Cocoa Trade in Cote d'Ivoire(COCOA)

      CASE NUMBER :   202
      CASE MNEMONIC:  COCOA
      CASE NAME :     COTE D'IVOIRE COCOA TRADE AND THE ENVIRONMENT

A  IDENTIFICATION

1.  The Issue

     This case looks at cocoa trade in C“te d'Ivoire, on the one
hand, because the C“te D'Ivoire is the world largest producer of
cocoa and the third for coffee after Brazil and Columbia. On the
other hand, the Cote D'Ivoire is a typical example of an
outward-oriented economy that relies for its foreign earnings on
the proceeds of primary products.  This reliance on primary
commodities affects the country's environment. Millions of hectares
of tropical rainforest have been devastated for the creation of
cocoa and other primary commodity plantations for economic motives.
The impact of such a devastation has changed the eco-system and
affected flora and fauna as well as living conditions in rural
areas during the last thirty years.

2.  Description

    The Cote D'Ivoire, as virtually all developing countries, is a
typical example of a developing economy depending on export
proceeds from primary products mainly cocoa.  The cultivation of
cocoa was introduced in Cote d'Ivoire in 1912 by colonial
authorities from Gold Coast actual Ghana (Robert Handloff, 1983).
France's colonial division of labor designated some colonies, among
them the C“te d'Ivoire, to supply French markets with cash crop.
That was the beginning of the cocoa story in the C“te D'Ivoire.
Apart from its ivory from which the country was named, the C“te
d'Ivoire at that time had less to offer for trading compared to its
eastern neighboring country Ghana, more endowed with gold. So, when
the French arrived in the area in the 1880s they found it simple to
use the vast fertile land of dense tropical forest for agricultural
commerce.
      Late in the 1900s, France's trading organization in West
Africa, with firms like the Compagnie Fran‡aise d'Afrique
Occidentale - CFAO - (the first French trading company in C“te
d'Ivoire), laid the foundations for a capitalist farming
development, including research stations in the south for the
improvement of varieties of seeds and plant diseases treatment.
Linked to France's trading organization, independent landowners not
enrolled in the colonial farm working started their own
plantations.  Furthermore, Ivorian farm owners organized themselves
in unions which controlled the gathering, the conveyance from
remote areas of the country to the harbor to sell their crop to the
colonial authorities who had the privilege of the export to France.
Since then, the C“te D'Ivoire has had the infrastructure to export
and has developed skills in operating plantations (Bastian A. den
Tuinder, 1984). 
     By 1960, at independence, C“te D'Ivoire producers had greatly
increased their knowledge in export commodities, mainly coffee and
cocoa. Moreover, the productivity and the resistance to
disease of cocoa and coffee trees gradually improved through a
replanting program financed by the government. An attempt to breed
a more disease-resistant variety of cocoa trees, which produce
cocoa used in the production of chocolate has been undertaken by
the government. That venture was a success because research
laboratory has ameliorated the treatment of some of the most
devastating diseases such the witches'broom that affect the trees. 
     The land-intensive techniques used for the exploitation of
agricultural products, which utilize a great amount of chemicals
that affect the environment, has also increased their quantity as
well as their quality, and since 1970, the Cote D'Ivoire has been
the world's first cocoa producer with a 27 percent share of the
world total output (Kouyate-Ethui, Mamou, 1989).
     Agricultural products such as cocoa account for a significant
proportion of the country's Gross Domestic Product (GDP) (Franco,
1981). In the late 1970s, for example, two-thirds of the
Cote D'Ivoire total export earnings derive from the country's
traditional primary commodities with a large part from cocoa 
(Priovolos, 1981). The GDP growth in percentage per year has been
as followed from 1981 to 1987:

                         1981  1982  1983  1984  1985  1986  1987
GDP growth (% per year)  4.3   1.6  -1.2  -4.4   9.2   3.2   -2.9 

The fluctuation of the GDP as shown is inconsistent because the
1980s have been a period of crisis in cocoa market.

