Abstract
This Selected Issues paper and Statistical Annex examines the impact of cocoa taxation on cocoa supply in Ghana. The paper describes historical developments in cocoa production. The effects of the taxation of cocoa in Ghana are evaluated and a dynamic model of cocoa supply is estimated and used for simulations. The paper concludes that the most important factors adversely affecting the cocoa sector were government policies. Specifically, in the late 1960s and the 1970s, the effective cocoa duty rates were punitive and the cocoa sector was further hit by policies of overvalued exchange rate.
I. Impact of Cocoa Taxation on Cocoa Supply in Ghana 1/
A. Introduction
From the early 1960s to the mid-1980s, officially recorded production of cocoa beans in Ghana declined by 60 percent. Ghana’s share in world output diminished from more than one-third to about one-tenth. Although production has begun to recover recently, it is still well below peak levels. The paper suggests some possible causes of the decline in cocoa production and provides some supporting empirical evidence. It focuses particularly on causes that can be remedied through appropriate policy actions.
The contraction of the Ghanaian cocoa sector can be explained by several external adverse factors and by the effect of domestic taxes. First, real international cocoa prices receded from their peak levels in the late 1950s, relative prices of competing domestic crops increased, and the sector experienced several years of severe drought in the 1970s and 1980s. Second, the cocoa sector has been badly affected by an explicit tax on the international price and implicit taxes in the form of producer price and exchange rate distortions.
The paper is organized into three sections as follows: historical developments in cocoa production are reviewed; the effects of the taxation of cocoa in Ghana are evaluated; and a dynamic model of cocoa supply is estimated and used for simulations.
B. Cocoa Production in Ghana: A Review of Recent History
Cocoa has historically been the key economic sector in Ghana and a major source of export and fiscal revenue. However, from its peak in the early 1960s, recorded cocoa output declined from about 400,000-450,000 metric tons, or more than 35 percent of the world production, to barely 200,000 metric tons, or less than 10 percent of the world production, in the early 1980s (Chart I.1). 2/ After the launching of the Economic Recovery Program (ERP) in 1983, cocoa output subsequently stabilized at around 300,000 metric tons in the late 1980s and early 1990s. This paper argues that this increase can be fully attributed to a more favorable economic climate.
Ghana is a price-taker, and world cocoa price as well as supply conditions have a powerful impact on its cocoa sector. External developments can be characterized by a few stylized facts. Evidence suggests the existence of a 25-year cocoa international price cycle, with the most recent troughs occurring in the early to mid-1960s and the mid-1980s (Chart I.2). 1/ Given the low income and price elasticities of world cocoa demand, large stocks of cocoa and recurrent oversupply have caused the real international cocoa price to decline by almost 2 percent per annum since 1950. In addition, the global supply of cocoa beans is price inelastic in the short run--the time span between new plantings and their first crop is about three to five years and trees bear beans for about 30 years or more with minimal maintenance. In the long run, however, supply has been sensitive to higher-than-average international prices because of new plantings: in 1957-64 and 1976-84, following spells of cyclically high prices, world output rose at annual rates of 9 percent and 6 percent, respectively.
GHANA Cocoa Output Developments
Citation: IMF Staff Country Reports 1996, 069; 10.5089/9781451814736.002.A001
Source: Cocoa Marketing Board (COCOBOD); staff estimates.1/ Official sales to COCOBOD; crop years, thousands of metric tons. Raw data and Hodrick-Prescott filter.2/ In percent; crop years.3/ In percent of total government revenue; fiscal years. Data for 1950-56 and 1958-60 are not available.Although cyclical price developments contributed to the initial contraction of the Ghanaian cocoa sector in the late 1960s and early 1970s, the macroeconomic policies pursued at the time further aggravated the situation. As has been well documented in earlier studies, price and fiscal policies aimed at import substitution shifted the balance of incentives in the economy toward industry and nontradable goods and away from exportable goods. 2/ Among agricultural producers, cocoa farmers were hardest hit: while between 1963 and 1980 the nominal producer price of cocoa rose 21 times, the respective price of maize and rice rose 49 and 60 times. 3/ The resulting price squeeze was further exacerbated by cost inefficiencies in the operations of the Cocoa Marketing Board (COCOBOD), which ultimately had to be borne by the farmers (Table I.1). 4/ These unfavorable developments resulted in the virtual cessation of new plantings in the late 1960s and 1970s, and the aging of cocoa trees.
Some studies, however, have suggested that the decline in production was smaller, at least in some regions, because of smuggling. Official C0C0B0D estimates of smuggling are in the range of 5-10 percent of the officially recorded crop, but in the late 1970s and early 1980s the amount smuggled may have been close to 50 percent in some of the border regions. 5/
During the ERP, policies were introduced with the aim of reversing the decline in cocoa production. These policies met with some success. As of the mid-1990s, annual supply was almost double that of 1982-83. In addition, increases in the producer price relative to neighboring countries weakened the incentive to smuggle, and a cyclically higher international price buttressed further the supply response.
