metadata: authors: 0: author: Bateman, Merrill J.
1: author: Meeraus, Alexander
2: author: Newbery,
count: Ghana
docna: 0: docna: Ghana's cocoa pricing policy
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Macro-Fiscal Policy,Taxation & Subsidies,Economic Adjustment and Lending,Rural Settlements,Crops and Crop Management Systems,Public Sector Economics,Food Security,Agricultural Growth and Rural Development,Public Finance Decentralization and
            Poverty Reduction
teratopic: Water Resources
abstracts: cdata!: Ghana's cocoa production has
            declined in the past 25 years from half the world market
            share to about one tenth of the market.  This has been
            partly due to policies that overvalued the domestic currency
            and heavily taxed cocoa exports.  This study addresses the
            dilemma Ghana's government faces: how to provide enough
            producer incentives to stimulate the cocoa exports Ghana
            need for foreign exchange while maintaining the government
            revenues needed to avoid unmanagable fiscal deficits.  The
            key may be identifying acceptable revenue alternatives to
            cocoa export taxes.  Among the conclusions reached in this
            study are: (a) the exchange rate regime should be
            liberalized; (b) the government should explore shifting
            taxes from cocoa producers to all consumers by increasing
            taxes on appropriate consumer goods; (c) taxing cocoa
            farmers directly lowers their income, indirectly lowers the
            income of food producers, and transfers incomes from those
            farmers to food consumers, thereby worsening income
            distribution; (d) yearly cocoa buying price should always be
            set above 140 cedis (in 1987 prices) to stimulate growth;
            and (e) COCOBOD should terminate its marketing activities
            for coffee, and all taxes on coffee exports should cease.
geo_reg_key: 1927320,517191
repnme: repnme: Ghana's cocoa pricing policy
display_title: Ghana's cocoa pricing policy
listing_relative_url: /research/1990/06/700255/ghanas-cocoa-pricing-policy
topicv3: Agriculture and Food Security m1326205 435,Crop Production m1326627 174,Taxation m1327615 1121,Population, Aging and Health m1327736 640,Rural Development m1504505 2667
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Water Resources
origu: Policy, Research & Ect Affairs
no_of_pages: 336
model_extractions: **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**
# EXECUTIVE SUMMMRY

i) This report presents the findings of a study of cocoa pricing policy for the Ghana Cocoa Board. The origin of the study was the realization by policymakers in the government of Ghana that past cocoa policy had been misguided. Twenty-five years ago, Ghana was the world's leading producer, wlth a market share approaching one-half. Today, Ghana's production levol Is about one half of what It was 25 years ago, and its market share is only one-tenth. The world leader now Is Cote d'lvoire, whose production of cocoa has tripled over the Intervening years. The key to the divergent paths of the two neighboring countries is In the pollcies their governments have adoptod with respect to cocoa producer Investment incentives Sd other policy instruments such as foreign exchange rates, taxes and interest rates.

ii) The long decilne In Ghana's cocoa production from the mid-1960s to the early 1980s was associated with policles that overvalued the domestic currency, and the implicit taxation of cocoa exports vla the high price placed on domestic currency was the major source of excessive taxation of cocoa. In truth, the formulation of cocoa policy appears to have been divorced from the realities of the world market. Yet, cocoa is still the major source of foreign exchange earnings, supplying 50-60 percent of the total. Since a viable subst'tute Is nowhere In sight, cocoa exports will have to remain the major source of foreign exchange earnings for the foreseeable future. This study attempts to sort out the issues and polnt the way to a resolutlon of the dilemma facing the government - - how to provide producer incentives sufficlent to Induce cocoa exports adequate to meet the country's needs for foreign exchange earnings while maintaining govainiment revenues at a level that does not create unmanageable fiscal deficits. The key to resolving this dilemma may be the Identification of acceptable revenue e'ternatives to cocoa export taxatlon.
ii

# 111) The main conclusions of the paper are as follows:

- a. World cocoa prices have been falling; and given the large stocks of cocoa In the world and the expected Increase In world output, the price will continue to fall Into 1990, declIning 25 percent below the 1987 levol. rollowing the 25-year cocoa cycle, the price will recover to the 1987 level by 1995 and reach a cyclical high somewhat after the year 2000 expected to be two to three times the 1987 level.

- _b._ There Is evidence from the Agricultural Economics Survey for Cocoa Producer Pricing that Improved Incentives have Induced new plantings of cocoa. Thirty-three percent of the land under cocoa by farmers interviewed was planted In the past four years.

C. It Is recommended that the government sustain a policy of providing adeq4uate price Incentives to cocoa producers. To be realistic and because of fluctuations In the world price, cocoa buying prices should be based on real costs and not Just on an artificially-set proportion of the f.o.b. price. In the context of growing population and Income, a price of 120 cedis (in 1987 prices) Is not adequate to sustain cocoa production over the long term; If a food grain selfsufficiency policy Is adopted, neither Is a price of 140 cedis. Except for this case, a price of 140 cedis will sustain but not Increase cocoa production over the longer term. Over the medium term (say ten years), somewhat larger volumes of cocoa production can be produced at these prices. Note that a price of 120 (1987) cedis Is equivalent to a price of 165 cedis In 1988 prices. d. In order that the government can continue to provide the required price Incentives In the cocoa subsector, the exchange rate regime should be liberalized so that at any polnt In time the prevailing rate Is approximately equal to Its equilibrium level. This Is only one of the ma,iy benefits from a llberalized exchange rate regime.

e. In addition to foreign exchange earnings, a low cocoa tax, high cocoa production policy impacts very positively on the Incomes of the rural poor, and this policy Is preferred on Income distributional grounds. In contrast, taxing cocoa farmers directly lowers the Income of cocoa farmers, Indirectly lowers the Income of food producers and transfers Incomes from these farmers to food consumers. Since cocoa farmers are poorer than consumers of taxed goods, and nontraded foods producers are much poorer than food consumers In jeneral, such taxation worsens the Income distributlon.
iiI f. Apart from the essential rlrst step of llberalizing the exchange rate ragkne, the Important stop In offsetting a fall In revenue from cocoa taxation Is to explore the extent to which taxes can be shifted from cocoa producers to all consumers by 1 reasing taxes on appropriate consumer goods. The ideai subjects for such taxation are those which are income elastic and price Inelastic -- gasoline, cars, consumers durables are all good examples.

g.

There are good ground3 for stabilizing the real producer price of cocoa. That is, above the level at which farmers are just willing to plant and maintain cocoa, the tax rate -an Increase with the world price. A variable rate tax on cocoa (above the critical level) results In a sharing of the world market price risk between cocoa farmers and the rest of society (assuming that revenue requirements are fixed). This both stabilizes the real incomes of cocoa farmers, and lets consumers also share in the windfall profits from high cocoa prices.

h.

Owing to long gestation lags In production, even setting cocoa buying prices for the short to medium term requires a long-term perspective. In brief, the questin of the longrun competitive trade advantage for Ghana must be answered In setting an optknal cocoa export tax even In the short run. Past policy In Ghana can be Interpreted as having assumed that long-run advantage did not Include cocoa, but that assumption has not turned out to be true. At the very least, pollcy ought to consider mixed strategies which admi **t** he possibility that present expectations of the future can be mistaken. If we admit that cocoa may likely be part of Ghana's long-term advantage, then the yearly cocoa buying price should never be set below 140 cedis (in 1987 prices). It should be set above this level If growth In long-term supply Is preferred.

L An annual decomposition of selected pricing policles over the 1988-97 decade showed that under a likely scenario - - growth In populatin, income and wages with a cocoa buying price of 140 cedis (in 1987 prices) -- cocoa production would remain at or below 250,000 metric tons per year through 1990 and then rise rapidly to reach a level of 500,000 metrl_ tons by 1997. The reason for the lag In production growth Is the long gestatlon lag after planting before cocoa trees produce cocoa at something approaching their potential. The same scenario shows total cocoa acreage remaining relatively constant as obsolete traditional varleties are replaced by higher ylelding hybrid varleties. Thus, the same acreage with relatively mature hybrid trees Is capable of much greater production. The lag In cocoa productlon also npliles a corresponding lag in farm Income. In the intorkn period before farm Income rlses In real terms, policies which heavily tax cocoa are capable of destroying the expectations of long-term profitability that induced the planting Investments of the past four years and
Iv

- thus abort the resurgence of cocoa production over the onger term.

- J. It Is recommended that the COCOBOD terminate its marketing activitles for coffee, and all export taxatlon of this commodity be ceased. Even given the present heavy taxation of coffee, net revenue from coffee Is negative to the Government of Ghana under tho current arrangement. Stopping coffee taxation would give coffee producers a much stronger Incentive to expand production, particularly In those areas for which swollen shoot virus infestation has reduced profits from cocoa productlon.
TABLE OF CONTENTS

|EXECUTIV|EMW|ARY<br>..............<br>I|
|---|---|---|
|INTDROO|CTIO|N<br>.<br>**6**|
|rARTONE:|ANA|LYSIS OF COCOA PRODUCER<br>INVESTMENT<br>RESPONSE<br>TO PRICING POLICY...<br>1.1|
|A.|**SOM**<br>ANAL|**E**ECONOMI**C**ONCEPTS<br>CENTRAL TO THE<br>YSIS OF PRODUCER<br>RESPONSE|
||*|Opportunity Cost .1.1|
||*|<br>Consumption Discount Rate.<br>1.1|
||*|Marginal Efficiency of Capital.<br>1.2|
||*|Risk Premium.<br>1.2|
||*|Economic Rent .1.3|
|B.|A RE|VEW OF THE CURENT STATUS OF GHANAIAN AGRICLTURE .........<br>.<br>1.4|
|||Land .1.8|
||*|'Labor<br>......................................<br>1.13|
||*|Purchased Inputs.<br>1.14|
||*|Farm Operatlons.<br>1.15|
|C.|qNA|LYSISOF PRODUCER<br>INVESTMENT.<br>.<br>..<br>.<br>1.23|
||*|Methodology for Dynamic Analysis of|
|||Response to Pricing Policy.<br>1.23|
||*|Tree Crop Investments.<br>1.25|
||*|Land Allocation.<br>1.26|
||*|ABrief Technical Note .1.30|
||*|Model Validation Using the Annual|
|||Decompositon Model .1.33|
||*|Policy Simulations .1.38|
||*|Scenario 1--Supply Response under Flxed|
|||<br>Resource Supplies .1.39|
||*|<br>Scen:rlo 2--Effects<br>of Population Growth<br>|
|||on Supply Responses .1.47|
||*|Scenario 3---Effects<br>of Growth In Per Capita<br>|
|||Income on Cocoa Supply .1.54|
||*|Scenario 4--Effects<br>of a Policy of|
|||Food Self-Sufficiency<br>on Cocoa Supply .1.68|
||*|Al Dii f h|
|||nnua ecomposton or te1988-97|
|||Decade of Selected Experiments.<br>1.72|
||*|Policy Implications of the Simulation Experiments .1.80|
|IL<br>**MANRAC**SPEICFICATON<br>**OF IANA iwLnT_O**<br>**AVMTLAPL**SECTOR<br>**_W_**<br>......................<br>**1.3**|
|---|
|*<br>Set Dofhnitions ................................<br>1.83|
|*<br>Variable List<br>..................................<br>1.84|
|*<br>Equation List<br>..<br>1.85|
|*<br>Paramoter List<br>..<br>1.87|

|PAT TWO. COCOA TAX AND R|EVEME ALTERNATVES<br>.2.1||
|---|---|---|
|I.<br>|hntroducton .2.1||
|II.<br>|The Analysis of Taxes and Tax Reform .2.5<br>||
|III.<br>|Salient Features of Ghanaian Cocoa Prichg .2.8<br>||
|IV.|Brie History of Cocoa Production Prichg and<br>||
||Taxation hI Ghana .2.11||
|V.|The Consequences of the Dclino In Cocoa Production|2.28|
|VI.<br>|Other C0nsequences of Exchange Rate Liberalization .<br>|2.35|
|VIl.<br>|Issuesin Setthg the Producer Price of Cocoa....|2.37|
|Vill.<br>|Alternatives to the Cocoa Export Tax .2.38||
|IX.<br>|COCOBOD'S<br>Costs .2.40<br>||
|X.<br>|The Optknal Export Tax .2.41<br>||
|Xl.<br>|Standard Arguments for Output Taxes .2.43<br>||
|XiI.<br>|Quallfications .2.54||
|XiII.|The Risks hnoived In Setting the<br>||
||Producer Price Too Low .2.56||
|XIV.|kIpilcatlonsof Taxing Cocoa||
||<br>for Input for Input Subsidies .2.58<br>||
|XV.<br>|Spatial Variations In Cocoa Pricing ............<br>|2.59|
|XVI.<br>|Price Stabilization .2.60<br>||
|XVII.<br>|knplicatlonsfor Taxes on Consumer Goods .2.62<br>||
|XVIII.|onclusions .2.84||
||References....................<br>......|2.65|
|APPENDIX<br>A:|A Note on Data .|1-6|
|PART THEE: GLOBAL PERSP|ECTIVES<br>ON COCOA SUPPLY<br>AND DBAAND ...<br>.........|3.1|
|I.|Introduction .3.1||
|II.|World Cocoa Market Environment,1988-2000.3.3||
||A. Cocoa Hectarage, Major Producnrs,1970-87...|3.3|
||B. World Cocoa Production & Prospects,1975-2000|3.6|
||C. World Cocoa Production Summary,1988-2000|3.21|
||D. World Cocoa Consumptlon,1975-85.3.23||
||E. World Supply/Demand and Price||
||Forecasts,1988-2000.3.24||

- 2-
**Ghana's** Cocoa and **Foreign Exchange Polcis** ......

**IIL**

3.42

**IV.** Conchlslons and Sumuary ................

3.44

# FO NMTEATION OF POLICY WPLICATINS **FROM IDIVmUAL** S1UDES AND **RE DAT** ............................

............................

4.1

# **ANNEXES:**

# **1.** Multiporlod Agricultural Sector Model and Numerkcal Shnulatlon Esthuates

# II. Optimal Trade Taxes on Agriculture In Developing Countries

Ill. Ghana's Cocoa Environemnt

# TMALES: PART ONE

|1.I.1:|Distribution of Survey Households by Reglon .<br>.|. 1.7|
|---|---|---|
|I.B.2:<br>|<br>Age Distribution of Household Members by Region..|1.8|
|1.8.3:<br>|Average Landholding per 4ousehold by Region ..<br>|1.9<br>|
|1.8.4:|AverageSize ofPlot by Region|1.10|
|I.B.5<br>|Number of Farmers Growhg Cocoa and Oil Pam..<br>|1.12|
|I.B.6:<br>|Age Distribution of Tradional Cocoa Trees by Region<br>|1.12<br>|
|1.I.7:|Mean Age Distribution of Hybrid Cocoa Trees by Region|<br>1.12|
|1.8.8:<br>|Mean Age Distribution of Oil Pakn Trees by Region..<br>|1.13|
|1.8.9:|Labor Use on Farms by Region|1.14|
|I.B. 1 0|Mean Labor Requirement for Farm Operatlons.<br>.|1.16|
|1.I.1 1:|Mean Labor Requirement for Harvesting One Acre of<br>||
||Various Annual Crops (Mandays).<br>.|1.19|
|I.8.12:|Mean Labor Requirement for Threshing Produce from<br>||
||One Acre of Various Annual Crops.<br>.|1.20|
|l.B.13:|Llvestock Numbers and Holders ..............<br>..|<br>1.21|
|I.C.1:<br>|Ghana Macroeconomic Projection|1.31|
|I.C.2:|Dlsaggregation of Macroeconomic Projections, 1984-85|1.32|
|I.C.3:|Annual Decomposition of Multiperiod Model||
||Validatlon Period|1.34|
|I.C.4:|Comparison of Slnulated and Actual Cocoa Production|1.36|
|I.C.S:|Calculatlon of Farm Income (Concept 3) from the||
||National Accounts|1.37|
|I.C.6|Arc Elasticlties of Cocoa Supply|1.41|
|I.C.7|Sbnulated Annual Pattern of Labor Use In 2015-19|1.49|
|I.C.8<br>|Food Grainknports|1.55|
|I.C.9|Annual Decomposition of Multiperiod Model Solutions|1.76|
|I.C.1 0|Cocoa Supply Esthiates|1.82|

- 3 -
**TABLE:- PARr TWO**

Distributional Characterlst',s for Ghana ..... . . . . .

2.1 . 2.48

# TABLES: PART THREE

|3.1|Cocoa Hectarage, Brazil|
|---|---|
||Cote d'lvolre & Malaysia (1970-88) ..... . . . .<br>.<br>3.4|
|3.2|Major Producer Yleld Patterns by Year ..... . . .<br>.<br>3.6|
|3.3|Coto d'lvolre Hectarage, Yields & Prodt..'lon<br>....<br>.<br>3.8|
|3.4|Brazilian Hectarage, Yields & Production ..... . . .<br>. 3.11|
|3.5|Peninsula Hectarage, Yields & Production ..... . .<br>. 3.14|
|3.6|Sabbah Hectarage, Yields & Production ..... . . .<br>. 3.16|
|3.7|Sarawak Hectarago, Yield & Production ..... . . .<br>. 3.18|
|3.8|Cocoa Productlon Prospects by Major Producing Area 3.22|
|3.9|World Cocoa Grindings ........<br>.. . . . .. . . . .<br>.<br>3.25|
|3.10|Productlon, Consumptlon Stocks & Prices ..... . .<br>. 3.27|
|3.11|Cocoa Consumptlon Regression Model (1960-2000).<br>3.29|
|3.12|Cocoa Price Regression Model .<br>.<br>3.31|
|3.13|Ghana Cocoa Premium Regression Model (1960-20)<br>.<br>3.32|

## FNlGUES: PART ONE

|I.C.1|Cocoa Supply Response .......<br>. . . . . . . . . . .<br>.|1.40|
|---|---|---|
|I.C.2|Cocoa Acreage Adjustment. .|1.42|
|I.C.3<br>|Farm Income .........................<br>.<br>|1.43|
|I.C.4|Arc Elasticities of Cocoa Supply ......<br>. . . . . .<br>.|1.41|
|I.C.5|Labor Uses Under Fixed Resources ......<br>. . . . .<br>.|1.46|
|I.C.6<br>|Cocoa Supply Response Under Populatlon Growth . . .<br>|1.48|
|I.C.7|Cocoa Acreage Adjustments to Price||
||Under Population Growth ......<br>. . . . . . . .<br>.|1.50|
|I.C.8|Farm Income Under Population Growth ..... . . . .<br>.|1.51|
|I.C.9|Land Use Under Population Growth, 2015-19 .... .<br>.|1.52|
|I.C.10|Labor Uses Under Population Growth, 2015-19 . . . .|1.53|
|I.C.1 1|Cocoa Supply Response Under Population||
||& Income Growth .|1.57|
|I.C. 12|Cocoa Acreage Adjustmer Populatlon & Income Growth|1.58|
|I.C.1 3|Farm Income Under PopL.Pdon&IncomeGrowth . . . .|1.59|
|I.C.14|Land Use Under Population & Income Growth, 2015-19|1.61|
|I.C.1 5|Labor Uses Under Population||
||& Income Growth, 2015-19 .|1.62|
|I.C.16|Cocoa Supply Response Jnder Population||
||& Income Growth .|1.63|
|I.C.1 7|Cocoa Acreage Adjustment, Population & Income Growth|1.64|
|I.C. 18|Farm Income Under Population, Income & Wage Growth|1.65|
|I.C.19|Land Use Under Population,||
||Income & Wage Growth, 2015-19 .1.66||
|I.C.20|<br>Labor Uses Under Population,||
||Income & Wage Growth, 2015-19 .1.67||
|I.C.21|<br>Cocoa Supply Response Under Population & Income||
||Growth Wlth Zero Foodknports.......<br>. . .<br>.|1.69|
|I.C.22|Cocoa Acreage Adjustment, Population & Income Growth||

_-4 -_
||With Zero Food<br>**wtrortc**. .e......................|1.70|
|---|---|---|
|I.C.23|Farm hcome**Uder**Food Self-Sufficlency .<br>.|1.71|
|I.C.24|Land Use Under Self-Sufficiency, 2015-19..|1.73|
|I.C.25|Labor Uses Under Food Self-SuffIcIency.<br>.|1.74|

# FIGURES: PART TWO

|1.|Production .2.12|
|---|---|
|2.|Real Cocoa Price (Producer prce' deflated by<br>rural CPI) ..........<br>2.13|
|3.|Cocoa Production, Prices, Income..<br>2.14|
|4.|Production and Lagged Prices ..<br>2.15|
|5.|Real Cocoa Pricos (at constant $1980).<br>2.17|
|8.|Ratio of Producer to World Price|
||(Ivory Coast and Ghana).<br>2.18|
|7.|Ghana Real Producer Prices (Deflate Rural CPI).<br>2.20|
|8.|Real Crop Prices (Deflated byRuralFood Price.<br>221|
|9.|Relative Prico of Cocoa (Defla'.. by Maize Prices) .<br>.23|
|9A.|Cocoa-Maize Price Ratio (Ratio of Domestic to World|
||Price Ratios).<br>2.24|
|10.|Area Under Crops..<br>................<br>2.25|
|11.|Area Under Cereals.<br>2.26|
|12.|Revenue from Cocoa Sales .<br>2.29|
|13.|Government Revenue (Deflated by CPI).<br>2.31|
|14.|Revenue from Cocoa Sales .2.32|

# **FIGES:** PART THREE

|1.|Cote d'lvoire Cocoa Production .3.9||
|---|---|---|
|2.|Brazil Cocoa Productlon .|3.12|
|3.|Malaysia--Peninsula Cocoa Production .3.15||
|4.|<br>Malaysla--Sabbah Cocoa Producton .3.17||
|5.|<br>Malaysla--Sarawak Cocoa Productlon.|3.19|
|6.|<br>Cocoa Consumptlon.|3.26|
|7.|<br>Cocoa Spot Price Ghana.|3.28|
|8.|<br>Ghana Cocoa Premium.|3.30|

- 5 -
# **INToDUC'ON**

This report presents the findings of a study for the Ghana Cocoa Board of cocoa pricing pollcy. T;e origin of the demand for this study was the realization of policymakers In the Government of Ghana that past cocoa polcy had been misguided. Twenty-five years ago, Ghana was the world's leading producer, with a market share approaching one half. Today, Ghanas production level Is about one half of what It was 25 years ago, and Its market share Is only one tonth. The world market leader now Is Cote d'lvoire, whose production of cocoa has tripled over the Intervening years. The key to the dIvergnt paths of the two neighboring countries is In the policies their governments have adopted with respect to cocoa producer investment incentives and other policy Instruments such as forelgn exchange rates, taxes and Interest rates.

In spite of Its relative decine, cocoa is still the major source of foreign exchange **arnig** for Ghana, supplyin over 60 percont of total export eamings. Since a vlable ujbstitute Is nowhere In sight, cocoa **exWorts** will have to remain the major sour:e of foreign exchang earaings for decades to come. Thus, the fate of' the country's development aspirations depends on the vitality and vigor of the cocoa sector. The prosperity of the cocoa sector depends, In turn, on '<he quallty of the government's policy toward cocoa. This study is ded&;ated to tS e proposition that better understanding of the principles involved can contribute to the formulation of better cocoa policy. Now that real world cocoa prlcor are approaching the low point of their 25-year cycle, the need for better policy is greater than ever.

This report Is divided into revlews of three major substudies, which follow In sequence:

1. Analysis of Cocoa Producer Investment Response to Policy Intervention;

I1 Fiscal Alternatives to Cocoa Taxation; and Ill. Giobal Perspective on Cocoa Supply and Demand.

The **report** concludes with a section that Integrates the policy hmpilcations deveioped In the substudles and presents some recomnendations. Detailed analytica! support for tho analytlcal **reulits** presented In the main report Is presented in **Annexes** 1, 11, and **Ill.**
# ]. ANALYSIS OF COCOA PRODUCER INVESTMENT RESPONSE TO vRICING POUCY

_by_ _Alexander Meeraus, W. Asenso Okyere and G.T. O'Mara_
# **A** SOME ECONOMIC CONCEPTS CENTRAL TO **THE** ANALYSIS OF PRODUCER RESPONSE

Prior to the discussion of the current status of Ghanalan agriculture and the analysis of cocoa producer response to price Incentives, It will be helpful to Introduce some economic cor,cepts that are kIportant to the analysis of perennial supply response. Opportunity Cot. _The productivity of a resource In Its most productivo alternative use._ Thus, the opportunity cost of land and labor employed In cocoa prcduction Is their productivity In their socially most valuable alternative use, which typically will be In the production of some other crop. Therefore, the analysis of cocoa producer response to price and other policy Interventions must be In the context of the entire agricultural sector, since other crops and/or regions may have less or more privately financially rewarding uses and either supply resources to or pull them out of cocoa production.

Cosrition Dbsoiunt Rate. _The rate at which consumers trade off present and future consumptlon._ Such tradeoffs are generally accomplished by saving and dissaving, though the savings may be relative to potential income as when the Individual forgoes present income by Investing In training that knproves future productivity. In a fully monetized economy, the saving and dissaving may be accomplished through Investing and disinvesting In financial assets; In a developing economy, it Is often accomplished by real Investment or disinvestment In property, educatlon, productive agricultural assets, etc. The disinvestment may be accomplished through fallure to replace real assets as they wear out. The basis of the trade off Is a preference for present consumption, with a one-period discount rate being the rate at which the discounted value of future consumption Is equivalent to present consumptlon--i.e., the consumer Is indlfferent between them. Thus, the consumption discount rate can be regarded as the required premkAm for deferred consumption. To the extent that Investment hI cocoa production involves present savng for future consumption out of the proceeds from cocoa production, the increased future consumption after allowing for
- 1.2 -

future production costs and when discounted<sup>to the present at the farmers consump-</sup> tion rate of discount must be at least as large<sup>as the amount of present savings.</sup> In other words, the cocoa Investment must have<sup>a positive return when discounted at the</sup> consumption rate.

**Margial** Efficiency of CapitaL _The return from an additional unit of investment when discounted at the_ cost _of capital confronting the Investor. Also called the private marginal productivity of capital or the private accounting rate of Interest._ If the Investor Is a small cocoa farmer without<sup>access to at least medium-</sup> term credit, then the cost of capital to<sup>the farmer Is his consumptlon rate of discount</sup> since the Investment must be financed from<sup>his private savings. In such cases, the rate</sup> of Investment and accumulation Is necessarily<sup>slow since It Is constrained by the small</sup> farmer's abillty to generate savings. Removing surplus from the return to small<sup>farmer</sup> cocoa Investments via explicit or knpllclt<sup>taxatkinkupliesthat expenditure of an additional</sup> cedl of revenue by government for either<sup>consumption or Investment purposes Is socially</sup> more valuable than expenditure of the<sup>same cedl by the cocoa farmer.</sup> The evidence from the past three decades casts doubt<sup>on the validity of this proposition</sup> at the levels of taxation of cocoa output that have<sup>prevailed. Alternatively, the calculation of</sup> net revenue from cocoa taxation should<sup>make allowance for the fiscal cost of reduced</sup> cocoa export earnings due to foregone<sup>cocoa productlon Investments.</sup>

Risk PrombAm. _The additlonal return that rlsk averse Investors require In addition to the expected return from an Investment If they are to undertake a rlsky Investment._ In other words, the risk premium Is the<sup>reward for bearing risk.</sup> The empirical evidence on the behavior<sup>of small farmers In developing countries Is quite</sup> clear; they are overwhekningly risk averse. Just as clearly, uncertainty with respect<sup>to</sup> future states of both the domestic and<sup>world economies Implles that all market medlated</sup> Investments are Inherently rlsky, though some<sup>are more risky than others.</sup> The existence of cyclical behavior In world cocoa prices<sup>makes cocoa production Investments more ris-</sup>
- **1.3** -

ky than average. Since risk averslon and the Impiled need for a risk premium Imply that risk averse Investors will undertake less investment than Is optimal, a case can be m.ide for subsidy of cocoa Investments In order to achieve a more efficient allocation of resources. This might take the form of a pollcy that buffered cocoa producer prices from the extremes of world price fluctuations.

**Economic** Rent. _The difference between the opportunity cost of a resource and the price recelved/pald by the producer or consumer._ Thus, the difference between the price of cocoa beans FOB Tema valued at equilibrium exchange rate, net of efficient marketing costs, and the price the farmer recelves Is an economic rent. In practice, It Is absorbed by implicit taxation and marketing costs greater than the efficient level. The absorption of economic rent by the government (Including COCOBOD) reduces the return to the producer and hence weakens the Incentive to expand cocoa production via more Intensive cultivation/harvesting or through expansion of cocoa acreage. If the expected return to Investment In cocoa production Is reduced below the expected return to other crops on a sustained basis, farmers will disinvest In cocoa and invest in other crops. Since shifting to other crops from cocoa requires extensive cutting, burning and clearing of the land, which Is costly, disinvestment may not be rapia unless the prospective return from the crop(s) Is sufficiently large to make quick land clearance profitable. Land can be cleared less rapidly by plecemeal cutting of trees whose maturity (over 30 years) has significantly reduced yield, by failing to replace dead trees, by pruning back cocoa trees and Interplanting annual crops, etc. Thus, unless the expected long-term profitability of the most attractive alternative crop Is much greater, the process of disinvestment may be siow and difficult to detect in the early stages.
# L A REVIEW OF THE CURRENT STATUS OF **GIHANAIAN** AGRICULTURE

Agriculture plays a major role In Ghana's economic development. The sector employs about 70 percent of the labor force and contributes nearly 60 percent to the Gross Domestic Product. With a high rate of growth of the active labor force (15-64 years) and a relatively low growth of gross capital formatlon, agriculture will continue to play an kIportant role In Ghana's development In the foreseeable future. Although the goverrnnent's food security objectivos call for the productlon of substantial amounts of local food staples, the high debt burden, the need for essential Imports and the absence of viable export alternatives continue to make cocoa which contributes about 60 percent of the country's foreign exchange earnings, the most hkportant export commodity in Ghana.

