Abstract
This paper aims to illustrate the important fiscal aspects of an agricultural price stabilization fund by examining the operations and experience of the CSSPPA in Côte d’Ivoire. After considering some of the issues that determine whether a price stabilization fund should be in the private or public sector and investigating the fund’s resource mobilization role through explicit and implicit export taxation, the paper discusses issues related to the adequate insulation of producer prices from changing world market prices, and provides a macroeconomic perspective of the fund’s role in the transmission of export stimuli to the domestic economy.
I. Introduction
The instability of world market prices of primary commodities is a well-known phenomenon. Keynes called it “one of the greatest evils in international trade.” 1/ Efforts to minimize price fluctuations of primary commodities have been made both internationally and domestically. In the context of international commodity agreements, buffer stock operations with international supply management have been set up for several primary commodities with the objective of moderating price fluctuations in the world market. 2/ On the domestic side, widespread attempts have been made through marketing boards and stabilization funds to insulate domestic producer prices from fluctuations in world market prices.
In Côte d’Ivoire, the world’s leading cocoa exporter and the fourth largest coffee exporter, 3/ a stabilization fund (CSSPPA) was created in 1955 with primary responsibility for stabilizing producer prices for cocoa; in 1964, it also took on the responsibility of stabilizing producer prices for coffee. 4/ Until 1986, the fund has consistently generated surpluses on its stabilization operations. The bulk of these surpluses has been transferred to various government entities to finance their outlays, or has been spent by the CSSPPA on the Government’s behalf, rather than used to build up the fund’s reserves. The CSSPPA has thus played an important role in Côte d’Ivoire’s public finances.
This paper aims to illustrate the important fiscal aspects of a price stabilization fund by examining the operations and experience of the CSSPPA in Côte d’Ivoire. Section II provides a background discussion on the operations of the CSSPPA in Côte d’Ivoire. Section III examines some of the issues that determine whether a price stabilization fund should be in the private or public sector. Should a price stabilization fund primarily serve the producers’ interests by dampening the impact of fluctuating world market prices on domestic producer prices? Or, should it also act as a fiscal agent, raising revenue to fund other government objectives? The risks of relying on surpluses on stabilization operations in the design of fiscal adjustment programs are also pointed out. Section IV examines the resource mobilization role of the CSSPPA through explicit and implicit export taxation. Because the bulk of the CSSPPA’s stabilization surpluses in recent years has been spent rather than used to accumulate reserves for future price support, Section V discusses expenditure issues with particular reference to distributional effects. In recent years, producer prices have generally been held stable while world market prices for cocoa and coffee have fluctuated widely. Issues related to the adequate insulation of producer prices from changing world market conditions are discussed in Section VI, which also includes an appraisal of the CSSPPA’s success in reducing the variability of producers’ income in recent years. Section VII provides a macroeconomic perspective of the CSSPPA’s role in the transmission of external stimuli arising from fluctuations in coffee and cocoa export prices and quantities to the domestic economy. Section VIII summarizes the paper’s conclusions.
II. The Stabilization Operations of the CSSPPA
1. Institutional arrangements
Unlike the marketing boards that prevail in Anglophone countries, the CSSPPA is only indirectly involved in the marketing and export of cocoa and coffee: it does not, at any stage of the marketing and export processes, have possession of cocoa or coffee. 5/ The export commodities remain in the hands of private exporters, who purchase the goods from the farmers and arrange transportation, storage, and exports on their own account. The CSSPPA, however, proposes a producer price and the Government fixes it by decree and agrees with the exporters on an export and marketing schedule (barème), which includes export duties and a profit margin for exporters. This schedule defines export f.o.b. cost and export c.i.f. cost, for each place of delivery. In addition, the CSSPPA is involved in seeking and establishing export sales; the terms of all export sale contracts are subject to the CSSPPA’s prior approval. However, whatever the terms of the sales contracts, the c.i.f. cost is guaranteed to the exporter. Any excess of the sales price over the c.i.f. cost accrues to the CSSPPA. If, on the other hand, the export price is lower than the c.i.f. cost, the CSSPPA makes up the difference. In recent years, export prices for cocoa and coffee have tended to be well above the c.i.f. cost, resulting in substantial stabilization margins for the CSSPPA. During 1975-85, for instance, the CSSPPA’s surplus from stabilization operations on coffee and cocoa averaged 7 percent of gross domestic product (GDP) (see Table 1). 6/
Côte d’Ivoire: Stabilization Operations of CSSPPA, 1975-85
(In percent of GDP)
Côte d’Ivoire: Stabilization Operations of CSSPPA, 1975-85
(In percent of GDP)
| 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Deficit (-)/surplus on stabilization operations | 2.8 | 4.8 | 15.5 | 10.0 | 7.9 | 3.9 | 1.3 | 2.7 | 3.7 | 9.0 | 9.7 | |
| Coffee and cocoa | 2.5 | 5.0 | 15.4 | 10.4 | 7.9 | 3.8 | 1.4 | 2.7 | 3.8 | 9.2 | 9.8 | |
| Other | 0.2 | -0.2 | 0.1 | -0.3 | -0.1 | — | -0.1 | — | -0.1 | -0.2 | -0.2 | |
Côte d’Ivoire: Stabilization Operations of CSSPPA, 1975-85
(In percent of GDP)
| 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Deficit (-)/surplus on stabilization operations | 2.8 | 4.8 | 15.5 | 10.0 | 7.9 | 3.9 | 1.3 | 2.7 | 3.7 | 9.0 | 9.7 | |
| Coffee and cocoa | 2.5 | 5.0 | 15.4 | 10.4 | 7.9 | 3.8 | 1.4 | 2.7 | 3.8 | 9.2 | 9.8 | |
