tea, rubber and coconut, respectively. 3 The secular trend towards reduced usage of primary materials per unit output of manufacturers subsidization of agriculture in industrial countries coupled with propogation of modern agricultural technology, the substantial substitution of synthetics for imported natural materials and the low income elasticity of demand for foodstuffs. 217 from synthetic rubber and coconut oil from other natural oils and fats as well as synthetic substitutes. FAO projections seem to indicate that the pros-pects for a substantial increase in export earnings from these products are remote. And, as rightly pointed out by Kravis, "it can hardly be hoped that the world will always increase its consumption of coffee and cocoa pari pariss with its real income."* It is doubtful whether the income elasticity of de-mand for these exports is high; in fact, the available evidence seems to in-dicate the opposite. Expenditure on tea has decreased, even though expendi-ture on all beverages other than tea has increased with rising incomes (see Table IV-12). Although trade depends! on the ability to shift into different lines of production, a primary producing country such as Ceylon whose exports are highly concentrated in a few products lacks the necessary flexibility due to such factors as the cost of planting anew, availability of suitable land, the difficulty of breaking into new markets, etc., and above all, the undiver-sified nature of the economy. Any hopes for the future appear to be centred around cutting costs, improving quality and other product differentiation. Indeed, Kravis.' find ings indicate that those countries with a successful performance (among L.D.C. owed it to increasing their share in the world market for traditional exports. These findings have serious implications for L.D.C.'s in that success depends upon competition with each other in a world market which cannot be expected I. Kravis, "Trade As A Handmaiden of Growth," op_. cit.. p. 864. 2 This table deals with expenditure in the U.K. — the world's largest tea consuming nation. 218 to continue increasing its demand for such products indefinitely. We present import prices for investment, intermediate and con-sumption goods separately (see Table VIII-5) and attempt thereby to examine whether there was a tendency for the terms of trade between manufacturers and primary producers to turn against the latter. The category "Food and Drink" comprises primary products for the most part. "Other" consumer goods are manufactured goods such as cars, watches,etc. Investment goods comprises manufactured goods — machinery, etc. and Intermediate goods comprises both primary products and manufactured goods. Categories (3) and (6) comprising manufactured goods have risen more in terms of price than the food and drink and intermediate goods cate-gories which contain primary products — some indication that the post-war terms of trade were more favourable to manufactured goods. There is no conclusive evidence here as category (2) has increased, less than category (1) and hence contradicts the earlier statement. On the other hand, cate-gory (5) has increased more than category (6) and seems to confirm the state-ment (see Table VIII-5). Just as favourable effects of the terms of trade have contributed towards G.N.P. in post-war years,1 adverse effects from the terms of trade have also affected CN.P. Central Bank of Ceylon statistics show increasingly An export multiplier of 2 has been calculated for the period 1926-57 by W. Rasaputram, op. cit., p. 77. Another export multiplier of 2.5 has been calculated for the period 1938-54 by Y. Lim, op_. cit., p. 41. 219 TABLE VIII-5 IMPORT PRICE INDICES (1958=100) YEAR CONSUMER GOODS FOOD & INTERMEDIATE INVESTMENT DRINK TEXTILES OTHER COMBINED GOODS GOODS (1) (2) (3) (4) (5) (6) 1938 25 30 26 26 35 32 1948 98 149 66 68 85 64 1949 97 119 59 92 75 64 1950 100 126 65 96 82 71 1951 112 146 86 124 99 88 1952 129 119 89 119 108 95 1953 131 115 94 120 101 102 1954 117 106 93 110 95 97 1955 106 101 100 104 99 97 1956 107 102 100 104 98 96 1957 112 111 96 109 109 103 1958 100 100 100 100 100 100 1959 102 103 98 101 '95 111 1960 101 108 98 101 94 120 1961 99 111 96 100 89 112 1962 98 104 92 98 85 92 1963 107 104 126 111 86 98 1964 115 101 129 116 82 96 1965 108 104 121 110 82 132 1966 108 96 132 111 91 185 1967 110 101 135 114 86 204 1968 154 128 178 155 105 241 Source: Central Bank of Ceylon, Annual Report, 1968, op. cit., Appendix II, Table 37. 