GHANA Cocoa Price Developments
(crop years)
Citation: IMF Staff Country Reports 1996, 069; 10.5089/9781451814736.002.A001
Source: Cocoa Marketing Board (COCOBOD); staff estimates.1/ Converted at the official exchange rate.2/ In constant 1963 cedis; logarithmic scale. Smoothed by the Hodrick-Prescott filter.3/ Converted into U.S. dollars at the black market exchange rate.The impact of the contraction in cocoa production on Ghana’s domestic and external imbalances was dramatic. The ratio of cocoa exports to GDP fell from about 20-25 percent in the early 1950s to 5 percent in the early 1990s. Equally damaging was the loss of foreign exchange receipts; the share of cocoa export receipts in total merchandise exports declined from 50-60 percent to 20-30 percent during this period.
Production developments (and the tax reform in the 1980s) were mirrored in cocoa export duty developments. In the 1970s, the cocoa duty averaged more than 30 percent of total revenue and it was the single most important source of government income. During the ERP, this share fell steadily, even though production began to rise in the mid-1980s (Chart I.1). 1/ Because the overall tax base broadened, fiscal dependence on cocoa diminished.
The decline in real producer prices had a severe impact on cocoa farmers’ income and worsened income distribution in rural areas compared to urban areas. As noted by Roe and Schneider (1992), the whole rural population loses from “bad” cocoa policies and gains from “good” ones. While in relative terms the “rich” farmers (the upper decile of the rural income distribution) lost the most because their share of cocoa in total crop revenue was higher than average, in absolute terms the “poor” farmers (the fourth, fifth, and sixth deciles of the rural income distribution) were the main losers. The “rich” receive 12 percent of total cocoa revenue as against 26 percent received by the “poor.” Accordingly, it can be concluded that an improvement in rural poverty during the ERP is attributable mostly to improved cocoa policies.
C. Taxation of Cocoa in Ghana
Despite some obvious efficiency problems of export taxes, they are simple to administer and thus remain common in most developing countries. Their gradual replacement by more efficient taxes depends, most of all, on the set of available alternatives.
1. Political economy of commodity taxation
Cocoa taxation has traditionally been effected by the Government collecting the difference between the prevailing international price and the cost of marketing the crop, which consists primarily of payments to farmers and the COCOBOD’s operating expenses. 1/ Producer prices, which are set at the beginning of each crop season, have been set so as to achieve a certain share of the international price for farmers: broadly in line with the World Bank recommendations, the Government has recently set the farmers’ share at 50 percent.
The main objective of any taxation is to raise the maximum revenue without hampering growth in output. 2/ While a profit tax is generally best suited for this, it is perceived as being difficult and costly to administer in a developing country’s agricultural sector. There are, of course, well-known efficiency considerations associated with export commodity tax that may easily outweigh their advantages: commodity taxes affect the marginal rate of return more than their alternatives.
2. Four potential benefits of commodity taxation
There are four traditional arguments for taxing export crops such as cocoa, which are discussed in turn.
First, administrative simplicity and fiscal transparency are clear advantages of the cocoa export duty in Ghana. In contrast to profit taxes, the cocoa export duty is virtually costless, since it is collected from export earnings retained by the COCOBOD. Moreover, its revenue is known well in advance because the producer price is fixed for the crop season and the cocoa crop is sold around three to six months forward. This setup also has financial advantages: because farmers receive only a certain share of the international price, the Central Bank is spared the effort of an immediate mopping up of liquidity injected in the system by cocoa payments. Even though the government eventually spends all proceeds of the cocoa duty, its spending is spread throughout the year. 3/
Second, this type of tax may help to sterilize the potentially destabilizing impact of sudden and unanticipated swings in international prices, a goal professed, for example, by the Ivorian authorities. 1/ Indeed, the volatility of producer prices in Ghana was lower than the volatility of international prices. However, full insulation is very difficult to achieve and may even be fiscally irresponsible, because little is known about long-run international prices. As a rule of thumb, the producer price should stay at or above the level of long-run planting costs, assuming that the long-run international price is higher than those costs. Maintaining the producer price below long-run costs will either lead to lower potential production in the long run or to widespread smuggling activity, or both.
World Bank staff attempted to address the issue of an optimal long-run producer price a few years ago (see Bateman et al. (1990)). The actual price was generally lower than the breakeven point of the long-run planting cost; it averaged more than 50 percent of the international price in the 1950s and early 1960s, less than 40 percent in the late 1960s and early 1970s before recovering in the early 1980s (Table I.1 and Chart I.2). In the 1990s, the ratio stayed above 40 percent; however, the producer price was accompanied by ex post compensation to farmers. 2/ Significantly, the ratio was below the levels prevailing in the other cocoa-producing countries: producer prices in Brazil and Malaysia, and up to 1993 in Cameroon and Cote d’Ivoire, averaged 60-80 percent of international prices.
Third, it has been argued that the efficiency losses arising from export taxes may be limited if the crop supply is relatively inelastic with respect to price. 3/ In the case of Ghana, however, empirical work presented below provides little or no evidence of price inelasticity in the long run. Anecdotal evidence offers some explanations about why this might be the case: Thabatabal (1986) found that between 1-2 million rural workers migrated from Ghana in the 1970s; Konings (1986) argued that, in the 1970s, cocoa farmers shifted their lots from cocoa production to food crops, which suffered a much smaller real price deterioration than cocoa; and May (1985) found significant incentives for smuggling in the 1965-80 period. 4/
Ghana: Producer Income, Marketing Cost, and Government Revenue, 1951-96
Excluding 1981-82.
Converted at the official exchange rate.
