**Policy, Research, and External Affairs**

## **Agricultural Policies**

# WPS 429

This paper a product of' thc Agricultural Plolicics Division, Agriculturc<sup>and Rural Dcvelopment</sup> Dcpartmentis part of a largercl'fort in PRE to analyze thc cconomics of perennial crops and thus provide policy guidelines for e'flicient agricultural development.<sup>Copies are available free from the World Bank,</sup> 1818 H Street NW, Washington DC 20433. Please<sup>contact Ciccly Spooncr, room N8-039, cxtension</sup> 30(464 (214 pages with flgures and tables plus 103 pages of annexcs).

The long decline in Ghana's cocoa production -from half the market 25 years ago to onctenth the market now - was associated with policies that overvalued the domestic currency, implicitly taxed cocoa cxports, and ignored the realities of world markets.

This study addresses the dilemma Ghana's govemrnment I'aces: how to provide cnouglh producer incentives to stitnulate Lhe cocoa exports Ghana needs for foreign exchange while maintaining ilie government revenucs nee(ded to avoid unmalnageable fiscal del'icits. The k-y maN N: idt6ing acceptable revenue alterTatives to ocoa export taxes, Amonig coniclusioris the auihlors reach: Taxing cocoa farmers directly lowers their income, indirectly lowers the income of food produccrs, and transfers incomes from those farmers to food consumers -worsening income distribution.

It would probablv help to stabilize the rcal producer price of cocoa. An attractive alternative is a variable rate tax on cocoa (above the critical level) that increases and decreases with the world price and would distribute the world market price risk between cocoa fanners and thc rest of' society (assuming revciuc requircnts are h'ixed). 'Tihis would stabilize thc real incomes oflcocoa f'anTlers and let consumers share in windlfall prot its f'rom high cocoa prices.

'I'o mainitain the right price incentives in tic cocoa subsector, the exchangc rate regime should be libcrali/cd so that the prevailing rate always roughly equals thc cquilibrium level.

'I'Thc yearly cocoa buying price should always be set above !40 cedis (in 1987 prices) if' the objective is to stimulate growth in long-term supplies.

Thc government should explore shifting taxes l'rom cocoa producers to all consumilers by increasing taxes on appropriate consumcr goods -CspecialIly Lhose that arc income clastic and price inclastic (such as gasoline, cars, andl consumcr duraibles).

A policy of low cocoa taxcs **anl high** cocoa production lavorably affects thc rural poor.

COCOBOD should terminate its marketing activities for col'fec, and **all** laxes on col'f'ce exports shiould cease. Even with heavy taxation, net revenue f'rom cof'ec is negative to **thC** government under the current arrangement. Stopping cof'fec taxes would give cofl'ec produccrs a stronger incentive to expand production, particularly where swollen-shoot virus infestation has rcduced profits from cocoa production.

't'hc **I'RE~** Workingt Pa;cr Sc'ri.s diis .minak's thc. tindiing.s of ork; undc.r w ay in thc R3ank s l'olicy,<sup>Rcscarch, and External</sup> Affairs Compilex An objectis Lof thc scrics is to gCt thsc tincirigs out<sup>quict\,</sup> vcen ifl presentations are less thlai fLIu) polished. 1'he Fmdings interpretations, aid conclusions in iltise papers do nol<sup>necessarilh representofFicialBank policy.</sup> Pmdu( a the **t'RE** FD Ii)tss **niinsiintwn terr**