| Other | 0.2 | -0.2 | 0.1 | -0.3 | -0.1 | — | -0.1 | — | -0.1 | -0.2 | -0.2 | |
In addition to coffee and cocoa, the CSSPPA stabilizes producer prices for cotton and sugar as well as for one food crop—rice. 7/ Up to 1984, the CSSPPA also stabilized producer prices for palm oil products. Because the stabilization operations on cotton, sugar, rice, and palm oil products have tended to be of minor importance in recent years, with the combined deficit from stabilization operations on these products not exceeding 1 percent of GDP, this discussion will focus on the CSSPPA’s role in the coffee and cocoa sectors. 8/
2. Distribution of export receipts
This section briefly reviews the distribution of export receipts from cocoa and coffee among all parties, including the CSSPPA and the Government, involved in the production and marketing processes for the period 1975-85. Export prices (f.o.b.) per kilo tended to increase over the period, from CFAF 242 to CFAF 1,154 for coffee, and from CFAF 280 to CFAF 950 for cocoa (see Chart 1). The average price over the period was CFAF 660 per kilo for coffee and CFAF 600 per kilo for cocoa. At the same time, producer prices per kilo increased from CFAF 150 to CFAF 380 for coffee and from CFAF 175 to CFAF 375 for cocoa. Consequently, less than 50 percent of total export receipts accrued to the farmers.
Distribution Of Export Receipts From Coffee And Cocoa, 1975–85
(In CFA francs per kilo)
Citation: IMF Working Papers 1988, 026; 10.5089/9781451981674.001.A001
The Government collects an export tax that is currently levied at a rate of 25.2 percent, based on administrative export value. The export tax share increased considerably during 1975-85 from CFAF 32 (coffee) and CFAF 44 (cacao) per kilo to CFAF 81 per kilo. As a percentage of export prices, the export tax fluctuated around 10 percent. Marketing costs, which include transportation, collection and storage costs, and the exporters’ profit, roughly tripled over the period: on average, they accounted for less than 10 percent of export prices. Notwithstanding the strong growth in all cost components and the fluctuation in coffee and cocoa export prices, the CSSPPA continuously recorded positive stabilization margins during 1975-85; they were particularly high in 1977-79 and 1984-85. In 1986-87, however, the picture has changed dramatically. As a consequence of the sharp decline in coffee and cocoa export prices, the stabilization margins narrowed considerably in 1986, and became negative in 1987.
III. The Stabilization Fund and the Public Sector
1. CSSPPA and privatization
The relationship between a stabilization fund and the government and the extent to which the government should interfere in the fund’s operations are important institutional issues. Should such a fund be conceived as a private producers’ organization, whose main objective is to serve the interests of its members, or should the fund assume a broader role and also act as a fiscal agent for the government, raising revenue to finance other government objectives? 9/ Many would argue for the former, defining the role of a price stabilization fund rather narrowly, limiting its activities to dampening the impact of variations in world market prices on domestic producer prices by accumulating reserves in good export years when world market prices are high, and drawing down these reserves in bad export years to cover any gap between producer prices (including marketing costs) and world market prices. They would also argue for a prominent role for producers’ representatives in the ownership, management, and control of a stabilization fund. Clearly, a stabilization fund restricted to stabilizing producer prices would be an integral part of the private sector.
In Côte d’Ivoire, as well as in many other developing countries, the concept of price stabilization is seen in a broader context. The CSSPPA not only plays an important role in the marketing of export commodities, but, as a government-established monopoly, it is also charged with mobilizing resources from the export sector for the purpose of other objectives of the Government. 10/ The CSSPPA’s mandate as a fiscal agent is evident not only in the CSSPPA’s legislation, which stipulates that 40 percent of the stabilization surplus of each season should go to finance development projects, but also in the actual allocation of the stabilization surpluses. In recent years, the bulk of the surplus has either been transferred to the Treasury or other public sector agencies, or has been spent by the CSSPPA on behalf of the Government. 11/
This broader use of price stabilization funds has been questioned in the context of a growing interest in privatization. 12/ Shifting the ownership, control, and management of the CSSPPA from the Government to the private producers would, most importantly, separate the domestic price stabilization of coffee and cocoa exports from their implicit taxation. Producers would determine how and to what extent to stabilize domestic prices and the Government would be deprived of its access to the surpluses on stabilization operations (as well as of the power to influence their level). However, privatization of the CSSPPA does not necessarily imply an increased share for producers and a decreased share for the Government in the country’s export receipts from coffee and cocoa. The Government could easily make up for the loss in revenue from stabilization operations by imposing higher export taxes.
2. Surpluses on stabilization operations and durable fiscal adjustment
Reflecting its important fiscal role, the CSSPPA has been a key element in the design of Côte d’Ivoire’s fiscal adjustment programs in recent years. However, because stabilization surpluses are inherently unstable and temporary, the consolidation of the CSSPPA’s stabilization operations with those of the rest of the public sector has tended to mask somewhat the degree of permanent adjustment achieved in the public sector. 13/ Table 2 provides information on developments in the overall balance of the total public sector, the surplus on stabilization operations of the CSSPPA, and the overall balance of the total public sector excluding stabilization operations of the CSSPPA, all as a ratio of GDP.