Converted into U.S. dollars at black market/forex bureau rates.
Ghana: Producer Income, Marketing Cost, and Government Revenue, 1951-96
| 1951-55 | 1956-60 | 1961-65 | 1966-70 | 1971-75 | 1976-80 | 1981-85 1/ | 1986-90 | 1991-96 | 1993/94 | 1994/95 | 1995/96 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In percent of total revenue) | |||||||||||||
| Producers | 45.6 | 53.2 | 65.0 | 44.2 | 37.6 | 39.0 | 32.2 | 44.4 | 47.8 | 35.6 | 53.9 | 51.0 | |
| COCOBOD | 6.0 | 10.0 | 17.2 | 8.8 | 18.4 | 26.8 | 35.7 | 30.3 | 31.1 | 24.9 | 26.5 | 15.5 | |
| Government | |||||||||||||
| budget | 48.4 | 36.8 | 17.6 | 47.2 | 44.2 | 34.2 | 32.1 | 25.3 | 21.5 | 39.5 | 19.7 | 35.5 | |
| Memorandum items: | (In percent of international price) | ||||||||||||
| Producer | |||||||||||||
| price 2/ | 168.7 | 48.6 | 48.1 | 39.8 | 39.3 | 41.2 | 64.6 | 39.3 | 41.1 | 23.1 | 43.5 | -- | |
| (In percent of Ivorian producer price) | |||||||||||||
| Producer | … | … | 107.9 | 46.8 | 58.9 | 27.1 | 36.7 | 57.4 | 104.1 | 81.9 | 135.0 | -- | |
| price 3/ | |||||||||||||
Excluding 1981-82.
Converted at the official exchange rate.
Converted into U.S. dollars at black market/forex bureau rates.
Ghana: Producer Income, Marketing Cost, and Government Revenue, 1951-96
| 1951-55 | 1956-60 | 1961-65 | 1966-70 | 1971-75 | 1976-80 | 1981-85 1/ | 1986-90 | 1991-96 | 1993/94 | 1994/95 | 1995/96 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In percent of total revenue) | |||||||||||||
| Producers | 45.6 | 53.2 | 65.0 | 44.2 | 37.6 | 39.0 | 32.2 | 44.4 | 47.8 | 35.6 | 53.9 | 51.0 | |
| COCOBOD | 6.0 | 10.0 | 17.2 | 8.8 | 18.4 | 26.8 | 35.7 | 30.3 | 31.1 | 24.9 | 26.5 | 15.5 | |
| Government | |||||||||||||
| budget | 48.4 | 36.8 | 17.6 | 47.2 | 44.2 | 34.2 | 32.1 | 25.3 | 21.5 | 39.5 | 19.7 | 35.5 | |
| Memorandum items: | (In percent of international price) | ||||||||||||
| Producer | |||||||||||||
| price 2/ | 168.7 | 48.6 | 48.1 | 39.8 | 39.3 | 41.2 | 64.6 | 39.3 | 41.1 | 23.1 | 43.5 | -- | |
| (In percent of Ivorian producer price) | |||||||||||||
| Producer | … | … | 107.9 | 46.8 | 58.9 | 27.1 | 36.7 | 57.4 | 104.1 | 81.9 | 135.0 | -- | |
| price 3/ | |||||||||||||
Excluding 1981-82.
Converted at the official exchange rate.
Converted into U.S. dollars at black market/forex bureau rates.
Finally, because cocoa farmers are perceived to be wealthier than other farmers, it has been suggested that this would make the burden of the export tax more palatable. 1/ Per capita expenditures of all other agricultural producers would decline by more than those of cocoa farmers by shifting taxes away from cocoa. For example, the social cost of ¢ 1 of cocoa taxation can be considered as much as three times higher than the social cost of ¢ 1 of maize taxation, depending on the inequality aversion of the government. 2/
3. Taxation of cocoa in Ghana in the 1990s
At present, farmers receive around 50 percent of the expected international price in the form of the producer price and, after deductions for the operating cost of the COCOBOD, the remainder is paid to the Government as export duty. The producer price is fixed at the beginning of each crop year on the basis of anticipated international price and exchange rate movements. Moreover, farmers are compensated ex post, if necessary to raise their share of the realized international price to 50 percent. As a result, the Government’s share may shrink if the actual international price is less than expected.
In the 1990s, the deviation between the projections and actual outcomes has been relatively high and usually in favor of the Government and against farmers (Table I.2). Specifically, the farmers’ share in real terms has been eroded by faster than expected depreciation of cedi and by higher than expected inflation. Although farmers were always compensated for those deviations, in 1992-95, according to COCOBOD information, the value of compensations was less than the actual loss.
Although the system guarantees both a certain level of fiscal revenue and a minimum cost recovery to farmers, the farmers’ dissatisfaction with the pricing (and taxation) mechanism seems to prevail. It has been pointed out that cocoa is effectively the only crop subject to taxation and, until recently, its effective tax rate has been well above the levels in neighboring countries (Table I.1 and Chart I.2). 3/
Projected and Actual Macroeconomic Developments, 1992/93-1994/95 1/
Period average.
U.S. dollars per metric ton.