There are three ecological zones In Ghana, namely, the coastal savannah which is minor In terms of area and covers part of the coastal strip of Ghana, the forest zone which occupies about one third of the country, and the northern savannah which occupies most of the remaining two thirds of the country. The forest zone produces the major food and cash crops, namely, maize, tubers, cocoa and oil palm. The northern savannah produces the basic crops: sorghum, millet, rice, beans, and peas, ground nuts and cotton. Cattle Is kIportant In the North and provides power for farm operations as well as a source of meat. It also serves as the place for quarantining and fattening cattle knported from Burkina Faso and Mall before they are moved down South for slaughtering.

The major activity In the coastal savannah Is fishing. Lknited numbers of cattle are raised In the Accra plains, In most parts of Ghana, small numbers of poultry, sheep and goats are raised by households as a source of protein and for sale to supplement the Income when the cash flow Is low. A few large scale poultry and pig ventures can be found close to the major urban centers. Vegetables are raised around the major cities to moet the demand of expatriate and urban dwellers.
- 1.5 -

There are tradtional regional patterns In food consumption In Ghana. The major staple foods In the North are miliet, sorghum and yams. 'n the coastal regions, maize products are more predominant. Plantains and tubers are consumed more In the forest zone. With increasing migratlon these broad reglonal patterns now follow thin lines. Malze and rice are gradually becoming national food Items, particularly In the South, and they are consumed by a large cross section of the population.

Agricultural production in Ghana Is characterized by smailholders who use traditional methods with little or no purchased Inputs. The major inputs are land and labor. There Is not much pressure on land as revealed by the 1984 population census. On the average there are 51 persons per square kilometer. It is estinated that of the total land In Ghana about 10 million hectares of them are suitable for agricultural productlon. However, due to accessibility and other constraints, less than one third of this land is currently being cropped. Farm sizes tend to be small because of the production technology used and also the Inheritance and land tenure systems which lead to land fragmentatlon. Farm extensions therefore occur in the vertical direction with one farmer owning a few plots at different locatlons in the village or in the country.

There are variations in the land tenure system depending upon the area. Generally, in the North, all the lands are vested In the government and so outright sale can be obtained only from the government. However, temporary occupation of land can be arranged through the 'tindana' or caretaker of the land In the area concerned. In the South, the chiefs are the custodians of the lands for the people. In most places, In the South, outright sale of land Is forbidden but security of tenure can be obtained through a long-term lease or sharecropping arrangement. People who come from an area (citizens) can obtain land from the chief for farming purposes and the farm can be passed on to one's heirs.

The relative abundance of land has given rise to a bush fallow-cropping sequence, especially In the South where the vegetation and rainfall patterns can support
- 1.8 -

It. In the bush fallow-cropping system, a plece of land is cultivated for a number of years and then It is left uncultivated for a while for the soil nutrients to be replenished befcre cropping Is done again. The length of the fallow normally depends on the pressure on land In the area.

Slnce land Is available the only critical factor in agricultural production is labor. Most of the agricultural labor Is supplied by the .armer and members of the household. High demands for labor during labor-intensive operatlons like harvesting and weeding used to be met by soliciting the help of a neighbor In an arrangement known as nnoboa. Nnoboa labor is not paid for but the farmer also provides the same service to the neighbor at another tkne. Wlth the dwindling In size of the farm household through schooling of children and rural-urban migratlon and the avallability of a pool of farm laborers, nnoboa Is ceasing to be an Important source of farm labor. A farm can hire labor on an annual contract or hire casual labor on a daily basis.

To be able to characterize the agricultural sector of Ghana, a nationwide agricultural economics survey (AES) was conducted from October 1987 to February 1988 to gather Information on land and animal holdings, cropping patterns and Input use in Ghanaian agriculture. The survey formed part of the cocoa sector rehabilitation project. A sample of 705 farm households constituting a probability sample of farm householas was used. The sample formed a subqet of the sample of 3,200 households being used for the Ghana Llving Standards Survey (GLSS). The GLSS sample was selected by a twostage sampling technique. In the first stage, 200 clusters or enumeration areas (EAS) were systematically selected from a total of 12,969 with probability proportional to the size of the EAs. The sample frame was a total of 2,444,836 households out of which 3,200 were selected. Through an arrangement with the Ghana Statistical Service which required that the AES should Interview the responoents after the GLSS enumerators had been there, the agricultural households of the first 1,070 households of the GLSS sample were interviewed for the AES. A total of 705 farm households were interviewed using a
- 1.7 -

pretasted structured questionnaire In the three ecobgical zones, coastal savannah, forest and northern savannah. Survey results were entered on computer floppy disks using a special data entry program which checked for consistencies In responses. Seven hundred questlonnaires were found to be useable for the analysis. The breakdown of respondents by region Is presented in Table l.B.1 There were 174 farm households in the North and 526 In the South. About 45 percent of the respondents In the South Table 113.1: Dlstrbution of **Survey** Households by Region

|**Region**|**Number**of<br>**Househids**|Cocoa<br>**Farmers**|
|---|---|---|
|**Ashand**<br>**Brong Ahafo**<br>**Central**|143<br>40<br>85|91<br>27<br>37|
|**Eas_m**<br>**G-eairAccra**<br>**NofWiem**|**81**<br>17<br>10|42|
|Upper**Eat**|32||
|<br>Upper**Wet**<br>**Vol**<br>|32<br>**84**<br>|5<br>|
|**Wstasm**<br>|**78**<br>|35|
|North|174||
|South|526|237|
|T O T A L|70|2S7|

respondents In the South cultivated cocoa. The age distribution of household members of the survey Is presented In Table l.B.2. When the distributlon Is compared with the national distribution (last two lines of Table i.B.2) as estinated by the Statistical Service, we see a sknilar pattern and so we can therefore Infer that our sample Is a normal one. The active labor force (age 15 to 64) represents 49.2 percent of all household members In the sample. Nationally the proportion of the population In the active lak'or force is about 49.5 percent (mid-year 1986 esthuate).
of HWoMsb MOWS by RS0wn 41 Tom AM OWth

|Regkon|0.|10-1|4<br>15.19|<br>2024|2544|45054|6644|Ove64|
|---|---|---|---|---|---|---|---|---|
|Aehahr|245<br>(4.04)|114<br>(33.02)|71<br>(15.36)|46<br>9.57)|1S<br>(6.20)|47<br>(21.43)|30<br>(6.33)|30<br>(4.04)|
|&WV<br>Ahdo<br>Brong|<br>as<br>66"0|~<br>34<br>(33.33)|22<br>(16.43)|21<br>(10.63)|42<br>(10.14)|10<br>(20.29)|3<br>(4.83)|6<br>(1.45)|
|CAnI"|154<br>(3.06)|61<br>(33.19)|44<br>(13.16)|36<br>(9.46)|104<br>(6.19)|26<br>(22.41)|20<br>(5.60)|17<br>(4.31)|
|EansWn|162<br>(SS7)|s<br>(32.21)|49<br>(13.52)|43<br>(9.74)|104<br>6.56|33<br>(20.66)|16<br>(6.56)|26<br>(3.18)|
|OrseWAccx|29|10<br>(34.94)|10<br>(12.06)|7<br>(12.05)|15<br>(.43)|6<br>(16.07)|4<br>(7.23)|2<br>(4.82)|
|Noitin|254<br>(1.47)|105<br>(34.00)|as<br>(14.06)|40<br>(984)|192<br>(1.16)|0<br>(25.70)|21<br>(7.76)|11<br>(2.81)|
|Upper<br>Eas|63|23<br>(33.16)|12<br>(12.11)|14<br>(6,35|45<br>(7.37)|22<br>(23.08)|6<br>(11.58)|a<br>(3.16)|
|upperWeN|71<br>(1.70)|26<br>(30.21)|30<br>(11.91)|24<br>(12.77)|49<br>(10.21)|16<br>(20.66)|11<br>(766)|4<br>(4.68)|
|Vom|201|76<br>(37.71)|47<br>(14.26)|40<br>(5.62|114<br>(7.50)|22<br>(21.39)|21<br>(4.13)|12<br>(3.94)|
|_Western_|136<br>(3. 2)|57<br>(33.33)|39<br>(13.77)|37<br>(9.42)|102<br>(6.54)|15<br>(24.64)|I1<br>(3.62)|15<br>(2.66)|
|Ghao.a<br>(Survey)|1366<br>(33.06)|576<br>(13.99)|**360**<br>(9.47)|310<br>(7.2)|(22.49)|251<br>(6.24)|143<br>(3.47)|130<br>(3.16)|
|T<br>iw<br>Ghws|4_<br>(3.|**12**<br>(11.71)|**1161**<br>(9.10|**lOMs**<br>_(YA_|<br>**UN**<br>OL14)|**734**<br>5|430<br>(33|472<br>(3.64)|

_S/ Figw is_ pwrmnUes deams prcen of ON ib region.

* EsUnaftd _pOPulnIOn_ (nVd.yer 1966) by BSte11i SIF5ios. Amr. Febuwy 1967.

# Land

The average **lnd** of a houshod an hoW the _WA_ Is used Is presented **hI** Table .1.3. On the average, the **Ounalan** farme **has abOut** 10 **acrs** of land at **his** disposal. Although there Is more **land pr** capa the North than In the South, the average
- 1.9 -

agricultural land holding In the South is greater than that In the North. In general, the farmer In the South has 32.5 percent more land than the farmer In the North. Leasing or share cropping Is completely absent In the North. About 18 percent of the land in the South Is Involved in some leasing or sharecropping arrangement. A lease Is normally contracted for a given period of time for a certain monetary consideration either paid outright or paid in Instaiments. When a plece of land is transacted under a sharecropping arrangement, the land owner and the tenant farmer share either the proceeds of the farm (in case of annual crops) or divide the farm (in the case of perennial crops) In some ratio. There are mainly two sharecropping arrangements: 'abunu' system whore the owner of the land and the tenant have equal shares; 'abusa' system where the owner of the land's share Is one-third and the tenant gets two-thirds.

Land Is cropped more Intensively In the North than in the South. Only 2..6 percent of the land in the North Is left to fallow as compared with 30.7 percent in the South. Farmers In the South have never cleared about 8 percent of the land they own whereas In the North Just 2.6 percent of such lands are uncleared.

Table LB.3: Average Land **Holding Per** Household ' Region (acres)

|Region|Size<br>of<br>Land|Owred<br>and<br>Operated|Leased<br>or Share<br>Cropped<br>Out|Leased<br>Or Share<br>Croppeed<br>In|Owned<br>and<br>Fallow|Owned<br>and Not<br>Cleared|
|---|---|---|---|---|---|---|
|AshanU<br>Brong Ahafo<br>Centrai<br>Eastern<br>**Greter**Accra<br>NorUwn<br>Upper East<br>Upper West<br>Voht|13.5<br>14.2<br>10.3<br>1 1.9<br>7.2<br>7.7<br>**e8**<br>8.6<br>8.1|5.3<br>25.8<br>4.2<br>6.6<br>38<br>7.4<br>6.7<br>8.0<br>4.2|1.0<br>0.3<br>0.4<br>0.7<br>0.00<br>0.0<br>0.0<br>00<br>0.1|1.1<br>3.3<br>2.6<br>1.5<br>06<br>0.0<br>0.0<br>0.0<br>06|5.3<br>4.8<br>2.3<br>2.5<br>2.1<br>0.1<br>0.1<br>0.5<br>1.9|0.8<br>0.0<br>0.7<br>0At#<br>08<br>**0.3**<br>0.3<br>0.0<br>1.3|
|Wetern<br>North<br>South<br>Ghana|1 1.6<br>7.7<br>11.4<br>10.5|4.2<br>7.4<br>5.0<br>5.6|0.1<br>0.0<br>0.5<br>0.4|1.9<br>0.0<br>1.6<br>1.2|3.6<br>0.2<br>3.5<br>**2.6**|1.9<br>_0.2_<br>0.9<br>**0.7**|
1.10 -

-

As It has already been polnted out farmers In Ghana may have more than one plot of land either In the same village or scattered in the farming areas. The average size of a plot In Ghana Is 4.44 acres (Table 1.8.4). Plot sizes tend to be bigger In the South than In the North. On the average, the plot size of a farm In the North Is 43.7 percent less than that of the farm In the South.

Ashanti Farmers normally plant multiple crops on the same plece of land. This is done to mitigate Brongyleld risk and also provide food security whereby the farmer ensures that most of his food Ahafoneeds are provided from his own sources. Annual crops could be mixed together or there Centralcould be a mixture of annuals and perennials. Thus the cropping pattern of an area could comprise a mixture of a number of crops. Apart from providing food and a cash Income, young cocoa trees are Interplanted with plantain, bananas and cocoyams. As the cocoa trees grow up and form a canopy, the food crops are elkuinatod.

Table 1.8.4: Average Size of Plot by Region (acres)

|Regio.|Size<br>of<br>Land|Owned<br>and<br>Operated|Leased<br>or Share<br>Cropped<br>Out|Leased<br>or Share<br>Cropped<br>In|Owned<br>and<br>Fallow|Owned<br>and Not<br>Cleared|
|---|---|---|---|---|---|---|
|Ashant<br>Brong Ahato<br>Central<br>Eastem<br>Greater Accra<br>Noren<br>|6.65<br>6.40<br>4.42<br>5.34<br>3.05<br>3.00<br>|2.59<br>2.6.<br>1.83<br>2.97<br>1.61<br>2.88<br>|0.50<br>0.15<br>0.17<br>0.31<br>0.00<br>0.00<br>|0.54<br>1.44<br>1.10<br>0.67<br>0.24<br>0.00<br>|2.63<br>2.20<br>0.99<br>1.13<br>0,88<br>0.02|0.39<br>0.00<br>0.32<br>0 25<br>0.32<br>0.10|
|Upper East<br>|2.11<br>|2.09<br>|0.00<br>|0.00<br>|0.02<br>|010|
|Upper West<br>Volta<br>|3.25<br>3.31<br>|3.04<br>1.76<br>|0.00<br>0.05<br>|0.00<br>0.32<br>|0.21<br>0.74<br>|0.00<br>0.52|
|Western<br>|4.80<br>|1.72<br>|0.04<br>|0.79<br>|1.47<br>|0.78|
|North<br>South<br>|2.85<br>5.06<br>|2.74<br>2.21<br>|0.00<br>0.22<br>|0.00<br>0.71<br>|0.06<br>1.53<br>|0.06<br>0.41<br>|
|Ghana|4.44|2.36|0.16|0.51|1.11|0.31|

Tree crops are cultivated In the forest zone. The most kIportant ones are cocoa and oll paln. The conditions that are suitable for the cultivatlon of cocoa are also suitable for oil pabn and so the two crops compete for land, labor and other
- 1.11 -

resources of the farmer. Forty-five percent of the respondents In southern Ghana cultivated cocoa and this represented 33.8 percent of aH the respondents (Table 1.9.1). Oil pakm was cultivated by 21.3 percent of the respondents In southern Ghana or 16 percent of all the respondents In the survey (Table l.B5).

Current output from a tree crop farm depends on the acreage and the ages of the trees since the age-yield relationship of trees have a great deal of impact on output. Cocoa and oil pakm trees were disaggregatad by vintage and the results are presented In Tables 1.B.6-8. There Is a large stock of old cocoa trees (20 years and over) of the traditional variety In Ghana. More than one-fourth of the acreage In cocoa have trees which are over 30 years old and most of these trees are of the traditlonal varlety. This result has a lot of consequence for cocoa production In Ghana since ylelds are very iow at that old age. The area under cocoa In Ghana started to shrink from the mid-19609 and reached Its lowest point around the late 19709. It Is noteworthy to point out the connection between acreage under cocoa and its real pt 'ce. Producer prices In real terms fell from 100 In 1963 to the 44-52 range In 1965-66. However, recent events ;ook promising for the cocoa subsector. Farmers have responded to new Incentives and carried out now plantings. Survey results Indicate that new plantings or cocoa under five years old cover 33 percent of all land under cocoa. Of these new cocoa trees, 90.9 percent of them are of the hybrid variety. Nearly 60 percent of these new farms planted to hybrid cocoa occurred In Ashantl and Western reglons. When all these trees start bearing they can boost Ghana's cocoa production by a large amount. In response to reduced Incentives In the growing of cocoa and therefore reductions In the average size of cocoa farms beginning In the mid 1960s, Interest started growing In oil palm cultivation with the average size of farms beginning to rise about two decades ago.
- 1.12 -

Tabt LL.: NI& r _of_ Farmers ok Cooa aWd 01 **Palo**

|||COCOA|||OL PALM||
|---|---|---|---|---|---|---|
|Region|Number|%Of<br>Souwm<br>Total|% Of<br>S<br>ySo<br>Tot|uem<br>Number|% Of<br>Totbl|% ot<br>Survey<br>Total|
|Ash"nX|91|17.3|13.0|12|2.3|1.7|
|Brong Ahao|27|5.1|3.9|6|1.1|09|
|CenVl|37|7.0|5.3|33|6.3|4.7|
|Ea*rn|42|8.0|6.0|14|2.7|2.0|
|VoIl|5|1.0|0.7|13|2.5|1.8|
|_Wee Ae_|35|6.7|5.0|34|6.5|4.8|
|Ohatr'|237|45.1|33.6|112|21.3|16.0|

Tabr 6: AV **Ae** trbuluon of Tracltuil Cocoa Trm" by Region

|Region|0.4|5,9|YEARS<br>10.14|(S)<br>15.19|20-29|30 plus|Al Ages (Aores)|
|---|---|---|---|---|---|---|---|
|Ashanl|1.39|0.00|4.18|11.68|36.55|46.20|214.5|
|BronoAhab|3.21|4.59|6.42|23.85|23.85|36.08|109.0|
|Cenmi|5.78|5.29|1.65|20.66|30.58|36.04|1210|
|Eastmn|2.18|0.35|0.65|2.46|0.77|1.50|89.5|
|Volta|0.00|0.00|100.00|0.00|0.00|0.00|1.0|
|Welern|3.30|0.00|6.35|14.21|4.82|71.32|31 5|
|Ghana|5.21|2.82|5.21|19.I6|27.0|35.89|566.5|

Table LB.7: Mean Age Dstrbuton of Hybrid Cocoa Tres by Region

|Region|0-4|5.9|Y EAAR<br>10-14|8I()<br>15-19|20.29|30 pFu|All Ages (Acres)|
|---|---|---|---|---|---|---|---|
|AehanU|58.06|12.62|12.28|7.77|3.11|1.16|257.5|
|BrongAhab|28.91|1.99|12.63|1.33|31.23|25.91|150.5|
|CenVa|37.50|25.86|2.59|26.02|6.03|0.00|118.0|
|E_sn|49.55|13.43|8.71|11.69|7.96|8.46|201.0|
|Volt|72.73|0.00|18.18|9.09|0.00|0.00|5.5|
|_WoeeSn_|81.89|0.00|0.00|13.39|1.57|3.15|127.0|
|Ghana|51.44|10.79|9.91|11.18|9.33|7.35|857.5|
- 1.13 -

Table 1X.8: Mean Agt Distrbution of ON Pal Tree by Rgon

|**Region**|**0-4**|**5-9**|Y EAR<br>10-14|S (%)<br>15-19|20-29|30plus|**All**Ages (Acres)|
|---|---|---|---|---|---|---|---|
|**Ashanti**|37.20|29.95|13.b3|**4.83**|14.49|0.00|<br>**103.5**|
|**erong Ahab**|2.04|40.82|51.02|6.12|0.00|**0.0C**|<br>49.0|
|**Centa**|40.57|46.38|4.95|5.24|2.8e|0.00|<br>105.0|
|E"JeYn|65.40|26.34|6.03|2.23|0.00|0.00|<br>44.8|
|vont|**1177**|12.71|67.72|7.80|0.00|000|117.0|
|Wesern|67.96|23.93|2.56|0.00|0.00|5.55|<br>117.0|
|Ghtana|**40.38**|30.13|**20.43**|4.12|3.64|1.31|<br>494.9|

Labor Slnce generally land can be obtained for agricultural purposes If the need be, the most constraining factor may be labor. Labor for farm operations can be obtained from the farm household or hired either on permanent or casual basis. Most of the labor Is supplied by the farmer and his spouse and other members of the household. In the Survey, 91.4 percent of the heads of households In the North and 74.2 percent of those in the South were married. About 85 percent of heads of households were under 65 years of age and so they formed part of the active farm labor force. The average size of a farm household is presented in column 2 of Table 1.8.9. There are more members in a norttiern household than a southern one wlth the survey average being about S. Since households have multiple farms, the small average household size puts a lot of stress on farm labor requirements. The use of family and permanent labor per tarm Is 2.2 adult persons (child labor Is valued at rialf adult labor) and they work 238 days on the average In a year. There are more family and permanent laborers per farm household in the North than in the South and on the average they work 44.6 percent more days than those In the South. More workers are Involved In casual farm work
_ 1.14 although they work loss number of days in a year than family and permanent workers. On the average there. are five casual laborers involved In :he farm operations of a household and they work about 62 days in a year. There are fewer people per household Involved In catual farm work In the South but they work more days than in the North.

Table L!3*: **Labor** Use on Farms by Region

||**Fai**<br>**ar**|**id Pwnmnt**|**Caw**|**il**||
|---|---|---|---|---|---|
|Region|Mean Size<br>of Farm<br>Households|Workers|Mean Days<br>Worked<br>Per Person<br>Per Year|Workers|Mean Days<br>Worked<br>Per Person<br>Per Year|
|**Ashanti**|5.2|1.7|214.8|2.9|49.4|
|**Brong**Ahao|5.2|1.8|218.6|3.5|55.0|
|Cental|5.5|1.7|233.0|7.0|74.7|
|Easrn|6.2|1.8|230.6|4.1|99.6|
|**GOmter**Accra|4.9|1.6|166.5|3.4|20.5|
|Norwrn|6.8|3.0|310.4|6.0|58.5|
|Upper East|6.0|5.0|264.2|7.0|38.2|
|Upper West|7.3|3.4|338.5|10.1|43.8|
|VoNt&|6.3|1.8|180.3|5.5|68.4|
|Western,|5.5|1.7|211.5|4.4|56.4|
|North|6.7|3.4|307.4|7.0|52.2|
|South|5.6|17|2125|45|65.1|
|Ghana|5.9|2.2|238 2|5.0|62.3|

# Purchased Inputs

Apart from farm knplements like axe, hoe, matchets, sickle, very few of the farm inputs are purchased. Lnilted amounts of fertilizer are used on food crops like maize, rice and pineapple. The major fertilizers used are NPK, urea and ammonium sulphate. Some cocoa farmers spray their trees wlth unden and gammalin Insecticide.

Farmers may purchase the seeds of knproved varieties from the Seed Company or other organizations Involved In seed multiplication. Hybrld cocoa seedlings may be obtained from the Cocoa Services Division of COCOBOD and oil pakl seedlings are obtained from the Oil Pakm Research Station at Kusl.
1.1 -

# Farm Operations

The first farming operaton Is land preparatlon.<sup>It can be done by manual labor</sup> with axe, cutlass and hoe, or with animal<sup>or machinery drawn implements. It Involves bush</sup> clearing, tree chopping, buo-ning and<sup>clearing of debris (apam). Due to the topography</sup> aimost all land proparaflons in the<sup>forest zone Is done by manual labor. To a large</sup> extent land preparation In the North<sup>is also manually performed</sup><sup>**althougn**</sup> there is soime use of animal powor. There are a few<sup>tractofs avallable which may be used for paowinSg</sup> and harrowing.

The amount of labor Involved in preparing<sup>a plce of land for cropping depends</sup> upon the previous use of the land<sup>or type of vegetatlon on It. Crops can be grown on</sup> virgin land, fallow land or a land already<sup>under a crop. Some of the big trees on a</sup> virgin land would have to be cut down<sup>with an axe during bush clearng. Therefore, land</sup> preparatin on virgin land may take<sup>several man days If the forest Is thick. Since land</sup> Is not left in fallow for too long, It may<sup>not take as long to cut down the trees during</sup> bush clearing as the land may not have<sup>big trees on It. Replanting on land on which an</sup> annual crop has been grown requires<sup>light bush clearing and so the demand on labor Is</sup> low. However, If the land had a tree<sup>crop on It, there may be the need to uproot the</sup> trees and so labor requirement could be<sup>substantial. In general, since the vegetation Is</sup> thicker In the forest zone then the savannah<sup>zone, bush clearing takes more man days</sup> In the forest areas than In the savannah<sup>areas.</sup> The mean labor requirements in man<sup>days for land preparation and weeding are</sup> summarized In Table l.B.10.
- 1.16 -

Tabt LS.1 0: Mean Lbr Requiremnt for Farm **OperatioB** (man days)

|**Region**|Bush<br>Ceaing|Tres<br>**Chopping**|Buming|Cleaning<br>('am)|W"ding/<br>Hoeing|
|---|---|---|---|---|---|
|North|6.9|3.2|1|4.8|7.1|
|South|13.2|8.1|1|9.1|14.2|
|_Ghana_|'V.S|7 6|1|8.7|_14_3|

Land preparation begins before the onset of the rains. In the South, the months of January, February and the fIrst half of March _are_ devoted to land preparation. The rains do not start In the North until late April or early May. Land preparation therefore starts around February and continues until April.

Plants can be planted In different ways, somethnes depending upon the crop and other tkmes upon the practice. For some crops, seeds can be sowed directly and for others, the seeds would have to be nursed Into seedlings before transplanting. The time required for planting depends upon the type of crop. It can take anything fr m one day for rice to 17 days for cocoyam. For instance, whereas rice can be broadcast, seed drills would have to be made for maize, mounds are made for yams, and holes are dug for oil pakm seedlings, cocoyam corms and plantain suckers. Fresh cocoa beans can be sowed directly. This Is the normal practice during rehabilitation of a farm when some dead trees are replaced. As recommended, replanting requires that the cocoa seedlings are raised In a nursery before transplanting them In the field.

When the seeds or seedlings are planted, certain operatlons are carrled out to take care of the plants. Cocoa trees need shade when they are young and so apart from leaving a few trees on the land durng land preparation, plantains and cocoyams are planted. These food crops provide the shade and also give the farmer some food and cash **ncome** during the non-yIelding years of the cocoa trees. Traps are made to
- 1.17 -

catch rodents and other small anknals which may prey on the young plants. Apart from preventing crop storage, the animals that the traps catch provide meat protein fcr the farm households. In addition to the traps, collars or rings made from wire gauze or raffla are put around young oil palm seedlings to protect them from rodent attacks. Artlficlal scarecrows are placed In cereal farms to scare away birds who may feed on the grains.

The most knportant farm majntenance or croP catr' operation Is weeding and/or hoelng. Weeds abound during the rainy season. The weeds compete with the crop for the available soll nutrlents and moisture. The more the weeds and the longer they cohabitate the soil with the plants, the lower the crop yield Is. It is therefore Important to weed around the farm a few times before harvesting. Weeds reduce as the plants outgrow them and form a canopy. On the average farmers weed around their plants twice In a season. The labor requirement for weeding depends on the spacing of the plants and the number of crops on the land. Thus, an acre of a monocrop land would take less man days to weed than It would a multiple-crop land. In the South, weeding Is largely done with a cutlass but In the North the hoe Is mostly used. The hoe Is also used to open up the soil for better aeration and seepage of water. Survey results Indicate that on the average It takes 14.2 man days to carry out weeding on an acre of cropped land In the South and half as long In the North. The large difference In the two figures may be due to the higher vegetative growth and the greater degree of multiple cropping In the South than In the North.

To maintain soll fertility, land that Is continuously cropped should be fertilized. Also to realize the full potentlal of an Inproved variety the soil should be fertilized to supply the optkial level of all soll nutrients In addition to adopting some approved cultural practices. Fertilizer needs water to be effective. In a ralnfed agriculture like Ghana's, there Is a risk In applying fertilizer when an uncertainty exists about the cilhate. The financial loss can be substantlal when there Is a drought. Rainfall patterns
- 1.18 -

Indicate that the chances for a drought In a particular year In Ghana Is one out of five. At this low risk level, the risk averse farmer can use fertilizer on his farm. Despite Its advantage, fertilizer is used by a small proportlon of the farmers. Only 14.3 percent of the farmers surveyed used fertilizer, and of this number, 66 percent were either maize, sorghum or milet farmers. None of the cocoa and oil palm farmers used fertilizer. As the population grows and food demand increases, Ghana would have to increase the food production o, resort to bIports. With a precarious export earn!ng potential, the viable alternative Is expansion In domestic production. Such an expanslon would put pressure on land and so the bush-fallow system would have to give way to more Intensive cultivation which would require the application of fertilizer to sustain the system. Even without an acute population pressure currently Ghana Is a high cost producer in many food conmmoditles like maize and rice. The cost per unit of output can be reduced substantially If ylelds would Increase. Yields can Increase through the use of fertilizer. If the widespread use of fertilizer can be postponed because of the abundance of land, It can hardiy be neglected In the cultivation of long cycle perennial crops. it is therefore disturbing that none of either the cocoa or oil palm farmers In the sample used fertilizer on their crops.

There Is very little use of insectIcides or fungicides on annual crops. Only 2.4 percent of the annual crop farmers used some sort of insecticide/fungicide. The situation was slightly better for perennials with 14.1 percent of the farmers spraying thear crops with insecticide or fungicide. Although the Cocoa Board recommends that cocoa farmers should spray their farms with Insecticide four tkmes In a year in order to control capsids and thereby Increase thelr yields, only 38.4 percent of the cocoa farmers In the survey spra>-hd their farms and most of them sprayed only once a year.

