This study analyses the technological change in the aggregate tea sector of Sri Lanka, by contributing to an understanding of total factor productivity change with assessment of the extent and nature of such changes from 1960/61 to 1994/95. The total factor productivity measures are then used to define a conceptually sound measure of the production cost of land degradation, providing insight into the scarcity of soil in the tea sector. Total factor productivity in the tea sector, increased at an estimated annual rate of 1.82 percent during the study period. This resulted from an estimated annual rate of increase of 0.01 percent in total output and a considerably larger rate of 1.81 percent annual decrease in total input. Thus, the reason for total factor productivity growth was largely due to cost savings associated with decreased use of inputs rather than increased output. Land and capital inputs showed significant negative growth trends, confirming a lack of long-term investment in the tea sector. As expected, all the partial factor productivities showed increases over the study period due to lower use of those individual inputs; the most significant changes occurring in the partial productivities of land and capital inputs. The terms of trade and the returns to costs ratio, exhibited an annual rate of decrease of around 3.7 percent and 1.9 percent, respectively. The producer terms of trade growth rate of -3.7 percent, has been brought about by an estimated annual rate of increase in prices received of 10.6 percent compared with an increase of 14.3 percent in prices paid. The Sri Lankan tea industry, once pre-eminent in the world, has been going through intermittent crises for a long time due to problems related to low productivity and the high cost of production. The management of the nationalised plantations proved inadequate to meet the task of adjusting to the new challenges of raising productivity and remaining competitive. The contribution of the tea industry to the economy declined. Among other causes, stagnating crop productivity was found to be an important factor. Land degradation in the form of soil erosion, was found to be a serious problem for the entire tea sector. Careless and ecologically unbalanced agricultural practices, have over the years, led to varying degrees of degradation of the tea soils. However, these physical measures of land degradation do not necessarily reveal an economic or social problem. In the second part of the study, an attempt is made to quantify the impact that land degradation has on tea production. Based on the theoretical relationship of the impact of technological progress and land degradation on tea production, a regression model was fitted to deconstruct the total factor productivity variable. The objective of this approach is to find an economic value for land degradation by quantifying the extent of this impact on aggregate tea production in Sri Lanka. One of the key points to come out of this estimation exercise, is the difficulty of isolating the impact of individual factors on measured total factor productivity. On the basis of available data and the chosen model, it could be concluded that the impact of technological progress has outweighed the negative effect of land degradation in the tea sector, over the study period. Considering the fact that investment in tea research is mainly on developing varieties of vegetatively propagated clonal tea, and the associated very long gestation periods involved, a much larger lag length of the order of 25-35 years is recommended for the research investment variable, to enable calculation of the marginal internal rate of return to public investment in tea. Importantly, a larger set of data will become available over the next decade or so which will enable appropriate lags to be incorporated in future research on productivity in the tea industry.

Many trade and development economists, policy makers and policy analysts around the world believe that globalisation promotes growth and reduces poverty. There exists a large body of theoretical and empirical literature on how trade liberalisation helps to promote growth and reduce poverty. However, critics of globalisation argue that, in developing countries, integration into the world economy makes the poor poorer and the rich richer. The most common criticism of globalisation is that it increases poverty and inequality. Much of the research related to the link between openness, growth and poverty has been based on cross-country regressions. Dollar and Kraay (2000; 2001), using regression analysis, argue that growth is pro poor. Moreover, their study suggests that growth does not affect distribution and poor as well as rich could benefit from it. Later, they demonstrate that openness to international trade stimulates rapid growth, thus linking trade liberalisation with improvements in wellbeing of the poor. Several other cross-country studies demonstrate a positive relationship between trade openness and economic growth (see for example Dollar, 1992; Sach and Warner, 1995 and Edward, 1998). In contrast, Rodriguez and Rodrik (2001) question the measurements related to trade openness in economic models, and suggest that generalisations cannot be made regarding the relationship between trade openness and growth. Several other studies also criticise the pro poor growth argument based upon the claim of weak econometrics and place more focus on the distributional aspect (see, for example, Rodrik, 2000). Ultimately, openness and growth have therefore become an empirical matter, and so has the relationship between trade and poverty. These weaknesses of cross-country studies have led to a need to provide evidence from case studies. Systematic case studies related to individual countries will at least complement cross-country studies such as that of Dollar and Kraay. As Chen and Ravallion (2004, p.30) argue, 'aggregate inequality or poverty may not change with trade reform even though there are gainers and losers at all levels of living'. They further argue that policy analysis which simply averages across diversities may miss important matters that are critical to the policy debate. In this study, Sri Lanka is used as a case study and a computable general equilibrium (CGE) approach is adopted as an analytical framework. Sri Lanka was selected as an interesting case in point to investigate this linkage for the following reasons: although Sri Lanka was the first country in the South Asian region to liberalise its trade substantially in the late seventies, it still experiences an incidence of poverty of a sizeable proportion that cannot be totally attributed to the long-standing civil conflict. Moreover, trade poverty linkage within the Sri Lankan context has hardly received any attention, while multi-sectoral general equilibrium poverty analysis within the Social Accounting Matrix (SAM) based CGE model has never been attempted. In order to examine the link between globalisation and poverty, a poverty focussed CGE model for the Sri Lankan economy has been developed in this study. As a requirement for the development of such a model, a SAM of the Sri Lankan economy for the year 1995 has been constructed. Moreover, in order to estimate the intra group income distribution in addition to the inter group income distribution, income distribution functional forms for different household groups have been empirically estimated and linked to the CGE model in 'top down' mode: this will compute a wide range of household level poverty and inequality measurements. This is a significant departure from the traditional representative agent hypothesis used to specifying household income distributions. Furthermore, as the general equilibrium framework permits endogenised prices, an attempt was made to endogenise the change in money metric poverty line within the CGE model. Finally, a set of simulation experiments was conducted to identify the impacts of trade liberalisation in manufacturing and agricultural industries on absolute and relative poverty at household level. The results show that, in the short run, trade liberalisation of manufacturing industries increases economic growth and reduces absolute poverty in low-income household groups. However, it is observed that the potential benefits accruing to the rural low-income group are relatively low compared to other two low-income groups. Reduction in the flow of government transfers to households following the loss of tariff revenue may be blamed for this trend. In contrast, long run results indicate that trade liberalisation reduces absolute poverty in substantial proportion in all groups. It further reveals that, in the long run, liberalisation of the manufacturing industries is more pro poor than that of the agricultural industries. Overall simulation results suggest that trade reforms may widen the income gap between the rich and the poor, thus promoting relative poverty. This may warrant active interventions with respect to poverty alleviation activities following trade policy reforms.