220 adverse effects since 1960 (see Table VIII-6). As the terms of trade have shown no tendency to decline continuously until 1955, the low level of per capita income and its slow growth until the late 1940's cannot be attributed to a decline in the terms of trade. Indeed, faster growth in per capita G.N.P. in later years almost coincides with a period of deterioration in the terms of trade. The decline in the terms of trade since 1955 led to the development of import substituting domestic in-dustry. This deterioration since 1955, however, has had the effect of slow-ing down the pace of industrialization since Ceylon is dependent on her earnings from exports for the importation of the necessary raw materials and machinery, etc. D. Sectoral Growth — Post-Independence Period As stated by Levin, when political power passed into domestic hands, government action began to play a key role in the economy. The government began to absorb a greater share of export proceeds by way of taxation and channel this to the domestic sector. Table VIII-7 illustrates the sharp increase in export taxation soon after Independence and the rela-tive decline in the importance of export taxation in the 1960's as other sectors of the economy expanded. In the export sector foreign management and ownership were replaced. The outflow of export receipts slowed down to a mere trickle. The outflow of investment income has been around four per cent of export earnings between 1959 and 1969.* Private transfers have averaged 2.5 per cent of export earnings be-Based on Central Bank of Ceylon Annual Reports, op. cit., various issues. TABLE VIII-6 THE TERMS OF TRADE EFFECT (Rs Mil) 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1. G.N.P. (at constant 1959 factor cost prices) 5893.3 6288.5 6424.7 6709.9 6899.7 7363.3 7550.6 7818.3 8181.1 8861.5 9370.3 2. Terms of trade effect due to export of: a) Tea - 31.9 -36.9 + 1.4 -133.7 -156.0 -211.8 -317.7 -419.2 -484.5 -545.7 b) Rubber +37.3 -24.5 -13.3 -55.7 -93.7 -103.5 -145.3 -190.1 -261.7 -193.8 c) Coconut Products - 26.0 -90.3 -79.6 - 63.1 - 84.4 - 12.0 - 44.6 - 54.7 - 17.7 - 49.7 d) Other Products + 10.0 + 1.1 + 9.6 + 10.7 + 18.3 + 18.4 + 2.3 - 3.1 - 19.9 - 21.5 e) A l l Exports - 10.6 -150.6 -81.9 -241.8 -315.8 -308.9 -505.3 -667.1 -783.8 -810.7 3. Gross National Income (at constant 1959 factor cost prices) 5893.3 6279.9 6274.1 6628.0 6657.9 7047.5 7241.7 7313.0 7514.0 8077.7 8559.6 Source: Central Bank of Ceylon Annual Report 1969, op. cit., Appendix II, Table 6. NJ 222 tween 1958 and 1969. This has been the result of greater Ceylonese owner-ship and employment as well as government regulations. A moratorium on the transfer of dividends and profits was instituted in August 1964. Successive measures introduced in 1959 and 1960 have restricted migrants' transfers. TABLE VIII-7 EXPORT TAXATION 1925-26 to 1968-69 (Selected Years) AS A PERCENTAGE YEAR EXPORT DUTY OF TOTAL REVENUE (Rs Mil) 1925-26 11.5 10 1930-31 9.8 10 1935-36 4.6 5 1940-41 5.6 4 1945-46- 13.7 4 1949-50 167.2 27 1955-56 322.1 28 1960-61 303.6 22 1965-66 255.8 14 1968-69 300.3 11 Sources: Economic and Social Development 1926-50, op. cit., Table XXIII; D. R. Snodgrass, op_. cit., Table A-65; Central Bank of Ceylon Annual  Reports, op. cit., various issues. *Based on Central Bank of Ceylon Annual Reports, op. cit., various issues. 223 The banking system was expanded to include a number of specialized institutions providing long-term credit to agriculture and industry such as the Agricultural and Industrial Credit Corporation, the Development Finance Corporation, etc. Gross domestic capital formation as a percentage of G.N.P. rose from 5.4 per cent in 1947 to 19 per cent in 1959* and further to 21 per 2 cent in 1969. Government efforts in the sphere of agriculture have been fairly successful. For instance, the output of rice increased by 300 per cent and yields doubled. Government policy has also been fairly success-ful in giving an impetus to industry — the value of industrial products increased from Rs 331 million in 1961 to Rs 1,627 mil in 1969, the compound rate of growth between 1961 and 1969 being 19 per cent per annum. Government aid and policy have thus led to an expansion in both domestic agriculture and industry since the 1950's. These sectors have grown faster than the export and service sectors in contrast to the earlier period. The share of exports in G.N.P. has dropped from 32 per cent in 1946 to 19 per cent in 1966 and further to about 13 per cent in 1969. Furthermore, small holders in export agriculture have been assisted by the provision of subsidized fertilizer and co-operative processing facilities, etc. The share of the industrial sector in G.N.P. was as low as four per cent in 1950 — after about a century of export-dominated growth. By 1969, *Based on Central Bank of Ceylon Annual Report, 1969, op. cit., Appendix II, Tables 4 and 7. 2 Based on Ibid., Appendix II, Tables 4 and 7. 224 It had risen to 15 per cent of G.N.P. The value of industrial products in-2 creased from Rs 155 mil in 1950 to Rs 331 mil in 1961 and further to Rs 1,627 mil in 1969.3 The growth of private industry since Independence has been largely a response to government policy with respect to imports. There is also a substantial public industrial sector. Some industries have been set up under virtual state monopoly and include such products as petroleum, basic indus-trial chemicals and fertilizer mixing and manufacture. Import substitution in industry commenced with the introduction of stringent import controls in the face of declining export prices and expansionist domestic fiscal policies. The nature of industrialization was influenced by the administration of con-trols. In 1966, the Ministry of Industries indicated that in the allocation of foreign exchange to industry, the following industries would be given priority — industries based primarily on indigenous raw materials, indus-tries with export potential, industries likely to promote agricultural de-velopment, textiles, building and construction, and engineering industries. Industrial investment has been assisted by such institutions as the Ceylon Institute of Scientific and Industrial Research, 1955; Development Finance Corporation, 1955 and the Cottage and Small Scale Industries Development Board, 1964, set up by the government. Statistics of the volume of production are not available. The in-crease in value may be due partly to higher prices of industrial goods aided by tariff protection and need not necessarily be in the volume of production. 