Journal of Social and Development Sciences (ISSN 2221-1152) Vol. 10, No. 4, pp. 1-11, December 2019 1 An Estimation of Technical Efficiency of Tea Smallholdings in Ratnapura District of Sri Lanka Sandunika Jayakody, Sajitha Dishanka Department of Business Economics, University of Colombo, Sri Lanka sandunikahansani1991@gmail.com, sajitha@dbe.cmb.ac.lk Abstract: While accepting the fact that the tea smallholdings sector of Sri Lanka immensely contribute to the annual tea output of the economy, the sector still faces various deficiencies due to problems pertaining to input related issues. Measuring the level of efficiency and identifying the factors which are attributed to inefficiency are in utmost importance in introducing remedies for that. A cross sectional survey was conducted on a sample of tea smallholders in Ratnapura district where highest contribution to the total tea production of the country is made. In this study, the Cobb-Douglas Stochastic production frontier model was used by incorporating the technical inefficiency effect model to estimate the level of technical efficiency in tea smallholdings sector. The study revealed that average technical efficiency of tea smallholdings sector in the study area was 87.36 percent that keeps a margin of 12.64 percent for further improvements through better use of available resources and technology. The results of the Cobb-Douglas model revealed that the estimated coefficients of land, labor and fertilizer are positively and significantly affect the green leaves production of the sector. The findings of the inefficiency model disclosed that age, farming experience, level of education, occupation, age of tea plants, farming group membership and credit access have significant negative impact on technical inefficiency. Keywords: Ratnapura district, Sri Lanka, Stochastic Frontier Approach, Tea smallholdings, Technical efficiency. 1. Introduction Tea is one of the most prominent plantation crops in Sri Lankan agricultural sector, contributing heavily to the development of Sri Lankan economy through generating foreign exchange and creating employment opportunities. Sri Lanka is well-known for its high quality black tea and is one of the largest tea producers and exporters in the world. At present, Sri Lanka has become fourth largest tea producer and third largest tea exporter in the world. It accounts for approximately 2 percent of the gross domestic product (GDP) and, generating annually US$ 1,325 million foreign exchange to the economy (Central Bank, 2013). Currently, tea sector provides direct and indirect employment to more than one million people in the country. As a result, it has become the main income source of large number of estates and rural farmers in Sri Lanka. The total tea lands in the country recorded as 204,024 hectares, of which smallholdings sector holds 59 percent and 41 percent by the plantation sector (Ministry of Plantation Industries, 2013). Currently, tea smallholdings sector takes a larger portion of the whole tea industry as it contributes 71.4 percent to the total made tea production of the country (TSHDA, 2012). Tea cultivation is scattered in many parts of the low-country, mid-country and up-country wet zones in Sri Lanka. Among these wet zones, low-country is the largest tea cultivating region with a contribution of 61 percent to the total tea production of the country (Ministry of Plantation Industries, 2013). It accounts for 89,176 hectares of cultivated tea lands in Ratnapura, Galle, Matara, Kegalle and Kalutara districts in Sri Lanka. There are 314,021 tea smallholders scattered in low-country who grow tea in their small blocks of land. They contribute 82 percent to the total smallholders’ tea production of the country (TSHDA, 2012). In low-country, the largest smallholders’ tea cultivating region is Ratnapura district and it takes a larger portion of the country’s total smallholders’ tea production. Tea industry has expanded their production by increasing the performance of the tea smallholdings sector during the last two decades. As a result of that Sri Lankan total tea production predominantly depends on the production possibility of tea smallholdings sector, especially in low-country. Although, tea smallholdings sector performs better than the tea plantation sector, this sector has been fronting several problems which are both technical and behavioral. Some of these are low productivity, increasing cost of production, falling export prices, irrational use of fertilizers, ineffective tea varieties used in cultivation and unexpected adverse climatic changes (TSHDA, 2012). These factors have kept Sri Lanka at a relatively lower level of tea production when compared with the other leading tea producing countries such as China, India and Kenya. Thus, it is primarily required either changing existing technology or increasing the quantity of inputs that uses for the green leaves production in order to increase the production capacity of the