Projected and Actual Macroeconomic Developments, 1992/93-1994/95 1/
| Inflation | Exchange rate (cedi/dollar) |
Rural Wage (cedi/day) |
International Price (fob) 2/ |
|||||
|---|---|---|---|---|---|---|---|---|
| Proj. | Act. | Proj. | Act. | Proj. | Act. | Proj. | Act. | |
| 1992/93 | 10.0 | 11.5 | 400 | 584 | 770 | 1,000 | 1,100 | 957 |
| 1993/94 | 8.0 | 25.0 | 650 | 882 | 1,080 | 1,500 | 950 | 1,235 |
| 1994/95 | 22.0 | 24.9 | 1,055 | 1,022 | 1,830 | 2,500 | 1,300 | 1,450 |
Period average.
U.S. dollars per metric ton.
Projected and Actual Macroeconomic Developments, 1992/93-1994/95 1/
| Inflation | Exchange rate (cedi/dollar) |
Rural Wage (cedi/day) |
International Price (fob) 2/ |
|||||
|---|---|---|---|---|---|---|---|---|
| Proj. | Act. | Proj. | Act. | Proj. | Act. | Proj. | Act. | |
| 1992/93 | 10.0 | 11.5 | 400 | 584 | 770 | 1,000 | 1,100 | 957 |
| 1993/94 | 8.0 | 25.0 | 650 | 882 | 1,080 | 1,500 | 950 | 1,235 |
| 1994/95 | 22.0 | 24.9 | 1,055 | 1,022 | 1,830 | 2,500 | 1,300 | 1,450 |
Period average.
U.S. dollars per metric ton.
D. Empirical Analysis of the Cocoa Supply in Ghana
A number of econometric analyses of cocoa supply and demand functions for Ghana have been undertaken since the 1960s. However, the research to date suffers from the problems associated with the estimation of nonstationary time series and the arbitrary selection of lag structures. After a brief review of the previous results, a model of cocoa supply determination is described and estimated using a simple error-correction technique for the sample period 1950-95.
1. Research to date
Important contributions in this field were made by Bateman. As a first step, Bateman (1974) estimated a long-run production capacity equation for Ghana based on tree yields and several variables measuring chemical spraying of cocoa trees. As a second step, his short-run supply function included the previously estimated production capacity, real producer prices, and three rainfall variables. Both equations were estimated separately for the three major cocoa-producing regions in Ghana, and the short-term price elasticities of supply were found to be of a similar magnitude, ranging from 0.14 to 0.22.
More recently, World Bank staff estimated several cocoa supply equations for Ghana. 1/ Akiyama and Duncan (1982) regressed production on real prices (both in first-order differences) and a rainfall variable; in addition, their equation included production, real producer prices, and the Ghana/Côte d’Ivoire price differential (all in levels) lagged one year. Both short- and long-term domestic producer price elasticities were very low and statistically insignificant. However, their model has shown the strong impact of price developments in Côte d’Ivoire: raising the price differential by 1 percent lowered the Ghanaian supply of cocoa by ¼ of 1 percent. In other words, official sales to the COCOBOD might have fluctuated due to smuggling rather than due to changes in cocoa output.
Stryker et al. (1990) regressed the actual production on its lagged value, an estimate of the production capacity, producer prices of cocoa, and producer prices of (competing) food crops. The estimated own short- and long-run price elasticities were 0.22 and 0.62, respectively, and the estimated cross price elasticities were -0.14 and -0.40, respectively. 1/ In addition, the study corroborated the evidence of smuggling; while in 1965-75 the actual production was on average lower by 16 percent than the potential production, in 1976-85 the average gap rose to 32 percent.
2. Determinants of cocoa supply in Ghana
The supply of cocoa is ultimately a function of prices, even though the short-term production capacity is constrained, and output may fluctuate because of weather conditions. Price incentives signaling changes in the expected return on cocoa affect planting and crop efforts, as well as farmers’ decisions about whether to sell domestically or to smuggle. This study measures the price incentives by three variables: the real international price, the real producer price, and the differential between Ghanaian and Ivorian producer prices in U.S. dollar terms (Chart I.2). 2/
The rationale behind these three price indicators is as follows. First, the real international price (IP) conveys information about secular and cyclical price developments and signals the expected return on cocoa production. Notwithstanding fluctuations in the producer price independent of international price developments, over time, producer prices will mirror the international price, and the latter can therefore be treated as an expectation of the former. 3/ Hence, the expected sign should be positive. Second, the real producer price (PP) measures the rate of return on farming cocoa relative to other crops, the prices of which are assumed to move with inflation. The expected return on cocoa is, in principle, unaffected by ex post farmers’ compensations. The expected sign of the own price elasticity is, of course, positive. Finally, the ratio of Ghanaian to Ivorian producer prices, called “the smuggling incentive” (SMUG), measures the rate of return on cocoa sold domestically relative to that of smuggled to Côte d’Ivoire. The variable also carries an expected positive sign. 4/ It should be noted that Ghanaian farmers were motivated to smuggle cocoa both by higher producer prices relative to international prices in Côte d’Ivoire (and Togo) and by the overvalued official exchange rate.