2 D. R. Snodgrass, op_. cit., Table A-38. See Table VIII-8. 225 TABLE VIII-8 VALUE OF INDUSTRIAL PRODUCTION BY MAJOR ECONOMIC CATEGORIES 1961-1969 AS PERCENTAGE OF TOTAL CONSUMER INTERMEDIATE INVESTMENT VALUE OF YEAR GOODS GOODS GOODS TOTAL PRODUCTION (Rs Mil) 1961 56.3 37.0 6.7 331.7 1962 60.8 32.7 6.5 388.0 1963 63.7 29.3 7.0 432.0 1964 63.3 27.2 9.5 537.5 1965 53.9 37.3 8.7 847.0 1966 " 56.5 34.9 8.6 850.3 1967 55.4 31.2 13.4 954.2 1968 49.7 34.2 16 ..1 1398.6 1969 51.7 31.1 17.2 1626.8 Source: Central Bank of Ceylon Annual Reports, 1965, 1966, 1967 and 1969, op_. cit. Some idea of the profitability of these industries is indicated by the Survey of Industrial Production, 1968. Most industries registered returns higher than they did in 1952. The higher returns are due probably to the fact that the country is still in the process of gaining economies of scale and to the protected market. Some of these products are being sold at prices lower than their imported counterparts although this may be due in part to dif-ferences in quality and to duties on imports, etc. 226 TABLE VIII-9 GROSS RATES OF RETURN 1968 INDUSTRY GROSS RATE OF RETURN PERCENTAGE3 Food, Beverage and Tobacco Textiles and Wearing Apparrel Leather and Leather Products Wood and Wood Products Paper, its Products and Printing Industrial Chemicals Other Chemicals Rubber Products Petroleum and Coal Plastic Products ^ Non-metallic Mineral Products Engineering Iron and Steel Gross output minus total payments expressed as percentage of the value of fixed assets. I^ncludes pottery, glass, etc. Source: Based on Survey of Industrial Production, 1968, op. cit., pp. 10, 11. The import content of private consumption, public consumption and gross domestic fixed capital formation has been reduced from 31 per cent, 10 per cent and 33 per cent in 1959* to 17 per cent, 4 per cent and 24 per 2 cent respectively in 1968; indicating a higher degree ofcbmestic production. C^entral Bank of Ceylon Annual Report, 1967, op. cit., Table II(a)9. 2 Central Bank of Ceylon Annual Report, 1969, op. cit., Appendix II, Table 13. 117 92 233 45 110 106 151 45 204 126 260 109 40 227 The composition of imports, too, appears to have altered somewhat in fav-our of investment and intermediate goods (see Table VIII-12). Favourable demand repercussions from the plantations did not lead autonomously to diversified growth in the economy. The government had to play an important role in assisting the domestic economy to capture the opportunities for development made possible by the growth of plantations. In its absence, the main function of trade was to provide "an outlet for the surplus product above domestic requirements."* If the country was not opened up to foreign trade it is doubtful whether economic growth could possibly have been greater as the feudal economy which preceded plantations lacked entrepreneurship, investment, etc. Furthermore, the revenue from export and import duties made possible social overhead investment; later these duties and the taxation of related sectors made possible the expanded role of government after Independence. Growth in Ceylon's G.N.P. has accelerated noticeably since Indepen-dence. It was not due primarily to favourable external conditions, nor the existence of plantations. The main source of growth was internal — govern-ment expenditure and other public policy. However, growth would have been seriously retarded but for the existence of a well-developed export sector. Export proceeds have been the means by which Ceylon has been able to obtain her requirements of machinery, and raw materials indispensable for develop-ment. Trade bestowed further benefits such as the transmission of manager-ial talents and entrepreneurship and the supply capital mentioned by Haber-hl. Myint, "The 'Classical Theory' of International Trade and Under-developed Countries," in Theberge, op_. cit., p. 189. 228 ler.1 But when growth did occur, trade expansion acted more as a 'hand-maiden, of growth' rather than as an 'autonomous engine of growth.' G. Haberler, "International Trade and Economic Development," in G. M. Meier (Ed.), Leading Issues in Economic Development, 2nd edition (U.S.A.: Oxford University Press, 1970), pp. 492-97. 