When the crops are matured, they are harvested. Some of the produce are consumed by the farm household and the surplus Is sold either In the local market or to a wholesaler who will take them to a large urban market. Groundnuts and the cereals
- 1.19 -

can be harvested continuously untit the whole crop has been Completely<sup>harvested. Due</sup> to problems of storage the root crops are harvested<sup>as they are needed for home</sup> consumption or for the market. The mean number of man<sup>days required in harvesting the</sup> annual crops Is summarized In Table 1.8.11. The harvested Droduce<sup>are carried in</sup> baskets or sacks to the house before they are sent to<sup>the market. Farms In the North</sup> are closor to the house of the households than farms in the South.<sup>Northern farmers</sup> practice what is termed 'compound farming' because the farm<sup>Is close to the house or</sup> dwelling place. Farmers In the South have to walk some distance<sup>before they get to</sup> their farms. Thus, distance from farm to house tend to be<sup>shorter In the North than in</sup> the South. On the average, It takes the farmer In the South<sup>24.5 percent more time to</sup> convey produce from the farm to the house. When the<sup>produce Is sent home, some</sup> minknal amount of processing Is done In case of cereals before<sup>the marketable surplus</sup> Is sold. Normally, millet, sorghum and rIco are threshed and<sup>maize Is shelled. Groundnuts</sup> may be sold shelled or unshelled. The labor requirements Involved<sup>In these operations</sup> are summarized In Table 1.8.12.

Table Mean Labor Requkrwmnt for Harvesthg One Acre of Varbus Aral Crops an Days)

|Region|Casuva|Yam|Miut|Sorghum|Rioe|Maize|Groundnut|
|---|---|---|---|---|---|---|---|
|North|9.7|8.1|5.3|5.2|10.7|9.6|5 5|
|South|14.7|14.1||.|21.7|24.2|6.3|
|Ghana|14.4|10.6|5.3|5.2|14.0|11.7|6.1|
- 1.20 -

**Tabt L LS12:** **_Mew LbO_ e~ibinen** **_fRW_ 1Iud*q Prou fraU Ore** **_Awe of Vwu Mwu_ CoP**

|Region|Mi|_Sorghum_|RiAe|Mai|
|---|---|---|---|---|
|North|6.7|4.6|6.2|9.1|
|South|||12.7|13.6|
|Ghana|6.7|4.7|5.4|12.3|

Mixed farming involves the raisig of both crops and **anhals.** Apart from generating an extra Income for the farm household and providng draft power and as a source of protein, ankual droppings can be used as manure for crop lands. In a country where fertilizer use Is ileted, the maintenance of sol nutrient with anbal waste material could be very essential. The major Ivestock kept by Qhwalan **farnrs** are cattle, sheep, goats, pgs, chickens and guinea fowls (Table 1i.13). Cattle re largely kept in the northern savannah. Over 90 percent of the cattle **belongi** to the households In _the_ survey were In the North. Both the North and the South have **sheep** and goats. There are about 28 percent more sheep and goats In the South than In the North. For religious and cultural reasons, many Ghanaians do not eat pork. The trend Is changing slowly especially In urban centers where port khebab Is becomig very popular. Consumption of pork can be hereased If more processed pork products could be made available on the market. Both the North and the South had about the same number of pigs, although the average holdng per household was higr in the North than In the South. Guinea fowls are reared mainly In the North **whereas** chickens can be found both in the North and South. Alfost every farm household **keeps** a few poultry birds either for the eggs, or the meat or occaslonally to sel when the cash flow is low. The average holding i the North Is 16 bids per household and seven birds per household In the South. Commrcial poultry (chickens) keepig Is undertaken aroUnd tho urban centers. None of them was Included In the survey **samPle.**
- 1.21 -

Table 1L.1 3: UveeWtok mbers and HodersNo a/

||Co|b|**Uwp**<br>|&Go"|PIs||_Po0I_|_41_|
|---|---|---|---|---|---|---|---|---|
|Region|Number|Holderl|Number|Holders|Number|<sup>Holders</sup>|<sup>Number</sup>|<sup>Holders</sup>|
|Ashani<br>Brong Ahafo<br>Cental<br>Efamn<br>Greer Accra<br>Nortwn<br>UpperEast<br>Upper WeN<br>Vora<br>Weeosm<br>Nokth<br>South<br>survey|0<br>0<br>0<br>0<br>12<br>451<br>182<br>342<br>34<br>35<br>975<br>81<br>1066|0<br>0<br>0<br>0<br>7<br>102<br>56<br>61<br>5<br>2<br>221<br>14<br>235|234<br>43<br>324<br>197<br>70<br>455<br>292<br>211<br>295<br>165<br>968<br>1328<br>2286|67<br>18<br>61<br>57<br>20<br>157<br>81<br>69<br>81<br>42<br>207<br>348<br>653|9<br>9<br>10<br>72<br>107<br>145<br>36<br>15<br>35<br>14<br>187<br>187<br>363|2<br>3<br>2<br>1<br>16<br>31<br>13<br>4<br>5<br>3<br>48<br>34<br>82|575<br>227<br>645<br>507<br>84<br>1368<br>1044<br>447<br>1056<br>**600**<br>2659<br>3694<br>6553|58<br>33<br>70<br>64<br>13<br>165<br>89<br>53<br>102<br>67<br>307<br>408<br>715|

a/ Holders may be greater than sample se<sup>due to aggregabon of animal t"yp.</sup>

* PourVy kiudes chckwns, skeys _and_ guWn fowla .

Livestock can be reared intensively by putting them<sup>In kraals, pens or coups and</sup> feeding them with concentrates, gralns, and fodder.<sup>Alternatively, they could be left to</sup> roam In an open space and look for food. Commercial<sup>rearing of cattle may use both</sup> techniques so that at certain times of the day<sup>the ankials are allowed to graze on a</sup> pasture and at other tknes, especially durlng the<sup>dry season, the feed Is supplemented</sup> with concentrates and grains. Commerclal raising of<sup>poultry requires keeping the birds</sup> in coups or houses and feeding them with concentrates.<sup>On the other hand, farmers who</sup> keep a few birds allow them te roam and look for<sup>their food although occasionally they</sup> are given small quantities of grains. Pigs<sup>are normally kept In pens but in the villages</sup> they are allowed to roam about.

One major cost component In livestock maintenance<sup>Is voterinary care and</sup> modIches. The anknals have to be vaccinated<sup>against some common Illnesses and when</sup> they are sick they have to be given drugs. Since the withdrawal of subsidies on veterinary drugs, veterinary care could be expensive.<sup>On the average, the Ghanaian</sup>
- 1.22 -

farmer spends $59.70 per cattle, $11.55 per sheep or goat, $13.00 per pig and $0.91 per poultry bird in a year on veterinary care. These expenditures are very low If one considers that the goverrnent has removod the subsidies on veterinary drugs. Apart from veterinary expenditure, other costs are mlnkial.
1.23 -

-

# C. ANALYSIS OF PRODUCER INVESTMENT RESPONSE TO COCOA PRICING POUCY

## 1. Methodology for Dynamic Analysis of Response to Pricing Policy

The analytical approach to cocoa Investment must start with the reality that SUCh Investments are long-lived (30 years on average) and Involve a significant gestation period between initial Investment and start of productlon (about 5 years) with an even longer perlod required to achieve full production. Thus, perennial crop Investments such as cocoa commit present resource outputs, as well as future ones, In order to generate future outputs, which _will_ be sold at unknown future pricos. In calculating the opportunity cost of conmitting land and labor to a perennial crop, the potential Investor must also form some notions of the future prices (and costs) of alternative crops, both annual and perennial.

Since no one has the ability to predict the future, the Investor must adopt some strategy In formulating expectations of the future. One such strategy Is to assume that the present situation remains the same In the future--e.g., existing prices, incomes, technology, or In a more sopilsticated form, their trend rates of change remain constant. This myopic strategy Is belled by history, and has little to recommend It. Another approach Is to use the past as a gulde to formulating expectations. This backwardlooking strategy Is better, and It often works well. However, It assumes that the pattern of the past will prevail In the future. This can be a dubious assumption In situations where people have no desire to follow the pattern of the past. Since the history in Ghana of economic policy has been of this kind, the past may be a poor guide to the future. Another approach Is to use all currently available informatlon to analyze the effects of present policies in formulathg expectations. This forward-looking strategy seems to be a better way of formulathg expectations for countries in Ghana's situation,
- 1.24 -

and It Is presumably the one used by farmers and other Investors In forming investment plans. Of course, If the economic policy of the government Is Inconsistent or chaotic, the plans made by private agents will minimize future commitments and seek rather to Invest outside of the country to the extent that this is feasible. For the purposes of this study, a continuation of the economic adjustment program that improves economic efficiency and leads to sustained growth is assumed. It should De noted that this scenario Is quite different from the experience of the past 20 years In Ghana, which have not seen sustalned growth In real per capita Income. In this sense, the study is conditional on the continued success of the adjustment program. Thus, a malntained hypothesis of the study Is that private agents such as farmers have formed similar expectatlons concerning the ongoing adjustment and that the Government of Ghana acts in such a way as to confirm these expectations.

Formulation of a simulation model requires careful specification of the domain of analysis--Le., what aspects of the economy (and the political and social environment) are to be taken as given, though subject to parametric variation to assess the sensitivity of model results to basic assumptions. In our context, this specification includes macroeconomic and International prices--e.g., real wage, real Interest rate, foreign exchange rate, world prices of cocoa and other tradeables--and the economic policies of the Government of Ghana. The model must be multiperiod In order to capture the essentlal way that time enters into decisions on long gestation, long-lived agricultural Investments. Model solutions simulate period-by-period multi-market equilibria for the major alternative commodity outputs from the agricultural sector. It Is necessary to model perennlal crops in the context of the agricultural sector since a comparison of expected returns from present and future alternative Investments In annual crops is critical to the efficient choice of perennial investments.
- 1.25 -

# Tree Crop Investments

The essence of a perennial crop Investment such as cocoa Is to plant tree seedllngs on cleared land set aside for the crop and to apply labor for cultivation, pruning, spraying of pesticides, etc., before and after the maturing trees begii to produce an output, as well as to harvest, ferment, dry and transport to market the output. In order to reallocate the land to another crop, It Is necessary to disirivast by clearing the land. If the prospective returns from alternative crops do not Justify the Investment In clearing, and the return from the crop Is so low that harvestlng and marketing the output Is unprofitable, then the land and the trees may be abandoned. This outcome may occur under some combinations of misguided policies and exogenous shocks. Therefore, we treat clearing and planting as separate Investment decisions and permit the (dis)invectment decision to abandon as well. Of course, the short-run marginal costs of producing from a mature tree are quite low In comparison with the long-run marginal costs of Investment and operations so that Is more likely that misguided policies will deter investment In planting while some level of harvesting remalns profitable. In modeling tree crops, accounting relationships distinguish each perennial variety by vintage (age) and tkie period. The stock of each perennial vintage Is a process variable that has a specific yield and specific Input requirements. Thus, the age yield curve of the perennial variety Is embedded In the model parameters.

Data on Initial tree stocks by variety, production, crop ylelds, technology, input use and prices are mostly taken from the 700 farm household Survey for Cocoa Producer Pricing (1987), although data from Ghana Cocoa Board, Ghana Ministry of Agriculture, Ghana Statistical Services and persons knowledgeable concerning crop agronomy were also used In estimating parameters related to crops. Typically, sample means and proportions were used as point estknates of population parametars. Mapping of task requirements Into Input requirements by months was done using crop calendars and agronomic consultation. While perennial stock proportions were taken from the survey, estimation
- 1.26 -

of total stocks required a sequence of Iterative model calibration solutions. ThiS expedient route was required diue to the total absence of the usual cansus type Information on perennlal crops.

# Land Allocatlon

Although Ghana has surplus land, such land Is not kimedlately available for agricultural use. A change In land use to agriculture requires migration of farm families and Investment In Infrastructure, e.g., roads, villagos. utilities to permit local Import of manufactured conswner goods and agricultural inputs and local export of agricultural outputs. The extension of the stock of land under cultivation or In bush fallow tones to proceed In parallel with populatlon and Income increases that tend to Increase population density on the land and create demand for greater agricultural outputs. So long as additional land of comparable quality can be cleared for agricultural use by means of migration of farm families to now lands and investment In Infrastructure, more Intensive use of existing agricultural land will not occur unless a now technology becomes available that Is at least cost competitive with tradItional methods using bush fallow. To date, this has not occurred on a signifhjant scale In Ghana or other West African countries. Thus, at any point In tkne, the stock of land available for agricultural use can be regarded as fixed, though ox or the medium term Increases In population and Incomes will create additinal demands for agricultural output that will result in the conversion of now !and to agricultural use under the traditional bush fallow cycle of Ghanaian agriculture. For each five-year period, the stock of agrlcultural land Is fixed, but between periods the stock of such land Is Increased In proportion to the Increase In population.

In the multl-agricultural market equilibrium within a t"me period, annual and perennial crops compete for the existing stock of agricultural land, with allowance being made for the required bush fallow under traditional practico. Note that any land In perennia! crops Is not avallable for other uses until It Is cleared. Skimlarly, land In bush fallow Is not
- 1.27 -

available for cropping use until It Is cleared. In order to keep track<sup>ot use in the five-</sup> year periods, the following accounting scheme Is used:

## **posbl** and uses:

xp cropped wlth perennials f fallow xe croPPed wltn annuals

# **poese** land tranactons **(at begig** of pwod)

|ap|abandoning perennlals|xp|--<br>3|f|
|---|---|---|---|---|
|aa|abandonig annual land|xa|-- >|t|
|cl|clearng|f|--<br>2|Xa|
|pi|plantng peronnials|f|-- >.|xp|
|fg|addition to land stock||-- >|f|

## and balnce relations:

xp(t+1) - xp(t) - ap(t+l) + pKt+1) ;(t+1) a f(t) + aP(t+l) - cKt+1) + fg(t+1) + aa(t+1)

- xa(t+1) xa(t) + cK(t+1) - pl(t+1) - aa(t+1)

## where the letter t Indicates a use or transactlon In period t.

## Labor Allocation

Crops In Ghana compete for two major inputs, land and labor. Unlike land, labor Is regionally and Internationally mobile. Since Ghana has a rural economy,<sup>the labor force</sup> Is predominantly rural and agricultural. Given that recent census type statistics on the labor force are not avaiable, the esthiates of labor force size,<sup>composition and growth</sup> are based on demographic statistbcs and projectlons. In our estleates, the labor force was identified as the class of people 15-44 years old. Given the predominantly rural
- 1.28 -

population of Ghana, this approxlmation Is sufficient for present purposes. Data from the Survey for Cocoa Producer Pricing Indicate that most of the labor empioyed in agriculture Is family labor. For such labor, there Is no market transaction from which wage Information can be obtalned. However, It Is also clear that family labor Is not willing to work in the fields for Infinitesinal returns. At some point, the disutillity of labor exceeds the utility valuation of the product from an additlonal hour of labor. Therefore, there exists a reservation wage (In the sense of a return In real output) below which the individual will not work. While the reservation wage Is a subjective magnitude and thus specific to Individuals, It will have a mean value across a farm population. Since the mean reservation wage Is not observable, it is a parameter that Is estimated In the process of model callbratlon. The estimate used In our modeling Is 50 percent of the daily wage for casual labor.

Since labor Is mobile, Interregional migration Is feasible; and, in fact, It Is observed In Ghana. In our modeling exercise, seasonal migrants between the two regions, north and south, are paid a premium for the cost and disutility of migration. Thus, the representative farm household faces a rising supply curve for labor through the Increasing cost over family labor of regional casual labor ard the premium over the casual wage paid to Interregional migrants.

Given that unskilled labor Is an economywide resource, Its wage Is determined in the general equlilbrlum of the economy. Thus, sectorwide modeling should treat the wage of labor parametrically; and this Is the way we handle It. This approach does present a difficulty In a multiperiod model: What will GDP and the %age of labor be In the future? In practice, we have estimated future GDP by assuming a steady but slow annual growth In output per worker (about one percent) combined with labor force estimates based on demographic projections, In this framework, two alternatives for projecting the time path. of the wage of unskilled labor are feasible. One assumes nio growth in real wages, with all of the Increment In real product golng to capital, including service of external debt,
- 1.29 -

and the other is to assume that some share of the Increment<sup>goes to labor, say 50</sup> percent. Both alternatives were simulated. The macroeconomic projections<sup>used In</sup> calibrating the multiperiod model are given In Tables l.C.1 and<sup>analogous projections for</sup> an associated annual model are given In Table I.C.2.

As already noted, the macroeconomic projections<sup>have assumed an elastic supply</sup> of arable land and a constant ratio of land to agricultural<sup>worker. in addition, the yields</sup> for annual and perennial crops are assumed to remain<sup>constant.</sup> In effect, these assumptions kIply the projection over 50 years<sup>of the static technology of traditional</sup> agricultural practice using bush fallow. As section 1.8<sup>has shown, this Is the current</sup> situatlon In Ghanaian agriculture. With the exc0ptlon of hybrid cocoa, high yielding varietles are not In use on a significant scale. Nor are<sup>the fertilizer and pesticide</sup> packages used In Intensifying agriculture elsewhere In the world<sup>In common use In Ghana</sup> or other countries In West Africa. In consequence, even the<sup>hybrld cocoa yields are 50</sup> percent lower In Ghana and Cote d'lvoire than In Brazil<sup>or Malaysia. Nonetheless,</sup> projecting the absence of significant technical change In agriculture<sup>over a half century</sup> Is a very strong assumption, and most agronomists and plant<sup>geneticists would be appalled</sup> at such a suggestion. The problem Is not that we expect<sup>technical change to remain</sup> static, but rather that meaningful crop specific estimates<sup>of the course of technical</sup> change In Ghanaian agriculture are simply not available.<sup>At least by projecting the</sup> absence of significant technical change against a backdrop<sup>of rapid population Increase,</sup> we highilght the resource imbalances that will occur unless agricultural<sup>productivity does</sup> start to Increase.
- 1.30 -

# A Brif Technical Note

The core concepts of the Ghana Multiperiod Agricultural Sector Model (GMASM) are multinarket equilibrium and forward-looking investmont planning. Markets are linked over thne by the investmont activities of farmers and labor supply and demand changes due to population and Income growth. Demand Is shuply specified owing to a lack of recent demand studies for Ghana. Demand functions are Inoar in own price and per capita consumption expenditure, and parameter estkiatlon utilized base case price and quantity observations alng with elasticity esthiates obtained from demand studies of skuilar countries. Supply functions are defined hDlicitIy using Ihear activity analysis. Multhiarket equlilbrium Is sbuAlated by maxknizing the sum of consumers and producers surplus In each thke poriod, using a nonlinear programmuing algorithm. To avoid arbitrary selection of termhal conditions. the sibulation experients were run for a 50-year horizon without terminal stock levels. Inspection of the temporal trajectories of key variables revealed evidence of some boundary effects In the later tkne periods. However, trajectories through 30-year horizons were free from any observed boundary effects. A complete algebraic specification of the multiperiod model Is given In Section l.D. For readers with some knowledge of the Generalized Algebraic Modeling System (GAMS), a complete specification of the model In GAMS notation, inclAding parameter derivation and calibration, Is given In Annex A of this report.
- 1.31 -

# Tabl* I.C.1: Chono Wacroeconomic Projectiono

||Popu-<br>Labor<br>lation<br>Force<br>Year<br>(000.)<br>(000 )|Growth<br>in<br>**JP**<br>DP/<br>Labor<br>Pri<br>Worker<br>Productivity<br>_GOP_<br>|Conjuu<br>(°°°O<br>1975)<br>U/yr<br>(1Os1975)<br>(1O 3|**rivate**<br>vate<br>_<br>ption<br>of<br>975)<br>GOP|Conoumpton<br>PerCcpita<br>(19751)|
|---|---|---|---|---|
||1965<br>12,737<br>6,433|**.8425**<br>-<br>5,420<br>4,1|81<br>.77|328.3|
||1990<br>14,974<br>7,56"|.9186<br>1.74<br>6.*49<br>5,|212<br>.7C|346.1|
||1996<br>17,506<br>**6,954**|<br>.9944<br>1.60<br>6,904<br>6,|676<br>.76|381.5|
||2000<br>20,291<br>10,637|1.0734<br>1.50<br>11,416<br>6,4|49<br>74|416.4|
||2001<br>23,266<br>12,633|1.1421<br>1.23<br>14,453<br>10,5|61<br>.73|463.S|
||2010<br>26,290<br>14,914|1.2091<br>1.11<br>16,033<br>12,9|64<br>.72|493.9|
||2015<br>29,309<br>17,442|1.27"<br>1.06<br>22,249<br>15,7|97<br>.71|539.0|
||2020<br>**32,320**<br>20,101|1.3440<br>1.01<br>27,016<br>16,|911<br>.70|SS5.0|
||**2025**<br>35,215<br>22,724|1.4125<br>1.00<br>32,096<br>22,4|49<br>.70|636.1|
||2030<br>37,637<br>**25C.200**|<br>1.4<br>1.00<br>37,412<br>26,1|99<br>.70|692.1|
||2les<br>40,501<br>27,136|1.560<br>1.00<br>42,340<br>29,6|26<br>70|731.3|
||2040<br>**43,203**<br>29,944|**1.693**<br>1.00<br>47,449<br>33,2|28<br>70|769.1|
|Year|Perceetage<br>Itural<br>Labor<br>Labor<br>Force<br> Foreo<br>Rural<br>(000's)|Urban _<br>;<br>M.turel<br>S. Rural<br>Agrieulture<br>Force<br>LaborForeo"/<br>Labor Forces/<br>Labor Forcec/<br>(000'o)<br>(000 ')<br>(000'.)<br>(000o)|N.Agriculture<br>Labor<br>Force/<br>(000g*)|S<br>Agrieulture<br>Labor<br>Forceo/<br>(000*)|
|1986|<br>70.0<br>4,03|1,930<br>1,247<br>3,266<br>3,260|903|2,367|
|1990|67.5<br>5,107|2,459<br>1,415<br>6,692<br>3,697|1,024|2,673|
|1995|<br>15.0<br>5,620|3,134<br>1,612<br>4,206<br>4,214|1,167|3,047|
|2000|62.5<br>6,648|3,Ng<br>1,641<br>4,607<br>4,613|1,333|3,480|
|2005|<br>60.0<br>7,560|**5,053**<br>2,100<br>5,480<br>**1,466**|1,620|3,968|
|2010|**11.0**<br>6,650|6,264<br>2,396<br>6,254<br>6,263|1,735|4,528|
|2015|56.5<br>**9,655**|75607<br>2,730<br>7,125<br>7,135|1,976|5,159|
|2020|55.0<br>11,05|9,045<br>**3,063**<br>**7,993**<br>6,005|2,217|5,708|
|2025|**53.5**<br>12,157|10,5U7<br>3,367<br>8,790<br>0,602|2,436|6,364|
|2010|61.0<br>12,852|12,$40<br>8,S66<br>9,292<br>9,305|2,677|6,720|
|2035|<br>49.5<br>13,432|13,704<br>3,720<br>9,712<br>9,725|2,694|7,031|
|2040|46.0<br>13,694|15,052<br>3,649<br>10,045<br>10,059|2,786|7,273|

o/ Computed **an** 27.7% of rural/agriculture labor force.

b/ Computed **as** 72.3Z of rural/ogriculture labor force.

c/ Computed **a.** 72.4X of rural labor force.
- **i.a2** -

S oL..1L AC **DLsaaregation** of Macroeconomic Projections. 1964-95

|Year|(000'r)<br>Populatioa|(000'r)<br>Labor<br>Force|(000's<br>675)<br>GDr/<br>Worker|Labor<br>Prod.<br>rarowLb/Yr|(10¢75)<br>GDP|(106¢75)<br>ri.<br>Cons.|2<br>GOP|(675)<br>Pri. Cons.<br>Per Capita|
|---|---|---|---|---|---|---|---|---|
|1964|12,323|6.228|.$2$2||5,158|3,917|.759|317.9|
|1985|12,737|6,433|.8425|1.73|5,420|4,161|.771|328.3|
|1986|13,095|6,645|.8581|1.85|5.702|4,321|.756|330.0|
|1967|13,506|6,664|.8706|1.46|5.976|4.269|.718|317.5|
|1988|13,900|7,091|8884|2.05|6.300|4,725|.750|338.0|
|1989|14,468|7,325|.9036|1.70|6,619|4,964|.750|343.1|
|1990|14,974|7,566|.9185|1.65|6,949|5,212|.750|346.1|
|l991|15,449|7.825|.9332|1.60|7,302|5,476|.750|354.5|
|1992|15,940|8,093|.9461|1.60|7,673|5.755|.750|361.0|
|1993|16,446|5,371|.9633|1.60|8.064|6,048|.750|367.7|
|1994|16947|6,657|.9767|1.60|6,473|6,355|.750|374.6|
|1995|17,506|6,954|.9944|1.60|6,904|6,678|.750|381.5|
|1996|18,031|9.268|1.0101|1.56|9.362|7,003|.748|388.4|
|1997|18,571|9,593|1.0259|1.56|9,841|7,341|.746|395.3|

|**Year**|(000o c)<br>Rural<br>_L.F._|Rurcl<br>LI<br>asI<br>**Total**|(000s)<br>AMr<br>L.F.<br>/|(000'.)<br>Urbn<br>L.F.|(000'° )<br>N. Rural<br>L.F.<br>!'|(000"' )<br>S. Rural<br>L<br>b/|(000")<br>X.Agr<br>.P.L_V_|(000's)<br>SA&r<br>L.F b/|
|---|---|---|---|---|---|---|---|---|
|1984|4,397|70.6|3,183|1,831|1,218|3,179|882|2.301|
|1985|4,503|70.0|3,260|1.930|1,247|3,256|903|2,357|
|1986|4,618|69.5|3,343|2.027|1,279|3,339|926|2,417|
|1967|4.736|69.0|3,429|2,128|1,312|3,424|950|2,479|
|1906|4,857|68.5|3,516|2,234|1,345|3.512|974|2,542|
|1989|4,981|68.0|3,806|2,344|1,380|3,601|999|2,607|
|1990|5,107|67.5|3,697|2.459|1.415|3,692|1,024|2,673|
|1991|5,243|67.0|3,796|2,582|1,452|3,791|1,051|2,745|
|1992|5,382|66.5|3.897|2,711|1,491|3,891|1,079|2,818|
|1993|5.525|66.0|4,000|2,646|1,530|3,995|1,108|2,692|
|1994|5,670|65.5|4*105|2,967|1,571|4,099|1,137|2.966|
|1995|5,620|65.0|4,214|3,134|1,612|4,206|1.167|3,047|
|1996|5,976|64.5|4,326|3,290|1,656|4,322|1.196|3 129|
|1997|6,140|64.0|4,445|3,453|1.701|4,439|1,231|3.214|

**a'** Computed **as** 27.72 of rural/agr labor<sup>**force**</sup>

g/ Com puted **as** 72.32 of rural/&gr labor **force**
1.33 -

-

Since investment In cocoa production is long-term investment, the appropriate model for analyzing farmer Investment response to cocoa pricing and other government interventions Is a multiperiod, long horizon framework. However, many pollcymakers have difficulty thinking In terms of a sequence of five-year perbods; and quite often the focus of policy concern Is the near future. For these reasons, an associatea annual model for short- to medium-term projections has been developed to assist In linking the multiperlod model to current pollcymaker concerns. This annual model takes the perennial investment projections of the multiperlod model as given. Thus, the annual model decomposes five-year Investment projections Into annual projectlons by means of a smoothing procedure and then solves the annual model for the factor allocations, commodity outputs and prices for annual crop Investments In a given year.

# Model Validation Using the Annual Decomposition Model

The first application of the annual decomposition model Is to the recent past In order to compare model solution values with some observed annual quantities. However, In making such comparisons It should be kept In mind that the anniual model solutions are based on Investment results from the multiperiod model, which outputs solution values for five-year periods. Hence, both models necessarily abstract from short-run fluctuations due to the weather, strikes, natural disasters, etc. Rather, these models assess producer response over time to pollcy Intervention. Since farmer supply response In Ghana Is mainly characterized by allocation of land and labor to various crops, this allocation Is given In Table 1.C.3 for the validatlon period of 1984-87. Deferring discussion of cocoa production estkiates for the moment, we turn to allocation of land ar,d labor. Labor use Is estimated to Increase from 477 million mandays In 1984 to 563 million mandays In 1987, a gain of 18 percent over three years, or 5.7 percent per year. While this increase also reflects growth In the agricultural labor force, up 7.7 percent over the period, most of the growth Is
- 1.34 -

# **Taft** LC.3& **Ajui D0oef Otf lUrtOd Mod Valdstton Perod**

|You|**C**<br>**c**<br>Prod'n<br>(000C MT)|**ooa**<br>(000<br>Trad.|**Acgs**<br>GAcius<br>Hyblid|**aborUufon**<br>(MWonManda)<br>Annuul Pown.<br>Total|Labor<br>(MiNors<br>Famnil|Sources<br>Marndays)<br>y Casal|
|---|---|---|---|---|---|---|
|198445<br>1906861<br>1966.7<br>1967.66|226.9<br>227.9<br>228.9<br>230.0|994.8<br>670.6<br>660.5<br>846.4|71.6<br>637.6<br>1066.0<br>1264.2|266.1<br>2107<br>476.6<br>271.4<br>239.3<br>510.7<br>279.4262.3<br>541.7<br>251.5<br>262.0<br>563.5|470.2<br>499.0<br>526.0<br>544.9|6.6<br>11.7<br>1s.7<br>18.6|

|Y|CrtpA<br>(00W <br>A_nnAua_|crae<br> **AncMe**<br>Peren.|Farm kcome<br>(ehllndof1067 Cedls)<br>C<br>Iet<br>1<br>CAXOCWe<br>2|
|---|---|---|---|
|196485|**4000**|2665|164.3<br>209.3|
|**19854.6**<br>1966-67<br>19874.6|4700<br>4640<br>4662|3201<br>3534<br>3639|174.2<br>223.4<br>197.0<br>230.2<br>171.8<br>227.9|

due to hproved icentives for cocoa productlon and investment. Of the 86 million manday increase in labor utilization over 1984-87, 71 million mandays wore for work on perennial crops, mostly cocoa. Only relative mnor amounts of casual labor were used, with family labor accounting for 97 percent or better of labor hput each year.

