Returns to Factors of Production and Total Factor Productivity in Coconut Plantations in Sri Lanka

The objective of this study was to identify the sources of productivity growth of the Sri Lankan coconut sector by decomposing the measured growth in total factor productivity into technological change and returns to scale. Technical change is reflected through the shift in the cost function where returns to scale is represented by the cost/output elasticity. This was achieved by linking the productivity growth to key parameters of a specific cost function. The study used cost of production data over the period 1961-2016 and specified a stochastic generalized translog cost function. Parameters were estimated using Seemingly Unrelated Regression (SUR) method. Estimation of the share of factor inputs in the total cost revealed that coconut cultivation is characterized by high labour share (61-67 %) and low material share (24-27 %) followed by low capital share (9-12 %). According to the results, the total factor productivity (TFP) was found to have grown at 0.083% per annum. Decomposing TFP, we found that technological change and scale of economies contributed to 78% and 22% of the TFP growth, respectively. The contribution of technical progress was greater towards the end of the considered time period while diseconomies of scale was operating throughout the period. Based on this, we recommend that the focus of the coconut sector development should be on technological interventions rather than the consolidation of coconut land.