229 TABLE VIII-10 ATTACHMENT TO SELECTED INDUSTRIES AS A PER CENT OF TOTAL 1901 1946 1953 1963 Estate Agriculture 27 30 29 Other Agriculture 38 21 33 Other Primary 3 2 2 Total Primary 67 53 54 53 Manufacturing 10 9 10 Construction 1 1 2 Total Secondary 11 10 12 13 Professional 2 3 4 Government 1 3 4 Other Tertiary 15 21 21 Total Tertiary 19 27 28 29 Insufficiently described 3 10 6 5 TOTAL 100 100 100 100 Total Number Employed (Million) 1.7 2.6 3.0 3.2 Sources: D. R. Snodgrass, op. cit., p. 323; Statistical Abstract  of Ceylon 1967-68, op. cit. TABLE VIII-11 G.N.P. (AT CURRENT PRICES) 1938-69a (Selected Years) 1938 1945 1949 1953 1959 1963 1966 1969 1. Domestic Exports 255 572 982 1,45.7 1,456 1,430 1,389 3,852 2. Agriculture, Forestry, Livestock and Fisheries 109 472 646 1,068 1,354 1,617 1,751 3. Industrial Products 29 81 118 192 225 404 432 1,929 4. Capital Development 30 119 233 377 544 651 620 5. Transport 29 112 143 192 469 529 700 1,091 6. Trade 53 180 277 332 673 734 887 1,715 7. Ownership of Dwellings 25 41 52 82 169 223 318 375 8. Government 50 194 295 411 702 821 943 478 9. Services n.l.e. 58 206 290 345 416 469 532 1,474 10. G.D.P. 638 1,977 3,036 4,456 6,015 6,877 7,571 10,925 11. Factor Income from Abroad 14 13 20 35 -37 -53 -42 -104 12. G.N.P. 652 1,990 3,056 4,491 5,978 6,824 7,529 10,821 Ceylon's official data. Statistics from 1959 are not strictly comparable with those for the earlier period as they contain Central Bank revisions. 1969 statistics, too, are not strictly com-parable with those between 1959 and 1966. Sources: D. R. Snodgrass, op_. cit., Table A-l, p. 240; Central Bank of Ceylon Annual Reports, op. cit., various issues. 231 TABLE VIII-12 THE COMPOSITION OF IMPORTS 1959-69 (Selected Years) 1959 PERCENTAGE 1962 1965 1969 1. Consumer Goods 60.0 54.6 52.8 47.9 A. Food and Drink 39.9 38.0 41.0 38.0 of which (i) Rice 14.1 11.7 9.8 10.1 B. Textiles (including clothing) 8.9 9.0 7.3 4.8 C.. Other Consumer Goods 11.2 7.7 4.6 4.7 of which ti) Pharmaceuticals 1.6 1.5 1.4 1.3 2. Intermediate Goods 19.8 24.6 28.1 23.3 of which (i) Fertilizer 3.0 3.6 6.0 2.6 3. Investment Goods 19.4 20.3 17.7 27.5 of which (i) Cement n.a. n.a. 1.2 0.6 (ii) Transport Equipment 7.3 5.5 6.5 8.4 (iii) Machinery & Equipment 6.7 6.8 6.8 14.5 Total 1, 2, 3 99.2 99.5 98.6 98.7 Unclassified Imports 0.8 0.5 1.4 1.3 Total Imports 100.0 100.0 100.0 100.0 Value of Total Imports (Rs Mil) 2,005 1,660 1,474 2,543 Comprises fertilizer, petroleum products, coal, chemical elements and compounds, etc. Source: Central Bank of Ceylon Annual Report, 1964, op. cit., p. 57; Ibid., 1969, p. 235. APPENDIX 233 TABLE A-l TEA EXPORTS 1882 - 1969 UNIT UNIT YEAR QUANTITY VALUE TOTAL VALUE YEAR QUANTITY VALUE TOTAL VALU (Mil lbs) (Rs f000) (Mil lbs) (Rs '000) 1882 1 .85 592 1920 185 .44 86,782 1883 2 .46 916 1921 162 .70 112,708 1884 2 .72 1,436 1922 172 .84 146,036 1885 4 71 2,482 1923 182 1.02 185,686 1886 8 .64 5,102 1924 205 1.05 214,965 1887 14 .59 8,300 1925 209 .95 199,697 1888 24 .53 12,625 1926 217 .98 213,775 1889 34 .52 17,859 1927 227 .94 213,775 1890 46 .50 22,900 1928 237 . .85 261,311 1891 68 . 45- 30,473 1929 252 .82 205,194 1892 72 .45 32,576 1930 243 .75 182,038 1893 82 .50 40,723 1931 244 .57 138,699 1894 85 .54 46,103 1932 253 .43 107,693 1895 99 .50 49,291 1933 216 .55 117,910 1896 110 .38 41,836 1934 219 .66 145,063 1897 114 .41 46,931 1935 212 .69 145,764 1898 122 .38 47,734 1936 218 .70 153,392 1899 149 .36 53,735 1937 213 .80 170,587 1900 149 .36 53,735 1938 236 .73 172,421 1901 144 .33 47,611 1939 228 .82 188,029 1902 151 3^6 54,299 1940 246 .84 207,910 1903 149 . .38 58,199 1941 238 .95 224,736 1904 158 .36 56,855 1942 266 .96 253,762 1905 142 .42 59,564 1943 264 1.02 269,374 1906 171 .36 61,390 1944 276 1.13 311,271 1907 180 .42 74,635 1945 232 1.20 278,476 1907 179 .41 73,553 1946 292 1.30 380,545 1909 193 .42 81,012 1947 287 1.97 566,523 1910 184 .46 84,137 1948 296 1.99 590,271:. 1911 187 .46 84,900 1949 298 2.18 649,845 1912 192 .44 83,817 1950 287 2,52 751,651 1913 192 .46 87,788 1951 305 2.62 800,036 1914 194 .46 89,726 1952 315 2.30 723,048 1915 216 .57 122,458 1953 336 2.46 826,090 1916 203 .52 105,266 1954 361 3.11 1,122,798 1917 195 .49 95,663 1955 362 3.30 1,194,227 1918 181 .46 83,176 1956 348 3.00 1,043,847 1919 209 .56 116,502 1957 366 2.77 1,015,896 TABLE A-l ( C o n t i n u e d ) UNIT YEAR QUANTITY VALUE TOTAL VALUE ( M i l l b s ) (Rs *000) 1958 411 2.75 1,130,969 1959 384 22 72 1,045,013 1960 410 2.67 1,095,679 1961 426 2.62 1,115,000 1962 452 2.54 1,149,000 1963 456 2.50 1,140,000 1964 456 2.51 1,142,000 1965 495, 2.45 1,210,000 1966 441 2.33 1,027,000 1967 478 2.22 1,061,000 1968 460 2.52 1,162,000 1969 445 2.39' 1,062,000 Sources: Snodgrass, op. cit., Table A-52; Central Bank of Ceylon, Annual Reports, cit., various issues. 235 TABLE A-2 DISTRIBUTION OF EXPORT RECEIPTS FROM TEA 1920 - 1938 (Rs Mil) VALUE OF WAGES & OTHER EXPORT COMPANY o YEAR EXPORTS SALARIES COSTS DUTIES TAXES1 PROFITS 1920 81 40 25 n.a. 16 1921 113 36 22 n.a. —. 55 1922 146 52 32 n.a. — 62 1923 186 59 36 n.a. — 91 1924 215 67 41 n.a. — 107 1925 200 63 38 n.a. — 99 1926 213 71 41 n.a. — 101 1927 214 70 39 n.a. — 105 1929 205 73 39 n.a. — 93 1930 182 68 36 7 — 71 1931 139 56 30 7 — 47 1932 108 54 30 6 2 14 1933 118 48 28 5 4 33 1934 145 62 38 55 5 35 1935 146 63 39 5 5 40 1936 153 65 40 4 5 38 1937 171 . 65 40 44 7 55 1938 172 87 41 4 6 54 Sources: Snodgrass, op. cit. , Ceylon, Table A-52; M.R. P. Salgado, The Ceylon Economy 1920-38, quoted in Lin i, op_. cit. , p. 86; Economic and Social Development of Ceylon, Table XXV, 30 Years Trade  Statistics, op. cit., Table 25. Calculated at the rate of 12 per cent of before tax profits for years 1932-37 and 10 per cent for 1938. This introduces some error as resident companies were taken at slightly different rates. Moreover, it is assumed that all producers are companies. 