3. Empirical results
A two-step approach is used. 1/ The first goal is to establish the existence of a long-run relationship between the supply of cocoa and various measures of real prices. We estimated the long-run cocoa supply function based on variables measuring the expected return on cocoa:
The results confirm that cocoa developments are price driven in the long run: the supply of cocoa, international prices, and the smuggling incentive are said to be cointegrated. The elasticities of supply with respect to international prices and to Ghana/Côte d’Ivoire price differential are 0.33 and 0.46, respectively (Table I.5). 2/ Estimated residuals from the function (2) confirm the obvious lack of a long-run equilibrium: during the 1950s, the supply of cocoa expanded thanks to positive price shocks; from 1959 to the early 1980s, it contracted because of negative price shocks; and it began to expand again during the ERP.
The second step involves estimation of the short-run dynamics of cocoa supply with the error-correction term embedded: 3/
where γ is the parameter of the error-correction term (ECM), which captures the speed of adjustment to disequilibrium conditions; Δ is a first difference operator; and ϵ is an error term.
The feed-through of the last period’s departures from long-run equilibrium into supply developments is based on the notion that cocoa supply does not adjust instantaneously to the desired levels consistent with international and Ghanaian/Ivorian prices. One reason for this partial adjustment of cocoa supply is the cost of gathering information on international and Ivorian prices. Uncertainty about the transaction and transportation costs of smuggling would be a second reason. For example, in the early 1980s, the Ghanaian government (unsuccessfully) attempted to close the borders with Côte d’Ivoire and Togo. Finally, new plantings as well as output switching from cocoa to other crops are time consuming and costly.
The empirical results of the unrestricted equation (2) are presented in Table I.3. The results of the error correction model correspond both to a priori economic assumptions and to the previously estimated long-run relationship. Long-run elasticities of supply with respect to international prices and to the price differential are found to be in the range of 0.34-0.38 and 0.43-0.55, respectively. As found in previous studies, the short- run producer price elasticity is rather low (0.2) and short-run semi- elasticity of the Ghanaian/Ivorian price differential is of a similar magnitude.
While short-run effects of price changes on cocoa supply are relatively small, the speed of adjustment to long-run price changes, as measured by the coefficient of the error-correction term, is rather high. More than 40 percent of the deviation from the long-run equilibrium in the previous year translates into the current supply decisions made by farmers, seriously affecting cocoa duty proceeds. 1/
4. Simulated medium-term effects of producer price changes
We used the estimated model (Equation B) to answer two policy questions. 2/ First, can the initial positive effect of lower producer prices on government revenue be sustained? Second, how would a higher (and stable) farmers’ share of international prices affect the supply of cocoa and government revenue in the medium term?
First, the results show that lower producer prices will only temporarily boost government revenue. Consider a situation in which the Ghanaian producer price is unexpectedly lowered, ceteris paribus, by 10 percent in order to increase government revenue from cocoa export duty. How will the consequent changes in the supply of cocoa be distributed over time? In the first year, supply will drop by about 3-4 percent, owing to the lower producer price (inputs will be switched to other crops or cocoa crops yielding submarginal returns will not be harvested) and owing to a bigger Ghanaian/Ivorian price differential (output will be smuggled). In the second year, farmers will adjust their long-run equilibrium supply downward by about 7-9 percent and the actual supply will drop by about 3- 4 percent. The whole effect of lower producer prices will dissipate in 2- 3 years; thereafter, government revenue may even decline somewhat from its initial level as supply drops.
Cocoa Supply Regression Results, 1951-95 1/
(Absolute value t-statistics in parentheses)
Estimation is by nonlinear least squares. A “*” signals significance at 95 percent level, a “+” signals significance at 90 percent level.
Cocoa Supply Regression Results, 1951-95 1/
(Absolute value t-statistics in parentheses)
| Variable | Equation A | Equation B |
|---|---|---|
| (Short-run dynamics) | ||
| Constant | 1.4278 | 1.4133 |
| (3.02)* | (2.98)* | |
| Producer price, | 0.1973 | 0.1946 |
| first difference | (1.84)+ | (1.64)+ |
| Smuggling incentive, | 0.1658 | |
| first difference | (1.75)* | |
| (Long-run equilibrium relationship) | ||
| Error correction term | -0.4212 | -0.4121 |
| (4.38)* | (4.27)* | |
| International price, | 0.3701 | 0.3553 |
| lagged once | (4.14)* | (3.96)* |
| Smuggling incentive, | 0.4450 | 0.5383 |
| lagged once | (3.13)* | (3.44)* |
| R2 | 0.437 | 0.476 |
| Adjusted R2 | 0.380 | 0.407 |
| Durbin-Watson | 2.452 | 2.369 |
| S.E. of regression | 0.142 | 0.139 |
| Heteroscedasticity χ(1) | 0.006 | 0.188 |
Estimation is by nonlinear least squares. A “*” signals significance at 95 percent level, a “+” signals significance at 90 percent level.
Cocoa Supply Regression Results, 1951-95 1/
(Absolute value t-statistics in parentheses)
| Variable | Equation A | Equation B |
|---|---|---|
| (Short-run dynamics) | ||
| Constant | 1.4278 | 1.4133 |
| (3.02)* | (2.98)* | |
| Producer price, | 0.1973 | 0.1946 |
| first difference | (1.84)+ | (1.64)+ |
| Smuggling incentive, | 0.1658 | |
| first difference | (1.75)* | |
| (Long-run equilibrium relationship) | ||
| Error correction term | -0.4212 | -0.4121 |
| (4.38)* | (4.27)* | |
| International price, | 0.3701 | 0.3553 |
| lagged once | (4.14)* | (3.96)* |
| Smuggling incentive, | 0.4450 | 0.5383 |
| lagged once | (3.13)* | (3.44)* |
| R2 | 0.437 | 0.476 |
| Adjusted R2 | 0.380 | 0.407 |
| Durbin-Watson | 2.452 | 2.369 |
| S.E. of regression | 0.142 | 0.139 |
| Heteroscedasticity χ(1) | 0.006 | 0.188 |
Estimation is by nonlinear least squares. A “*” signals significance at 95 percent level, a “+” signals significance at 90 percent level.
