_COTE D’IVOIRE: Growth, Specialization and the Terms of Trade_ decades as is, in part, the choice of development policy in the early 1970s and earlier to _specialize_ in cocoa and massively expand cocoa bean production. This is notwithstanding the facts that part of this specialization was an endogenous response of cocoa farmers to high international prices and that some diversification did occur with the development of light manufacturing and food processing.

**Second, the long-term decline in per capita output is related to the secular deterioration in terms of trade.** The per capita decline in output started well _before_ the pronounced currency overvaluation, and at a time of political stability.  It is related to a major deterioration in terms of trade that started after 1976.

**Third, total factor productivity estimates indicate that TFP per capita grew until it hit a plateau in 1976-78, and then shrank thereafter despite gains in human capital accumulation.** A Cobb-Douglas productivity regression validates the accounting TFP estimate and provides evidence for a major turnaround and subsequent, secular deterioration in the terms of trade, which partly explains the decline in per capita output and falling TFP.

**Fourth, reflecting partly a strategic choice of development policy in the 1970s, Cote d’Ivoire has become heavily specialized in cocoa bean production and its exports, and has steadily increased physical cocoa output.** This strategy brought prosperity during the 1970s when real cocoa prices rose,  but turned for the worse when cocoa prices dropped steadily after 1976 presaging the long-term economic decline since 197880. (empirically, Cote d’Ivoire began to exercise market power on the world price of cocoa in 1975 when its share of world output increased beyond [15 percent].). Worse, coffee and cotton prices—two other major export commodities––exhibit the same profile. A related long-term trend reinforcing the terms of trade impact was the depreciation of the U.S. dollar vis-à-vis the French franc since the 1985 Plaza Accord. As a result, the government’s strategy of cocoa specialization has been defeated by cocoa and other commodity price trends. In short, the bet on a single raw commodity to finance development efforts failed. The dependence upon cocoa seems to be at least one important explanatory factor for Cote d’Ivoire’s growth profile and particularly the post1980 decline.<sup>24</sup>

**Looking forward, Cote d’Ivoire faces twin challenge for development policy of both short-term (restoring stability on political and security fronts) and long-term nature (restarting structural reforms).** While ending the conflict is important for short-term economic recovery and political stabilization, it is only a first step towards sustainable recovery.  Improving governance at all levels, restructuring and diversifying the economy for more balanced, long-term growth will be critical in reversing the long-term economic trends of the past two and a half decades.

> 24 This points to at least two areas for further analysis: (i) volatility: the extent to which commodity-related volatility has impacted growth in Cote d’Ivoire,24 and (ii) competitiveness: Cote d’Ivoire’s competitiveness and real effective exchange rate, issues dealt with in two separate background papers to the Cote d’Ivoire’s Development Policy Review.

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