The resurgence of peronnial crops, ospecially cocoa, Is also shown In the estkinates of acreages in annual and perennial crops, with annual acreage Increasing by 280,000 and perennial by 930,000 acres, of which 630,000 are In cocoa. The Increase in future cocoa production potential Is even greater since all of the Increased acreage (and more) Is In hybrid cocoa, which **enjoys** a 50 percont yield differential over traditional varlties. As we shall see, the reolacement of acreage In traditional varieties by planting of hybrld varieties Is desthnd to be an heprtant feature of cocoa Investments over the next decade. This transition has already occurred In the other major cocoa producing countries.
- 1.35 -

Estimates for two concepts of farm Income are also presented. Concept 1 is utility based in that the cost of labor Is netted from Income, most of wnich Is the estimated disutility of labor by family members. This Is the Income concept that enters Into the multiperlod decislons fo farmers in model solutions, and It Is the concept used for the Income estimates from the solutions of that model. Concept 2 Is more conventional In that labor costs are not netted out. This concept Is practically Identical to the value added concept used In measuring agricultural gross domestic product (GDP).

At this point, it Is useful to note that of the osthuates presented In Table 1.C.3, only the cocoa production and family Income (Concept 2) esthuates can be chocked against reliable, Independent estimates, although cocoa acreage can be checked against the Informal estimates of the COCOBOD. Clearly, the absence of census and survey data that documert the labor force and Its utilization, as well as an agricultural census that Integrates annual and perennial crops has created an information void concerning labor and land utilization that should be corrected.

Turning to the cocoa production estbmates for which validation Is possible, Table l.C.4 presents the relevant comparison. Clearly, simulated production Is acceptably close to actual productlon In 1985 and 1986. Note, however, that both 1984 and 1987 were years marked by exceptional weather that depressed cocoa production. Moreover, the cocoa buying price was still quite iow In real terms In 1984, provIding little Incentive for a complete picking of the cocoa on the trees. As already noted, the model cannot be expected to pick up the effect of short-run weather fluctuatlons. In fact, the simulated level of production shown, with annual cocoa production approxkmately constant over the perlod, Is precisely what should be expected given an IncreasIng price Incentive but a history such that cocoa Investments five to ten years previously were quite low due to weak Investment Incentives then.
- 1.38 -

Table LC.4: Cot rlson of Sbuated and Actual Cocoa Production

|Yer|Cooo<br>(000.<br>Simulated|a Prod<br>Metric<br>Actua|ucion<br>Tons<br>Simulated<br>/Actual|Cocoa B<br>(Ced<br>Currnt<br>Cedis|uying Price<br>is/kg)*<br>1987<br>Cedis|
|---|---|---|---|---|---|
|1964-85|227|175|52|30.0|54.2|
|1968.6|228|219|9|56.6|93.9|
|1968467|229|228|1|85.5|116.8|
|1967488|230|183|47|140.0|140.0|

Source: The WoMd Bank, Ghan Country Economic Meorandum, Report No. 751564 (Green Cover), November3, 1968, Statistical Appendix: Tabes 7.01, 9.01.

To compare farm Income estimates (Concept 2) from model solutions with estimates from the natlonal accounts, some adjustments to national accounts data are necessary. These are shown In l.C.5. The national accounts sectoral GDP estimates separate cocoa production and marketing from other agriculture and livestock, as shown (in current cedis) In rows 1 and 2 of Table l.C.8. To calculate the amount of cocoa GDP that accrues as Income to farmers, cocoa GDP (row 2) Is multiplied by the farmer's share of cocoa export revenue (row 3). yielding the desired amount (row 4). Estimated farm Income (row 5) Is then the sum of rows 1 and 4. The estimates In current cedis are then deflated to constant 1987 cedis, using deflators based on the average rural CPI for each year (row 6) to obtain farm Income (in 1987 cedis) In row 7. The GDP based estimates are then computed as percentages of the model estimates (row 9). Note that the exclusIon of Ilvestock and some high vaiued minor crops from the model Implies that the GDP based estimates should bo greater than the model estimates by perhaps 10 to 20 percent. Thus, the model estinates for 1984 are clearly too high by at least 10 percent; and the model estimate for 1987 Is low by perhaps 10 percent. However, given the weakness of the data base, and hence the strong assumptions that had to be made to
- 1.37 -

**Table** LC.5: **Calculation** of **Farm hkcoo** (Concept 2) **from the** National Accounts

||rTEM|1984|1985|1986|1987|
|---|---|---|---|---|---|
|1.|GDP, Agriculture & Uvestock (billions current cedis)|110.4|118.7|175.6|266.1|
|2.|GDP, Cocoa Production & Marketng (billions current cedis)|11.1|18.8|41.0|66.0|
|3.|Cocoa Farmers' Share, Cocoa Export Revenue|.311|<br>.320|.408|<br>.45 (est)|
|4.|Cocoa GOP Paid to Farmnrs (Row 2 x Row 3)|3.5|6.0|16.7|29.7|
|5.|Estmated Farm Income (Row I + Row 4)|113.9|124.7|192.3|295.8|
|6.|Rural CPI, Annual Average (1987=-100)|55.4|60.3|73.2|100.0|
|7.|Estmated Real Farrn Income (billions 1987 cedis)|205.6|206.8|262.7|295.8|
|8.|**Model**Estimate of Farm Income|209.3|223.4|230.2|227.9|
|9.|(GOP-Based Estmate/Model Estimate) x 100|98.2|92.6|114.1|129.8|

Source: The World Bank, 'Ghana Country Economic Memorandum, Report No.7515-GH-, (Green Cover), November 23, 1988, Statistical Appendix: Tabes 2.02, 7.01, 9.01.

generate both estimates of farm Income, the relative closeness of the two sets of farm Income estimates Is reassuring.

Finally, we note that the estimates of cocoa acreage In 1987 given In Table l.C.3 Imply total cocoa acreage of about 2,100,000 acres, or approximately 850,000 hectares. These estimates were derived first from the sample totals (by age class) of cocoa acreage obtained from the 1988 Agricultural Economics Survey for Cocoa Producer Pricing (by COCOBOD) and then projected to the natlonal level In the calibration of the Multiperiod Agricultural Sector Model. The exact calibratlon procedure Is given In Annex A, which lists the GAMS specificatlon for the model. The official COCOBOD estimate of cocoa acreage Is one millon hectares. There Is no precise way of resolving the difference between these two estimates of about 150,000 hectares short of a detailed census. However, we note that if the model estimate Is low, then model yield estimates (by tree ages) must also be too low. Again, only detailed measurements of cocoa yields (by age class) can answer this questlon.
1.38 -

-

# 2. Policy Simulatkns

In order to assess cocoa producer response to price Incentives In a dynamic context, several different sconarios are required since producer response is also a function of the available supplies of the inputs needed for cocoa investment and productlon, as well as the state of the Ghanaian economv and other policies of the Goverrvnent of Ghana. in general, the continued bmpiementation of the policy measures integral to the structural adjustment program Is taken as given. However, the progress of the Ghanalan economy Is stll subject to external economic and climatic influences as the history of the recent decade attests. Therefore, the following sequence of sconarios was simulated:

1. The effects of price incentives, given zero growth in population and per capita icome.

2. The effects of prico incentives, given population growth, but no growth in per capita income.

3. The effects of price incentives, given population increase and relatively slow growth in r capita income with some agricultural protection.

4. The effects of price incentive, given growth In populatlon and per capital income and a policy of food self sufficiency.

Scenarlo 1 Is included skmply to assess the effects of price incentives without the complications of growth In population and per capita Income. Scenar5o 2 introduces the affects of population growth alone, although with a proportionate Increase in land available for cultivation (as discussed above). This scenario essentially projects a continuation of the lack of growth In per capita Income of the past two decades, but without the distorted price incentives. It also Inpiles Investment in Infrastructure sufficient to extent the margin of cultivation proportionately with population growth. Scenario 3 Introduces the effects of slow growth In per capita income. As already noted, this scenario has two variants: one with no growth In the wage of unskilled labor, and another In which unskilled labor **receives** a 50 percent share of the Increment in per
- l.39 -

worker product. Sconario 4 **consilers the** effects of a policy of food self sufficiency on cocoa supply.

# Scenario 1 - Supply Response Under Fixed Resource Supplies

This Is a reference case, not a realistic sconario; however, It strips the situation to Its essentials, the use of land and labor In the production of cocoa, other perennials crops and annual crops. Except for the export crop, cocoa, all other crops are produced to supply domestic demand; and domestic supply and demand are equilibrated by an endogenous domestic price. The crops maize **and** rice, which compoet with Imports, are protected by a 100 percent tariff; and thol pricos are ondogenous only when less than twice the world price. The cocoa supply response for the fixed endowment case Is presented In Figure l.C.1 for a set of prico experW nts over a horizon of 50 years. Note that the Initial conditions are the same for each experiment--the stock of cocoa acreage by vintage and variety, cocoa production **and** the Ghana Cocoa Board buying price at the midpoint of the years 1985-89. Measuring the surply response as the average of the five-year average supplies over horizons of 20, 30 and 50 years and computing arc elasticities of supply yields tho estimates for this scenario presented in Table l.C.6. Clearly, the resporse Is Inelastic Irrespective of horizon except for the 120-140 cedls price Interval; and the estimates are consistent In the sense that they do not exhibit a large coefficient of variation. The clear implication Is that reducing the buying prico below 140 1987 cedis will significantly reduce supply, at least In a context of fixed resources.

Note the 30-year cycle In cocoa supply response which corresponds with the productive life of a cocoa tree. Since the tial conditons for cocoa tree stocks are relatively iow for historical reasons, heavy plantig of now trees Is profitable in the early periods when a buying prico that at least covers cost prevails, In additlon, It Is profitabie to scrap the stocks of traditional varieties in the hintlal periods since these are dominated by the hybrid varieties, In this respect, Ghana Is still going through the
1.40 -

-

Flgure I.C.1 COCOA SUPPLY RESPONSE UNDER FIXED RESOURCES <!-- Start of picture text --> 700- I<br>Suoo /<br>-s0o I .1 I I' -4<br>400 /<br>200 -<br>1987 1997 2007 2017 2027 2037<br>PERIOD MIDPOINTS<br>0 10 * Mo o 30 £ 0 X<br><!-- End of picture text -->
- 1.41 -

# Table LC.S: Arc Elasticiltes of Cocoa Supply

|Scenario&<br>Horizon|120-140|Cocoa BuyIng<br>140-160|Price Intervals<br>160-180|180-200|
|---|---|---|---|---|
|hbed Paourm<br>|||||
|20 years|1.573|0.584|0.472|0.448|
|<br>30 years<br>50 yeaus<br>Averag|1.213<br>1.149<br>1.312|0.441<br>0.537<br>0.521|0 461<br>0.501<br>0.478|0 468<br>0.481<br>0.456|
|Paon|||||
|20 years<br>|0.973<br>|0.439<br>|0.264<br>|0.274<br>|
|<br>30 yer|0.775|0.414|0.285|0.328|
|<br>50 years|0.916|0.355|0.286|0.315|
|<br>Aveage|0.888|0.403|0.279|0.306|
|PcpusaionandIoomGrowlh|||||
|<br>Cuas A:<br>Conudant Wage|||||
|<br>2sr yeus|_1.746_|0.714|0.392|0.373|
|<br>30years|<br>1.986|<br>0.913|<br>0.579|0.324|
|<br>50 years<br>|2.634<br>|1.616|0.786|0.476|
|<br>Average|2.122|1.061|0.586|0.391|
|Case B:<br>ocreasing<br>Wage<br>|||||
|<br><br>20 yura|2.043<br>|0.815|0.429|0.436|
|<br>30yeoas|2.567|1.042|0.690|0.366|
|<br>50 years|3.493|2.038|1.056|0.658|
|<br>Averwa|2.701|1.298|0.725|0.487|
|qiA In Populon&**hoame**<br> <br> <br>|||||
|<br>Vf<br>Zo<br>**Food**h|||||
|20**years**|0.043|2.019|**1.606**|0.562|
|<br>30**yas**|0.042|3.059|<br>1.931|0.710|
|<br>**50 years**|0.041|4.286|3.106|1.087|
|<br>**Aveagoe**|0.042|3.121|2.215|0.786|

transition to hybrid varieties that other producing countrles have essentially completed. Thus, supply roughly reproduces the shape of the age yield curve for hybrid cocoa trees In this scenario with fixed supplies of laind and labor.

The long gestatlon period of cocoa Investments converts the supply response to price Into a stock adjustment problem skiilar to the stock adjustment of any long-lived capital asset when relative profitability changes. Flgure l.C.2 presents the sequence of stock levels of cocoa acreage defining the adjustment path for each price experklent. Note that acreage stocks converge fairly rapidly (I.e., one to two periods) to the nelghborhood of the desired level, but further adjustments are necessary due to the unbalanced nature of the age composition of Initial stocks. Not surprisingly, acreage stocks show much less variation than cocoa production, which is constrained by the age compositlon of stocks.
- 1.42 -

Figure I.C.2 COCOA ACREAGE ADJUSTMENT TO PRICE UNDER FIXED RESOURCES <!-- Start of picture text --> 3.8<br>3.2 - / \ _ _ _ _ _ _ _ _ _ _ _<br>Ij 2.6-<br>AK1//N~~~~~~~~~~~~ \\ =\<br>4167 1907 2007 2017 2027 20:37<br>PERIOD MIDPOINTS<br>0 120 * 1 o g _0<br>q ~<br><!-- End of picture text -->
- L43 -

FlVU l.C3 FARM INCOME UNDER FIXED RESOURCES (oftI twof SW CeiIe} <!-- Start of picture text --> 240<br>am<br>300 o<br>30<br>no<br>300<br>no<br>go<br>- 3002~a 2032<br>o 30 + No0 o 30MO~ 0<br><!-- End of picture text -->
- 1.44 -

The anomalous acreage adjustment path under the 120 cedis per kilogram buying price reflects the marginal profitabillty of cocoa at this price. Only limlted amounts of resources can be bid away from other crops, requiring slower adjustment. The sharp rise In acreage at this price (in the 2015-19 perlod) reflects holding trees In production longer than Is profitable at hliher prices.

Sknulated varlatlon In total farm Income under a fixed resources scenario Is given In Figure i.C.3. Farm income Is defined as gross revenue (including farm level consumption valued at the endogenous market price) less purchased Input costs (including family labor valued at the reservatlon wage). In general, variation In farm income reproduces the pattern of cocoa supply response (at a constant price). Note the relative constancy of farm Income at the marginally profitable buying price of 120 cedis per kilogram in contrast to the divergent patterns of variatlon in cocoa supply and cocoa acreage at this price. These adjustments were necessary to roughly stabilize Income.

Patterns of land and labor use for a representative period (the years 2015-19) are shown In Figures 1 .C.4 and 1 .C.5, respectively. In contrast to cocoa output and farm Income, the allocation of Inputs varles smoothly across prices and periods. Since total land Is fixed under a given scenario, and a proportion of annual land must be held In bush fallow, only the allocatlon between annual and perennial crops contains any Information. The acreage In perennlals Increases almost linearly with Increasing cocoa buying prices (at roughly 100,000 acrea per 20-cedi increase in the price per kilogram). In contrast to land, at least seasonally unemployed labor exists for all solutions. Since total employment Is overwhelningly In family labor (never less than 97 percent), only total employment of ik - ***6** % **9 Y** family labor and the allocation of total employment between annuals and perennials are shown In Figure l.C.5. More complete data on sknulated labor employment Is given In Table 1 .C.4. As with land, labor al;ocatlon changes smoothly with both total family labor and allocatlon to perennials Increasing with Increases In the cocoa buying price.
1 .45 Figure 1.C.4 LAND USE UNDER FIXED RESOURCES, 2015-19 (MiLLior of Acres) <!-- Start of picture text --> 4.5<br>4.0<br>3.5<br>3.0<br>2.5<br>2.0<br>1.5<br>0.5<br>120 140 160 180 200<br>Cocoa Price (1987 Ccdib/Kgi<br>a Perennial + Annuol 0 Follow<br><!-- End of picture text -->
<!-- Start of picture text --> 0~~~~~~~~<br>4c~~~~~~~<br><!-- End of picture text -->
> - 1.47 -

t Total empoyment Increases by about three pwrcont as the cocoa price Increases from 120 to 200 cedis per klbgram, reflecting the greater labor Intensity of cocoa production. Scenario 2 - Effects of Population Growth on Supply Response This sconaro assesses the effect of parl Passu growth In population and cultivable land. The population projection, which was prepared by Rodolfo Bulatao of the Population and Human Resources Department of the World Bank, inplies declining fertility from the present rather high levobe. As noted before, the assoclated labor force estimates are defind as the class aged 15 to through 64 years. Both sets of estinates are givon in Table l.C.1. The cocoa supply responses generated by this modification of the reference case are presented in Figure l.C.6 for the same set of price experkments. Note the significant **werease** over the reforence case valiu for cocoa production In all of the exprints. This change Is due solely to a more elastic labor supply over time. Measurin supply response as before and computing arc elasticities of supply, we obtain the estimates presented In Table l.C. for this sconario. These estimates are qualitatively similar to those for the reference case. They Indicate an Inelastic supply response except possibly for the 120-140 codis Interval. Thus, the supply elasticities for this scenario also imply that reducing the buying price below 140 1987 cedis will significantly reduce supply.

With growth In population (and associated Increases in land in use sufficient to keep the land-man ratio constant), the pattern of cocoa production over time changes from the aimost pure cycles of the reference case to cycles with upward steps. In this C sconaro, as with the reforence case, It Is the Initial condition of relatively low cocoa production and acreage that creates the cycle by nduchg heavy planting (at profitable pricos) In the early piod. This pattern of hvistment combinod with the productive life cycle of the cocoa tree and an incoasig endowment of labor (and effective land) results In the pattern of stepped cycles, in contrast, the adjustments of cocoa from
1.48 -

-

Flgure 1.C.6 COCOA SUPPLY RESPONSE UNDER POPULATION GROWTH <!-- Start of picture text -->
1.2-<br>'.5<br>0.4<br>0.37<br>0.2<br>1967  1997  2007  2017  2027  2037<br>PERI;O MIDPOINTS<br>0  m  *+  140  o  2 0  00<br><!-- End of picture text -->
- 1.49 -

**Table LC.7: Sujlated Aruul Pattern of Labor Uso hI 2015-19 Period (mulons** of **man-days)**

|Scenario|Cocoa<br>Producer<br>Price|Peren.<br>Crops|USES<br>Annual<br>Crops|Total|Family<br>Labor|SOURC<br>Casual<br>Labor|ES<br>Under<br>Employ.|
|---|---|---|---|---|---|---|---|
|Fixed<br>Resources|120<br>140<br>160<br>180<br>200|354.1<br>358.2<br>364.3<br>378.1<br>392.8|256.1<br>251.2<br>247.9<br>242.9<br>237.8|610.2<br>609.4<br>612.2<br>621.0<br>630.6|597.7<br>599.1<br>601.2<br>607.4<br>614.2|12.5<br>10.3<br>11.0<br>13.6<br>16.4|808.8<br>809.7<br>806.8<br>798.0<br>788.4|
|Population Growth<br>Only|120<br>140<br>160<br>180<br>200|687.5<br>789.4<br>810.1<br>839.6<br>868.0|603.5<br>563.4<br>552.3<br>540.6<br>529.6|1291.0<br>1352.8<br>1362.4<br>1380.2<br>1397.6|1277.8<br>1322.7<br>1330.3<br>1343.6<br>1356.7|13.2<br>30 1<br>32.1<br>36.6<br>40.9|1812.4<br>1750.5<br>1740.9<br>1723.2<br>1705.7|
|Population & Income<br>Growth|120<br>140<br>160<br>180<br>200|330.4<br>488.7<br>628.8<br>720.1<br>769.4|738.4<br>679.5<br>630.1<br>581.8<br>563.8|1068.8<br>1168.2<br>1258.9<br>1301.9<br>1333.2|1068.8<br>1168.2<br>1254.9<br>1288.6<br>1312.2|00<br>00<br>4.0<br>13.3<br>21.0|2034.5<br>1935.2<br>1844.5<br>1801.4<br>1770.1|
|Population,<br>**come**&<br>**Wags**Growthi|120<br>140<br>160<br>180<br>200|243.4<br>432.4<br>577.9<br>662.8<br>749.1|779.5<br>699.0<br>647.4<br>606.4<br>571.8|1022.9<br>1131.5<br>1225.3<br>1269.2<br>1320.9|1022.9<br>1131.5<br>1225.3<br>1263.4<br>1303.4|0.0<br>0.0<br>0.0<br>5.8<br>17.5|2080.4<br>1971.9<br>1878.1<br>1834.2<br>1782.5|
|Food<br>SelffSufficiency|120<br>140<br>160<br>180|215.7<br>215.8<br>380.7<br>6214|814.6<br>814.5<br>743.5<br>4|1030.3<br>1030.3<br>1124.2<br>|1030.3<br>1030.3<br>1124.2<br>|0.0<br>0.0<br>0.0<br>|2073.0<br>2073.0<br>1979.2<br>|
||<br>200|.<br>717 1|60.8<br>599.4|1262.2<br>1316.5|1262.2<br>1303 4|0.0<br>13.1|1841.2<br>1786.9|

acreage (I.e., investment and disinvestment In cocoa trees) at each buying price shown In Figure l.C.7 reduce to almost a pure step functlon since these do not have the ageyield curve of cocoa trees Influencing their form. The variation In farm income at various buying prices under this scenario, shown In Figure l.C.8, also has a rough step function form due to the Induced pattern of cocoa Investment and production and the growing avallabiiity of labor (and associated land) resources. The pattern of land use in response ***** varlation In cocoa bsylng price, nown In Figure I.C.9 for a representative period (the years 2015-19), now exhibits a sharp nonlinearity reflecting sharp the Increase In profitabiiity of cocoa production between prices of 120 and 140 cedis per kliogram. The pattern of labor use, shown In Figure I.C.10, exhibits this nonlinearity In attenuated form. The Increase In total labor employment between prices of 120 and 200 **cedis** per kilogram
1.50 -

-

Figure I.C.7 COCOA ACREAGE ADJUSTMENT TO PRICE UNDER POPULATION GROWTH <!-- Start of picture text --> a.<br>3 - s 2~~~~~~~~~~~~# / / / "_ _<br>2<br>1- .4 - ..<br>1987 1997 2007 2017 2027 2037<br>PERIOD MIDPOINTS<br>o f140 o + ISO 3 0 I<br>*~~~~~~ , .<br><!-- End of picture text -->
> - **1.51** -

# Figure I.C.8 FARM INCOME UNDER POPULATION GROWTH

(Billions of 1987 Csdis) <!-- Start of picture text --> 700<br>500<br>300 e<br>so~~~~~~~~~~~~ /<br>200-<br>1992 2002 2012 2022 2032<br>PERIOD WLDPOINTS<br>0 120 + 140 o 160 180 = 200<br><!-- End of picture text -->
- 1.52 -

Figure 1.C.9 LAND USE UNDER POPULATION GROWTH, 2015-19 (Miltiom of Acres) <!-- Start of picture text --> 10.0<br>9.0<br>8.0<br>7.0<br>4.0<br>3.0<br>2.0<br>1.0-<br>120 140 160 160 200<br>Cocoa Price 11987 Cede/Kg)<br>0 Perennai + Annuol 0 Foilow<br><!-- End of picture text -->
- 1.53 -

# Figure I.C.I0 LABOR USES UNDER POPULATION GROWTH, 2015-19

<!-- Start of picture text --> (littions of Nmn-Do")<br>1.4-<br>to<br>0.9 -<br>0.8 -<br>0.7<br>0.6<br>0.5_<br>120 140 160 180 200<br>Cocoa Price (1987 C.&/Kg)<br>3 POuUAL + ANUAL FAMIY LABOR<br><!-- End of picture text -->
- 1.54 -

is now about 8 percent. The significant increase in cocoa production under this scenario also reflects Increasing reliance on food grain Imports that permit more specialization in the comparatively advantageous cocoa crop. The simulated levels of imports are given In Table 1'.C.8. They rise to levels of 1.0 to 1.3 million tons per year under all of the simulated buying prices, In contrast to simulated Imports of only 0.4 million tons under all buying prices for the reference case.

# Scenario 3 - Effects of Growth In Per Capita Income on Supply

This scenarlo adds growth In per capita Income to the set of conditions that affect cocoa supply response. The income growth stems from an assumed growth In GDP per worker that averages 1.3 percent over the 50 year horizon. Estimates of this productivity growth, Its use in calculating estimated GDP and the assoclated growth In per capita GDP are shown In Tables l.C.1 and l.C.2. Note the full employment assumption implied by the calculation of GDP. A growth rate In output per worker of 1.3 percent Is not very large by International standards, but It represents a significant break with Ghanaian experienco over recent decades. The derived growth In per capita income averages 1.6 percent over the 50-year horizon owing to the Increasing labor force participation rate that follows from the declining fertility assumption. This phenomenon Is generally associated with declining fertility In the process of development. This scenario also distingulshes two cases--a constant wage case In which all of the Increment in domestic product accrues as Income to capital (including external creditors), and a real wage growth case in which labor receives half of the Increment In product. We examine first the constant real wage case. Cocoa supply responses for this case are given In Figure I.C.11 for the standard set of price experiments. It Is clear that the addition of income growth has drastically reduced the cocoa supply response at a given price, and this Is to be expected since the additional Income causes growth In food demand that raises food prices and Induces farmers to shift land from cocoa to food crops. The arc elasticities
- 1.5S -

# Table LC.8: Food Grahi ports ('000 metric torwm)

## **L Mai Upor** ndar FRed **P_owcu**

|Period|COCOA PRODUCER PRICE<br>120<br>140|(1987 CEDIS/KG)<br>160|180|200|
|---|---|---|---|---|
|1990.94|206.1<br>444.1|444.1|444.1|444.1|
|199S99|44.1<br>44.1|444.1|444.1|444.1|
|2000-04|444.1<br>444.1|444.1|444.1|444.1|
|2005-09|4441<br>444.1|444.1|444.1|444.1|
|2010-14|444.1<br>444.1|444.1|444.1|444.1|
|2015-19|444.1<br>444.1|444.1|444 1|U4.1|
|2020-24|444.1<br>444.1|444.1|444.1|444.1|
|2025-29|444.1<br>444.1|444.1|444.1|444.1|
|2030-34|444.1<br>444.1|444.1|444.1|444.1|
|**2035-39**|319.5<br>444.1|444.1|444.1|444.1|

## L **Maie**

## Undwr **P_xAUon rwh**

|Period|COCOA PRODUCER PR<br>120<br>140|ICE (1987 CEDIS/K<br>160|G)<br>180|200|
|---|---|---|---|---|
|1990-94<br>1995-99<br>**2000.04**<br>**2005409**<br>2010-14<br>2015-19<br>2020-24<br>2025,'9<br>2030-4<br>|318.0<br>522.2<br>610.1<br>610.1<br>707.4<br>707.4<br>811.3<br>811.3<br>916.5<br>916.5<br>1021.8<br>1021.8<br>1127.0<br>1127.0<br>1091.4<br>1227.8<br>1080.7<br>1319.3|522.2<br>610.1<br>707.4<br>811.3<br>916.5<br>1021.8<br>1127.0<br>1227.8<br>1319.3|522.2<br>610.1<br>707.4<br>811.3<br>916.5<br>1021.8<br>1127.0<br>1227.8<br>1319.3|522.2<br>610.1<br>70-<br>3<br>s<br>6<br>10<br>1<br>112t.0<br>1227.8<br>1319.3|
|**2035-39**|934.5<br>1412.1|1412.1|1412.1|1412.1|

**1** Maie **and** Rio **h.pog** Undw **PopuIafon wnd cme** Gro*,M

|Peliod|Grain|120|COCOA PROD<br>140|UCER PRICE (1<br>160|987 CEDIS/KG<br>180|)<br>200|
|---|---|---|---|---|---|---|
|1990-94<br>1995-99<br>**200004**<br>2005-09|Maize<br>Maize<br>Maize<br>Maize|312.3<br>649.7<br>788.9<br>942.4|534.7<br>649.7<br>788.9<br>942.4|534.7<br>649.7<br>788.9<br>942 4|534.7<br>649.7<br>788.9<br>942.4|534.7<br>649.7<br>788.9<br>942.4|
|2010-14<br>2015-19|Maize<br>Maize|1110.5<br>1295.2|1110.5<br>1295.2|1110.5<br>1295.2|1110.5<br>1295.2|1110.5<br>1295.2|
|2020-24<br>2025-29<br>i<br>2030434<br>2035-39|Rice<br>Maize<br>Rice<br>Maize<br>Rice<br>Maize<br>Maize<br>Rice|1491.7<br>1706.2<br>600.2<br>2111.6|1491.7<br>81.9<br>170G.<<br>988.4<br>2125.5|1491.7<br>81.9<br>1706.2<br>183.7<br>1393.7<br>2125.5|1491.7<br>81.9<br>1706.2<br>215.6<br>1393.7<br>2125.5<br>169.6|3.3<br>1491.7<br>1706.2<br>215.6<br>1393.7<br>2125.5<br>426.4|
**1.56** -

-

**IV. Main aid Nos MOM Lkdw Papuluiwi.** v & **Wag O** **_wt_**

|Period|Grain|<br>120|CO;OA PRO<br>140|DUCER PRICE (1<br>160|987 CEDIS/KG)<br>180|<br>200|
|---|---|---|---|---|---|---|
|1990-94<br>1995-99<br>2000-04<br>2005-09<br>2010-14<br>2015-19<br>2020-24<br>2025-29<br>2030-34<br>2035-39|Maize<br>Maize<br>Maize<br>Maize<br>Maize<br>Maize<br>Rios<br>**Maize**<br>**Rice**<br>Maize<br>Rice<br>Maize<br>Maize<br>**Rice**|284.8<br>649.7<br>788.9<br>942.4<br>1110.5<br>1158.0<br>1491.7<br>1706.2<br>450.3<br>1938.4|534.7<br>649.7<br>788.9<br>942.4<br>1110.5<br>1295.2<br>1491.7<br>1706.2<br>771.3<br>2125.5|534.7<br>649.7<br>788.9<br>942.4<br>1110.5<br>1295.2<br>1491 7<br>1706.2<br>1316.8<br>2125.5|534.7<br>649 7<br>788.9<br>942.4<br>1110.5<br>1295.2<br>1491.7<br>83.5<br>1706.2<br>217.6<br>1393.7<br>2125.5|534.7<br>649.7<br>788.9<br>942.4<br>1110.5<br>1295.2<br>45.<br>1491.7<br>83.5<br>1706.2<br>217.6<br>1393.7<br>2125.5<br>354.5|

implied by this supply response are giver, In Table I.C.6 and these exhibit the same pattern as previous scenarios, elastic at low prices and inelastic at higher prices.