Côte d’Ivoire: Surplus on Stabilization Operations of the CSSPPA and Public Sector Overall Balance, 1982–85
(In terms of GDP)
Cocoa and coffee only.
Côte d’Ivoire: Surplus on Stabilization Operations of the CSSPPA and Public Sector Overall Balance, 1982–85
(In terms of GDP)
| 1982 | 1983 | 1984 | 1985 | ||
|---|---|---|---|---|---|
| A. | Overall public sector deficit (-)/surplus | -16.1 | -11.7 | -1.7 | 2.0 |
| B. | Surplus on stabilization operations 1/ | 2.7 | 3.8 | 9.2 | 9.8 |
| C. | Overall public sector deficit (-) excluding stabilization operations | -18.8 | -15.6 | -10.9 | -7.8 |
Cocoa and coffee only.
Côte d’Ivoire: Surplus on Stabilization Operations of the CSSPPA and Public Sector Overall Balance, 1982–85
(In terms of GDP)
| 1982 | 1983 | 1984 | 1985 | ||
|---|---|---|---|---|---|
| A. | Overall public sector deficit (-)/surplus | -16.1 | -11.7 | -1.7 | 2.0 |
| B. | Surplus on stabilization operations 1/ | 2.7 | 3.8 | 9.2 | 9.8 |
| C. | Overall public sector deficit (-) excluding stabilization operations | -18.8 | -15.6 | -10.9 | -7.8 |
Cocoa and coffee only.
In 1982-85, during which Côte d’Ivoire undertook several Fund-supported adjustment programs, developments in the overall balance of the public sector indicate that the degree of fiscal adjustment was substantial. The financial position of the public sector shifted from a deficit equivalent to 16 percent of GDP in 1982 to a surplus of 2 percent of GDP in 1985. However, adjusting the overall public sector balance for the surplus on the stabilization operations of the CSSPPA suggests that the durable improvement in the public finances was less significant. In 1985, the fiscal accounts, excluding stabilization operations, registered a deficit amounting to 8 percent of GDP, down from a deficit of 19 percent of GDP in 1981. To a large extent, the surplus position of the public sector in 1985 was due to the CSSPPA’s sizable stabilization margins, which do not represent a durable improvement and can disappear quickly, as recent developments have shown. 14/ Out of a total improvement in the public finances of 11 percentage points of GDP during 1982-85, more than half was accounted for by a temporary increase in the surplus on stabilization operations.
In general, if a stabilization fund’s sole function is to insulate domestic producer prices from fluctuations in world market prices, it should have no role in the design of a fiscal stabilization program. However, it is very tempting for policymakers to use the surpluses of a stabilization fund for fiscal adjustment efforts. This tends to divert attention away from the need for durable fiscal adjustment measures.
IV. Implicit and Explicit Export Taxation
1. Implicit versus explicit export taxation
Surpluses on stabilization operations do not constitute an implicit taxation on farmers. Insofar as surpluses are used to build up reserves, they can be considered as forced savings of the farmers to build up reserves against periods of lower prices. However, surpluses on stabilization operations come very close to imposing an export tax on farmers when they are transferred to the Treasury or other public sector agencies, or used to fund investment or other government activities. 15/ Thus, in Côte d’Ivoire, the combined total of the CSSPPA’s transfers and investment expenditure on behalf of the Government represents a good proxy for the implicit export taxation of coffee and cocoa. This definition excludes all outlays that result in an increase of the CSSPPA’s financial and real assets, such as lending to other public sector agencies (including the purchase of government paper) as well as investment expenditure in which the CSSPPA acquires the ownership of the assets. Table 3 shows that the implicit taxation of coffee and cocoa has varied widely between 1975 and 1985, exceeding 11 percent of GDP in 1977-78, compared with 1 percent of GDP in 1981. 16/
Côte d’Ivoire: Implicit and Explicit Export Taxation of Cocoa and Coffee, 1975-85
(In terms of GDP)
Côte d’Ivoire: Implicit and Explicit Export Taxation of Cocoa and Coffee, 1975-85
(In terms of GDP)
| 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Implicit export tax revenue | 2.8 | 4.8 | 11.2 | 11.1 | 8.5 | 5.7 | 0.9 | 1.2 | 3.1 | 6.8 | 8.8 | |
| Explicit export tax revenue | 2.8 | 3.1 | 3.1 | 2.4 | 2.3 | 2.4 | 2.5 | 2.2 | 2.0 | 2.5 | 2.6 | |
| Total export tax revenue | 5.5 | 8.0 | 14.2 | 13.5 | 10.8 | 8.1 | 3.5 | 3.4 | 5.1 | 9.3 | 11.4 | |
| Other explicit tax revenue | 18.3 | 19.3 | 18.5 | 19.6 | 19.3 | 19.4 | 20.5 | 20.4 | 20.1 | 19.0 | 17.8 | |
| Total tax revenue | 23.8 | 27.3 | 32.7 | 33.1 | 30.0 | 27.4 | 24.0 | 23.8 | 25.2 | 28.3 | 29.2 | |
Côte d’Ivoire: Implicit and Explicit Export Taxation of Cocoa and Coffee, 1975-85
(In terms of GDP)
| 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Implicit export tax revenue | 2.8 | 4.8 | 11.2 | 11.1 | 8.5 | 5.7 | 0.9 | 1.2 | 3.1 | 6.8 | 8.8 | |
| Explicit export tax revenue | 2.8 | 3.1 | 3.1 | 2.4 | 2.3 | 2.4 | 2.5 | 2.2 | 2.0 | 2.5 | 2.6 | |
| Total export tax revenue | 5.5 | 8.0 | 14.2 | 13.5 | 10.8 | 8.1 | 3.5 | 3.4 | 5.1 | 9.3 | 11.4 | |
| Other explicit tax revenue | 18.3 | 19.3 | 18.5 | 19.6 | 19.3 | 19.4 | 20.5 | 20.4 | 20.1 | 19.0 | 17.8 | |
| Total tax revenue | 23.8 | 27.3 | 32.7 | 33.1 | 30.0 | 27.4 | 24.0 | 23.8 | 25.2 | 28.3 | 29.2 | |
There is also an explicit export tax on coffee and cocoa. The explicit export duty is not based on actual export prices, but on fixed administrative values. As a result, revenue from the export duty varies only with the volume of exports and the duty assumes the character of a specific tax (the current rate being 25.2 percent). Thus, revenue from the explicit export duty has been rather stable in terms of GDP in recent years, varying between 2 and 3 percent.
