Is More Chocolate Bad for Poverty? Evidence from Ghana

In the 1960s, Ghana was the world’s largest producer of cocoa beans; while the country’s cocoa crop took a hit in the 1980s as a result of rampant bushfires, it has since rebounded and is now the second largest producer of cocoa beans in the world. The majority of the raw beans grown in Ghana are not processed within the country, however, and the government has been putting more emphasis in recent years on promoting industrialization of the domestic cocoa value chain by subsidizing the price paid for beans by local cocoa bean processors.

A new AGRODEP working paper, “Is More Chocolate Bad for Poverty? An Evaluation of Cocoa Pricing for Ghana’s Industrialization and Poverty Reduction,” examines how these government subsidies impact both cocoa bean processors and the cocoa bean value chain as a whole, with special emphasis on the potential impacts for poverty reduction within the country. The authors find that these subsidies could come at the cost of reduced revenue for farmers, highlighting the challenge in finding a balance between industrialization and poverty reduction.

Ghana’s cocoa value chain is regulated by the Ghana Cocoa Board, or COCOBOD. While the COCOBOD’s efforts to improve the quality and social responsibility of cocoa bean producers has increased the value of Ghanaian cocoa beans in the international market, the Board has historically placed less emphasis on encouraging local cocoa processing. The only policy currently in place to support local processors is a 20 percent discount given on the light cocoa bean harvest, a smaller harvest that takes place in July and produces smaller (although identical quality) beans. There is no discount given for main crop beans, which processors still need to purchase at the international market price. These policies, critics argue, provide little incentive for local processors to increase the quantity of beans they process.

The AGRODEP-funded study examines how changes to these pricing options could help the government reach its goal of 40 percent local processing capacity. One possible way that COCOBOD could help with this goal would be to issue a 35 percent discount rate for processors on main crop beans. The authors find that this would result in a reduction of COCOBOD’s revenue by 36 percent and an increase in processors’ revenue by 57 percent. If, as the study assumes, COCOBOD would bear the full cost of the discount, there would be no impact on farmers; however, if COCOBOD were to pass on the full cost to farmers, cocoa producers’ income would be reduced by up to 22 percent. In addition, even if COCOBOD bears the full cost of the discount, it is safe to assume that the Board’s subsequent loss in revenue will mean that it have less money for its existing farmer support activities, such as mass spraying, agricultural extension services, and social security. Thus, the government’s goal of increasing local processing may not necessarily be compatible with its other goals of supporting farmers and reducing poverty.

The situation is further complicated by the involvement of several large multinational players, including Cargill and ADM. These companies benefit from several export-free zone (EFZ) advantages offered by the Ghanaian government. Namely, they receive a 100 percent exemption from the payment of direct and indirect duties and levies on all imports for production and exports from free zones, a 100 percent exemption from the payment of income tax on profits for their first 10 years and a guaranteed no more than 8 percent income tax levied after 10 years, exemption from value-added tax (VAT) on purchases, including utilities, and no restrictions on fund repatriation. All of these benefits for processors equate to a loss in tax revenues that could in theory have been used to compensate farmers for income lost as a result of subsidy programs for processors.

Promoting the transition from an agriculture-based economy to an industrial economy is an important goal for governments throughout Africa south of the Sahara, where 65 percent of the labor force is employed in agriculture. Industrialization can provide an opportunity for people to move from the agricultural sector into the manufacturing sector and can provide both overall economic growth and more equitable distribution of resources throughout society. However, as this paper highlights, sometimes the goals of industrialization and poverty reduction work at odds, and policies need to be formulated with a true understanding of their impact across an entire value chain and the population as a whole.

Photo credit:Flickr: Francesco Veronesi