The simulated patterns of cocoa production over time for various buying prices under this scenario are In general quite similar to the stepped cycles of the population growth only scenario. However, In this sconarlo, the lowest buying price of 120. cedis per kilogram has cocoa production collapsing to qulte low levels as other crops are more attractive. That is, the growth In Income stimulates demand for foods, raising the prices of nontradable foods, and shift'ng resources away from cocoa production. In addition, the stimulus to food demand from Income growth boosts imports of food grains to levels that reach 1.5 to 2.5 million tons per year In the later time periods.

The simulated patterns of cocoa acreage adjustment under this scenarlo, shown In Flgure I.C.12, show the rough step function of the previous scenario at the hlgher prices. At the 120 cedis per klogram price, acreage collapses to under one mililon acres. At a price of 140 cedis per kilogram, acreage Just malntains its Initial level of silghtly over two millon acres. Thus, the price beiow which demand becomes elastic becomes 160 cedis per kilog-am under this scenario. The simulated levels of farm Income in the Income growth, constant wage scenario, shown In Fiqure I.C.1 3, follow the rough step function of
- 1.57 -

# Flgure 1.C.11 COCOA SUPPLY RESPONSE UNDER POPULATION AND INCOME GROWTH

(Constant Wag) <!-- Start of picture text -->
1.5<br>14  -<br>12<br>0.  o  14<br>0.5<br>0.7~~~7/<br>0.3<br>0.2<br>0.1-19207-<br>198769  07  2017  2027  2037<br>PERIOD MIDPOINTS<br>12~0  *  140  o  IS0  IGO  AK  20<br><!-- End of picture text -->
> - 1.58 -

Figure I.C.12 COCOA ACREAGE ADJUSTMENT POPULATION AND INCOME GROWTH <!-- Start of picture text --> (Comtant Ws)<br>6-<br>3<br>*=37 1997 2007 2017 2027 2037<br>PERIOD MIDOINTS<br>o W2 + 140 o 0 IG a IG a<br><!-- End of picture text -->
> _ 1.59 -

# Flgure 1.C.13 FARM INCOME UNDER POPULATION AND INCOME GROWTH

> (lilittfa of 1987 Codis)

<!-- Start of picture text --> 900<br>no 6<br>7W -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7<br>,/~~~~" ', *';<br>400-<br>300 -~\<br>200- Wti/0=0ofZ<br>l~~~~~~~~~~~~~~~ _<br>iSi92 2002 2012 2022 2032<br>PERIOD MIDPOINTS<br>a 120 + 140 o 360 I O A 2X<br><!-- End of picture text -->
- 1.60 -

the population growth only scenario up to the last two periods. These last two show a dip and then a rise that Is due to a boundary effect from the fixed horizon--adjustment of perennial acreages produces this effect.

Patterns of land and labor use for this scenario, shown in Figures 1 .C.14 and 1.C.15, respectively, both show Increased allocations of resources to annual crops at all prices, as would be expected. In consequences, the growth In agricultural employment going from a cocoa buying price of 1 20 cedis to one of 200 cedis per kilogram Is 25 percent. This Is a dramatic illustration of the Income redistributlonal effects of Increasing cocoa prices. The Increased pressure on agricultural resources raises prices of nontradable foods, labor wages and land rents. These changes raise the incomes of the poorer households, small farmers producing nontradable foods and landless laborers at the expense of more affluent urban consumers.

The patterns of cocoa supply response and acreage adjustment under the Income growth, Increasing wage scenario, given In Flgures 1.C.16 and 1.C.17, follow those of the constant wage scenario, except that levels are everywhere reduced due to higher labor costs. The same can be said for the patterns of farm Income, land use and labor presented in Figures 1.C.18, 1.C.19 and 1.C.20.
1.61

-

-

# Figure I.C.14 LAND USE UNDER POPULATION AND INCOME GROWTH, 2015-19

(MiLlions of Acres) <!-- Start of picture text --> 13.0<br>Ito<br>10.0<br>7.0<br>9.0<br>6.0(<br>3.0<br>4.00<br>2.0<br>120 140 160 180 200<br>Cocoa Price (1987 Cedis/Kgi<br>O Perennici + Annual ° Follow<br><!-- End of picture text -->
> - 1.62 -

**Fisure** 1.C.15 LABOR USES UNDER POPULATION AND INCOME GROWTH, 2015-19

<!-- Start of picture text --> (liLliam of aN-Dwa)<br>1.4-<br>1.3 -_<br>L2 -<br>Li '<br>LO l<br>0.8<br>0.7<br>0.5<br>0.4<br>120 140 160 10 200<br>Cocoa Price (1987 Cod&/Kgi<br>o PERIAL + ANUAL FAMLY LAS E<br><!-- End of picture text --> .
> - 1.63 -

Figure 1.C.16 COCOA SUPPLY RESPONSE UNDER POPULATION AND INCOME GROWTH <!-- Start of picture text --> (Increasing Wage)<br>1.4 -<br>13 -<br>1.2-<br>1I"<br>0.9 '<br>0.4-<br>0.3-<br>0.2<br>0.1<br>1987 1997 2007 2017 2027 2037<br>PERIOD MNDFOINTS<br>0 1 + 140 o I0 a 2O<br><!-- End of picture text -->
!.64 <!-- Start of picture text --> Figure 1.C.17<br>COCOA ACREAGE ADJUSTMENT. POPULATION<br>AND INCOME GROWTH<br>(Incrosing WVga)<br>4<br>2 -J I<br>I187 1997 2007 2017 2027 2037<br>PERIOD MIDPOINTS<br>0 120 + 140 o I0 I O 2<br><!-- End of picture text --> .
I.B5 -

-

# **Figure** 1.C.18 FARM INCOME UNDER POPULATION. INCOME AND WAGE GROWTH

(ItLtlfao of 196? CedIs) <!-- Start of picture text --> 900<br>700<br>-<br>600-<br>300 \\<br>200<br>1992 2002 2012 2022 2032<br>PERIOD MDPOINTS<br>0 0 + 140 o mI I SO<br><!-- End of picture text -->
- Xe -

**_Uies_** I.C.19 LAND US UNDER POPULATION. INCOME AND WAGE GROWTH. 2015-19

<!-- Start of picture text --> Vitt, of Aem<br>sdo - ILO - ~ ~ ~ ~ ~ MII Lgs<br>n.0<br>VW -<br>10.0-<br>&o -<br>7.0<br>4.0-<br>3.0<br>2.0-<br>120a0 s0o IO 200<br>C Mm GM? C.4F/Kgl<br>0 ~~.ronnhoI * ~~Annual 0 Follow<br><!-- End of picture text -->
l.67

-

-

> Figure 1.C.20 LABOR USES UNDER POPULATION. INCOME AND WAGE GROWTH, 2015-19

<!-- Start of picture text --> (Ultlm of mm-oe")<br>1.4<br>1.32<br>11 1.<br>0.9<br>0.8<br>0.7<br>0.6<br>0.5<br>0.4<br>0.2<br>120 140 160 IS0 200<br>Cocoa Pice (1967 C.4/KSI<br>a PERENAL + AN JAL r A.? LuO<br><!-- End of picture text -->
- 1.68 -

# Scenario 4: Effects of a Policy of Food Self Sufficiency on the Cocoa Supply -- Response of Scenario 3

The thrust of this scenario Is to remove the possibillty of food Imports from the adjustments of the previous sconario. Solutions to experiments in the previous scenario, particularly at higher price levels, Included Imports of up to 2.5 million tons of maize and rice In later time periods of the 50-year horizon. Elkmination of these removes the gains from trade achieved by importing maize and rico at constant prices and shifting land and labor Into the more valuable cocoa crop. In consequence, cocoa production virtually collapses at the iower price levels once the horizon extends beyond 20 years. As Fgure I.C.21 shows, only a price of 160 1987 cedis or higher assures cocoa production throughout the 50-year horizon. Moreover, the quantities produced, when cocoa is produced, are much less than under previous scenarios.

Patterns of cocoa acreage under zero food Imports, shown in Figure I.C.22, confirm the collapse of cocoa Investment at the lower buying prices. Even a price of 160 cedis per kliogram results In a decilne In cocoa acreage of 50 percent. Only at the higher prices does cocoa production and acreage increase. Thus, as Table 1.C.6 indlcates, at the iower prices supply elasticities are essentially zero. In the range from 140 to 180 cedis per kligram, supply Is elastic; and only In the Interval from 180 to 200 cedis is supply Inelastic.

However, under this scenario, farm Incomes Increase consistently (ignoring ths dip In the last two periods due to horizon effects) reaching the highest levels In any of the simulatlon experiments, as Figure l.C.23 shows. By ellmInating the galns from trade and thus shifting more land Into producing food grains via higher food grain prices, the prices of other foods and peremial crops tend to Increase In the competitlon for the supply of land and labor. Thus, agricultural prices, land rents and agricultural wages tend to Increase. These changes Increase farm Incomes. As cocoa prices exogenously Increase In this context, resources are drawn away from food production causing food prices to
> _ I.e. _

Figure 1.C.21 COCOA SUPPLY RESPONSE UNDER POPULATION AND INCOME GROWTH WITH ZERO FOOD IMPORTS <!-- Start of picture text -->
1.2-<br>Li -/\<br>0.  -<br>0.6-<br>0.7-<br>0.6-<br>0.5-<br>0.4-<br>0.3<br>0.2<br>0.1<br>s97  1997  2007  2017  2027  2037<br>PERIOD  MDPOINTS<br>* o 90  U  *  140  o  30  I O  X<br><!-- End of picture text -->
- 1.70 -

Figure I.C.22 COCOA ACREAGE ADJUSTMENT, POPULATION AND INCOME GROWTH WITH ZERO FOOD IMPORTS <!-- Start of picture text --> 6 -<br>,/' '\\<br>4 -<br>2 J<br>=7 l 200t 2017 2027 2037<br>PERIOD MDP>TS<br>O 1X ~~+ 140 oI8^SO 20<br><!-- End of picture text -->
> - L1-

<!-- Start of picture text --> 3g I.C23<br>FARM INCOME UNDER FOOD SLF-SUFFICIENCY<br>I.<br>_<br>0.9<br>OA~~~~~~~~~~~~~~~~~~<br>O I<br>0. -4<br>0.3-<br>02 1<br>1392 2002 2032<br>0 3 * "140 3L A a 200<br><!-- End of picture text -->
- 1.72 -

Increase and tending to increase land rents and agricultural wages. In short, the food self-sufficiency scenario turns the internal terms of trade toward agriculture, which as already noted has beneficlal Income distributlonal effects in that it Increases the welfare of poorer families. On the other hand, it raises the cost of Wlving in urban areas, increasing the real wage cost to urban employers.

The patterns of land and labor use under zero food kmports, given in Figures l.C.24 and l.C.25, confirm the Increased resource aliocatlon to annual food crops. Under this scenario, agricultural employment increases by 28 percent as cocoa buying prices are Increased from 120 to 200 cedis per kliogram.

Annual Decomposition for the 1988-97 Decade of selected Experbkents by the Multiperlod Model In order to assist the reader In assessing the medium-term knplicatlons of several of the more likely scenarios, the annual decompositlon model was used to provide annual projections over the next decade. The particular experknents selected were:

- I. Growth In population, Income and wages at a constant real cocoa buying price of 140 (1987) cedis.

- II. Growth In populatlon and Income at a constant real cocoa buying price of 160 (1987) cedis.

- Ill. Growth In population and Income wlth no grain knports at a constant real cocoa buying price of 160 (1987) cedis.

Glven the apparent fIscal needs of the Goverrwnent of Ghana and Its feasible revenue alternatives, a real cocoa buying price of 140-160 cedis was judged to be the most likely range of policy choice. In particular, the 140 cedls price has been Identifled In many scenarios as the threshold below which producer supply response bocomes elastic, resulting in large foreign exchange earnings losses. Slmilarly, the 160 cedis price was Identifled In the food self-sufficiency sconarios as the threshold beiow which cocoa S,Apply collapses In the longer term. Results from simulations of the three sconaris are given
- 1.73 -

**Figure** 1.C.24 LAND USE UNDER SELF-SUFFICIENCY, 2015-19

<!-- Start of picture text --> (MiI.ttos of Mr")<br><!-- End of picture text --> <!-- Start of picture text --> 14.0-<br>13.0-I<br>Ito-<br>10.0 1<br>9.0<br>3O /<br>5.0<br>4.0 -<br>2.0 T<br>120 :40 160 180 200<br>Cocoa Puce (17 C.d/KqJ<br>a Perennsal * Annual O Follow<br><!-- End of picture text -->
- L74 -

# Ftpre l.C.25 LABOR USES UNDER FOOD SELF-SUFFICIENCY

<!-- Start of picture text --> (Sititon of NMi*ai)<br>t4<br>Li!<br>LO-<br>0.4 - ,<br>0.4<br>-<br>0.2<br>W2 140 360 N60 200<br>0oo-. P ( C/K<br>a P+NAL v MSWMA ' AMT AOMO<br><!-- End of picture text -->
- 175 -

In Table l.C.9. Starting with Exporkment I, which Is perhaps the scenario most likely to be realized, a striking result Is the slow Increase In cocoa production over the next few years despite significant planting investments in hybrid cocoa acreage. Production stays at 250,000 tons or below through 1990, and then rises steadily to over 500,000 tons by 1997. The main reason for this time of cocoa production Is the gestatlon lags of five years before productlon commences and ten years before full yield Is reached. Since significant new cocoa planting Investments were not occurrlng before 1985, full production on significant now plantings will not be reached until the mid-1990is The other reason for the lag In production Is a consistent decline in acreage In traditional varieties as overage tree stocks reach economic obsolescence. By 1997, the estimated 885,000 acres In traditional varieties In 1984 Is projected to decline to only 36,000 acres. For this reason, estknated total acreage In cocoa does not Increase over the decade. The gain In production comes from Increasing maturity of higher yielding hybrid variety acreage.

The lag of cocoa production behind cocoa planting Investments Is also reflected In the farm Income estinates (Concept 2), which remain below 250 billon cedis through 1991, and then steadily rise to over 400 billon cedis by 1997. In contrast, land and labor utilization Increase steadily over the decaae, with an additional 1.7 millior, acres going under cultivatlon and an additlonal 110 millon million mandays of labor employment projected, of which 64 millon are In perennial crops and 45 millon In annual crops. This behavior knpiies significant farm savings and Investment (mainly in the form of labor Inputs) In the early years of the decade, with the payoffs coming only after five to ten years. These Investments will not occur unless adequate Incentives to cocoa farmers are in
- 1.76 -

# Table I.C.9: Annual Decompositon of Multiperlod Model Solutons Estknates for Several ScenarIos, 1988-97

1. Growth in Population, Income & Wages Cocoa Buyug Price - 140 (1987 cedis)

|Yar|Cocoa<br>Prod'n<br>(OSOc MT)|Cocoa<br>(ooos<br>Trad.|Acreag<br>Acres)<br>Hybrid|Lab<br>(Milli<br>Annual|or Utiliza<br>on&(Mand<br>Pwn.|tion<br>ays)<br>Total|Labor S<br>(Millions/<br>Family|ources<br>Mandays)<br>Casual|
|---|---|---|---|---|---|---|---|---|
|1988<br>1969<br>1990<br>1991<br>1992<br>1993<br>i994<br>1995<br>1996<br>1997|229.0<br>234.0<br>250.9<br>276.2<br>309.7<br>352.1<br>399.6<br>448.2<br>488.3<br>513.6|771.0<br>656.5<br>522.0<br>384.9<br>262.4<br>171.8<br>108.4<br>67.8<br>45.3<br>36.4|1540.8<br>1818.6<br>2077.8<br>2283.5<br>2397.2<br>2381.4<br>2339.7<br>2298.7<br>2259.7<br>2224.2|284.2<br>283.4<br>286.8<br>290.4<br>294.2<br>301.6<br>309.1<br>315.9<br>322.7<br>329.5|306.6<br>328.2<br>348.0<br>362.2<br>367.8<br>361.3<br>361.8<br>364.7<br>368.0<br>370.5|590.8<br>611.6<br>634.8<br>652.6<br>662.0<br>662.9<br>67-.9<br>680.6<br>690.7<br>700.0|569.4<br>584.6<br>605.7<br>622.5<br>632.6<br>636.6<br>647.7<br>660.0<br>672.7<br>684.7|21.4<br>27.0<br>29.1<br>30.1<br>29.4<br>26.3<br>23.2<br>20.6<br>18.0<br>15.3|

|Year|Crop<br>(OOO<br>Aual|Acrege<br>e Acres)<br>Peren.|Grain<br>Impoits<br>(OSOs MT)|Farm<br>(Billion of<br>Concept 1|Income<br>1987 Ced5I)<br>Concept 2|
|---|---|---|---|---|---|
|1988<br>1969<br>1990<br>1991<br>1992<br>1993<br>1994<br>1995<br>1996<br>1997|4935<br>4968<br>5040<br>5093<br>5146<br>5255<br>5364<br>5474<br>5583<br>5694|4123<br>4405<br>4653<br>4844<br>4956<br>4966<br>4974<br>5002<br>5060<br>5113|100.0<br>502.9<br>534.6<br>564.1<br>595 7<br>629.3<br>665 2<br>703.7<br>t42.8<br>818.8|175.8<br>143.1<br>160.0<br>179.1<br>202.5<br>229.4<br>260.8<br>290.7<br>315.8<br>332.7|235.9<br>207.4<br>227.5<br>248.8<br>273.0<br>299.4<br>331.8<br>362.9<br>389.4<br>407.6|
- 1.77 -

11. Growth in Population & Income - Cocoa Buying Price 160 (1987 codis)

|**Yer**|Cocoa<br>Prod'n<br>**(000. MT)**|**Coco**<br>(000<br>Trad.|Acreage<br>9 Acres)<br>Hybrid|La<br>(Mil<br>Annual|bor Utiliz<br>lions/Ma<br> **Pern.**|ation<br>ndays)<br>Total|Labor<br>(Millionl<br>Family|Sources<br>Mandays)<br>Casual|
|---|---|---|---|---|---|---|---|---|
|1968<br>1969<br>1990<br>1991<br>1992<br>1993<br>1994<br>1996<br>1996<br>1997|229.0<br>234.0<br>250.9<br>276.9<br>314.0<br>365.3<br>428.0<br>499.1<br>568.2<br>626.7|771.0<br>656.5<br>522.0<br>384.9<br>262.4<br>171.8<br>106.4<br>67.6<br>45.3<br>36.4|1576.3<br>1921.7<br>2280.0<br>2610.7<br>2873.2<br>3027.0<br>2339.7<br>3106.7<br>3081 7<br>3046.2|263.3<br>281.7<br>282.7<br>263.8<br>281.7<br>292.7<br>309.1<br>312.7<br>320.3<br>327.5|310.5<br>337.9<br>365.4<br>389.3<br>406.5<br>414.3<br>361.8<br>427.1<br>432.4<br>437.9|593.8<br>619.6<br>648.1<br>673.1<br>666.2<br>707.0<br>67.9<br>739.8<br>752.7<br>765.4|571.8<br>591.0<br>614.7<br>630.5<br>646.0<br>663.1<br>647.7<br>705.8<br>719.5<br>733.2|22.0<br>28.6<br>33.4<br>42.6<br>42.2<br>43.9<br>23.2<br>34.0<br>33.2<br>32.2|

|Yew|Crop<br>(000<br>Annual|Acrege<br>Acre)<br>Prn.|Grain<br>Imports<br>(0006 MT)|Farm<br>**(Billns**of<br>Concept 1|Incone<br>1987 Crdis)<br>Concept2|
|---|---|---|---|---|---|
|1968<br>1989<br>1990<br>1991|4921<br>4960<br>**5000**<br>5039|4139<br>4455<br>4760<br>5034|100.0<br>502.6<br>474.6<br>460.4|176.6<br>144.4<br>189.5<br>224.0|236.8<br>209.0<br>257.4<br>295.6|
|1992<br>1993|5078<br>5196|5257<br>5411|542.2<br>629.3|244.1<br>250.3|317.2<br>325.3|
|1994<br>1995|5312<br>5429|5513<br>5584|665.2<br>703.7|270.2<br>291.1|346.1<br>387.7|
|1996|5546|5644|742.8|324.5|401.9|
|1997|5663|5712|784.3|351.3|429.6|
- 1.78 -

M. Growth In Popuation & Income wih No Grin ImporX **Cocoa** Ikyn Prce - 160 (1987 oedis) <!-- Start of picture text --> Cocoa Cocoa Acrea Labor Utllzaon Labor Sources<br>Prod'n (000s Acrs (Mililors/Manrdays) M<br>You (000. MT) Trad. Hybrid Annual Pow. Total Family Casual<br>1968 228.0 757.9 1365.2 296.3 284.0 580.3 562.8 17.5<br>1960 231.3 623.0 1421.2 310.9 280.0 590.9 576.0 14.9<br>19o 246.5 466.0 1424.1 325.6 276.8 602.4 589.2 13.2<br>1991 264.0 312.6 1426.1 340.4 276.2 616.6 604.2 12.4<br>1992 279.9 183.4 1459.2 355.1 281.1 636.2 622.8 13.4<br>1903 291.7 102.3 1555.5 360.5 290.5 651.0 637.2 13.8<br>1994 297.2 58.2 1685.5 366.6 302.0 667.6 653.3 14 5<br>1995 299.1 30.9 1819.6 371.3 312.5 683.8 669.0 14.8<br>1906 303.5 36.4 1928.4 376.6 320.6 697.2 683.0 14.2<br>=ao7 315.5 36.4 1962.2 362.1 324.4 706.5 694.2 12.3<br><!-- End of picture text -->

|Y u|Crop**A**<br>(0009<br>A<br>l|**creage**<br>AMs)<br>Peron.|Famr<br>(B13o11 of<br>Concept I|Income<br> 1967Codis)<br> <br>Concept2|
|---|---|---|---|---|
|198<br>1980<br>1990<br>1991<br>1992<br>1993<br>1994<br>**1905**<br>**19-6**<br>1997|5125<br>**5366**<br>**5670**<br>5853<br>6o09<br>6162<br>6269<br>**6355**<br>6442<br>6528|3970<br>4011<br>3996<br>3975<br>3965<br>4073<br>4209<br>**4366**<br>4514<br>4626|174.0<br>192.5<br>210.6<br>231.4<br>245.6<br>263.9<br>281.0<br>297.1<br>313.1<br>331.9|231.6<br>250.8<br>260.8<br>291.9<br>380.1<br>3276<br>346.6<br>364.3<br>381 5<br>401.0|

to cocoa farmers are In place early In the decade. Note also, the growth In inputs to **annual** crops Is restrahed by the Increase In grain kmports to 0.8 mIllIon tons by 1997.

Experkuents **II** and III are really a matched pair, differing only In whether or not grain huports are allowed. They will be discussed together sInce all of the differences are due to the reubrement that domestic food demand be met from domestic production In the no-food grains **hkorts** case. Thib requirement forces additional land and labor Into food production. Since cocoa production at a fixed real price Is an alternative, resources can be bid away from cocoa use only by IncreasIng factor returns and therefore food commodity prices (which are now totally nontraded). The results In 1997
- 1.79 -

are cocoa production that Is 100 percent greater than under food self-sufficiency at the cost of 0.8 million tons of grain bports when these are allowed. In both cases, the gestation lag results In remarkably shlllar cocoa productlon estimates through 1991. Though the food self-suffcIency scenario turns the Internal terms of trade toward agriculture, the static effickincy **loss** means farm _income_ Is lower and the greater labor Intensity of cocoa means that employment Is also lower under food self-sufficiency. However, self-sufficlency Is a standoff **hcome** and employment wise when compared with Sconario I. It can also be argued that the dynamic learnig by doing gains from higher food prices and greater food production would speed the modernization of Ghanalan agriculture.

To put the short-run cocoa prici3 hmplications of these experkments In context, the reader must keep In mind that cocoa nvostments are made when compared with alternativo Investments and In full knowledge of the gestation lag. There Is very llttle effect that a cocoa buying price announced this year can have on cocoa production over the next four years. It will have an increashg effect on productlon beyond five years.

From the risk bearing perspective, the government Is assuming all of the external price risk If It sustains a constant real price--this Is equivalent to a variable export tax. If the government levies a constant unit tax on cocoa, then the farmer assumes all of the external price risk. posint a constant ad valorem tax on cocoa results In risk sharlng between the government and the farmer, with the government risk share determinod by the level of the tax. In contrast, the farmer perceives a government prcig risk In that he doos not know what price the government will offor In the future when he makes a cocoa Investment. Shulathg a dynamically varying rIsk hmpiles a stochastic formulation, and this Is currently beyond the state of the art. Moreover, If the risk Is truly random, then In the **longer** run Its value should appraoch the mean (If the distrbution function Is weN behaved), and a deterstic formulation Is adequate for
- 1.80 -

assesshg long run hnvostment prospects. As a practical matter, the worst case<sup>is</sup> vacillating government pollcy that arbitrarily<sup>varles the real buying price (or real tax) since</sup> Investors will shorten Investment horizons<sup>(which Is the kiss of death forlong-lived</sup> investments like cocoa) until they have<sup>formed stable prior distrlbutlons. This might take</sup> long tine if government Is sufficiently arbitrary.

# Pollcy Implications of Simulation Experlments

It Is now appropriate to sort out the lmpications<sup>of the analytical work on cocoa</sup> producer supply response. First and foremost, It Is clear that<sup>specification of a</sup> producer buying price (even In real<sup>terms) Is not sufficient Information to permit</sup> unqualifled estimates of cocoa supply.<sup>Analytical methods which attempt to do this are</sup> really saying that the future will be like the<sup>past. In many contexts, this Is an acceptable</sup> approach; but givon Ghana's economic history<sup>of recent decades, such an approach can</sup> be misleading. Who could have predicted<sup>the exuberant cocoa Investment resDonse of</sup> Ghanaian farmers to Improved price Incentives,<sup>given the way that previous policy had</sup> worked against the Interests of cocoa<sup>farmers? Yet the evidence from the Survey for</sup> Cocoa Producer Pricing shows that 33 percent<sup>of existing cocoa acreage In trees have</sup> been planted In the past four years.

The results from the simulatlon experiments<sup>are less obvious since they are</sup> concerned with medium- and long-term<sup>horizons. The Inertia of the past weighs heavily</sup> on the adjustment path of long gestation,<sup>long-lived Investments. Thus, the differences</sup> among the several scenarios with<sup>respect to cocoa production and acreage are not</sup> great for the first ten years of the<sup>multieriod experhnents. By the tkme 40 years have</sup> elapsed, the differences can be huge.

Perhaps the real Issue of judgment<sup>iswhich scenario Is the relevant one for</sup> policy planning purposes? Since no<sup>one can predict the future, this Is not a question</sup> that responds to economic expertise.<sup>For that reason, several varlant scenarios have</sup> been shmuiated. However, discounting<sup>sconarios with zero population growth or with Income</sup>
- 1.81 -

but not wage growth as very unlikely, the supply for the remaining sconarlos Is given for ton and forty year horizons In Table l.C.10. The sconario wlth parl passu growth in population and cultivable land is In effect a simulation of Ghanalan experience over the past two decades. This Is the set of experiments which show the greatest growth In cocoa production and for which supply response Is inolastic over most price Intervals. Yet the bottom line Is static real Income for the Ghanalan people, and what use Is all the cocoa production?

Clearly, the sconarlos with positivo welfare kIplications for the Ghanalan people are those with growth In population and Income, with or wlthout a food self-sufficlency policy; and this kind of scenario Is the objective of the Economic Recovery Program. One knplicatlon of Table l.C.10 Is that a price of 120 cedis per kilogram is not sufficient to sustain cocoa production over the lngor term when Incomes are growing; If a food grain self-sufficiency pollcy Is adopted, neither Is a price of 140 cedis. Although sizeable volmes of cocoa can be produced at these prices over the medium term, say, ten years. At higher prices, cocoa supply response Is sustained over both medium- and long-term horizons. Thus, the questlon of the optknal level of cocoa taxation has a dynamic dknenslon that asks where will the competitive trade advantage for Ghana be In the long run? Past policy In Ghana can be Interpreted as having assumed that long-run advantage did not Include cocoa, but that assumption has not turned out to be true. At the very least, policy ought to consider mixed strategies which admit that present expectatins of the future can be mistaken.

Both of the scenarios positing Income growth, with or without food grain selfsufficiency, show substantial growth In employment as cocoa prices are Increased, reflecting the greater demand for resources as incomes Increase and more resources are shifted to labor-intensive cocoa production. Thus, a low cocoa tax, high cocoa production pollcy kmpacts quite positively on the incomes of the rural poor. Of course, the food grain self-sufficiency policy Impacts drastically on cocoa production at lower
- 1.82 -

prices. The reason Is quite shuple. This policy shifts resources away from more productive employment In cocoa<sup>production toward less effiient</sup> productlon In maize. It may be argued that this outcome<sup>Is really a consequence of the assumption of static</sup> agricultural technogy. However, until convincing evidence<sup>Is at hand that Ghanaian</sup> agriculture Is movlng to cost<sup>efficlent</sup> cost efficient higher productivity practices, a food self-suffiieWncy policy entalls<sup>heavy offilency</sup> **lsss.** On the other hand, combining food self-sufficiency with a high cocoa prie policy does yild a strong kIpact on employment of rural labor and smalholder<sup>farmer Incomes. The greater</sup> Impact on the welfare of the poor might be an<sup>acceptable tradeoff</sup> for lower static efficiency. Moreover, If It Is accepted that productivity<sup>enhanchg technh;al change In agriculture Is</sup> more likely in the context of<sup>rising agricultural employment and Incomes, then dynamic</sup> efficiency gans are more lkely<sup>under the food self-sufficincy</sup> scenario.