Reflecting developments in the rate of implicit export taxation of cocoa and coffee, total taxation of cocoa and coffee exports was an important element in total tax revenue in 1977-79 and 1984-85. While in 1981-82, for instance, implicit and explicit tax revenue from cocoa and coffee accounted for less than 10 percent of total tax revenue, its share jumped to 30-40 percent in 1984-85, reflecting the combined effect of large financing needs at the level of the Treasury and the Debt Service Agency, and favorable price trends in coffee and cocoa markets.
2. The rationale for export taxes
Taxation of exports discourages the production of goods for which the country has a comparative advantage. Thus, export taxation, implicit as well as explicit, is highly questionable. However, it has been argued that for a developing country like Côte d’Ivoire, export taxation of cocoa and coffee may be justified to some extent. This section briefly reviews the arguments. 17/
First, it has been argued that if a country exercises monopoly power in the world market of its export goods, it should impose an implicit or explicit export levy in order to extract monopoly profits. 18/ The optimal export duty rate equalizes the marginal revenue and marginal cost of exporting the product. Sanchez Ugarte and Modi have calculated the optimal export tax rate for several countries and products. They found that, in Côte d’Ivoire, the optimal export duty rate in terms of maximizing export revenues (defined as the ratio of stabilization margin plus explicit export tax to export price) for cocoa was around 45 percent and for coffee around 15 percent. However, they pointed out that the estimates should be interpreted with extreme caution. For example, the international commodity arrangements for coffee and cocoa limit Côte d’Ivoire’s scope for expanding the level of its exports, at least in the short run.
Second, according to the ability-to-pay principle, taxes should be distributed in relation to people’s income. In Côte d’Ivoire, agriculture accounts for about one third of GDP, but largely escapes income taxation. Thus, export taxation of cocoa and coffee (both implicit and explicit) may be justified in that it serves as an indirect means to tax the income of coffee and cocoa producers. In any case, although equity in taxation is always a relative matter, export taxation of cocoa and coffee can be only a very crude substitute for income taxation of agricultural producers, in particular, because it takes into account farmers only as a group, not individually. For the individual farmer, the export tax amounts to a proportional tax on income and disregards family status considerations.
Third, according to the other basic principle underlying any rationally designed tax system—the benefits principle—taxes should be distributed in relation to the benefits they receive from the goods and services provided by the government. Thus, insofar as activities financed by the CSSPPA have benefited the agricultural sector, taxation of cocoa and coffee exports may be warranted. (The nature of activities funded by the CSSPPA is discussed in the following section.)
Fourth, when export revenues are extremely high owing, for example, to temporary exchange rate fluctuations, export duties could represent a reasonable windfall gain tax.
V. Expenditure Issues
This section discusses a number of issues related to the expenditures financed by stabilization surpluses. First, the legislation of the CSSPPA stipulates that 60 percent of its surpluses are to be paid into reserves, 15 percent to finance economic projects, 15 percent to finance social projects, and 10 percent to be allocated to the National Agricultural Development Bank. Table 4 suggests that, in 1977-85, the actual allocation was quite different, with expenditures including transfers substantially exceeding the limits foreseen in the law.
Côte d’Ivoire: Investment Expenditures, Transfers, and Changes in Reserves of the CSSPPA, 1977-85
(In percent of GDP)
Refers to stabilization operations on coffee, cocoa, cotton, rice, and sugar.
Côte d’Ivoire: Investment Expenditures, Transfers, and Changes in Reserves of the CSSPPA, 1977-85
(In percent of GDP)
| 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | |||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Stabilization surplus 1/ | 15.5 | 10.0 | 7.9 | 3.9 | 1.3 | 2.7 | 3.7 | 9.0 | 9.7 | ||
| Capital expenditures | 6.0 | 7.2 | 8.3 | 5.2 | 0.9 | 1.2 | 0.3 | 0.4 | 1.4 | ||
| Of which: | |||||||||||
| Agriculture | (1.0) | (1.9) | (2.6) | (2.2) | (0.2) | (0.3) | (0.3) | (0.1) | (0.5) | ||
| Transport | (1.3) | (1.7) | (1.0) | (0.9) | (—) | (—) | (—) | (—) | (0.1) | ||
| Transfers | 5.2 | 3.9 | 0.2 | 0.5 | — | — | 2.8 | 6.4 | 7.4 | ||
| Of which: CAA | (0.1) | (0.5) | (—) | (0.4) | (—) | (—) | (2.5) | (6.1) | (6.1) | ||
| Increase/decrease (-) in reserves | 4.2 | -1.6 | -1.4 | -2.1 | 0.2 | 1.4 | 0.6 | 2.0 | 0.9 | ||
Refers to stabilization operations on coffee, cocoa, cotton, rice, and sugar.