2 Profits include an estate duty which is atnegligible sum running at around a total of Rs 1 to Rs 2 mil per year for tea, rubber and coconut estates. 1920-30 profits include export duties which were also low. 236 TABLE A-3 DISTRIBUTION OF EXPORT RECEIPTS FROM TEA 1948 - 1967 (Rs Mil) VALUE OF WAGES & OTHER- EXPORT- COMPANY YEAR EXPORTS SALARIES COSTS DUTIES TAXES PROFI 1948 590 215 158 113 55 49 1949 650 231 169 113 55 82 1950 752 249 157 131 91 124 1951 800 290 203 164 68 75 1952 723 309 195 115 57 47 1953 825 302 195 139 119 71 1954 1123 348 251 214 194 116 1955 1194 350 268 300 173 10 1956 1044 342 266 221 142 72 1957 1016 377 217 238 126 58 1958 1131 440 182 281 156 72 1959 1045 390 275 198 125 58 1960 1096 386 288 139 283 79 1961 1115 404 285 139 203 79 1962 1149 416 290 224 '94 115 1963 1140 414 293 216 98 119 1964 1142 433 294 218 112 85 1965 1210 436 337 229 104 104 1966 1027 401 303 205 59 599 1967 1061 450 323 223 38 38 Ho per cent .of total cost has been added to cover transpc and handling costs from factory to ship and taxes levied for health programmes, tea research, etc., as suggested by Snodgrass, op. cit., Ceylon, p. 135. 2 1961-67 includes tea tax. 3 1948-60 includes income tax on companies, profits tax. 1961-67 does not include profits, remittance tax for non-resident companies or tax in lieu of estate duty for non-resident companies. Sources: Snodgrass, op_. cit., Ceylon, Table A-52, and p. 114; Central Bank of Ceylon, op_. cit., Annual Reports; Census of Agriculture 1952, Part I, p. 13; Lim, op_. cit., p. 86, Statistical Abstracts of Ceylon, op. cit. 237 TABLE A-4 RUBBER EXPORTS 1913 - 1969 YEAR QUANTITY (Mil lbs) UNIT VALUE TOTAL VALUE (Rs 1000) YEAR QUANTITY (Mil lbs) UNIT VALUE TOTAL VALUE (Rs '000) 1913 25 2.42 61,269 1944 224 .99 222,791 1914 34 1.67 57,220 1945 215 1.02 218,404 1915 49 1.62 78,997 1946 228 .99 226,665 1916 55 1.90 103,812 1947 181 .75 135,502 1917 72 1.81 130,968 1948 206 .69 141,619 1918 46 1.34 62,252 1949 195 .63 122,862 1919 101 1.31 132,071 1950 262 1.53 401,120 1920 88 1.02 89,961 1951 226 2.53 572,439 1921 88 .59 51,602 1952 206 1.76 363,060 1922 105 , .54 56,970 1953 213 1.54 328,893 1923 84 .88 73,594 1954 203 1.36 275,967 1924 83 .77 63,750 1955 222 1.58 350,348 1925 102 .1.66 169,992 1956 190 1.54 292,553 1926 130 1.29 170*078 1957 209 1.44 300r298 1927 125 .58 73,986 1958 207 1.25 258,109 1929 181 .48 86,631 1959 266 1.45 297,820 1930 171 .28 , 47,158 1960 235 1.61 378,374 1931 138 .14 19,842 1961 197 1.32 260,000 1932 111 .12 13,233 1962 224 1.29. 290,000 1933 142 .16 22,995 1963 209 1.23 257,000 1934 179 .32 56,615 1964 253 1.15 290,000 1935 120 .32 38,394 1965 267 1.14 304,000 1936 112 .42 46,840 1966 298 1.13 337,000 1937 156 .49 77,010 1967 291 .97 282,000 1938 115 .39 45,275 1968 328 1.01 331,000 1939 135 .50 67,564 1969 315 1.37 431,000 1940 197 .57 113,101 1941 202 .58 118,287 1942 251 .69 171,824 1943 220 .77 169,006 Sources: Snodgrass, op. cit., Ceylon, Table A-52; Central Bank of Ceylon, Annual Reports, op. cit., various issues. TABLE A-5 DISTRIBUTION OF EXPORT RECEIPTS FROM RUBBER 1920 - 1938 (Rs Mil) EXPORT WAGES & OTHER EXPORT COMPANY YEAR RECEIPTS SALARIES COSTS DUTIES TAXES PROFITS 1920 90 23 14 n.a. nil 53 1921 52 17 8 n.a. nil 27 1922 57 19 9 n.a. nil 29 1923 74 18 8 n.a. nil 48 1924 64 20 9 n.a. nil 35 1925 170 23 10 n.a. nil 137 1926 170 29 11 n.a. nil 130 1927 119 30 11 n.a. nil 78 1928 74 30 11 n.a. nil 33 1929 87 38 13 n.a. nil 36 1930 47 34 13 3 nil -3 1931 20 16 6 1 nil -3 1932 13 11 5 nil nil -3 1933 23 13 5 nil 1 4 1934 57 21 9 nil 3 1 24 1935 38 20 8 nil 1 9 1936 47 18 8 nil 3 18 1937 77 25 11 nil 4 37 1938 45 18 8 nil 3 16 Sources: Snodgrass, op. cit., Ceylon, Table A-52; M. R. P. Salgado, quoted in Lim, op_. cit., p. 106; 30 Years Trade Statistics of Ceylon, 1924-54; Economic and Social Development of Ceylon, op_. cit., 1926-50. TABLE A-6 DISTRIBUTION OF EXPORT RECEIPTS FROM RUBBER 1952 - 1967 (Rs Mil) EXPORT WAGES & OTHER EXPORT COMPANY YEAR RECEIPTS SALARIES COSTS DUTIES TAXES PROFITS 1952 363 134 67 44 65 53 1953 329 152 60 33 53 31 1954 276 141 69 31 22 13 1955 350 167 70 37 48 28 1956 293 147 49 53 29 15 1957 300 138 61 60 28 13 1958 258 144 37 49 20 8 1959 298 133 49 45 48 23 1960 378 141 66 53 86 32 1961 260 102 55 54 22 27 1962 290 114 58 30 40 48 1963 257 113 56 29 27 32 1964 290 132 63 12 42 31 1965 304 158 51 22 37 36 1966 337 155 57 17 54 55 1967 282 151 55 — 38 38 Contains a margin of 10 per cent for transportation and handling costs from factory to ship and taxes levied for research,etc. as suggested by Snodgrass. Sources: Snodgrass, op_. cit., Ceylon, p. 114; Central Bank of Ceylon, Annual Reports, op. cit., various issues; Lim, op. cit., p. 106; Statistical Abstract of Ceylon, op. cit., various issues. 