Table **LC.1** 10 Cocoa Supply Estbates ('000 Metric Tons)

|Horizon and Scenario|Cr<br>120|OOBjoINPvlc<br>140|(1987 cOiM<br>160|180|200|
|---|---|---|---|---|---|
|Ten-Year Horizon||||||
|Population Growti Only<br>Population, Income &<br>Wago Growth<br>Population &income Growth<br>(wliF no food imporb)|338<br>248<br>216|527<br>468<br>216|**643**<br>548<br>296|687<br>an6<br>440|728<br>6/6<br>530|
|Fort-vYew Hortzon||||||
|Population Growth Or<br>Populton.<br>bnom &<br>**Wa**<br>o<br>Population &ncom Growth<br>(no food<br>mo-)|1062|1449<br>314|1578<br>636<br>282|1697<br>1191<br>689|1781<br>1346<br>1179|
# D. ALGEBRAIC SPECIFICATION OF **GHANA** MULTI-PERIOD AGRICULTURAL **SECTOR MODEL**

|Set Definltions||
|---|---|
|Sot Name|D"|
|(r)|Agricultural regions|
|(rp)C(r)|Agricultural regions with perennial crops|
|tc)|Crop commodities|
|(ca)C(c)|Annual crop commodities|
|(cp)C(c)|Perennial crop commodities|
|(cn)C(c)|Natlonally consumed crop commodities|
|(cm)C(c)|knportedcrop commodities|
|(ce)C(c)|Exported crop commodities|
|(rc)C(r,c)|Crop possbilitles|
|(a)|Annual crop prooessos|
|(Ap)|Perennial crop processes|
|(ra)C(r,a)|Process posslbilltles|
|(t)|Thne In months|
|(v)|Vintage (in 5-year ordinal periods)|
|(vf)C(v)|First vintage|
|(th)|Tlme periods (5-year chronolgical periods)|
|(tl)C(th)|Initial period|
|(tp)C(th)|Tlme periods|
|(vtov)C(v,v)|Agelng sequence sets|
|(in)|Inputs|
|tk)|Tasks|
|(v)-(vv)|Alias sets|
|(c)-(cc)|Alias sets|
|(cn)-(cnn)|Alias sets|
|(v)-(vv)|Alias sets|
- _ 1.84

# Variable List

# Varabb Name

# Descr"tlon

|XA(TH,R,A)|Land under annual crops|
|---|---|
|TXA(TH,R)|Total annual land|
|XP(TH.R,AP,V)|Land under perennial crops|
|F(TH,R)|Fallow land|
|XPF(TH,R,AP,V)|Abandoned perennlal crop land|
|XAF(TH,R)|Abandoned annual crop land|
|CL(TH,R)|Cleared fallow land|
|LABFAM(TH,T,R)|Family labor|
|LABCAS(TH,T,R,RR)|Casual labor|
|OUTPUT(TH,R,C)|Crop connodity production|
|NATCON(TH,C)|Domestic consumptIn of crop commodity|
|EXPORTS(TH,C)|Exports of crop commodlty|
|IMPORTS(TH,C)|kIportsof crop commodity|
|INPCOST(TH,R)|Cost of purchased nonlabor Inputs|
|LABCOST|Labor cost|
|ICOST|Total Input cost|
|CPS|Consumers' and producers' surplus|
- 1.8S -

# Equation List

1. Perennial Land Baance XP(TH.RP,AP,V) * E XP(TH-1, RP,AP,VV) - XPF(TH,RP,AP,V) VVeVTOV(VV,V)

2.

<!-- Start of picture text --> Falow Land Balance<br>F(TH,R) - F(TH-I,R) + XAF(TH,R) + E XPF(TH,R,AP,V)<br>AP,Ve/VF(V)<br>+ GF(TH,R) - CL(TH,R)<br><!-- End of picture text --> 3.

- Total Annual Land Det tion TXA(TH,R) - £ XA(TP,RA) AeRA(R,A)

4.

- ItAhs Falow Requremmnt

- F(TP,R) 2 FREO(R) TXA(TP,R)

5.

6.

<!-- Start of picture text --> Arwuja Land Balance<br>-<br>TXA(TH,R) TXA(TH-1,R) - XAF(TH,R) + CL(TH,R)<br>- E XP(TH,RAP,VF)<br>(AP,VF)<br>Labor Balnce<br>L CLABREQA(R,A,T) + FREQ(R) TLABCL(T)) XA(TP,R,A) +<br>AeRA(R,A)<br>C(LABREQP(AP,T,V)XP(TP,RAPSV) + TLABPL(TAP) XP(TP,R,AP,VF) +<br>(AP,V) LENGTH<br>E LABCAS(TP,T,R,RR) + TLABCL(T) CL(TP,R) -<br>RR LENGTH<br>LABFAM(TP,T,R) + LABCAS(TP,T,R,RR) + t LABCAS(TP,T,RR,R)<br>RR<br><!-- End of picture text --> 7.

- Labor SuyPpy Constraint LABFAM + E LABCAS(TP,T,R,RR) < LABSUIIT(TP,T,R) RR

8. Prt.-ucton Acount g OUTPUT (TP,R,C) - E NYELD(R,CA) XA(TP,R,A)/1000 AeRA(R,A) + E XP(TP,R,AP,V) YIELDP(CAP,V) T E YELDP1 (C,AP)XP(TPSR,AP,V) (AP,V) (AP,VeVF) 9.

D_wnd Balance NATCON(TP,CN) - E OUTPUT(TP,R,C) + WPORTS (TP,CU) ReRC(R,C)

- EXPORTS(TP.CE)
**-** 1.86 **-**

10. Wkut **Cost ACOunthg** INPCOST(tP,R) . E CICOSTA(R,C) + FREO(R)INCOSTCL) XA(TP,R,A) AERA(R.A) + E ICOST(AP,V)XP(TP,R,AP,V) + INCOSTPL(AP) XP(TP,R,AP,V) (AP,V) (AP,VfVF) LENGTH + INCOSTCL CL(TP.R) LENGTH 11.

**L~LOW 0ost** ACWXMV LASCOST(TP,R) **a** £ (WAGEFAM(R)LABFAN(TP,T,R) T

- + E WAGECAS(RR,R)LASCAS(TP,T,RR,R)) (1 + WFACTOR(PINDX(TP) -1))

12. Total Cot **DetIfon** TCOST(TP) **-** E (CNPCOST(TP,R) + LASCOST(TP,R)) R 13.

**Mwket EiUibrkn Cndftlon** CPS **-a £** EDELTA(TPXE<sup>(ALPHA(CN)</sup> - GAMMA(CN)(1 + YFACTOR CN

- 2

- (CINOX(TP) -1)))NATCONWTP,CN) + .54ETA (CN) (NATCON(TP,CN] ) 1 + PFACTOR(POPINDX(TP)-1)

- - E PE(CE)EXPORTS(TP,CE) - **£** PM(CM)OAPORTS(TP,CM) - TCOST(TP))) **CE Cm**

14.

**Wm Condtw an Lwp Bowids** XP(TI,TPAP,V) **-**<sup>CALLOCP(AP,RP)</sup> YPROP(RPAP,V) TXA(TI,R) **-** E CALLOCA(A,R) **A** - FMTI) FRECKR) TXA (TIR) LAOFAWTH4T,R) O FRAT LR) LABSUPT(TH,T,R)
_ 1.87-

# Parameter List

FREO(R) GF(TH,R) LABREQA(R,A,T) LABREOP(AP,T,V) LENGTH TLA8CL(T) TLA8PL(T,AP) LABSUPT(TP,T,R) NYIELD(R,C,A) YIELDP(C,A,P,V) YELDPKC,AD) ICOSTA(R,C) ICOSTP(AP,V) INCOSTCL INCOSTPL(AP) WAGEFAM(R) WAGECAS(RR,R) WFACTOR YFACTOR PFACTOR PINDX(TP) CINDX(TP) POPINDX(TP) DELTA(TP) ALPHA(CN) BETA(CN) GAMMA(CN) PE(CE) PM(CM) CALLOCPAP,RP) CALLOCA(A,R) YPROP(RP,AP,V) FRAT(R)

|Fallow land required per annual rotation|(prop)|
|---|---|
|Growth additlon to land cultivated|(1 0OOA)|
|Total labor requirements, annuals<br>|(MVPA)|
|Total labor requirements, perennials|(.ADPA)|
|Length of the periods|(YEARS)<br>|
|Labor requirements, clearng land|(MDPA)|
|Labor requirements, planting perennials|(MDPA)|
|Total labor availabiNty|(1000 MD)|
|Net yild, annuals|(KGPA)|
|Perennial yields|(KGPA)|
|Oth<br>_peronnlal_(first peiod) yields|(KGPA)|
|Total hput cost, annuals|(1000 CPA)|
|Total input cost, Perennials|(1000 CPA)|
|hput cost, clearkig land|(1000 CPA)|
|Input cost, perennial plantig|(1000 CPA)|
|Family reservation wage rate|(1000 cedis)|
|Casual labor wage rate|(1000 cedis)|
|Wagegrowthswitch (zero or one)||
|Income growth switch (zero or one)||
|Population growth switch (zero or one)||
|Productivity ndex (1985-89-1)|(PROP.)|
|Consumption Index (1985-89-1)|(PROP.)|
|Population Index (1985-89-1)|(PROP.)|
|Discount factor|(PROP.)|
|intercept, commodity demand function||
|Price gradient, commodity demand function||
|Income shift, commodity demand function||
|Export commocity prices|(CPKG)|
|h4ort commodity pricss|(CPKG)|
|Gross perennial crop allocation (1987)|(1000A)|
|Gross annual crop allocation (1987)|(1000A)|
|Perennial yield proportions (1987)|(PROP.)|
|Fraction of famiy labor|(PROP.)|
- 1.88 -

<!-- Start of picture text --> Key to Unit AbNrevlatku<br>A Acre(s)<br>MD Man-day(s)<br>MOPA Man-days per acre<br>KGPA Klograms per acre<br>CPA Cedis per acre<br>CPKG Coes per kclbgram<br>PROP. Proportion<br><!-- End of picture text -->
# I. COCOA TAX AND REVENUE ALTERNATIVES

by _DWdE M. Ns.bw_
# 1. **INTRODUCTION**

Ghana's past cocoa t and pricing policy has caused cocoa exports to decilne steadlly over the past two decades. As part of the Economic Recovery Program the price paid to cocoa farmers has recently been significantly Increased, although In the 198788 season It was stlll less than 40 percent of the export price. The fIrst part of this Interku study examines the way In which Ghana's tax system and agrlcultural pricing policy has Influenced the composition and level of output of her agricultural sector, particularly In the cocoa growing regions. It also examines the consequences of this policy for Goverrnent revenue. The Government must decide on Its future price policy towards cocoa and other crops. These policies will affect future levels of agricultural output, forelgn exchange earnings, government tax revenue, and the standard of living of cocoa farmers. The final part sets out the case for ralshg the producer prico of cocoa as quickly as possible to at least 55 percent of the export price.

In 1986, the latest year for which esthiates are available, foreign exchange earnings In real terms were less than half their 1970 level, despite a considerable kIprovement over the recent past. Cocoa accounts for about two-thirds of Ghana's export earnings. World Bank projections show other sources of foreign exchange rlsirg from 32 to 37 percent of total export earnings by 1989, whilst debt service and Imports of necessities will place heavy demands on available foreign exchange. In the medium term it may be possible to diversify Ghana's exports, though most of the alternative agricultural exports are, like cocoa, tree crops with a lengthy gestation period. Despite the heavy discrh,inatlon against cocoa, there has been little evIdence In the past of any significant switch to alterative export crops, and It would therefore seem unwise to rely on any spontaneous Increase in earnings from these sources in the **short** to medium term. Export earnings from cocoa will remain central to Ghana's neods In thG foreseeable future.

Cocoa production will continue to declhe as trees age and yields fall, unless the rate of planting of new trees rises significantly compared with the past two decades or the productivity of existing trees Is -alsed, or both. Future world cocoa prices are
- 2.2 -

projected to decline as supplies from other countries expand, so wlthout an active policy to stimulate new cocoa planting, Ghana's export earnings will be severely squeezed. The most dire-t way to encourage more planting, and the more Intensive cultivation of existing cocoa trees, Is to raise the price to the farmer. In tne 3hort run this Is likely to reduce Goverrnment revenue, though the amount of cocoa harvested and sold should increase and offset some cf the revenue reductn. In the medium run (4-6 years) if the price Increase Is enough to stimulate new planting, cocoa supplies should Increase further as these trees come Into bearing, and the decline in revenue will be further offset. The Government therefore faces a difficult choice -- In order to reduce the pressure on foreign exchange earnings It Is desirable to Increase cocoa prices and face a reductkn In its cocoa tax rece4ts. This will be acceptable, provided there are alternative sources of revenue which have less damaging consequences on the economy than the present cocoa tax.

if COCOBOD Is to be In a position to argL, for ralsing the price of cocoa to farmers, then It needs to know the revenue Implications of this policy, and be able to compare the economic costs of the cocoa tax with those of other taxes that the Government Is currently examining. on addition, alternative taxes may have impacts or cocoa farmers which will affect their supply decision, and these need to be taken Into account when deciding on the appropriate cocoa pricing policy.

From a wider perspective, the Government should Oe concerned to choose a tax system and pricing policy which ral*es the required level of revenue efficiently and equitably. It Is therefore Important to compare the present taxes on cocoa producers with possible altemative sources of revenue. If It can be shown that cocoa taxes are less efficient and/or less equitable than altemative taxes, then the case for lowering cocoa taxes and replacing the lost revenue by these alternatives Is further strengthened. Of course, a study such as this whose prime focus is the cocoa industry cannot undertake a full review of the current tax system, which Is in any case the subject of
- 2.3 -

a World Bank stLAdy t be undertaken in early 1988. Instead this study will consider a limited range of alternative sources of revenue which have been suggested, and which are of direct relevance to the cocoa Industry.

One suggested alternative Is to replace, elther fully or partially, the cocoa tax by extending the present Income tax to cocoa farmers. At present, in prlnciple, all noncocoa agricultural income Is liable for direct taxation, though Income from cocoa Is exempt. It Is therefore Interesting to examine the case for such a chtngo, to see whether It Is warranted on efficiency and equity grounds, and whether It would be administratively sensible. Taxes on reported agricultural Income are not only hard to monitor, hut also suffer from the usual disincentive effects, and varlous economists, together with the _NF,_ have therefare argued for a land tax, effectively a tax on presumptive or po' ntlai Income, rather than a tax on agricultural Income. How far does this argument apply In Ghana? Would a land tax, assuming It to be feasible, be preferable to the present cocoa tax? If so, would It be administratively feasible In Ghana, elther now or in the Rikely future?

> Both agricultural Income taxes and land taxes are natural alternatives to the current cocoa tax, though both present formidable administrative problems. If, as seems likely, these difficulties rule them out, then alternatNVe sources of revenue will be iequired. One obvious alternative Is a broad based Indirect tax, such as sales taxes and/or hmport tariffs. Another Is an excise tax on transport fuel and/or purchase taxes or Increased licence fees on transport vehicles. Both would affect cocoa producers, though they would also have wider inpacts. Indirect taxes would reduce the purchasing power of cocoa farmers, whiist transport taxes would raise the cost of transporting cocoa from the farmer to the point of export. Nevertheless, because both taxes fall on other sectors of the economy, the net burden of taxes on cocoa farmers would fall, and one would like to know by how much.
- **:.4** -

At present, inputs such as pesticides, fungicides, fertilizer, sprayers and cocoa seeds are subsidized, In large part to offset the Ilaincentlve effects of the low producer price of cocoa. If the producer price Is Incteased, then the case for subsidies<sup>Is</sup> weakened, though not necessarily ehiminated. A coherent pricing policy for cocoa<sup>should</sup> therefore also consider th choice of the aproprlate level of subsidies on purchased Inputs.

Finally, cocoa Is an Investment with a gestatIon period of 4-5 years and a life of 30-40 years. Any change In tax or price policy will have consequences<sup>stretching</sup> Into the future, which need to be taken Into account. One potentially attractive way of summarizing theso dynamic apcts Is to discount the future hipacts on revenue back to the present. It may be that **raising** the price of cocoa Induces a sufficiently large supply response that although there Is an himdbate fall In cocoa tax revenue, future revenues actually Ierease. In an extremo case the present value of tax revenues might rise with an Increase In the producer price, makhg both the goverrwnent and the cocoa farmer better off. Even !f the present value of revenue falls, the not benefit to producers might be large compared wlth the fall In revenue, making It potentially attractive to switch to some altematIve source of revenue which has a lower Impact on welfa )er unit of revenue raised.
2.5 -

-

# 11. THE **ANALYSIS** OF **TAXIS AND TAX REFORM**

When consIdring a reform of tax*s or agricultural pricing polices, there are two natural ways In which to proceed. The first Is to compare the current system with some concept of a 'desirable' or opthnal alternative, and then to move towards this ideal goal. The second, rather **les** ambitio aWroach, Is to attert to detbrmine the costs and benefits of possibe changes, and choose changes which have a high benfit-cost ratlo.1 If the benfit of a tax Is the revenue Is rates, then the cost Is the reductIon In welfare of the taxpayer. The natural way In which to rank tax or price changes is to measure the fall In **welfare** pr urt of revens raIsed - then the most desirable taxes are those which give the lowest faN In elfare per unit of revenue raised.

The desirablgty of a tax wtfl depend on two factors. First, the extent to which Jt Is dstrlbutlonally desrable - that Is, the extent to which the tax falt more heavily on groups who are consikered dstributkonally ls deservhg, such as the rich. Second, the inef lfincy of the tax _wUI_ **depend** on the proportion of the fal In the money value of welf are which Is captured In the form of reesnu. If a tax reduces the real Income of tax payers by SY, and yields revenue SR, then the dead-weight lss of the tax, a measure of Its Inefficiency, Is Y-R, or, In proportional terms, Y/R-1. Taxes on Inelastically supplied or demanded goods cause price changes which result In relatively small changes In demand, and for such taxes the inefficiency will be low. If consumers can readily substituto altemative, untaxed **goods** for those on which taxes are levied, then little revenue will be collected, though the consumers will have been made worse off since 1 The distinction between these two approaches has some skmilarities to the distinction betwen comprehenlve plannig and project appraisal. With the former the akl Is to choose the entire hnvostmnt plan, whgst the latter Is a piecemeal or decentralized way of selectig Individual projects. Of course, a good method of cost benefit analysis systematically applied will generate a complete Investment plan, ust as a systematic approach to measurhg the costs and benefits of tax changes should result In the selection of an opthial set of taxes. In both cases the merit of the plecer ial approach Is that It Is informatkonally less demanding.
- 2.6 -

they have now shlf ted to their second-best choices. If they have few alternatives to the taxed goods, then they are effectively compelled to pay the tax, and the efficiency of the tax will be high.

The case for uniform and broad based taxes, that Is, taxes which fall on a large fraction of consumer expenditure, Is that they provkid Uttle reason or opportunity for changing consumption patterns to avoid the tax, **and** hence are relatively efficient. Income taxes, or uniform taxes on consumption (such as a universal value added tax) are good examples where the mair source of inefficiency (assuming that evasion Is not a problem) Is the reduction In work effort since ielsura b untaxed). Land taxes are ahuiarly attractive as the SUppiy of lnd Is fixed, and **again** the tax camot be avoide by shIfting expenditure to other **goods.** Heavy taxes on a narrow range of goods are potentially distortionary unless these **goods** are helastkally demnded (le are ssentlals) or are helastbcaity supplied (ike land). Goods that **are** hieastlcafy demanded and essential are lkely to account for a larger fractlon of expenditure by the poor than the rlch, and heavy taxes on such goods are therefore lkely to be inequitable. Although taxing such goods may appear to score well on effciency, they score poorly on equity, strengthening the case for broader based taxes which are less inequtable.

The suiplest taxes to analyze are those whose incidence falls entirely on the tax payer. Value addod taxes which are only paid by final consumers are a good example - - they resut In an increase In the consumer prlce of the taxed good, but, under reasonable assumptions, no change In the pattern of r.oducer prices. When analyzing changes In taxes on fhal consumpt!oii goods one only needs to study the hnpact on consumers - supply consirations (and supply eiastthies) can be gnored. Taxes on agricutural Inputs and outputS have far more widespread repercussions, and It Is potentially misleading to concentrate only on the hedate tax payers. Further, the efficlency of such taxes wifi depend not only on demand elasticities but also on supply responses and supply elasttities.
- 2.7 -

The tIrst **step** hi studyhi **Ghana's tax** and **prico** policy Is to sketch the way In which the current **system** of taxes, **prices,** and other oovernment polices affects the Ghanaian economy. The sketch Is necessarily rather h4pressoonbstick as data **are** scarue and often unroeable, and It Is hard to be wue how the economy hi fact Q"pllbrates In rosponse to the varlety of distortion and hIterventlone to which ; Is subject.
- 2.8 -

# 111. **SAUENT** FEATURES OF **GHANAIAN COCOA** PRICING

Ghanalan agriculture might be roughly characterized as follows. The main export crop Is cocoa, which Is heavily taxed. It competes on the production side with root crops, vegetables and fruit, all of which are, to a first approxhuaton, non-traded goods, and with cereals, which are currently imported. Cocoa competes with maize for land and labor. Ric Is grown under different agro-cikuatic cIrcumstances, and so cocoa does not comto so directly with rice, though there may be an indirect and possibly rather weak link through the labor market. Indeed, In the past a significant fraction of the labor needed for the expansion of cocoa production was migrant **labor** from the North and from present rice producing areas.

The main defence for taxing a non-food export crop like cocoa Is that Its supply Is relatively Inelastic, the tax incidence Is likely to be **m*Hiy** ,Xrogressivo (especially If cocoa farmers are wealthier than non-cocoa farmers). and the tax Is administratively easy to collect. It we accept the equity and administrative arguments for the moment, then the key Isstne Is the Inelasticity of supply. A cocoa tax will approxlnate a broad-based tax If all of the following conditions hold.

- I) The supply of total labor in the economy as a whole is Inelastic, that Is, tUe totat number of hours worked In Ghana changes little In response to changes In the cocoa price.

- ii) There Is little substitutablity between cocoA and traded agricultural (,oods like maize and rice, or, alternatively, these other traded goods are taxed as heavily as cocoa, so that the tax base Is effectively broadened to a tax on traded agricultural goods. As we shall argue below, It may not be necessary that non-traded agricultural goods are taxed.

- 111) Elther the demand or supply of non-traded agricultural goods Is Inelastic -- that is, either It Is unattractive to switch between producing traded and non-traded agricultural goods, or consumers have relatively fixed demands patterns for non-traded goods (like roots and vegetables).
- 2.9 -

- Iv) The supply of labor to the non-agricultural sector Is elastic, that Is, It responds to differences between urban and rural living stArdards, and the non-agricultural wage responds to chanr,.os In labor supply.

To see the role of each of these conditions, suppose that the farm-gate price of cocoa Is reduced. Farmers will now find It relatively more attractive to produce other crops. If there Is llttle possibility of substituting Into traded crops, or If their price has also decilned as much as that of cocoa (condition 2) then the only attractive alternative Is to shift Into the production of non-traded goods, whose price Is set by local supply and demand. If It Is hard to switch Into these crops (condition 3), then their supply will be Inelastic, and the farmer effectively cannot replace cocoa by other agricultural activities. If consumers have an Inelastic demand for these non-traded crops (condition 3) then a small Increase In their supply will cause thelr price to fall, Inhibiting further switches from cocoa to non-traded crops.

If farmers cannot divert their resources to other crops, then they will be compelled to elther continue growing cocoa, or to migrate to the urban area, or to wlthdraw their labor from the economy (either by emigrating or by Increasing their leisure). If the urban wage responds rapidly to a fall In the rural standard of living (condition 4), then the relative attractiveness of migrating will be roduced, and cocoa farmers will again be Induced to continue production. An elastic labor supply toge.her with a competitive urban labor market widens the incidence of any agricultural tax, and by broadening the effective base of the tax, reduces Its Inefficiency, and reduces the supply response to the tax.

The next section examines the historical record to throw some light on these Issues, and to examine the kmpact of past policies on the economy and on Government revenue. Given the sparsity of reliable data and the problems of Interpreting events In a highly distorted and Inflatlonary economy (issues which are taken up In Appendix 1), the
- 2.10 -

approach adopted Is to look for persistent long tarm trends or deviations from earlier pollcles, and to study them graphically, rather than econometrically. A visual presentatlon such as that adopted here gives a much better Idea of the extent to which events ir. any year or short period are unusual, significant, or merely reflect lags In adjusting to sharp changes In Internal or external circumstances. For example, measures of effective protection or domestic resource cost ratios can vary dramatically from year to year wlth changes In the degree of overvaluation of the exchange rate, changes In world market prices (which can be dramatic, as the graphical record shows), or changes In domestic supply and local price levels. Any study of agricultural pricing policy using these measures which Is based on one or even a few years' data gives little reassurance of the correctness or robustness of Its concluslons. Graphical prosentations give a quick visual kIpression of the degree of variability and a rough Idea of the significance of devlations or trends (though of course it is always useful to supplement them by more systematic econometric tests).
- 2.11 -

# **IV.** BRIEF HISTORY OF **COCOA PRODUCTION PRICING** AND **TAXATION** IN **GHANA**

Figure 1 gives a graph of cocoa production since the 1947/48 crop year, and the five ysar moving average smoothed trend. It shows reported<sup>2</sup> production roughly doubling between 1957 and 1962, then holding roughly constant until about 1972, and then doclinng fairly steadily to Its current levil somewhat below the start of the period. _Flgwo_ 2 gives the real prIce of cocoa (deflated by the rural cost of living Index)<sup>3</sup> since 1940/41. It showS the dramatlc rise In prkcos after World War 11, their steady fall up to the mid 1980s, and their second main fall In the mld 1970s. Prices In the recent past have been less than one quarter of their value in the early 19509. The latest figures, based on an assumed producer prico of 150,000 cedis per MT, and using the August 1987 prico **inex as** deflator (pwrhaps optnisticaliy) shows that real prices appear to have returned to their 1970 level.

Figure 3 suporlmposes the prico serles and the hIpiled total producer Income (real prico thues production), showing that Income remained roughly constant until the early 1960s (as productlon Increases offset price falls), but since then the docilne In producer Income has be(en even more dramatic than that of producer prIces.<sup>4</sup> Naturally one asks whether the fall In output can be attributed to the fall In prices, and Flgure 4 graphs the movement In output and the real pries of eleven years earlier. Cocoa takes about 4-6 years to come Into frult from planting, and ylelds Increase steadily thereafter. The 2 The _fgwuros_ refer to deliveries to buying agents, and thus Ignore productlon which Is Illegally smuggled IntO nelghboring countries, such as the Coto d'lvoire. Konings (1986), citing World Bank esthuates, suggests that a minhum of 40,000 tons were smuggled out of the country In 1977, whilst a Brong-Ahafo Regional Admuinistrator has asserted that as much as one-third or the region's output Is sold llelly In the Coto d'lvoirs. (West Africa, June 12, 1978.) 3 See the discussion In the Appendix on defiating cocoa prices, and the relative movements In the different price **indlces.** 4 **See** also footnote 2. To the extent that cocoa was smuggled, farmers Incomes will be understated by this calculation.
# GHANA Cocoa Production

<!-- Start of picture text --> Tonnes (Thousands)<br>800 r<br>400 -<br>300-<br>200<br>100 _<br>1947 1952 1957 1962 1967 1972 1977 1982<br><!-- End of picture text -->

**crop years**

> Figure 1 Total output + 5 yr MA
# GIHANA REAL COCOA PRICE Producer price deflated by rural CPI

## 1977 C/MT (Thousands)

<!-- Start of picture text --> 6<br>5<br>4<br>3<br>2<br>1<br>O ,,, I' ,,1 I 1111 f I_ Ij 11 I I 'ji 'ii ' '11 I'<br>1940/41 1945/46 1950/51 1955/56 1980/61 1965/66 1970/71 1975/78 1980/81 1985/86<br><!-- End of picture text --> Crop Year

- 2 Figure Real producer price
# 3 GHANA COCOA Figure

## Production, Prices, Income

<!-- Start of picture text --> 00 tons, C/MT, x .2 mill C (Thousands)<br>8.<br>6<br>4f<br>2<br>1947 1952 1957 1962 1967 1972 1977 1982<br><!-- End of picture text -->

### crop years

> - Total output + real price i real income

Income is real price times production
# 4 GHANA COCOA Production and lagged prices

## Figure 4

<!-- Start of picture text --> '00,000 tons,'000 C/MT<br>6<br>5<br>4<br>S ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,<br>3<br>2<br>1eI<br>1951 1956 1961 1966 1971 1976 1981<br><!-- End of picture text --> <!-- Start of picture text --> crop years<br><!-- End of picture text -->

- Total output + real price lag 1 lyr

Prices lagged **11** years
- 2.16 -

figure certainly makes plausible the clakm that farmers plant when prices increase and stop planting, or neglect existing trees as the price falls, with the effect on output showing up after a substantial lag, perhaps as long as eleven years.