Côte d’Ivoire: Investment Expenditures, Transfers, and Changes in Reserves of the CSSPPA, 1977-85
(In percent of GDP)
| 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | |||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Stabilization surplus 1/ | 15.5 | 10.0 | 7.9 | 3.9 | 1.3 | 2.7 | 3.7 | 9.0 | 9.7 | ||
| Capital expenditures | 6.0 | 7.2 | 8.3 | 5.2 | 0.9 | 1.2 | 0.3 | 0.4 | 1.4 | ||
| Of which: | |||||||||||
| Agriculture | (1.0) | (1.9) | (2.6) | (2.2) | (0.2) | (0.3) | (0.3) | (0.1) | (0.5) | ||
| Transport | (1.3) | (1.7) | (1.0) | (0.9) | (—) | (—) | (—) | (—) | (0.1) | ||
| Transfers | 5.2 | 3.9 | 0.2 | 0.5 | — | — | 2.8 | 6.4 | 7.4 | ||
| Of which: CAA | (0.1) | (0.5) | (—) | (0.4) | (—) | (—) | (2.5) | (6.1) | (6.1) | ||
| Increase/decrease (-) in reserves | 4.2 | -1.6 | -1.4 | -2.1 | 0.2 | 1.4 | 0.6 | 2.0 | 0.9 | ||
Refers to stabilization operations on coffee, cocoa, cotton, rice, and sugar.
Second, stabilization fund outlays are typically spent outside the budgetary framework of the government. It has been argued that this procedure tends to favor ill-conceived and politically motivated projects, and that the quality of stabilization fund projects is often poor. In Côte d’Ivoire, the government investment budget has three components, the (domestically financed) budget of the Treasury, the (externally financed) budget of the Caisse Autonome d’Amortissement (CAA), and, since 1977, the investment budget financed by the CSSPPA. All capital expenditures of the CSSPPA are included in the CSSPPA investment budget; however, they are typically only retroactively “regularized” and not budgeted ex ante. Thus, although the creation of the CSSPPA investment budget has improved the recording of the use of stabilization surpluses, capital expenditure financed by the CSSPPA basically takes place outside the budgetary framework of the Government of the Côte d’Ivoire.
Third, in 1983-85 the CSSPPA transferred sizable amounts to the CAA. It has been argued that the CSSPPA’s large surpluses mainly reflect the temporary depreciation of the CFA franc versus the U.S. dollar over this period and, only to a lesser extent, changes in supply conditions or in the level of demand in the world market. At the same time, however, the country’s external debt service was inflated because of the U.S. dollar appreciation. Thus, the transfers from the CSSPPA to the CAA represented, in effect, a redistribution of windfall gains from those who benefited from the temporary weakening of the local currency to those who suffered from it. 19/
Fourth, another distributional effect is related to the fact that expenditures undertaken by price stabilization funds tend to have an urban bias. This is certainly the case in Côte d’Ivoire; for example, the development of the government office blocks in Abidjan in the late 1970s was largely financed by CSSPPA transfers. As for the extent to which the agricultural rural sector benefited from expenditures financed by CSSPPA, the 1987 investment budget document contains a functional breakdown of the CSSPPA’s investment expenditures during 1977-85. According to this classification, roughly one third of capital expenditures (excluding transfers) went to the agricultural sector. Thus, expenditures financed by CSSPPA surpluses benefited the farmers in the rural areas only to a rather limited extent. At the same time, the surpluses were generated from a tax on the farmers, resulting in a substantial redistribution of income from the rural to the urban sector.
Furthermore, in Côte d’Ivoire, like in the rest of sub-Saharan Africa, the poor are overwhelmingly concentrated in the rural areas. According to Glewwe (1987), almost 90 percent of the poorest 30 percent of the population live in rural areas. More than 50 percent of them produce at least one of the country’s three main tree crops: coffee, cocoa, and palm oil. This implies that a sizable proportion of the resources that finance CSSPPA’s expenditures has been generated by taxing the poorest fraction of Côte d’Ivoire’s population.
VI. Producer Prices and World Market Prices
1. Producer price stabilization
A producer price policy that attempts to sever the link between producer prices and the fluctuation in world market prices raises at least two issues: the average level at which producer prices should be stabilized relative to world market prices, and the extent to which variability in producer prices should be limited. The level of the producer price should be related to the average spread between domestic production costs and world market prices. This spread will ultimately reflect the Government’s decision on the amount of implicit export taxation, as discussed in Section IV. The second issue concerns the speed at which price signals from the cocoa and coffee world market, indicating transitory or permanent changes in international supply conditions or in the level of demand for these commodities, should be transmitted to the local producer.