Second, the supply of cocoa appears to be responsive to higher domestic producer prices. If producer prices stabilize in 1996-2000 at 55 percent of the 1995 international price and the Ghanaian/Ivorian price gap is completely closed, then, ceteris paribus, the supply of cocoa would reach about 420,000 metric tons by 2000, up from 320,000 metric tons in 1995. As a result, between 1996 and 2000, government revenue would increase by about 10 percent. 1/ However, too high an increase in the producer price would not raise supply by much in the medium term and would be detrimental to government finances. Raising the farmers’ share to 65 percent would increase the annual supply only to some 430,000 metric tons and government revenue would decline by 33 percent.
E. Conclusions
The decline of Ghana’s share in world cocoa output between the early 1960s and the early 1980s suggests that multiple effects were at play. Nevertheless, the most important factors adversely affecting the cocoa sector were government policies. Specifically, in the late 1960s and in the 1970s, the effective cocoa duty rates were punitive and the cocoa sector was further hit by policies of overvalued exchange rate. Although some of the policy mistakes have been rectified and output has begun to recover, Ghana’s cocoa sector is still below its peak levels.
Cocoa taxation has been traditionally effected by retaining export proceeds at the COCOBOD and by paying farmers a pre-set price in domestic currency. This helped insulate domestic producers from short-term fluctuations in the international cocoa price and stabilize the real producer price. The cocoa export duty remained an administratively simple and quantitatively important source of revenue and, moreover, it simplified monetary policy by smoothing the liquidity profile induced by cocoa payments. In addition, cocoa taxation may have been perceived by the Ghanaian authorities as an instrument of income equalization.
In the medium term, the Ghanaian authorities will be faced with mounting pressures to lower the effective rate of cocoa taxation and to bring it in line with neighboring countries. A modest increase in the real producer price, say to 55 percent of the international prices, will not necessarily harm government revenue; unless the secular decline in the international cocoa price accelerates, it might be possible to preserve the current contribution of the cocoa export duty to fiscal revenue through a further gradual rise in cocoa supply.
Unit Roots Tests 1/
(1950-1995)
The 95 percent critical values of the Dickey-Fuller and the Adjusted Dickey-Fuller tests are -2.93 and -3.51, respectively. A “*” signals significance at the 95 percent level. All variables are in logs.
The Dickey-Fuller test.
The Augmented Dickey-Fuller test.
Unit Roots Tests 1/
(1950-1995)
| Variable | Without trend | With trend | |||
|---|---|---|---|---|---|
| DF 2/ | ADF 3/ | DF 2/ | ADF 3/ | ||
| Supply of cocoa | |||||
| Level | -2.0914 | -1.8579 | -2.1144 | -1.9823 | |
| First difference | -8.0311* | -5.3933* | -7.9567* | -5.3296* | |
| Producer price | |||||
| Level | 1.8044 | -2.0316 | -1.7817 | -1.7713 | |
| First difference | -6.1954* | -5.6528* | -5.8184* | -6.2962* | |
| International price | |||||
| Level | -2.0677 | -3.3455 | -2.2527 | -3.7106* | |
| First difference | -4.3407* | -4.5925* | -4.2894* | -4.5540* | |
| Smuggling incentive | |||||
| Level | -2.2336 | -2.6665 | -1.9917 | -2.4537 | |
| First difference | -5.8570* | -3.5872* | -5.9137* | -3.6593* | |
The 95 percent critical values of the Dickey-Fuller and the Adjusted Dickey-Fuller tests are -2.93 and -3.51, respectively. A “*” signals significance at the 95 percent level. All variables are in logs.
The Dickey-Fuller test.
The Augmented Dickey-Fuller test.
Unit Roots Tests 1/
(1950-1995)
| Variable | Without trend | With trend | |||
|---|---|---|---|---|---|
| DF 2/ | ADF 3/ | DF 2/ | ADF 3/ | ||
| Supply of cocoa | |||||
| Level | -2.0914 | -1.8579 | -2.1144 | -1.9823 | |
| First difference | -8.0311* | -5.3933* | -7.9567* | -5.3296* | |
| Producer price | |||||
| Level | 1.8044 | -2.0316 | -1.7817 | -1.7713 | |
| First difference | -6.1954* | -5.6528* | -5.8184* | -6.2962* | |
| International price | |||||
| Level | -2.0677 | -3.3455 | -2.2527 | -3.7106* | |
| First difference | -4.3407* | -4.5925* | -4.2894* | -4.5540* | |
| Smuggling incentive | |||||
| Level | -2.2336 | -2.6665 | -1.9917 | -2.4537 | |
| First difference | -5.8570* | -3.5872* | -5.9137* | -3.6593* | |
The 95 percent critical values of the Dickey-Fuller and the Adjusted Dickey-Fuller tests are -2.93 and -3.51, respectively. A “*” signals significance at the 95 percent level. All variables are in logs.