240 TABLE A-7 COCONUT OIL EXPORTS 1870 - 1969 YEAR QUANTITY UNIT TOTAL VALUE YEAR QUANTITY UNIT TOTAL VALUE ('000 cwt) VALUE (Rs '000) (*000 cwt) VALUE (Rs *000) 1870 136 12.50 1,700 1871 207 12.50 2,588 1872 278 11.90 3,307 1873 114 12.44 1,418 1874 145 12.46 1,807 1875 124 12.44 1,542 1876 213 12.46 2,653 1877 133 12.42 1,652 1878 175 12.47 2,183 1879 218 12.47 2,718 1880 352 12.46 4,386 1881 202 12.42 2,508 1882 211 12.44 2,625 1883 348 12.46 4,335 1884 384 12.44 4,778 1885 265 12.45 3,300 1886 277 12.46 3,451 1887 323 12.46 4,025 1888 364 12.45 4,531 1889 380 12.44 4,728 1890 369 12.44 4,589 1891 427 12.44 5,310 1892 565 12.44 7,026 1893 389 15.56 6,045 1894 450 15.56 6,993 1895 419 15.56 6,522 1896 391 15.56 6,080 1897 488 13.07 6,383 1898 467 13.07 6,109 1899 468 14.25 6,673 1900 468 14.25 6,673 1901 474 16.03 7,601 1902 551 18.15 10,008 1903 688 16.03 11,023 1904 511 18.00 9,197 1905 587 16.71 9,816 1906 539 17.71 9,546 1907 479 24.72 11,830 1908 644 18.60 11,985 1909 600 21.91 13,142 1910 528 .:26.05 13,741 1911 505 26.03 13,146 1912 402 26.35 10,587 1913 547 30.60 16,738 1914 486 27.54 13,392 1915 502 25.84 12,959 1916 323 27.66 8,935 1917 435 23.19 10,081 1918 527 V29.57 15,693 1919 676 37.97 25,674 1920 508 39.14 19,865 1921 485 31.00 15,025 1922 555 26.91 14,925 1923 481 29.00 13,935 1924 553 28.64 15,827 1925 617 27.24 16,813 1926 570 27.17 15,489 1927 673 24.62 16,568 1928 779 24.73 19,266 1929 879 20.51 18,024 1930 764 17.26 13,190 1931 963 12.60 12,130 1932 1,025 14.12 14,475 1933 1,061 10.18 10,800 1934 1,397 7.49 10,461 1935 1,109 12.31 13,647 1936 689 16.44 9,949 1937 1,337 15.00 20,061 1938 1,508 9.32 14,657 1939 1,258 10.56 13,286 1940 597 11.33 6,763 1941 563 13.58 7»643 1942 497 -23.15 11,504 1943 961 21.90 21,049 1944 827 23.59 19,509 1945 774 27.60 21,359 TABLE A-7 (Continued) YEAR QUANTITY ('000 cwt) UNIT VALUE TOTAL (Rs VALUE '000) 1946 861 34.56 29,758 1947 846 57.31 48,488 1948 1,515 55.49 84,061 1949 1,784 68.01 121,327 1950 1,514 84.13 127,374 1951 2,195 103.44 227,061 1952 2,134 62.36 133,084 1953 1,871 75.98 142,153 1954 1,378 72.71 100,191 1955 1,945 58.25 113,291 1956 1,699 58.40 99,221 1957 1,081 62.83 67,920 1958 887 69.78 61,897 1959 1,390 84.36 117,264 1960 1,110 71.85 79,753 1961 1,837 58.16 106,500 1962 2,043 55.08 112,500 19 6 J 1,621 61.04 98,950 1964 2,351 65.42 153,800 1965 1,738 83.09 144,000 1966 1,457 74.45 108,000 1967 1,334 65.70 88,000 1968 1,261 105.40 133,000 1969 1,103 97.65 108,000 242 TABLE A-8 COPRA EXPORTS 1870 - 1969 YEAR QUANTITY UNIT TOTAL VALUE YEAR QUANTITY UNIT TOTAL VALUE ('000 cwt) VALUE (Rs '000) ('000 cwt) VALUE (Rs '000) 1870 41 8.00 5,024 1908 749 11.16 912 1871 51 8.00 3,931 1909 785 12.76 365 1872 41 6.76 3,931 1910 624 16.80 717 1873 34 5.62 4,541 1911 822 16.03 1,496 1874 29 6.42 4,099 1912 614 16.42 1,644 1875 8 6.25 7,352 1913 1,117 18.76 1,277 1876 28 6.21 7,974 1914 1,412 16.47 1,377 1877 20 7.95 4,904 1915 1,209 14.61 1,071 1878 46 8.67 5,661 1916 1,310 13.58 1,255 1879 65 8.15 5,322 1917 1,079 12.25 429 1880 93 9.81 8,356 1918 1,272 10.03 1,480 1881 54 6.76 10,008 1919 1,760 18.39 921 1882 96 7.47 10,479 1920 1,358 20.92 1,625 1883 171 8.75 13,173 1921 1,367 17.78 1,251 1884 202 8.14 10,083 1922 1,687 17.07 579 1885 162 7.88 20,959 1923 1,015 17.86 451 1886 157 8.77 23,248 1924 1,769 17.53 565 1887 136 7.88 17,657 1925 2,274 16.83 1,328 1888 147 8.54 21,868 1926 2,419 16.47 39,848 1889 55 7.81 13,216 1927 1,982 16.07 31,845 1890 156 9.48 12,758 1928 1,977 16.09 31,802 1891 69 13.37 32,357 1929 2,042 12.89 • 26,316 1892 169 9.61 28,405 1930 1,813 9.94 18,029 1893 87 14.36 24,304 1931 1,877 6.77 12,715 1894 46 12.66 28,804 1932 914 9.06 8,284 1895 41 11.13 18,123 1933 1,287 5.31 6,828 1896 58 9.81 31,008 1934 2,109 4.38 9,244 1897 140 9.46 38,268 1935 975 8.02 7,818 1898 517 9.71 329 1936 1,035 9.74 10,077 1899 403 9.76 408 1937 1,417 8.83 12,511 1900 403 9.76 277 1938 1,504 5.84 8,783 1901 458 9.92 191 1939 1,061 6.69 7,102 1902 378 10.85 188 1940 1,566 6.32 9,892 1903 732 10.29 50 1941 2,138 6.92 14,799 1904 723 11.03 174 1942 2,297 12.14 27,887 1905 391 12.53 159 1943 2,953 12.67 37,403 1906 449 12.62 399 1944 2,020 14.17 28,625 1907 384 13.85 530 1945 2,274 17.06 38,803 TABLE A-8 (Continued) QUANTITY UNIT TOTAL VALUE YEAR ('000 cwt) VALUE (Rs '000) 1946 776 21.14 16,407 1947 595 35.94 21,387 1948 1,089 38.74 42,191 1949 431 50.04 21,567 1950 422 60.37 25,463 1951 387 69.92 27,059 1952 815 40.73 33,194 1953 428 53.40 22,825 1954 920 49.40 45,445 1955 1,531 37.41 57,281 1956 1,160 42.23 48,989 1957 700 47.63 33,343 1958 560 52.40 29,346 1959 860 59.97 51,572 1960 580 55.48 32,181 1961 1,100 43.47 47,820 1962 1,448 40.74 59,000 1963 862 45.55 39,260 1964 1,162 47.44 55,140 1965 819 59.26 49,000 1966 417 58.92 > 25,000 1967 316 58.61 18,000 1968 425 79.25 34,000 1969 381 78.25 26,000 244 TABLE A-9 DESICCATED COCONUT EXPORTS 1892 _ 1 9 6 9 YEAR QUANTITY ('000 cwt) UNIT VALUE TOTAL VALUE (Rs '000) YEAR QUANTITY ('000 cwt) UNIT VALUE TOTAL (Rs VAL1 000' 1892 16 23.10 370 1927 873 23.46 20 482 1893 27 21.91 597 1928 787 25.21 19 840 1894 43 23.45 1,001 1929 690 17.21 11, 876 1895 73 22.66 1,658 1930 705 14.24 10 036 1896 94", 21.81 i2,051 1931 669 10.21 6, 832 1897 103 20.69 2,152 1932 599 11.94 7 ,150 1898 121 19.20 2,332 1933 790 8.54 6 747 1899 130 17.67 2,295 1934 647 6.39 4 135 1900 126 17.74 2,238 1935 664 11.01 7, 308 1901 126 18.38 2,315 1936 602 11.70 7 ,042 1902 239 11.99 2,871 1937 589 11.51 6 ,780 1903 164 18.91 3,105 1938 594 7.41 4 ,399 1904 169 18.31 3,094 1939 673 10.60 7 ,132 1905 186 17.94 3,301 1940 285 9.61 2 ,738 1906 182 18.72 3,404 1941 106 10.37 1 ,099 1907 205 21.78 4,471 1942 112 19.28 2 159 1908 246 17.44 4,299 1943 66 25.76 1 ,700 1909 231 19.09 4,407 1944 58 26.00 1 516 1910 264 23.76 6,276 1945 107 30.37 3 ,250 1911 292 24.03 7,023 1946 194 52.71 10 ,226 1912 279 23.99 6,689 1947 231 100.01 23 ,103 1913 304 25.89 7,867 1948 236 106.97 25 ,245 1914 312 25.13 7,839 1949 312 81.73 25 ,500 1915 349 24.78 8,647 1950 898 106.06 95 ,238 1916 306 28.44 8,705 1951 795 82.63 65 ,687 1917 272 34.41 9,361 1952 1,112 58.71 65 ,280 1918 203 25.47 5,180 1953 1,146 68.79 78 838 1919 675 36.93 24,928 1954 1,104 66.01 66 ,250 1920 519 35.34 18,330 1955 1,157 47.37 54 807 1921 871 30.56 26,602 1956 1,275 50.85 64 836 1922 768 26.24 20,159 1957 978 56.08 54 846 1923 819 27.74 22,716 1958 1,135 63.71 72 310 1924 871 25.21 21,964 1959 1,050 71.43 75 000 1925 794 23.65 18,778 1960 1,099 64.96 71 400 1926 754 22.91 17,276 1961 967 49.30 47, 660 V 245 TABLE A-9 (Continued) YEAR QUANTITY UNIT. TOTAL VALUE ('000 cwt) VALUE (Rs '000) 1962 981 57.12 56,040 1963: 967 61.60 59,570 1964 1,080 59.36 64,100 1965 1,041 79.51 82,000 1966 930 67.20 63,000 1967 926 66.10 61,000 1968 1,382 118.70 164,000 1969 1,018 86.24 87,000 246 TABLE A-10 DISTRIBUTION OF EXPORT RECEIPTS FROM COCONUT 1920 - 1938 (Rs Mil) EXPORT £ ^ OTHER^  EXPORT COMPANY YEAR RECEIPTS WAGES COSTS DUTIES TAXES PROFITS 1920 71 28 9 n.a. nil 34 1921 71 29 10 n.a. nil 32 1922 70 29 6 n. a. nil 31 1923 61 25 9 n.a. nil 27 1924 77 33 122 n.a. nil 32 1925 81 34 12 n. a. nil 35 1926 79 33 12: n.a. nil 34 1927 78 33 11 n.a. nil 34 1928 79 33 12 n.a. nil 34 1929 64 33 11 n.a. nil 20 1930 47 28 10 2 nil 7 1931 36 19 6 1 nil 10 1932 35 17 5 nil nil 13 1933 29 14 4 nil 1 10 1934 28 16 4 nil 1 7 1935 36 16 5 nil 2 13 1936 33 12 3 nil 2 16 1937 47 20 6 nil 2 19 1938 34 23 6 nil 1 4 * Includes value added by coconut processingL Sources: Lim, op. cit.. Appendix Table II-6; M. R. P. Salgado, The Ceylon Economy 1920-38, A National Accounts Study.Vol. II, Table 21, quoted in Lim, op_. cit.; 30 Years Trade Statistics, op. cit., Table 25; Economic and Social Development of Ceylon, 1926-50, op. cit. 247 TABLE A-11 DISTRIBUTION OF EXPORT RECEIPTS FROM COCONUT 1944 - 1967 (Rs Mil) EXPORT WAGES & . 2 EXPORT 3 YEAR RECEIPTS SALARIES COSTS DUTIES MARGIN 1944 53 15 10 nil 28 1945 68 19 13 nil 37 1946 68 18 13 nil 37 1947 101 18 13 8 •  62 1948 166 26 21 30 89 1949 190 37 30 34 89 1950 280 37 27 36 210 1951 370 49 56 47 218 1952 258 54 58 28 118 1953 273 62 41 32 138 1954 243 56 22 35 120 1955 259 102 33 124 1956 244 92 28 124 1957 194 61 18 115 1958 199 58 16 125 1959 284 76 26 178 1960 184 54 24 106 1961 202 73 30 .99 1962 227 90 31 106 1963 198 65 42 91 1964 273 105 56 112 1965 275 81 56 138 1966 196 65 31 100 1967 167 62 20 85 Coconut is exported mainly in the forms of coconut oil, copra and dessicated coconut. 2Do not include processing costs. 3 'Margin' for this period, i.e., 1944-67 is not comparable to 'profits' for the period 1920-38 as the former includes processing costs. Sources: Lim, op. cit., Appendix II-6; Central Bank of Ceylon Annual Reports, op_. cit.,; Census of Agriculture, Part III, op_. cit., pp. 20, 21; Snodgrass, op_. cit.. Ceylon, Table 5-6; Statistical Abstract of Ceylon, op. .cijt., various issues; 30 Years Trade Statistics, op. cit., Table 25. TABLE A-12 INDEX NUMBERS OF TERMS OF TRADE YEAR TERMS OF TRADE 1900 98 iaoi 98 1902 103 1903 106 1904 101 1905 99 1906 100 1907 119 1908 109 1909 113 1910 129 1911 126 1912 123 1913 131 1914 112 1915 117 1916 107 1917 93 1918 65 1919 65 1920 4^6 1921 62 1922 72 1923 92 1924 101 1925 102 1926 100 1927 97 1928 94 YEAR TERMS OF TRADE 1929 113 1930 97 1931 90 1932 85 1933 92 1934 96 1935 93 1936 136 1937 142 1938 99 1939 125 1940 112 1941 108 1942 87 1943 67 1944 63 1945 85 1946 74 1947 92 1948 83 1949 93 1950 121 1951 122 1952 88 1953 98 1954 119 1955 132 249 Estimate of Costs of Processing Coconut Products and The Share of Profits (1948 - 1967) Data with respect to the cost of processing coconut products is limited to data on the cost of processing coconut oil published in the Cen-sus of Industry, 1952. The gross output of coconut oil was valued at Rs 234 million in 1952. The total cost of production amounted to Rs 189 million, of which wages accounted for Rs 5 million.1 Hence profits for that year from the production of coconut oil were Rs 45 million. Of the coconut oil produced, approximately Rs 150 mil was ex-ported in 1952. Its cost of production is estimated at Rs 123 million — the share of wages and salaries is put at Rs 3 million, and processing costs at approximately Rs 6 million (assuming that they accounted for about 2 five per cent of the cost of production), The bulk of the cost of produc-tion appears to have been spent on the input,, i.e., coconut. Furthermore, assuming that the share of processing and wages in both copra and desica-ted coconut were around Rs 4 million and Rs 2 million respectively and that the profits from processing these items amounted to about Rs 20 million in 1952, export receipts from coconut products can be divided in the follow-ing manner. Other Export Export Receipts Wages, Salaries Costs Duties 1952 -Rs Mil 258 59 68 32 Statistical Abstract, 1963, op. cit., pp. 214, 215. 