Côte d’Ivoire has no official formula for determining producer prices. The CSSPPA proposes a producer price (based on its forecast of world market prices, the level of its own reserves, and producer costs), which the Government fixes by decree. Since 1975, there have been five changes in the producer prices for coffee and cocoa; all changes have been upward adjustments. Producer prices tend to be increased in good years and kept unchanged in bad years. This ratchet effect has resulted in a clear upward trend in producer prices in recent years, with producer prices in 1987 (CFAF 400 per kilo) being more than double the levels prevailing ten years ago (coffee, CFAF 150 per kilo; cocoa, CFAF 175 per kilo). 20/
One way of strengthening the link between world market conditions and domestic prices is to base producer prices on a moving average formula for world market prices. This would introduce elements of automaticity and transparence in the process of determining producer prices and would ensure that producer prices are adjusted both upward and downward. The shorter the period used for calculating the average prices, the more responsive to external developments would be the internal price. In the extreme case, the CSSPPA would refrain from any interseasonal price stabilization and would stabilize prices only within a given season.
Intraseasonal price stabilization could be well combined with a profit-sharing scheme (as in Ghana and Kenya, for instance), whereby the stabilization fund sets a producer price based on a cautious forecast for world market prices at the beginning of the season and then pays out bonuses at the end of the season if world market prices have been higher than the original forecast.
2. Variability of producer prices
Price stabilization schemes insulate farmers from only one element that destabilizes their current income—fluctuating export prices. Farmers, however, are not so much concerned with price variability as with income variability. 21/ Price stabilization schemes enhance the welfare of farmers only if they are successful in reducing the variability of producers’ current income. If administrative costs and other expenditures (including implicit and explicit export tax payments) are taken into account, producers are better off only if the associated net loss in welfare does not exceed the welfare gains from reduced income variability. Has the CSSPPA succeeded in smoothing out the path of producers’ current income? Table 5 provides some answers for 1975-86, by comparing export stimulus, CSSPPA impulse, and the resulting change in private income.
Côte d’Ivoire: Export Stimulus and Internal Adjustment, 1975-86
(In terms of GDP)
Cocoa and coffee only.
Côte d’Ivoire: Export Stimulus and Internal Adjustment, 1975-86
(In terms of GDP)
| 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Coffee and cocoa exports | 15.0 | 20.2 | 21.4 | 18.8 | 16.0 | 14.8 | 15.2 | 14.7 | 14.8 | 23.4 | 25.2 | 21.8 |
| Export stimulus | … | 5.2 | 1.2 | -2.6 | -2.9 | -1.2 | 0.5 | -0.6 | 0.1 | 8.6 | 1.8 | -3.4 |
| Surplus on stabilization operations 1/ | 2.5 | 5.0 | 15.4 | 10.4 | 7.9 | 3.8 | 1.4 | 2.7 | 3.8 | 9.2 | 9.8 | 4.8 |
| CSSPPA impulse | … | -2.5 | -10.4 | 5.0 | 2.5 | 4.1 | 2.4 | -1.3 | -1.2 | -5.4 | -0.6 | 5.0 |
| Private sector income change | … | 2.7 | -9.1 | 2.4 | -0.4 | 2.9 | 2.9 | -1.8 | -1.1 | 3.3 | 1.2 | 1.6 |
Cocoa and coffee only.
Côte d’Ivoire: Export Stimulus and Internal Adjustment, 1975-86
(In terms of GDP)
| 1975 | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Coffee and cocoa exports | 15.0 | 20.2 | 21.4 | 18.8 | 16.0 | 14.8 | 15.2 | 14.7 | 14.8 | 23.4 | 25.2 | 21.8 |
| Export stimulus | … | 5.2 | 1.2 | -2.6 | -2.9 | -1.2 | 0.5 | -0.6 | 0.1 | 8.6 | 1.8 | -3.4 |
| Surplus on stabilization operations 1/ | 2.5 | 5.0 | 15.4 | 10.4 | 7.9 | 3.8 | 1.4 | 2.7 | 3.8 | 9.2 | 9.8 | 4.8 |
| CSSPPA impulse | … | -2.5 | -10.4 | 5.0 | 2.5 | 4.1 | 2.4 | -1.3 | -1.2 | -5.4 | -0.6 | 5.0 |
| Private sector income change | … | 2.7 | -9.1 | 2.4 | -0.4 | 2.9 | 2.9 | -1.8 | -1.1 | 3.3 | 1.2 | 1.6 |
Cocoa and coffee only.
The export stimulus is a measure of the variability of total export receipts (from coffee and cocoa) and is calculated as the difference in coffee and cocoa export receipts in terms of GDP between the current and the preceding year. It indicates the change in the level of total export receipts accruing to the CSSPPA and the private sector. A negative sign implies a contractionary stimulus. Similarly, the CSSPPA impulse is calculated as the difference in its surplus on stabilization operations in terms of GDP between the current and the preceding year. A negative sign indicates a contractionary impulse, implying that the share of export receipts accruing to the CSSPPA goes up and the share for the private sector goes down. The change in private sector income is a residual. It is calculated as the total of the export stimulus and the CSSPPA impulse. In 1982, for instance, total export receipts dropped by the equivalent of 0.6 percentage points of GDP. At the same time, the CSSPPA’s share in export receipts went up by 1.3 percent of GDP. As a consequence, private sector income in the coffee and cocoa sectors dropped by 1.8 percent of GDP. Thus, the CSSPPA’s price stabilization operations resulted in a decline of farmers’ and exporters’ income, which was larger than that of total export receipts.