The obvious questlon to ask is why the real producer price fell so dramatically. Figure 5 graphs the real world price and the real producer prices In Ghana and Cote d'lvolre In constant S1980. The world price would be the same as the fob export price (apart from a relatively small transport component) at a Purchasing Power Parity exchange rate, which the Appendix argues Is the appropriate measure to use for a distorted economy such as Ghana's. The Cote d'lvoire Is a natural country against which to compare Ghana, as it shares a skillar cklkate and ecology, and yet has displayed a dramatically dlfferent cocoa production performance since the start of the period, more or less changing places with Ghana In the world share of cocoa production.<sup>5</sup> The vertical scale in Figure _5_ Is necessarily compressed and disgulses the fall In the producer prices In the two countries, so Flgure 6 gives the ratio of the producer prices to the five year moving average world price for the two countrles. Together the two graphs show that the decline in producer prices In Goiana (and perhaps In the Cote d'tvoire, though the data are lacking) In the late 1950s was in response to the fall In - world prices If anything the ratio of the prorducer to the world price Increases in Gharn until 1962/63. Thereafter the world price recovers, but the Ghanaian producer price continues to decline as a fraction of the world price, In contrast, producer prices In the Cote dilvoire are a relatively more stable fraction of the world price and does not exhlbit any noticeable decline, at least In the 19709. Furthermore, the producer price in the Cote d'lvoire remains at roughly the same fraction of the world price as that In Ghana In the l9SOs.

5 Again, though, see footnote 2. To the extent that Ghanalan cocoa was smuggled into Cote d'ivoire, her performance has been exaggerated, though of course the causes of the dlfferential marketed supplies remalns the difference in prices paid In the two countrles.
# **5** Figure Real Cocoa Prices

## At constant $1980

<!-- Start of picture text --> 1980$/MT (Thousands)<br>6<br>5<br>4<br>3<br>21<br>1<br><!-- End of picture text --> 1950/51 1955/56 1960/61 1965/66 1970/71 1975/76 1980/81l 1985/86 year World price Ivory prod pr Ghana prod pr 5 yr MA wld price Deflated by CPI or MUV
# Ratio of producer to world price Ivory Coast and Ghana

<!-- Start of picture text --> 100 Percentage<br>80 -<br>60 L<br>-<br>40<br>20<br><!-- End of picture text --> <!-- Start of picture text --> 1952/53 1957/5a 1962/63 1967/68 1972/73 1977/78 1982/83 1987/88*<br><!-- End of picture text --> year Figure 6 Ivory Coast Ghana 'atios to 5 yr MA (final years forecasL)
- 2.19 -

Cocoa output mht respond to a faN In the price of cocoa for two different reasons. If the price of cocoa fell relatively to the prices of other crops, then farmers might devote their effort to growhg these alternativo crops instead. If so, then it might be sufficient to restore the previous relative prices of alternative crops, perhaps all at a lower absolute level, in order to **encourage farmers** to redirect their efforts towards cocoa production. On the other hand, the farmers may negbect cocoa not because of the relative attractivenoss of alternative crops, but because farming has beconme less attractive than migrating either to the urban areas or to neighboring countries. Figure 7 shows the real prices of competing crops (though ric is relatively unknportant In the cocoa growhg area) The real prices of an crops decline over the period, though none so dramatically as cocoa. Figure 8 gives more detaih for the relatively recent past, and corrects for the unstable torms of trade between food and non-food during this period by deflating by the rural food price. (More details on the relative movements in the various price indlcos are to be found In Appondix 1). This shows the lack of any obvious trend in the prices of the ma!n food crops (with the exception of rice whose relative price tends to appreciate), but the continued decline on the cocoa price.
# Ghana Real Producer Prices Deflated by rural CPI

<!-- Start of picture text --> 1977 cedis/MT (Thousands)<br>6<br>5<br>4<br>3<br>2<br>0<br>1953/54 1958/59 1963/64 1968/69 1973/74 197B/79 1983/84<br>crop year<br>7 cocoa i maize X rice °<br>Figure yam<br><!-- End of picture text -->
# GHANA REAL CROP PRICES Deflated by rural food price

<!-- Start of picture text --> 1977 cedis/MT or 100kg<br>350<br>300<br>250<br>200<br>150-<br>100<br>50<br>.0<br>1970 1972 1974 1976 1978 1980 1982 1984<br>crop years beginning<br>Yams | Cocoyams Cassava<br>a Rice Maize Cocoa<br><!-- End of picture text -->

Figure 8
- 2.22 -

Flgure 9 highlights the relativo price movemonts in cocoa and maio at domestic and world pricos. (The **prices** of the two other main alternatioeS to cocoa - yams and cocoyams -- follow that of maize farly closely and the graph of their domestic price ratis would be shUar to that of cocoa to maize). The praph brhg out two points clearly -- whilst the domostic prico ratio of cocoa to malze has declhed fairly C eadily from its late 1960* peak, the world price ratio has If anythin drifted upwards, reflecting the steady fall In the real world price of maize, to the point where It now stands at Its nw,st value for over fifty **_yers._** Thus whilt cocoa has steadlly become relatively more valuable than maize in the rest of the world, Ghana has boen attompthg to maintain the domestic real porlce of maize hilst alowi the real price of cocoa to fal.

How does one nterpret the evidenco? Although the relative price of cocoa to other crops has deteriorated, the **pries** of non-traded products such as yams and cocoyams has not faln much In ra tr_m over the past fifteen yars. Had their been a substantial switch Into these non-traded alternatives one might have expected their supply to Ins ease relative to dmnd and to have dopressod their price. Of course, It may be farmers chose to grow maize istead of non.-traded crops, and that the price was prevented from falling by protective trade policies (and, at the Increasingly overvalued exchange rate, the domestic price of iaported crops such as maize and rice might be expected to have fallen rapidly In real _term,_ even faster than the fall In world prices). Even here, though, there Is not much evidenco of a large increase In domestic food productlon. Figuro 10 gives (completo) ovdenco on areas under food crops. The recent rise appears to mahW be a recovery from the poor performance of the mid 19709, and there In no perceptble trond over th period from 1970. Flgure 11 conf Irms that this also hold for maize, which , urnko the other coreals, Is grown In the cocoa producing area.

Given the substantlal irease In population during this period It Is hard to accept that the rural labor force redirected Its efforts from cocoa to alterativo crops. The
# Figure **9** Ghana Relative Price of Cocoa Deflated by maize prices

<!-- Start of picture text --> ratio at domestic and world prices<br>20<br>15<br>10<br>5<br>0<br>1953 1958 1963 18 1973 1978 19b83<br><!-- End of picture text --> year + cocoa/maize cocoa/maize $ 3YMA$ prices
# Ghana Cocoa-Maize price ratio Ratio of domestic to world price ratios

<!-- Start of picture text --> percentage<br>100<br>80<br>60<br>40<br>20 -<br>1953 1958 1963 1968 1973 1978 i983<br><!-- End of picture text --> year <!-- Start of picture text --> 9A dom/S price ratios<br>Figure<br><!-- End of picture text --> Ratio to 3yr **MA world** price ratio
## Figure 10

# GHANA

## Area under crops

<!-- Start of picture text --> Thousand hectares<br>3000<br>2500<br>2000<br>1500L<br>1000<br>500<br>0<br>1970 1972 1974 1976 1978 1980 1982 1984 1986<br>* _ Cereals Cassava L Yam<br>Other starch Pulses LI Vegetables<br><!-- End of picture text -->
**S**

## Figure 11

# GHANA Area under cereals

<!-- Start of picture text --> Thousand hewtares<br>1400<br>1200<br>1000<br>800<br>600 .I. .. ..<br>400<br>200<br>19.0 1972 1974 1976 1978 1980 1982 1984 1986<br>Maize Rice LI Millet Guinea Corn<br><!-- End of picture text -->
- 2.27 -

more plausble explanation Is that cocoa<sup>**famers**(or potential cocoa *armors and workers)</sup> withdrew their labor from the agricultural<sup>sector In response to more attractive</sup> alternatives elsewhere, either in the<sup>urban areas or In countrlos such as Nlgerla and the</sup> Cote d'lvolre, which enjoyed a decade<sup>of prosperity following the oil price rlse of 1974.</sup> This Interpretation Is supported<sup>by Thabatabal's careful analysis5.</sup> He argues persuasively that the declne In agricutural<sup>production In the 1970s was caused by the</sup> migration of between one and two<sup>million mainly rural workers, or roughly one-fifth of</sup> Ghana's population. An esthmatod 1.2 miUlon<sup>of these were expolied from Nigeria In 1983</sup> (followed by a further 150,000 In 1985),<sup>causing a large Increase In the rural populatlon</sup> coincident with the severe drought of<sup>1983. The large Increase In food production in</sup> 1984/5 (and the fall In real food prices)<sup>was a natural response to both the drought and</sup> the increase In labor supply.

Konings (1986, p.117-122) argues,<sup>without quantitative evidence, that cocoa</sup> tarmers were increasingly shifting their<sup>efforts from cocoa production to food crops and</sup> other agricultural raw materials. Of<sup>the farmers he Interviewed In the 1979/80 season</sup> 79 percent Intended to expand food<sup>production, whilst the remalning 21 percent clahied</sup> that the switch was difficult because<sup>of transport and/or marketing difficulties. He also</sup> found that 59 percent of the cocoa<sup>farmers had abandoned weeding of cocoa on (at</sup> least a part of) their farms.

6 Hamd Thabatabal, **"Economlc** Declin, Access to Food and Structural<sup>Adjustment In Ghana",</sup> World Economic Programme Research<sup>Workhg Papr 10-6/WPSO, nternational Labor Organisation,</sup> 1986.
## - 2.28 -

# V. THE CONSEQUENCES OF THE DECUNE IN COCOA PRODUCTION

> The offects of the price policy on the icomes of cocoa farmers as a whole has already been Illustrated In Flgure 3. Thabatabal (1988) argues that this must have been an kmportant factor behind the out-migration of rural labor. One could argue that the pull of the oil-rich nelghbors was too strong to resist at any sonsible domestic cocoa price, but this Is beled by the Cote d'lvolre, whose higher cocoa prices durlng this period were associated with a continued growth In cocoa output (or at least, marketings), not wlth a redirection of thelr rural labor into non-agricultural employment. Konings (1986) reported that some cocoa tenants and workers had migrated to the Coto d'lvoire intendig to farm cocoa there.

Figure 12 shows the division of the real purchasing power of cocoa revenues over two sub-periods -- the 1950s, the the of prosperity and the lead-up to the rapid expansion of output, and the last decade. The figure shows the real Income of the farmers (deflated by the Natlonal CPI), the reported real costs of the Cocoa Board, the Governmont recelpts from the cocoa export tax and the profits of the Cocoa Board (which, as a public agency may be conskiered as part of the revenue sources of the Government), and the profits on the forelgn exchange recelpts ('Forox Profit'). This last Item Is the dl'forence between the value of the forolgn exchange earnings at the PPP exchange rate and at the official rate (the earnings reported by the Cocoa Board). The are a measure of the potential surplus value available to the Government via the Bank of Ghana.

The _figur_ shows the relatively small size of the Board's costs In the earlier period, and the extent to which the prico policy stabilized the producer price, absorbing fluctuations In the world market price In fluctuathg Government revenues. During the second poriod the producer's share was squeezed by the fallig value of exports at the officlal exchange rate, the gradual increase In Board costs, and the attempt by the goverrnent to preserve Its own direct clabl on the nominal revenue (i.e., excluding Its
a

## Figure 12

# GHANA

### Revenue from Cocoa sales

<!-- Start of picture text --> 1977 Cedis/MT (Thousands)<br>20-<br>15<br>10<br>5<br>0.<br>-5<br>50/51 52/53 54/55 56/57 58/59 75/76 77/78179/80 81/82 83/84 85/8B<br>crop years<br>Producers Government U Board Costs Forex Profit<br><!-- End of picture text --> Forex profits relative to PPP ex rate
- 2.30 -

forex profits) -- an attempt which clearly became hmpossible at the end of the 1970s. What Is, however, striking, Is the extent to which the country (or some of Its members) was nevertheless enjoying unprecedented profits per tonne of cocoa exported during this period, most dramatically during the period of high world prices In the mid 1970s, but remaining higher in real terms throughout this perbod as compared wlth the earlier period.

Figure 13 highlights the implications of this unrecorded source of profits, Itself reflecting the fallure of the Governmient to makitain the real value of the exchange rate. The figure gives the real value of recorded Government revenue from taxes on cocoa and from other sources, as well as the potential revenue which might have accrued to the Government had the Bank of Ghana auctioned off the cocoa recelpts at a constant real PPP exchange rate. The figure demonstrates the Importance of cocoa tax to the budget, and Its fall (along with other sources of revenue) during this period. What Is striking Is that the potentlal revenue dwarfs the nominal tax revenue on cocoa, and for the past decade has been larger than total Government revenue from all sources.

Much, perhaps most of this hidden surplus was dissipated In either consumption or unproductive Investment -- certalnly there Is little evidence of much productive Investment. Part of It presumably created opportunities In Accra which must have strengthened the pull on rural out-migration, thus further worsening rural labor scarcity (at wages cocoa farmers could afford to pay, or those bIplled by the abusa tenancy system).

Figure 14 examines the extent to which excessive Cocoa Board costs eroded the sums available to the producers and the Government. It takes as a benchmark the real board costs per tonne averaged ovor the earlier period In Flgure 12 -- these are the 'Standard costs'. The excess costs are the difference between the reported Board costs per tonne and this standard cost -- and in 1980/81 to 1982/83 this excess was negative, suggesting that the standard may well be on the high side. The figure shows
**I**

# GHANA Government Revenue Figure 13 Deflated by CPI

<!-- Start of picture text --> Billion 1977 cedis<br>7<br>6<br>5<br>4<br>3<br>2<br>-1<br>-1 H ' I' I ' I ' I ' g i _<br>69/70 71/72 73/74 75/76 77/78 79/80 81/82 83,84 85/86<br><!-- End of picture text --> Cocoa tax Non-cocoa revenue L Forex potential Forex = cocoa exports at PPP - official
**t**

## Figure 14

# GHANA

### Revenue from Cocoa sales

<!-- Start of picture text --> 1977 Cedis/MT (Thousands)<br>6<br>4<br>c)<br>-2<br>-2 I I I I ' I " -1-- |<br>1974/75 1976/77 1978/79 1980/81 1982/83 1984/85<br>crop years<br><!-- End of picture text -->

**Producers Standard Cost LI Excess Costs Profits, taxes**

Standard Board costs **are** 1950-60 **average**
- 2.33 -

that this excess cost was, In several years, large compared both to the standard costs and to producer revenue, and again represents another avoldable loss to the economy. Several conclusions emerge from these last three figures. First, the problem of raling the price to producers without re4lucing the tax rate per tonne is best achleved by moving the exchange rate into line with Its equilibrium or PPP rate. Second, the most obvious next sourre of revenue either for the Government or the producers Is the excessive costs of the Cocoa Board. Though these were much smaller than the foregone foreign exchange profIts during the second period graphed in Figure 12, they will become Increasingly knPortant as the exchan.i rate regime Is liberalized and the discrepancy between the official and equiilbrium rate Is reduced. Third, It Is potentlally dangerous to specify a target producer price as a percentage of the fob price, as this leaves unspecified how the fob price Is to be translated into domestic currency. The temptation would be to use the exchange rate as a mechanism for reconciling the clalms on the surplus by the Cocoa Board and the Government. The Board might propose a cedi producer price which, givon prevalihg world cocoa prices and the current exchange rate, met the specified target percentage of fob, and the Government, anxious to raise revenue In the following calendar year, might devalue, thus raising the cedi export price of cocoa. Whilst this would be better than maintaining the exchange rate at an overvaled level, It would have the effect of raising domestic prices and reducing the real value of the producer cocoa price. This Incentive could be reduced by contracting to pay cocoa producers a given percentage of the finally realized export price, which In effect would require the payment of a bonus If the cedi were devalued (and possibly also If world cocoa prices huproved). The main objection to this system, apart from Its administratlve complexity, Is that a promise of future paymen **t** o cocoa growers Is less attractive than current payment. (The former 'chit' system was apparently very unpopular). On the other hand, It might serve the purpose of keeping the management
- 2.34 -

of the **xcha** rate la t', and of convkicb the coca rowrs of the good faith of the Cooa ard.
- 2.35 -

# **VI.** OThER **CONSEQUENCES** OF **EXCHANGE RATE UBERAILZATION**

A major component of the reform strategy Is the liberalization of the forolgn exchange market, with the consequent movement of the market rate towards Its equilibrlum level. As argued above, provided the Cocoa Board's costs are held down to historically feasible real levels per tonne (which, given the fall in output, will require a substantial reduction In total costs), and provided the cocoa exrport tax per tonre is not greatly increased in real terms, this should allow the real cocoa price to be substantially raised. It will also have effects on the prices of competing crops. Maize and rice are currently knported (as Is wheat, which Is not domestically grown). Salinger (1988) has demonstrated how sensitive the profitability of cereals production Is to the exchange rate and domestic pricing policies, and If we concentrate on maize (as being the more obvious mmedbate competitor to cocoa) the situation would appear to be as follows. World maize prices have fallen so much In real terms, and transport and handlng costs from rural areas to Accra are so high, that kuported maize enjoys a substantial comparative advantage In Accra at equilibrium exchange rates. At the moment knported cereals are subject to an knport duty and sales tax at a combined rate of 40-45 percent of the cif prico, whilst domestic cereals In practice do not appear to pay the sales tax. Thus cereals are quite heavily protectec (or would be at the equilibrium exchange rate). In addition knports have In the past been controlled, and the free market price appears to reflect the scarcity price of foreign exchange and the Inport tariff, so that the undervaluation of the exchange rate does not appear to have undermined the protective Intent of the cereals kport policy, If this protection were maintained as the exchange rate were llberalized, domestic maize prices might not change markedly, though the government would now receive the scarcity rents and hkport tariff revenue from cereal Imports. Domestic malze prices would remain high relative to world price levels and the maize/cocoa price ratlo at domestic prices would amplify the disincentives to cocoa production relative to maize production.
- 2.36 -

One solution to tnis would be to reduce the hnport tariff (and do facto tariff In the form of the sales tax) on cereals (or at least on maize). This would load to a fall In the market prico and farm gate price of malze, and would make cocoa relatively more attractive. It would probably load to a fall In the oquIlibrium prices of non-traded food crops like plantalns, yams, cocoyams, and cassava, **for** as **farmOrs** switched out of maize into the alterratives, thoe supply would rise. As consumers might be expected to substitute Into the now cheaper maize, demand for these non-traded crops would fall, and thus the equilibrium price would also fall, probably by about as much as the fall In the Price of maize.

These tariff and price changos would have further repercussions. Government revenue would fall, as would the cost of livig (as the cost of food would have fallen). If the revenue shortfall were made up by Increases in taxes on other consumer goods, then urban consumers would be no worse off (and should be better off to the extent that non-cereal food prices will have fallen). Tho taxes on other consumer goods would fall partially on rural consumers, who would now be taxed twice over -- their food crops would command lower prices whilst their purchases of consumer goods will be more expensive. Whether on balance cocoa farmers were better or worse off would depend on how much the cocoa price were Increased, and the extent to which the other price changes affected them, but one would expect the effect to favor cocoa farmers relative to non-cocoa farmers, and certainly to encourage the production of cocoa relative to food crops.

The next section attemptS to reach more precise policy conclusions and recommendations on setting the producer price of cocoa.
- 2.37 -

# VIl. ISSUES IN **SETTING THE** PRODUCER PRICE OF **COOA**

Increases In the real producer price of cocoa will have kIpacts on Government revenue, foreign exchange earnings, on the Incomes of cocoa farmers, and, Indirectly,<sup>on</sup> rural and urban wage rates and the prices of some food crops. At this stage, In<sup>the</sup> absence of a quantified model of the cocoa sector, one cannot be very precise about the magnitude of these effects, and the followig analysis Is therefore more a framework for dist ission than a set of well-defined and defondod recomnendatlons.
- 2.38 -

# Vill. ALTERNATIVES TO THE **COCOA** EXPORT TAX

The first questlon to ask is whether a cocoa<sup>export tax Is desirable, or whether</sup> cocoa farmors should be taxed either through<sup>an agricultural Income tax, or a land tax</sup> (ie a tax on presumptive Income). The arguments<sup>In favor of a land tax are sknple -- It</sup> Is a tax on an Inelastically supplied factor, which therefore causes no distortions provided It is levied on the unkiproved site vaiue<sup>(le on the value of the land before It</sup> Is cleared and prepared for cultivation). To the extent that land ownership Is correlated with wealth, It Is also an equitable tax, and so<sup>desirable on both grounds. The difficulties</sup> with the land tax are equally sinple. It will be unpopular amongst landowners, who frequently have the polltical power to block the<sup>tax, and It requires a cadastre (le a land</sup> register giving the unimproved value or potential<sup>rental of the land, Its locatlon and</sup> ownership). Such cadastres are costly to construct, and none yet exists for Ghana. Moreover, It Is not clear how high the unimproved site<sup>value of uncleared agricultural land</sup> Is, sinre the major cost of bringing land<sup>Into production Is the clearing and land</sup> preparation. If the land has a relatively low value then<sup>the tax base will also be small,</sup> whilst If the value of the land Is taken as Its<sup>uIproved value, then the tax will essentially</sup> be elther a labor tax (le a tax on the labor needed<sup>to prepare the land) or a tax on</sup> agricultural output, and In particular cocoa output<sup>(or potential output, le on trees).</sup> It Is therefore difficult to see a land tax replacing other<sup>forms of agricultural tax In Ghana,</sup> at least In the foreseeable future.

If land taxes are not feasible, would an<sup>agricultural Income tax be a better</sup> a'ternative? In practice this would amount to a tax on gross<sup>output at crop-specific</sup> rates (the rates being adjusted to reflect notional<sup>Input costs).</sup> (Usually farmers are allowed to Itemize their costs If they can prove<sup>them to be higher than the notional</sup> allowance, but In practice this Is rare In countries<sup>which have a large farming population</sup> which they attemPt to tax by this method). It Is<sup>hard to hmagine food crops being taxed</sup> on gross output as opposed to marketed sales,<sup>and even here the taxation would</sup>
- 2.39 -

typicafly be done by nfluncwhg the prico of hIported compoting crops as It would be hard to monitor (and tax) even wholesale sales In rural areas. In practice, then, the tax would apply malnly to export crops or crops whose whole output Is handled by markoting boards, In which case we are offectivoly back to the type of taxation already employed for cocoa.

The next argument to consder Is that, given the difficulty of taxing many agricultural crops, would It not be better to tax the goods that farmers buy (is consumer goods), rather than the goods they sell? In both cases the effect Is to turn the terms of trade agaist agriculture, and It might therefore be sensible to choose the least cost or administratively sriplest alternative. This argument Is compelling to the extent that It would have been deshrable to tax all crops at the same rate. If It were desirable to tax cocoa more heavily, and other crops at a uniform rate, then the same effect can be achieved by taxhg consumer goods and cocoa alone, exempting the other crops. The question then resolves Into whether there Is a case for a differential tax on cocoa.

There are two basic arguments for a differential tax on cocoa productlon -- an optimal export tax argument, according to which Ghana has some Influence on the world price of cocoa, and a supply elasticity argument, according to which cocoa Is an attractive crop to tax because It has a relatively low elasticity of supply. These two arguments are examined below, and relate to the extent to which the producer price should be driven below the appropriate farm-gate price. The latter Is related to the fob or export price by the costs Incurred by COCOBOD In handling the cocoa from the buling station to the world market. If the producer prico Is to be specified as a percentage of the fob price, then It Is hportant to detormhe the appropriate margin for handling costs, which Is done In the next section.
- 2.40 -

# DL **COCOODS COSTS**

The World Bank has argued that COCOBOD should reduce Its costs to 15 percent of the fob price. Is this a reasonable target? The average ratio of costs In real terms to the 1950/51 fob price was 6.5 percent for the decade 1950/51 to 1959/60. The projected fob price In 1989 Is, however, only just over 50 percent of Its real value In 1950/51, and on that basis the real costs might be 13 percent of the fob, If COCOBOD was to achieve Its former level of officIncy. If some costs were now higher (because of the need for more disease control, or more research, or more extension), then the 15 percent would seem plausible. If one argues that there Is no reason for COCOBOD's real cost per tonne to change over tkne, then It might be botter to specify the target not In terms of the fob prIce, but as a real cost per tonne. This Is discussed further below.
- 2.41 -

# X THE **OPTIMAL EXPORT TAX**

The first argument for taxing cocoa Is that the world demand is inelastic, so that increases in Ghanaian exports of cocoa will tend to lower the world price. The elasticity of demand facing Ghana wiil depend on the supply response of the rest of the world, which will depend on the extent to which changes In the world price are passed through to other producers, the speed with which the producer price In other countries is adjusted to the predicted now lng run world equilibrium pric, and the speed with which this affects planting and ssWpply. In the short run It may be that other countries will not vary their supply, In which case the (short-run) elasticity of demand facing Ghana will be E/a, where E Is the world short run price elasticity of demand (given as between about 0.2-0.3, as a positive number, by inran and Duncan, 1988, Table 3), and a Is the share of Ghana in world production (roughly one-tenth). in the long run the rest of the world will presumably respond to the lower prico and reduce Its supply. If the long run elasticity of supply of the rest of the world Is n, and the long run demand elasticity Is e, then the long run net demand elasticity facing Ghana Is e/a + n(1-a)/a. lmran and Duncan give the long run demand elasticity as 0.4 (in Table 3) and the supply elasticities of most countries as about 0.3 In the short run and variously esthnated as 0.8-1.8 In the long run for different countirles on the basis of econometric estkiates, but perhaps as high as 1.5-2 (on the basis of rather little hard econometric evidence, see knran and Duncan p14-15). Imran and Duncan then estknate that the Ghanalan short run demand elastilcty might be 3.2, and the long run elasticity would be 12. The opthnal short run export tax (Ignoring other arguments for cocoa taxation) would then be 1/3.2 or 30 percent of the fob price, whilst the long run opthnal tax would be 1/12 or 8 percent. knran and Duncan, using a rather different approach which Involves balancing the advantages **of the sWort** run inelasticities agaist **the lng** run costs of excessive export taxes, actually esthuate an opthnal export tax of 21 percent, but this appears to rest of a shaky estknate of the social discount rate In Ghana. The figuro we shall use Is
- 2.42 -

somwhat arbitrargy "t at 12 prcont, c reflects some sacrifice of long run revenue for short run gain Anothwr way of **looking** at this Is that tho shadow value or accounting value of cocoa fob s 88 percent of the fob prico, and the shadow value of cocoa at the farm gate Is 88 **less** 15 percent (COCOBOD's costs), or 73 percent. A recommendatin to pay 55 percont of the fob price s thus to pay 55/73 or 75 percent of Its vahoe -- oquivalent to a tax of one third of the post tax prico (25/75).
- 2.43 -

# **XI.** STANDARD **ARGUMENTS** FOR<sup>**OUTPUT TAXES**</sup>

The remaining arguments for cocoa taxation Involve balancing the need for Government revenue against<sup>the cost of raising that revenue In terms of deadweight</sup> losses and adverse impacts on the distributlon<sup>of Income. The main arguments for taxing</sup> cocoa production are elther<sup>that cocoa farmers are richer than non-cocoa farmers, and</sup> should therefore be subjected to a higher rate<sup>of tax than can be achieved by the</sup> system of Indirect taxes, or<sup>that the elasticity of cocoa supply Is sufficiently</sup> low that the inefficlency losses make<sup>It an attractive</sup> source ot revenue.

Appendix 2, entitled 'OpthTal trade<sup>taxes on agriculture In developing countries',</sup> gives a skiplified model of the<sup>economy (even If the mathematics appears somewhat</sup> complex!) which aliows one to<sup>characterize the optinal rate of taxation of cocoa, on the</sup> assumption that other agricultural<sup>products are not taxed, (and In particular that cereals</sup> are kmported duty free) and<sup>that non-food consumption goods are subject to Indirect</sup> tax. The technical analysis sets out the<sup>mathematical formulas and In the final section</sup> quantifies them for Ghana<sup>using the results of the Ghana Living Standards Survey and the</sup> Agricultural Economic Survey (AES). The<sup>discussion here will be confined to a non-</sup> technical summary of the main<sup>findings of that Appendix paper.</sup> The essence of the argument<sup>Is that cocoa taxes have to be compared with</sup> alternative methods of raising<sup>government revenue, and the assumption Is that these will</sup> have to be Indirect taxes<sup>on non-food manufactured (orknported)goods.</sup> The argument here Is simple -- Income<sup>taxes have a relatively lknited coverage and may already be set</sup> at unsatisfactory levels, while Indirect taxes<sup>fall on all consumers and thus have a</sup> reasonably broad base. It Is hard to tax domestically<sup>produced food</sup> and nonmanufactured goods, which<sup>leaves the main cholce as specified.</sup> It Is possible to knposo tarlffs on cereal Imports and that<sup>Issue Is addressed beiow.</sup> The exact levels at which<sup>various tax rate will need to be set will depend on the</sup> amount of revenue required<sup>by the Government, and this Is not yet known. I therefore</sup>
- 2.44 -

proceed as follows. Cocoa taxes have been an knportant source of revenue In the past, and for this to continue to be true several things must aiso be true -- the Government has heavy requirements for revenue, and the costs or availability of alternative sources of revenue must be tight. I shall therefore make both these assumptions in order to see how strong the case for high cocoa taxes Is under conditions most favourable to a hlgh rate of cocoa tax. The assumption is that the Government has reformed the exchange rate system so as to capture the large foreign exchange rents generated under the previous system of overvalued exchange rates and licensing. In addition, taxes on knported and domestically produced goods that can be taxed are assumed to be taxed at an effective rate of 40 percent of their pretax price,<sup>7</sup> and at this level the total taxes collected from Indirect taxes and the cocoa tax when the producer price of cocoa Is set at 55 percent of the fob level will be enough to cover planned government expenditures. These rates would be rather high If the exchange rate alignment took place, for the past situation has been to tax knports quite heavily but allow them In at an artificially low domestic price through the overvaluation of the exchange rate. If lower tax revenue Is needed then the case for heavy cocoa taxation will be further weakened.