The Dickey-Fuller test.
The Augmented Dickey-Fuller test.
Cointegrated Vectors (β) in Johansen Estimation, 1951-95
(VAR regressions with one lag) 1/
The lag structure selection was based on an iterative application of restrictions on a higher order VAR.
Critical values for Likelihood Ratio tests at the 95 percent significance level in parentheses. A “*” signals significance at the 95 percent level.
Individual parameters of the right-hand side variables are restricted to zero. A “*” denotes rejection of this restriction at the 95 percent level.
All parameters of the right-hand side variables are restricted to zero. A “*” denotes rejection of this restriction at the 95 percent level.
Cointegrated Vectors (β) in Johansen Estimation, 1951-95
(VAR regressions with one lag) 1/
| Supplyt = 0.33*International pricet + 0.46*Smuggling incentivet | ||||||
|---|---|---|---|---|---|---|
| Test statistics for 2/ | A unique vector | Two vectors | ||||
| Maximal eigenvalue | 23.13* | (20.97) | 6.90 | (14.07) | ||
| Trace | 35.47* | (29.68) | 12.34 | (13.33) | ||
| Tests for individual parameter restrictions 3/ | ||||||
| β International price = 0 | 11.03* | (3.84) | ||||
| β Smuggling incentive = 0 | 6.50* | (3.84) | ||||
| Tests for joint restriction 4/ | 13.79* | (5.99) | ||||
The lag structure selection was based on an iterative application of restrictions on a higher order VAR.
Critical values for Likelihood Ratio tests at the 95 percent significance level in parentheses. A “*” signals significance at the 95 percent level.
Individual parameters of the right-hand side variables are restricted to zero. A “*” denotes rejection of this restriction at the 95 percent level.
All parameters of the right-hand side variables are restricted to zero. A “*” denotes rejection of this restriction at the 95 percent level.
Cointegrated Vectors (β) in Johansen Estimation, 1951-95
(VAR regressions with one lag) 1/
| Supplyt = 0.33*International pricet + 0.46*Smuggling incentivet | ||||||
|---|---|---|---|---|---|---|
| Test statistics for 2/ | A unique vector | Two vectors | ||||
| Maximal eigenvalue | 23.13* | (20.97) | 6.90 | (14.07) | ||
| Trace | 35.47* | (29.68) | 12.34 | (13.33) | ||
| Tests for individual parameter restrictions 3/ | ||||||
| β International price = 0 | 11.03* | (3.84) | ||||
| β Smuggling incentive = 0 | 6.50* | (3.84) | ||||
| Tests for joint restriction 4/ | 13.79* | (5.99) | ||||
The lag structure selection was based on an iterative application of restrictions on a higher order VAR.
Critical values for Likelihood Ratio tests at the 95 percent significance level in parentheses. A “*” signals significance at the 95 percent level.
Individual parameters of the right-hand side variables are restricted to zero. A “*” denotes rejection of this restriction at the 95 percent level.
All parameters of the right-hand side variables are restricted to zero. A “*” denotes rejection of this restriction at the 95 percent level.
References
Akiyama, Takamasa, and R.C. Duncan, “Analysis of the World Cocoa Market,” World Bank Staff Commodity Working Paper, No. 8 (Washington: World Bank, 1982).
Akiyama, Takamasa, “Cocoa and Coffee Pricing Policies in Côte d’Ivoire,” Policy, Planning, and Research Working Papers, WPS 64 (Washington: World Bank, 1988).
Bateman, Merrill J., “An Econometric Analysis of Ghanaian Cocoa Supply,” in: Economics of Cocoa Production and Marketing, R.A. Kotey, C. Okali, and B.E. Rourke (eds.), Institute of Statistical, Social, and Economic Research (Ghana: University of Ghana, Legon, 1974).
Bateman, Merrill J., Alexander Meeraus, David M. Newbery, William A. Okyere, and Gerald T. O’Mara, “Ghana’s Cocoa Pricing Policy,” PREA Working Papers. World Bank, WPS 429 (Washington: World Bank, 1990).
Coleman, Jonathan R., Takamasa Akiyama, and Panos N. Varangis, “How Policy Changes Affected Cocoa Sectors in Sub-Saharan African Countries,” Policy Research Working Paper, WPS 1129 (Washington: World Bank, 1993).
Engle, Robert F., and C.W.J. Granger, “Cointegration and Error Correction: Representation, Estimation, and Testing,” Econometrica, Vol. 55 (March 1987), pp. 251–276.
Johansen, Soren, and Katerina Juselius, “Maximum Likelihood Estimation and Inference on Cointegration--with Application to the Demand for Money,” Oxford Bulletin of Economics and Statistics, Vol. 52, (May 1990), pp.169–209.
Konings, P., The State and Rural Class Formation in Ghana: A Comparative Analysis, Routledge and Kegan Paul, London (1986).
May, Ernesto, “Exchange Controls and Parallel Market Economies in Sub- Saharan Africa,” World Bank Staff Working Papers, No. 711 (Washington: World Bank, 1985).
Roe, Alan, and Hartmut Schneider, Adjustment and Equity in Ghana, Development Centre of the OECD, Paris (1992).