In the whole period 1975-86, there were only four years—1976, 1979, 1984, and 1985—when the CSSPPA’s intervention stabilized income in the cocoa and coffee export sectors. In all other years, the fluctuations of total export receipts were less pronounced than the income of the farmers and exporters. Although the CSSPPA achieved some measure of success in stabilizing producer prices, it was not equally successful in stabilizing private income. In a number of years, price stabilization has led to increased income variability.
This result is not surprising, given that the CSSPPA influences only one of the two components that determine the farmers’ revenues. Schemes that intend to stabilize farmers’ income link producer prices to production by introducing a negative covariance between domestic prices and production. 22/ In good crop years, producer prices would be set below average and, in bad crop years, above average.
VII. Export Stimulus and Internal Adjustment
Côte d’Ivoire’s export receipts from coffee and cocoa have fluctuated widely in recent years, between 14.7 percent of GDP in 1982 and 25.2 percent of GDP in 1985. By stabilizing producer prices, the CSSPPA is interfering with the transmission of export stimuli to the domestic economy. In the private sector, the source of the export stimulus—price fluctuations or changes in export quantities—has important ramifications for the adjustment process. As for the government budget, one should expect different fiscal responses depending on whether the change in export earnings is diagnosed as a transitory or a permanent shock.
The primary function of a price stabilization fund is to insulate the private sector from external price shocks. Consequently, if export prices decline, the whole burden of adjustment falls on the fund by reducing its stabilization margins, whereas the current income of producers and exporters is not affected. The drop in export earnings is fully offset by a variation in the CSSPPA’s operating balance. If the implications for government finances are disregarded, domestic demand will be maintained despite the decline in export receipts; in other words, the external price shock is entirely absorbed by the stabilization fund.
As for export shocks resulting from good and bad crop years, in Côte d’Ivoire the burden of adjustment arising from a drop in export quantities is equally split between the CSSPPA and the farmers and exporters, since only the level of export proceeds is affected by the bad crop, not the distribution of export proceeds. The stabilization margin, the producer price, and the exporters’ profit margin do not change, only the quantity exported.
In sum, by stabilizing producer prices, the CSSPPA acts as only a partial buffer against external shocks. It shelters domestic demand only from external price shocks. Export stimuli resulting from changes in export quantities directly affect private sector income. In fact, the CSSPPA’s stabilization operations have tended to accentuate rather than dampen the export stimulus in recent years (see Section VI). In 1986, for instance, the crop was excellent, but export prices declined with the result that export receipts from cocoa and coffee in terms of GDP decreased by the equivalent of 3.4 percentage points. At the same time, reflecting the decline in export prices, the surplus of the CSSPPA fell by the equivalent of 4.8 percent of GDP. As a result, the income of the farmers and exporters in the coffee and cocoa sectors grew by 1.6 percent of GDP. Despite the deterioration in the external environment, private income in the coffee and cocoa export sectors expanded because the private sector was fully protected from the drop in world market prices and, at the same time, benefited from the excellent crop.
Turning to government finances, in Côte d’Ivoire a decline in the surplus on stabilization operations tends to adversely affect government revenue, necessitating a fiscal policy response. Côte d’Ivoire has been in this situation since 1985. CSSPPA transfers to the Treasury, the CAA, and other public sector agencies, as well as expenditures undertaken by the CSSPPA on behalf of the Government, declined from 8.8 percent of GDP in 1985 to 5.6 percent of GDP in 1986 and are projected to be zero in 1987. Such a close link between the export sector and the government budget is common in a developing country. In many developing countries, public finances depend heavily on foreign trade taxes. When foreign trade taxes decline, governments have two principal options in terms of fiscal policy response, depending upon their diagnosis of the external shock. If they consider the decline a temporary development that will not affect the permanent income of the country and the government, they could try to act as a buffer, maintaining the level of domestic spending at a level above the one suggested by current income. 23/ The alternative would be to adjust to the decline in export tax revenue by increasing other revenue or lowering expenditure; this appears to be a government’s only realistic option if the drop in export prices turns out to affect adversely the permanent income of the country and the government. 24/
VIII. Concluding Remarks
As in many other countries, Côte d’Ivoire’s agricultural price stabilization fund plays an important role in the public sector and in the economy. This paper has attempted to illustrate a number of the fiscal issues posed by a price stabilization fund through an examination of the operations of the CSSPPA. The main conclusions are summarized below.
First, the price stabilization fund in Côte d’Ivoire, like in many other developing countries, has allowed the Government to raise substantial amounts of revenue for development and other purposes. This broader use of price stabilization funds has been questioned in the context of a growing interest in privatization. Shifting the ownership, control, and management of the CSSPPA from the Government to the private producers would, most importantly, separate domestic price stabilization of cocoa and coffee from their implicit taxation. However, privatization of the fund does not necessarily imply a lower share for the Government in the country’s export receipts, because the Government can easily make up the loss in revenue from stabilization operations by imposing higher export taxes.
Second, implicit and explicit export taxation of coffee and cocoa averaged 8 percent of GDP in the period 1975-1985. While a number of arguments can be advanced for taxing agricultural exports in developing countries, there are good reasons to believe that cocoa and coffee exports in Côte d’Ivoire were overtaxed in these years. Among the reasons are that, like in the rest of sub-Saharan Africa, the poor are overwhelmingly found in the agricultural rural areas, and the expenditures financed by the CSSPPA’s stabilization surpluses have tended to benefit the urban sector rather than the agricultural rural sector.