These tax rates are benchmarks to establish the level of revenue to be raised - - as the cocoa tax rate Is varied In response to alternative views about the elasticities and the distributional goals of the government, so the Indirect tax rate wll also need to be adjusted to ensure that the same total amount of revenue Is collec'ad. Thus lower cocoa taxation will raise the Indirect tax rate and ralse the marginal cost of collecting taxes by this method, and this will Inhlbit further reductions In the cocoa tax rate. Again, we are blasing the results towards making the strongest case for heavy cocoa taxatlon 7 This roughly corresponds to the present tax system, though of course with an overvalued exchange rate the effective tax rate on knported goods will be lower than that. The actual tax rates are quite varled, belng for example very low on gasollne and knported cars. the effective tax rate can be thought of as the tax rate which has the same marginal cost of raising revenue as an equiproportbonal Increase of the current set of tax rates.
- 2.45 -

- If alternative sources of revenue can be found or If less revenue Is needed (or expenditure Is cut) then lower cocoa taxes will be Indicated. The other two assumptions are that 20 percent of extra Income Is spent on taxed goods, and that the (compensated) price elasticity of demand is 1.25. These assumptions are also discussed In the section on the taxatlon of consumer goods below. Again this assumption biases the case In favour of high cocoa taxes -- If the price elasticity of their demand Is less than 1.25, then the optinal cocoa tax rate will be correspondingly reduced.

Perhaps the most useful way of structuring the discussion is to examine whether the World Bank's recommendation of setting the producer price of cocoa at 55 percent of the export price Is soundly based as a formula, and whether the Implied level of cocoa prices Is roughly right. Here the work of Meeraus, Asenso Okyere and O'Mara is particularly relevant. Their finding was that below a critical level of about 140 (1987)cedis/kg there would be little Incentive for the farmers to plant cocoa. Above this level there appears to be a strong response to price Incentives, summarised by a medium to long run price elasticity of supply of one or higher. The AES survey data shows that there was considerable replanting over the past four years once prices began to Increase, though we do not know what price expectations the farmers then held. If they based their planting decisions of current prices, In the full knowledge of the effect of Inflation on their eventual return, then the critical price below which planting will not occur may be somewhat lower than 140 cedis/kg, but If they planted In the expectation that the Government would continue to attempt to raise the real price of cocoa, so that they were looking ahead to more promising prices, then the figure might be an underesthnate. For the moment let us take It at face value. The formula for the optimal tax on cocoa In the Appendix knpiies a ratio for the producer to the export price which appears to be Independent of the world price level, lending superficial support to the World Bank formula. In fact the tax rate Is particularly sensitive to the supply elasticity, which rises rapidly as the real domestic price falls towards the critical level (of 140
2.46 -

-

cedis/kg). If this Is taken Into account then the domestic price should be bounded below by tnis critical level.

If, as seems to be likely over the near future, the world price of cocoa Is such that 140 codis/kg represents more than 55 percent of the export price, then this lower bound will Imply that the Bank's recommendatlon Is too low, and the price should be accordingly adjusted. But what If 55 percent of the world price Is above this critical level? And Is there a case for raising the prico above the critical level even if the export price Is low. Finally, how should the producer price respond to varlatlons In the expected world price, for example, as forecast by the World Bank's Commodity Divislon or by other consultants such as Bateman? Here the Ghanaian survey data throws useful light on the standard problem facing the choice of any tax. The level of taxes on any particular commodity or Income source Involves a balance between the need for revenue, the distortlonary costs Introduced by the tax, and the distributlonal consequences of the tax. A tax on cocoa must be compared with alternative ways of ralsing the same revenue -- In particular, we need to ask whether it would be better, on balance, to Increase cocoa taxes and reduce other taxes, or, conversely, to reduce cocoa taxes and Increase other taxes. For present purposes, the alternative source of tax revenue Is considered to be a general increase In taxes on non-food consumer goods produced In the modern sector or kIported. It may well be the case that particular goods are even better choices as bases for Increased taxes, and If so, that will further strengthen the case for switching away from cocoa taxes to these alternatives.

If the Goverrunont Is concerned with the distributlon of income, and believes that taxes should fall more heavily on richer members of society, then much will depend on how egalitarian the Government Is. In the technical paper this Is captured by a 'coefficient of Inequality averslon', which may take the values 0.5, 1.0, or 2.0. To take the central value of 1.0, this kupiles that the social cost of a tax of S1 on a person whose annual Income Is $5,000 Is considered to be twice that of a person with twice his Income --
- 2.47 -

$10,000. At an inWuallty aversion of 0.5 the social cost Is 2 raised to the power 0.5, or 1.414 thies as costly as taxing $1 on tho $10,000 Income, whl, at an Inequality aversion of 2.0 the cost Is 2 raised to the power 2 or 4 tInos as much. The consensus Is that the range 0.5-2.0 covers most plausbie attitudes to hequalilty, with 0.5 perhaps somewhat hegaltarlan and 2.0 behg rather progressive. An Inequality aversion coofficient of 0 would Imply that the Government attached zero weight to redistributing income, or, equivalently, considered the cost of raisig $1 in tax to be the same whether pald by the person with $5,000 or $10,000.

Once we have agreed upon a way of weightin the costs and benefits of Income received or paid by people of difforin kicome, then It Is possible to describe the distributional Impact of changig pricos In a particularly simple way, by caiculating the distributional characteristic of the commodity whose prico changes. Table 1, reproduced from the Appendix, givos the values of the distributional characteristics of the Key commodities relative to that of cocoa In production. (At an hequality aversion of 0, the characteristics would all be 1.0). The table Is Interpreted as foliows. Consider the second llne, which gives the distributional characteristics of maize (good 2 In the paper) in production (suporscript p for producers). If the price of matzo to producers were to be reduced so that $1 was transferred from farmers to the government with no other change In the economy (in particular, no changes In production or consumption or
# Table 1. Distributional Characteristics<sup>for Ghana</sup>

|Variable|Values for i<br>Commod|nequality aversion v<br>v = 0.5<br>v = 1.0|v = 2.0|
|---|---|---|---|
|dP<br>1|cocoa|1.00<br>1.00|1.00|
|dP<br>2|maize|1.13<br>1.36|2.90|
|d2|maize|0.93<br>0.91|1.03|
|dP|cereals|1.12<br>1.36|3.18|
|d2|cereals|0.90<br>0.87|0.97|
|dP<br>3|NT food|1.11<br>1.30|2.40|
|d3 c|NT food|0.89<br>0.83|0.87|
|d4|mfg goods|0.91<br>0.88|0.99|
|d s|lab sold|1.01<br>1.09|1.69|
|de|lab bought|0.98<br>1.01|1.86|
- 2.49 -

revenue from other sources) then, looking at the second column for an Inequality aversion of 1.0, the number 1.36 means that thJ soclal cost of this transfer is 1.36 tknes aa high as were the $1 to be collected by reducing the price of cocoa and transferring **S1** of Income from cocoa farmers. This I: because maize growers are somewhat poorer than cocoa farmers. On the other hand, looking at the row Immediately below this, which refers to maize In consumption (suporscript c for consumers), the cost of transferring S1 from malze consumers to the goverrinent Is only 0.91 thies as high as making the same transfer from cocoa farmers. Shnilarly, and more to the present point, the cost of transferrlng $1 from consumers of manufactured goods Is only 0.88 tines that of the cocoa transfer.

If changing cocoa taxes and taxes on manufactured goods only resulted In changes In the prices of cocoa and manufactures respectively, then the relative advantage of the two taxes would be reasonably simple. If the elasticity of supply of COC03 Is lower than the elasticity of demand for manufactures then on efficiency grounds cocoa would be a preferable tax base to manufactures, but conversely on equity grounds. But changing the price of cocoa changes the Income of cocoa farmers which in turn reduces their expenditure on taxed goods, and reduces the revenue ralsed, and this effect weakens the case for cocoa taxation on efficiency grounds. 3econd, changing the price of cocoa lowers the returns to farming cocoa and eticourages farmers to switch into other non-traded crops, whose price will then fall as their supply Increases. This will redistribute Income from poorer farmers to the richer consumers of non-traded food -- the differences In the table between the distributional characteristics of NT (non-traded) food In production and consumption are quite pronounced. Rural wages will tend to fall (in money terms) as returns to farming fall, which will redistribute Income from sellers of labour to buyers of labour.

All these effects make taxing cocoa less attractive on distributinal grounds, so the final choice will depond very much on the relative elasticities (which will affect the
- 2.50 -

officlency aspects) and the weight placed on distrlbutn. If the Government Is completely neutral as to Income distribution (an inequallty aversion<sup>of zero) and If the long run</sup> cocoa supply elasticity Is one (corrosponding to<sup>a producer price quite close to the</sup> critical level) then "he optknal ratio of the producer<sup>price to the export price would be</sup> 55 percent. If the supply elasticity were as low as 0.5, then<sup>the optimal producer price</sup> would be 47 percent of the export price.

The effect of changes In the world prico of cocoa are quite<sup>interesting. Suppose</sup> that the best long run estimate of the fob price Is 270 cedis/kg,<sup>so that 55 percent of</sup> this Is 150 cedis, at which polnt the supply elasticity might<sup>be quite high, perhaps 1. At</sup> this elasticity, ignoring distrlbutional Issues the right producer<sup>price Is Indeed 55 percent</sup> of the fob price, and the correct amount of revenue Is<sup>raised. Now suppose that the</sup> (long run) world price rlses by 40 percent to 380 cedls/kg,<sup>so that 47 percent of this</sup> Is about 180 cedis, at which polnt the supply elasticity might<sup>be 0.5, and again we appear</sup> to have found a consistent soiution. The effect of the fall In the<sup>supply elasticity with</sup> rising domestic producer prices has been to Justify higher<sup>cocoa taxes which tend to</sup> reduce the response of the producer price to changes<sup>In the (longrun) world price --</sup> in this case the producer price only rises 20 percent<sup>In response to a rise In the fob</sup> price of 40 percent. But thero Is another force at work<sup>tending to make the domestic</sup> producer price track the fob price more ciosely. The<sup>tax collected from cocoa will</sup> Increase substantially as the world price rises, and this<sup>will reduce the need for Indirect</sup> taxes, Justifying a lower Indirect tax rate 'knd with It a<sup>lower cocoa tax rate -- so the</sup> producer price should In fact be somewhat higher than 47 percent of the fob price.

Thus the change In the supply elasticity with Increases In the domestic<sup>price means</sup> that the domestic price should respond loss than proportionately<sup>to fluctuatlons In the</sup> world price, even ignoring cases for stabilizing domestic<sup>producer Income. (This case will</sup> be considered separately beiow). Above a world price<sup>of 400 cedls/kg provided the</sup> supply elasticity remains roughly constant at 0.5, the ratio<sup>of the producer to the fob</sup>
- 2.51 -

price would tend to stabilizo at 47 percent, again, **Ignoring** any distributional consideratlons, except that as the cocoa tax rovenuo rises with the fob price, so all taxes can be scaled down somewhat, and the producer prico will now tend to move more than changes In the long run world price.

1' the Government Is concer !d about the distrlbution of Income, and if we take the central value of Inequality aversion of 1.0, the optimal rati or producer to export price would be 64 percent at the high supply elasticity of 1.0, and 56 percent at the lower elasticity of 0.5. (Both calculations assume as before that at a producer price of 55 percent of fob the Indirect effective tax rate raquired to balance the budget Is 40 percent. Thus If the producer price Is set at 64 percnt of the fob prico the indirect tax also has to be ralsedj. At an Inequality aversion of 2, the producer prico should be between 63 and 74 percent of the export price (deponding on the supply elasticity), at least according to the formula. But It Is Important to recognise that the parameters upon which these estimates are made might change If the balance of taxation changed as dramatically as this between cocoa and consumer goods, and all that should be Inferred Is that If the Government Is very concerned with Income distribution, then In effect It should be shifting the balance of taxation away from Its concentration on rural producers towards the more broadly directed consumer taxes which fall on everyone, both rural and urban.

The reason why a concern for Income distribution can make such a difference to the level of cocoa taxation lies In the Indirect effects which changing the cocoa price has on the prices of non-traded food stuffs. Raising the price of cocoa also raises the price of non-traded foods like yams and cassava, and thus Increases the Incomes of farmers who produce such crops. Since farmers tend to produce roughly similar amounts regardiess of their Income level, whilst richer consumers are more Ikely to substitute cereals for roots. The effect Is roughly simlar to a proportional icome tax which Is returned as a limp sum to producers -- a rather egalitarlan kind of income transfer.
- 2.52 -

Taxhg traded manufactures Is also rather like a proportional income tax and so Is a good way of financing the shortfall of revenue which reducing the cocoa tax would cause.

As explained In the Appendix, the calculations of the optimal producer price of cocoa assume that the tovernment has decided to follow a policy of free trade In cereals. Given that cereals are currently subject to a 30 percent import duty, this raises two questions. Should cereals be protected by this tariff, and how does the presence of this tariff affect the level at which the price of cocoa should be set?

The first questlon Is addressed In the technical Appendix, and the answer Is fairly unambiguous. Regardless of attitudes to Inequality, there Is a case for ralsing some revenue from cereals Import dutles If this allows taxes on other goods (either cocoa or currently taxed representative consumer goods -- though not necessarily particular consumer taxes on eg gasoline) to be reduced. The reason Is simple -- tariffs raise revenue, and the effect In encouraging cocoa farmers to switch Into maize production and hence lower cocoa tax revenue is relatively slight, at least at low levels of cereals duty and adequate levels of the cocoa price. In additlon tariffs redistrlbute Income from consumers to cereal farmers. Further, by inducing a switch Into cereais and out of nontraded roots, the price of roots rises and further red:strlbutes Income to the poorer farmers. How high a tariff on cereals can be justlfled on these grounds Is hard to say, for the higher the price of cereals relative to cocoa, the greater will be the loss In cocoa revenue for each extra cedl collected In cereal import duties.

The second question Is nut treated formally. Given that cereals are currently subject to Import duty, an increase In cocoa tax (le a fall In the cocoa producer price) will Induce farmers to swltch Into other crops. This will tend to drive down the price of non-traded roots, and so encourage at least part of the resources released from cocoa farmhg Into cereals production. The rise In the price of roots cause by the fall In production will Induce consumers to switch from roots to cereals to some extent. On balance It Is not clear whether the Wicrease In cereals consumption will exceed or fall
- 2.53 -

short of the Increase in cereal production, and It Is notoriously difficult to measure cross-price elastIties either In supply or demand to answer the question. Taking an agnostic stance, suppose that there were no change In cereal knports caused by an Increase In cocoa tax, there would then be no offect on cereal tariff revenue, and so the earlier analysis would stand.
- 2.54 -

# **Xl. QUAUFICAT1ONS**

The model from which this calculation derives Is not only highly simplifled, but also static, both In modelling the demand for Ghanalan cocoa and the domestic supply response. The first point has already been noted, the second Is potentially more serious. The co..oa supply response consists of two distinct components. The first is the output response of the existing stock of cocoa trees to higher prices. Farmers will intenslfy management (weeding, spraylng etc) and produce more cocoa per tree at higher prices. This productlon response will be rapid, and a plausible estimate of the elasticit) of output per tree might be 0.25. It might well be higher If one recognizes that what Is relevant Is the response of sales to prico, and higher prices will discourage smuggling, raising the sales elasticity above the output elasticity. If, as seems to have been the case In Ghana, the elasticity of labor supply to agricunural (and therefore cocoa) productlon Is quite high (alowing for migration, as well as the number of hours worked per manyear), then again this short run elasticity will be further ralsed.

Farmers will also Increase the number of trees If the price Is attractive, and this area response will lead to Increased production with a lag of 4-5 years, with a steady build-up thereafter. It Is more difficult to estimate this iong run response, but the model of Meeraus, Okyere and OMara suggests that It might be qulte high -- perhaps more than 1.0 at low producer prices, though lower as the price Increasingly exceeds the cost of planting and productlon. Again, a high labor supply elasticity will raise this figure, and the elasticity will be higher If the prices of competing food crops are kept down by a liberal Import policy. 1, grain Imports are restricted, or tariffs raised on cereals In an attempt to Increase food self-sufficiency, then cereals prlces will rise, leading to sympathetic Increases In non-traded food prices, and the relative attractiveness of cocoa planting (and tending) will be lower, reducing the supply response.

The cocoa supply response thus has two components -- a short run response with an elasticity perhaps In the range 0.25-0.5, and a long-run area response, taking
- 2.55 -

perhaps 8 years or more, but perhaps having a considerably higher elasticity. If the goverrvnent could credibly announce a future price which would prevail In four years tkne, then the optinal producer price would be one that used the short run supply elasticity to calculate the price for the first four years, and thereafter used the full supply response (the sum of the short-run and area elasticities). Farmers would therefore plant more trees know, knowing that the current low prices would be replaced by more attractive prices Just as the newly planted trees first started bearing cocoa.

It Is, however, difficult to kuagine that this would be a credible strategy In Ghana, given the experience of cocoa farmers over the past two decades. If farmers are to be persuaded to continue to plant now trees, and to tend to their existing recently planted trees, then they will have to be given evidence that the price of cocoa will be attractive, and that In practice means raising the price now. It Is possible to show that the best constant producer price Is a compromise between the low initlal price (based only on the short run supply elasticity) and the higher long run equlilbrium price (based on the full elasticity). At this stage, given the present state of knowledge about likely planting responses to the cocoa prico, all one can say Is that the producer prices should be above, and possibly substantially above, the price at which the supply response Is large, which Is near the cost of productlon, and about 140 (1987) cedis/kg.
- 2.56 -

# **XiII.** THE RISKS INVOLVED IN **SEMNG** THE PRODUCER PRICE **TOO** LOW

The argument in favor of a producer price at least as high as 55 percent of fob price, and at any rate above the critical supply price of about 140 (1987) cedls/kg, may look somewhat fragile, and once can knagine arguments for elther a higher or (less plausibly) a lower price. Granted this, one would like to know the risks Involved In setting the price either too high or too low, to see on which side It Is safer to err. If the price Is set too high, the obvlous loser Is the Government, which will lose tax revenue. This would be serlous If there were no alterative sources avallable. Granted that revenue is tight, there are several mitigating factors which make this a lower risk strategy than might appear. The first Is that provided the foreign exchange market Is liberalized, the potential extra effectivo revenue flowing to the government sector will be significantly Increased, compared with the recent past. In particular, this will tend to Increase the real value of the cocoa tax receipts, since cocoa exports will now earn the market, not the overvalued, rate of foreign exchange. The second Is that the extra Income transferred to cocoa farmers will be spent ulthiately In considerable part on taxed goods (or services) and will In part return to the exchequer. Flnally, the foreign aid situation Is likely to be relatively more favorable In the earlier period of reform and adjustment than later. A shortfall In cocoa tax revenue which has been urged by the Bank and the IMF Is likely to be more sympathetically treated than Is a subsequent shortfall In foreign exchange earnings caused (or thought to be caused) by a failure to stknulate increased output by failing to pay the agreed price.

The risks of setting the price too low look more serious. The most obvious problem Is that It will take some time before the ovidonce -- In the shape of a failure to inrease production and exports -- becomes available to demonstrate that the price was too low. By the tkne that It does, It wlH take a further 4-8 years to reverse the damage, and the patbnce of internatinal creditors will beome strained. There are other poiltical economic reasons why a low producer prico strategy may have harmful
2.57 -

-

consequences. **Raising the** producer **prico** puts prosswe on COCOBOD to cut costs, and on the Government to reduce wasteful expenditure. The argument for taxing cocoa (or anything else) is that the revenue can be bettor or more productively spent by the government than by the taxpayer. This argument has been demonstrably false In the past, and without strong Incentives to hprove offlciency and cut waste, it will continue to be false. The lower Is the value of government expenditure, the lower should be the level of taxation, and the higher should be the producer prico of cocoa.

At this point it Is worth brnging out another hportant finding from the GLSS and AES survey data and the technical appendix. It appears that cocoa farmers are rather poorer that the typical consumer of **knported** or taxed goods, and that producers of non-traded foods are very considerably poorer than consumers of these foods. Given this, it Is, on distribuclonal grounds, desirable to transfer revenue from consumers of food to farmers, and also from consumers of taxed goods to cocoa farmers. Taxing cocoa farmers does the reverse on both scores, for It directly taxes the Income of cocoa farmers, and Indirectly lowers the Income of food producers and transfers Incomes from these farmers to food consumers.
- 2.58 -

# **XIV.** IMPUCATIONS OF **TAXING** COCOA **FOR INPIUT** SUBSIDIES

If there is a case for taxing cocoa output, then there Is a corresponding argument for subsidizing cocoa Inputs, so that the relative price ratio of Inputs to outputs facing the farmer Is not moved too far from the efficient price ratio. It can be shown that If the elasticity of substitution between hputs which can be subsidized (like Insecticides, fungicikes, sprayers, hybrld **seods** and tfrtlizers) and those which cannot (labor, land) Is unity (l the production functlon Is Cobb-Douglas), then the optimal Input subsidy should be set at the same rate as the output tax. If It Is argued that the producer price of cocoa Is set at 55 percont of the world prie, then this corresponds to a ratio of producer price to farmgate vakhe of 55/73 or 0.75, where the farmgate value Is 73 percent of the world price (equal to the fob price less the optiinal export tax of 12 percent and a COCOBOD handlhg cost of 15 percent of fob). The corresponding sales price to the farmer for Inputs Is 75 percont of cost of delivery, equal to the ratio of the cocoa prico to Its farm-gate. If there are boneficial externalities In using disease prevention measures (le If other farmers benefit) then there Is a case for further subsidy, otherwise not.
- 2.59 -

# XV. SPATIAL VARIATIONS IN COCOA PRICING

The argument that the optimal output tax on cocoa is positive given above refers to a tax rate on the farm-gate value, Itself equal to the fob price less handling costs. These handling costs will vary depending on the location of the farm, and will presumably be higher In more remote areas. If one were to Interpret the choice of tax rate literally, then the producer prico should be set at different levels In different places, though at the moment the producer price Is uniform across the whole country. There are two reasons why the full handling costs should not necessarily be borne by the farmer. The first Is akin to the argument given above that It Is desirable to subsidize Inputs, in this case the transport and handling services necessary to produce the final output -- In this case, cocoa for export to the world market. This would argue for making the cocoa price equal to 65 percent of the fob price less handling costs at each location, and would not make the price uniform (though there would be less variation than If the handling costs were deducted from the net of tax farm-gate price).

The second argument is that the elasticity of supply might vary systematically wlth location, belng higher In more distant or costly locations, arguing for a higher producer price relative to farm-gate value. The main reason for this would be that more distant locations are closer to alternative marketing outlets in nelghboring countries, which make smuggling more attractive than In the more central areas. If this Is true, then a uniform producer price might be Justif led as the sknplest compromise designed to reduce smugglng. Whether It Is true or not Is not clear.
- 2.80 -

# **XVI.** PRICE STABIUZATION

The remaining Issue to resolve In setting the producer price of cocoa Is how to respond to medium run variations In the world price level. (Short run fluctuations are already dealt with by announcing and keeping to one price for the forthcoming season, though, as remarked in the main paper, It is Important to adjust the domestic price In line with exchange rate changes even wlthin the season to achieve a constant real price of cocoa). There are two separate Issues. The first Is how quickly to adjust the domestic price In response to a permanent change in the expected level of world prices -- caused, for example, by a permanent switch (or at least, a long perlod switch, In the level of supply of other producing countries), and how to respond to a deviation over the next year or so from the expected long run level. In the case of a permanent change, the sooner the domestic producers are confronted with the correct producer price corresponding to the world price the better. If the adjustment Is downwards, nothing Is gained by postponing the downward adjustment of the domestic price, as the short-run supply elasticity will be lower than the longrun elasticity, arguing for the shortrun exploitation of the revenue potential of lowering prices (assuming that the longrun consequences of this price change are what Is desired). If the adjustment Is upward, although this argument might appear to work against a rapid Increase In the price, the long run supply response Is unlikely to begin unless current prices Increase.

In the case of a shortrun deviation of the world price from trend, there are good reasons for buffering the domestic producers from these transient shifts. MIrrlees (1988), In a recent paper for the World Bank, estimates that In such cases It would be appropriate to take a five year moving average of export prices (including futures prices In the formula). In other words, current producer prices should only respond 20 percent to changes In the export price level. Mirrlees assumed no correlatlon between price and supply, and so his case Is somewhat overstated, If there were a strong correlation
- 2.61 -

between Ghanaian and other West African cocoa supply, then prices would be high when supply were low, and there would be a case for allowng domestic prices to rise In sympathy with world prico movements to offset the effects of low output. Whether this could be accomplished within the present system of payments la not clear, though It might be possibe to pay a bonus In years of below average total supply.

U4
- 2.62 -

# **XVII.** IMPUCATIONS FOR **TAXES** ON CONSUMER GOODS

The opthnal producer price for cocoa was derived on the assumptlon that consumer goods were taxed 40 percent on their cost (or Import price), and faced a (rather h!gh) compensated demand elasticity of 1.25. ' It also assumed that the Government has iberalized the exchange rate reghme so that the officlal exchange rate Is cose to the equilbrhkm exchange rate. (If this Is not true, then It Is knportant that the cocoa producer prkce be set at a level which takes account of the overvaluation of the exchange rate, but even then the effective rate of tax on consumer goods will be lower than the nominal rate If the exchanger rate remains overvalued. This In Itself strengthens the case for ralshg consumer tax rates and lowering the effective taxation of cocoa exports). If there are consumer goods with a lower demand elasticity, or which are taxed at a lower rate than 40 percent, or which have a higher than average income elasticity of demand, then there Is an equally strong case for switching tax revenue from cocoa farmers to such sources of taxation. The most obvious examples are cars and petroleum products, which, though currently subject to excise taxes, certalnly meet most, If not all of the above conditlons. If we concentrate on transport fuels (gasoline and diesel), then most, perhaps all, of the current tax Is better considered as a user charge. As a rough guide, the road user charge element of taxes on transport (of which fuel taxes are a major component) should yleld revenue comparable to expenditures on the road network. Specifically, taxes on heavy vehicles should cover perhaps two-thirds to three-quarters of the maintenance expenditures required to keep the road network In Its desired long-run state of repair, whilst taxes per passenger car equivalent (a measure of congestive capacity) should recover the balance of malntenance expenditures and a substantial fraction (between two-thirds and the full amount) of the Interest on the capital stock of the highway system. This last Item Is typically well below the annual Investment In building or reconstructhg roads, unless the highway system Is expanding faster than the rate of Interest. If the highway system has deteriorated to the point at
- 2.63 -

which substantial reco,structlon expenses **are** reuirod, then<sup>higher roadasercharges</sup> can be justifled In the period before this reconstructlon Is completed.

The pure tax element corresponding to the 40 percent Indirect<sup>tax rate would be</sup> In addition to this road user charge componmnt. Ideally,<sup>the tax would be restricted to</sup> fall on passenger transport, leaving frelght transport<sup>untaxed, as It Is an Input Into</sup> production. in practIce this means concentrating the<sup>tax on gasoline and passenger</sup> vehicles, with dissuasive taxes on diesel-engined private<sup>cars designed ta make it</sup> unattractive to buy these Instead of conventlonal gasoline powered<sup>cars. Such levels of</sup> gasoline taxation would be appreciably higher than current levels,<sup>though probably below</sup> European levels. Given the administrative ease with which such taxes can<sup>be collected,</sup> and the difficulty the consumer has In Identifying the tax<sup>element given that fuel prices</sup> change In response to changes In the world market price and<sup>the exchange rate, It Is</sup> hard to think of cogent arguments against shifting revenue collection<sup>away from cocoa</sup> farmers towards gasoline taxes.
- 2.64 -

# **xIn. CNCLUSIONS**

The case for announchig and demonstratlng a commitment to a higher real producer price for cocoa appears strong, and the risks of setting the price too low appear to be higher than the rlsks in the other directin. The first priority in setting the producor price of cocoa Is to ensure that It Is above the level at which farmers are willing to plant and maintain cocoa. While this seems self-evident, It has not been the past polIcy of the Government, and It would not necessarily be ensured by llnking the producer to the export price level. The main way In which the fall In tax revenue from the cocoa tax and the profits cf COCOBOD can be offset are first of all to move the exchange rate to Its equilibrium level so that the Goverrmnent will have access to additlonal purchasing power which Is significant compared to total current tax revenues. The next step Is to explore the extent to which taxes can be shifted from cr- ;a producers to all consumers by Increasing taxes on approprlate consumer goods. The Ideal subjects for such taxation are those which are Income elastic and price Inelastic - - gasoline, cars, onsumer durables, etc are all good examples. The greater the scope for consumer good taxation, the hlgher should be the price of cocoa. There also appears to be good reason to try and stabilize the real producer price of cocoa, both because the tax rate legitinately Increases with tne world price, and because on Income smoothing grounds price stabilization Is moderately efficaclous. Finally, even If there does remain a (rather modest) case for an output or export tax on cocoa, there seems little point In moving to the more complex alternatives of an agricultural Income tax or a land tax.
- 2.9

-

# **RAEEBCES**

Imran, M and R C Duncan,<sup>(1988?). 'Opthal Export Taxes for Perennial Crop Erporters',</sup> mhoeo, Internatinal **Comfodltles**<sup>Market Division, WorldBank,</sup><sup>**Washington**DC.</sup> Konings, P. (1986). The State<sup>andRuralClass Formation hI hana:AComparative Analysis,</sup> KPI (distr. by Routledge and Kean Paul,<sup>London).</sup> MIrrlses. J. A. (1988), 'OptUal<sup>Comodity Price hntrventIon", _beo, WorldBank,August.</sup> Thabatabal, Hamld, (1908) 'Economc<sup>Decline, Acces to Food and Structural Adjustment In</sup> Ghana'. World Ecoromc Programeo<sup>Rosech WorkIng Paper 1O-G/WP8O,</sup> hnternatIonal Labor Organisatlon.
4 APP_DOt **A** A NOTE ON DATA IN COCOA TAX AND REVENUE ALTERNATIVES by _David N. Nwbry_