2 The price of oil depends mainly on the price of seeds, the processing costs being negligible, United Nations, ECOSOC, ECAFE, Vol. 4, p. 258. 250 Assuming that the costs of production remained constant during the period 1948-67 and assuming further.that company taxes averaged 40 per cent* during this period, export receipts for the period are divided as follows. Export Wages & Other Export Year Receipts Salaries Costs Duties Company Taxes Profits 1948-1967 234 92 33 44 65 Company taxes ranged between 25 per cent and 50 per cent of after tax profits. This estimate of 40 per cent is a very rough approxi-mation due to the predominance of small holders and the fact that process-ing and growing coconut are separate operations. SELECTED BIBLIOGRAPHY Allen, P. W. "The Way Ahead for Natural Rubber," in J. A. Byrdson (Ed.), Developments With Natural Rubber. London: Mac Laren, 1967. Baldwin, R. E. Economic Development and Export Growth: A Study of Northern  Rhodesia 1920-1960. Berkeley, Calif.: University of California Press, 1966. Bauer, P. T. The Rubber Industry: A Study in Competition and Monopoly. London School of Economics and Political Science, Longmans Green & Co., 1948. Caves, R. E., and R. H. Holton. The Canadian Economy. Cambridge, Mass.: Harvard University Press, 1961. Central Bank of Ceylon. Annual Report of the Monetary Board to the Minister of Finance, 1950 to 1969. Colombo: Central Bank of Ceylon. . Survey of Ceylon's Consumer Finances, 1953. Colombo: Central Bank of Ceylon, 1954. Department of Census and Statistics. Census of Agriculture 1952, Part I. — Tea Plantations, Part II — Rubber Plantations, Part III — Coco- nut Plantations. Colombo: Government Publications Bureau, 1956. . Census of Agriculture 1962, Vol. II — Land Utilization. Colombo: Government Press, 1966. . Statistical Abstract of Ceylon Annual. Colombo: Government Press. . Survey of Industrial Production, 1968. Colombo: Government Press. Department of Commerce. Thirty Years Trade Statistics of Ceylon 1925- 1954. Colombo: Department of Commerce, 1955-57. Government of Ceylon. Administration Report of the Tea Controller for 1969. Ceylon: Government Press, July 1970. . Administration Report of the Rubber Controller for 1969. Ceylon: Government Press, August 19 70. . Administration Report of the Commissioner of Coco- nut and Cocoa Rehabilitation for 1969. Ceylon: Government Press, November 1970. 251 252 Government of Ceylon. Interim Report of the Tea Commission, Sessional  Paper No. VII, 1968. Ceylon: Government Press, 1968. . Report of the Commission on the Rubber Industry in Ceylon, 1947. Ceylon: Government Press, 1947. . Ministry of Finance, Economic and Social Develop- ment of Ceylon 1926-1950. Ceylon: Government Press, 1951. . Ministry of Finance. Economic and Social Develop- ment of Ceylon 1965-1969. 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"The 'Classical Theory' of International Trade and Underdeveloped Countries," in Theberge (Ed.), Economics of Trade and Development (New York: John Wiley & Sons Inc., 1968). 255 Myint, H. "The Gains From International Trade and the Backward Countries," in Theberge (Ed.), Economics of Trade and Development. New York: John Wiley & Sons, Inc., 1968. Nicholls, C. W. "Civilization of the Late Anuradhapura Period," in History  of Ceylon, University of Ceylon Press Board. Colombo: Ceylon Univer-sity Press, 1960. Pakeman, S. A. Ceylon. New York: Praeger, 1964. Paranavitana, S. "Civilization of the Early Anuradhapura Period," in History  of Ceylon, University of Ceylon Press Board. Colombo: Ceylon Univer-sity Press, 1960. Pieris, Ralph. Sinhalese Social Organization: The Kandyan Period. Colombo: Ceylon University Press Board, 1956. Piggott, C. Coconut Growing. London: Oxford University Press, 1964. Prebisch, R. "The Role of Commercial Policy in Underdeveloped Countries," American Economic Review (May, 1959). Ramachandran, N. Foreign Plantation Investment in Ceylon, 1889-1958. Colombo: Central Bank of Ceylon, 1963. Rasaputram, W. Influence of Foreign Trade on the Level and Growth of National  Income of Ceylon 1926-1957. Colombo: Central Bank of Ceylon, 1964. Roberts, M. "The Impact of the Wastelands Legislation and Growth of Planta-tions on the Techniques of Paddy Cultivation in British Ceylon: A Cri-tique," Modern Ceylon Studies, Vol. I, No. 2 (July, 1970). . "Grain Taxes in British Ceylon 1832-78," Modern Ceylon Studies, Vol. I, No. 1 (January, 1970). Ryan, B. Sinhalese Village. Coral Gables, Florida: University of Miaimi Press, 1958. Singer, H. "The Distribution of Gains Between Borrowing and Investing Countries," American Economic Review,Papers & Proceedings, May 1950. Snodgrass, D. R. Ceylon: An Export Economy in Transition. Illinois: Richard D. Irwin Inc., 1966. Snodgrass, Katherine. 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Wickizier, D. Coffee/ Tea-and Cocoa: An Economic and Political Analysis. California: Stanford University Press, 1951. Wijewardena, R. "Mechanization on Coconut Plantations," World Crops, (December, 1948). 

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