Stryker, J. Dirck et al., “Trade, Exchange Rate, and Agricultural Pricing Policies in Ghana,” World Bank Comparative Studies, World Bank (Washington: World Bank, 1990).
Thabatabal, Hamid, “Economic Decline, Access to Food and Structural Adjustment in Ghana,” World Economic Programme Research Working Paper, 10-6/WP80, International Labor Organisation (1986).
Prepared by Aleš Buliř.
By way of comparison, during the same period, cocoa production in Côte d’Ivoire rose ninefold to about 1 million metric tons; see Akiyama (1988).
See also Bateman et al. (1990).
See Coleman, Akiyama, and Varangis (1993) for a review.
International cocoa prices rose about ten times in U.S. dollars, while the exchange rate depreciated four times.
At its peak, the COCOBOD had on its payroll over 100,000 “employees” and its share of total export proceeds was about 50 percent. During the ERP, the payroll was reduced to about 10,000 workers, without any discernible adverse impact on crop quality or the timeliness of deliveries.
See May (1985).
Cocoa production began to rise, of course, as a result of lower effective tax rates.
Prior to 1951, the bulk of the difference between the international and producer prices was absorbed by the reserve fund of the COCOBOD. The reserve fund was used purely for stabilization of the producer price–from 1950 to 1954, the producer price was more than double that of the international price. The reserve fund was taken over by the Government in the late 1950s and it was depleted in the early 1960s.
In principle, the optimal short-run export tax is simply a function of the world elasticity of demand and country’s share in world production. In the long run, the optimal export tax should take into account also the impact of new international prices on other producers and the speed with which this affects planting and production.
It can be argued, however, that farmers would save a portion of the international prices, while the government tends to spend all tax proceeds.
In principle, perfectly informed farmers should save all windfall profits and no quasi-stabilization fund would be needed.
The compensation mechanism is activated when the actual forward international price at the moment of the trade is higher than the expected price, which was used earlier to compute the producer price. The aim of the mechanism is to defend the stipulated 50 percent share of farmers on export proceeds.
Price inelasticity of supply requires that the supply of rural labor is perfectly elastic and that little output switching away from cocoa is possible.
May observed that the producer price differential between Ghanaian and neighboring markets evaluated at black market exchange rates exceeded 50 percent for most of the period. As a result, in the 1970s and 1980s, all new cocoa plantings in Ghana were in areas adjacent to Cote d’Ivoire and Togo in order to minimize the transportation cost of smuggled cocoa.
Even though survey data suggest that cocoa farmers are richer than other farmers, they seem to be poorer than urban household members who are the typical consumers of imported goods. See Bateman et al. (1990) and Roe and Schneider (1992).
See Bateman et al. (1990) for the analysis of income distribution effects of cocoa taxation.
Cote d’Ivoire, for example, has fixed the producer price in nominal terms well above the long-term planting cost and occasionally, when the international price was low, repealed the tax altogether (see SM/95/301). In 1993-96, Ivorian producer prices were on average somewhat lower than those of Ghana mainly because the expansion of Ivorian exports had reduced international prices so that the marginal revenue from cocoa production had declined. Hence, Côte d’Ivoire has been trying to curb new plantings and output, the world share of which has been well above the market shares previously agreed within the International Cocoa Organization (ICCO).
See Stryker et al. (1990) for a review.
However, the estimate of the cross price elasticity was only marginally significant.
Both producer and international prices were deflated by the CPI. International prices were converted into cedis at the official exchange rate, because this rate was used by the COCOBOD for producer price calculations. The Ghanaian-Ivorian price differential, however, was computed using the black market exchange rate: if farmers smuggle cocoa to Côte d’Ivoire or Togo, they are paid in CFA francs, which they have to exchange into U.S. dollars and ultimately into cedis.
In 1950-95, on average only 20 percent of a change in the international price was transmitted to the contemporaneous producer price.
Data for the price differential up to 1982 were taken from May (1985) and the same methodology was used for the 1983-94 period. It should be noted that the Ghanaian/Ivorian border is practically unguarded and, hence, little sanctions for smuggling could have been enforced.
Procedures for estimating equations with nonstationary variables were developed in Engle and Granger (1987) and Johansen and Juselius (1990). The Dickey-Fuller and the Augmented Dickey-Fuller stationarity tests are contained in Table I.4. While the long-run supply function was estimated using the so-called Johansen methodology, the short-run supply function was estimated by non linear least squares.
Real producer prices (PP) do not seem to have a long-run impact on the supply of cocoa; the estimated parameter is not significantly different from zero and the whole long-run supply function comprising producer prices is only marginally significant. This supports the intuitive conclusion that other crops are not long-run substitutes for cocoa production.
Because international prices are used as a proxy for expectations of domestic producer prices, the former do not enter the short-run portion of the error-correction model. Correspondingly, producer prices do not enter the long-run portion thereof.
This speed of adjustment is still only about half of that reported by Akiyama and Duncan (1982). Their estimate, however, is most likely biased upward because of an incorrect estimation technique.
We constrain our simulations to the medium term in order to avoid modeling of international price effects on the potential output. In the long run, a bigger Ghanaian contribution to the world supply of cocoa would depress international prices.
We assume that the COCOBOD cost would stay at 20 percent of the international price.