Third, the adjustment programs undertaken by Côte d’Ivoire since the early 1980s have, to some extent, relied on surpluses of the CSSPPA to reduce the imbalances in the public sector. However, increasing surpluses of a price stabilization fund do not represent a durable improvement in a country’s public finances and can disappear quickly, as the recent developments in Côte d’Ivoire have clearly shown. In general, the reliance on surpluses of a stabilization fund for fiscal adjustment efforts tends to divert attention away from the need for durable adjustment measures.
Fourth, the rationale for stabilizing producer prices rests on the proposition that the stabilization scheme reduces the variability of producers’ current income and thus improves their welfare. However, the CSSPPA’s intervention insulates farmers from only one element that destabilizes their current income—export prices. In fact, by stabilizing producer prices the CSSPPA has had only little success in reducing the volatility of the farmers’ current income in recent years.
Fifth, from a macroeconomic point of view, by stabilizing producer prices, the CSSPPA shelters private demand only from external shocks that originate in price changes. Export stimuli resulting from changes in export quantities directly affect private sector income. As a consequence, the CSSPPA’s stabilization operations have tended to accentuate rather than dampen the export stimuli in recent years. In years with a good crop and low export prices, for instance, the private sector is fully protected from the negative price effect and, at the same time, benefits from the increase in the export quantity.
Sixth, in Côte d’Ivoire, as in many other developing countries, government finances depend heavily on the surpluses of the price stabilization fund. Facing a decline in the stabilization surplus that will adversely affect government revenue, policymakers have two options in terms of their fiscal policy response. If they consider the decline as a transitory development, the government could act as a buffer and pursue an expansionary fiscal policy stance. If the export revenue shortfall turns out to adversely affect the permanent income of the country and the government, there appears to be no realistic alternative to adjusting government revenue and expenditure to the lower permanent income.
Appendix
Producer Benefits from Price Stabilization
Following Newberry and Stiglitz, the producer gain achieved when variations in producer prices are eliminated can be derived by comparing the utility associated with a stabilized income and the incomes without stabilization. 25/ For a risk-averse farmer, the utility (U) is a concave function of his income (Y), as in Figure 1. Assume that, without price stabilization, the farmer’s income is
that is, halfway between the two utility levels. The equivalent income level of ØU is Ŷ
Producer Benefits From Price Stabilization
Citation: IMF Working Papers 1988, 026; 10.5089/9781451981674.001.A001
Alternatively, a stabilization fund could intervene and stabilize the fanner’s income in both years at
that is, halfway between the two income levels. The difference Ŷ -
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I am grateful to Messrs. Peter S. Heller, Abdellali Jbili, Henri R. Lorie, and Blair E. Rourke for helpful comments on earlier drafts. Any remaining errors are my responsibility. The views expressed in this paper should not be construed as reflecting those of the Fund.
See Goreux (1978) and International Monetary Fund (1984) for a review of such schemes.
It is the most important exporter of the robusta type, accounting for about 30 percent of world production.
The stabilization fund was initially called Caisse de Stabilization des prix du cacao; since 1964 its name has been Caisse de Stabilization et de soutien des productions agricoles.
See UNCTAD (1975) for a description of various types of marketing and distribution systems.
In 1987, however, the stabilization margin on cocoa is estimated to be negative, reflecting the sharp drop in cocoa prices from its peak level in 1985, while the costs did not change or continue to grow.
Rice is domestically produced as well as imported. Currently, the Government sets consumer prices above import costs and below local production costs. While the losses on domestically-produced rice are covered by the CSSPPA, the gains on imported rice benefit the Caisse de Perequation.
A useful summary of the operations of the CSSPPA is provided by Delaporte (1970).
See Helleiner (1964) for a review of the arguments for and against the fiscal role of marketing boards.
Furthermore, it has been argued that a price stabilization fund could also play an important role in other areas, such as the macro-management of the economy (for instance, by generating savings during export boom periods), promotion of rural development, and allocation in the agricultural sector (which crops are to be encouraged and which discouraged?), as well as income distribution.
See Section V for a discussion of the nature of public expenditure financed by stabilization surpluses.
See Hemming and Mansoor (1987) for a concise overview of the merits of privatization strategies.
See Tanzi (1987) on the issue of the durability of adjustment efforts.
In 1987, the CSSPPA is estimated to record a deficit on stabilization operations.
The literature typically defines the surplus on stabilization operations rather than the stabilization fund’s expenditures as implicit export taxation. See, for example, Goode, Lent, and Ojha (1966).
For 1987, implicit export taxation of coffee and cocoa is estimated to be zero.
See Tanzi (1976) for the role of export duties on coffee in Haiti; and Ojonkwo (1978).
See Davis (1980) for an analysis of the economic effects of the windfall gains in export earnings during 1975-78.
In real terms, producer prices increased by about 10 percent during the same period.
See Newberry and Stiglitz (1981) for a comprehensive microeconomic analysis of commodity price stabilization. See also the Appendix, a brief analysis of producer benefits from price stabilization, and Behrman (1987).
See Frazer (1984).
This implies that “budget deficits matter” and do not crowd out private spending. See, for instance, Schiller (1985).
See Tanzi (1986), Mansfield (1977), and Chu (1987a and 1987b).
See Chapter 6 of Newberry and Stiglitz (1981).