     The composition of the C“te D'Ivoire exports as displayed:
cocoa 29%, coffee 14%, timber 6%, petroleum products 5% and other
46% show the importance of cocoa in the country's international
trade.
     The economic concentration of Cote D'Ivoire on primary
products is essentially related to the need to generate revenues,
in order to industrialize the country and to finance public
expenditures, especially public services and other components of
economic and social infrastructure (Peterson, 1979). However, as
most of primary products, ivorian cocoa is subjected to vacillating
demand in developed countries. Because of that demand fluctuation,
the country's export earnings are quite erratic. 
     Furthermore, there is a great deal of controversy in economic
development literature regarding the nature and the impact of the
commodity problem in developing countries. In an empirical
analysis, Priovolos points the commodity problem to the declining
secular terms of trade.  He argues that downward fluctuations
trends have a detrimental impact on developing countries. In
her theoretical analysis of an optimal pricing model for primary
commodities, Kouyate-Ethui, Mamou states that commodity price
problem does not allow sufficient returns for farmers in order to
optimize government revenues. She argues, " that in the face of the
continued decline in prices of internationally traded commodities,
many developing countries nations face a challenge..." that of
setting producer prices so as to maximize government revenues." 
     According to Kouyate-Ethui the way to do so, is to impose tax
on agricultural products.  However, inappropriate imposition of
taxes will have deteriorious effects on economic welfare. In
another critical analysis of commodity trading, Belinda Coote
contends that the international commodity market traps developing
countries in a permanent poverty. To exit the snare those
countries have to produce more by using more land as well as more
chemicals which alter the environment (Belinda Coote, 1992). 
     In fact, since the 1980s, after having experienced a rise of
344 percent in cocoa income in the 1970s (Priovolos, 1981), the
ivorian cocoa price has deteriorated significantly. Abraham Usman
and Andrea Savvides view part of that deterioration in the
membership of several West and Central African countries (13
countries exactly among them the C“te D'Ivoire) in the " Communaut‚
FinanciŠre Africaine ( CFA ) zone. They argue that the pegging of
these countries' currency to the French franc has hindered their
performance in the coffee and cocoa market. For the fluctuation of
the French franc vis-…-vis other currencies is automatically
transmitted to the CFA and influences external competitiveness
through the relative price. 
     The impact of the exchange rate risk on trade flows is surely
an serious concern in the economy of a country like C“te D'Ivoire
because it leads to an increase of the production in order to
compensate for the loss of hard currencies that could result from,
and that damages the environment.
     In a recent study, Panagariya and Schiff (1990) addressed the
issue of export pessimism for the cocoa exports of Africa. In their
inquiry, they simulated to assess the impact of a 100,000 tons
increase in production in Ghana. The expansion led to a world price
decline of 3.7%, and income losses of 8%, 12.3% and 5.7% for C“te
D'Ivoire, Cameroon and Nigeria respectively . When prices
fall the tendency is to sell more meaning creating more plantations
which reduce the forests. This well illustrates  what Belinda calls
the trade trap (Belinda Coote, 1992).
     Although the cocoa as well as coffee export business in Cote
d'Ivoire is regulated by a marketing board, prices are
internationally determined by considering the volume of the world
export.  Moreover, the volume on the international market is
controlled by an international cocoa agreement or "Cocoa
Agreement". A three-year agreement whose objective is to prevent
excessive cocoa price fluctuations through a buffer stock by
helping stabilize and increase the export earnings of cocoa
producers while protecting consumers interests as well (The World
Cocoa Market, p.1035).  According to this article, participants in
the first 1976 agreement ended in 1979 included nineteen
exporting countries, representing more than 90 percent of world
production and exports and twenty-nine importing countries
accounting for 70 percent or world imports. But the United States,
the largest importing country was not a signatory to this 
agreement. 
     The United States consume about a fifth of the world's cocoa
production but the reason of her resentment to the agreement has
two fold aspects. First, the cocoa agreement is mainly a trading
pact between Europeans and their African producers, based on
political ties ; Britain and the members of the commonwealth, and
France with the CFA zone countries. Unlike those two Europeans
countries, the USA has no special ties with the African cocoa
producers. Rather, the US has close relationship with the Latin
Americans where she can easily import cocoa because Brazil one the
world's largest cocoa producer is just next door. Second, although
in the Kennedy and Johnson's era the US was interested in
considering membership of commodity agreements, that became less
important to the US when President Nixon came to power. The reason
lies in part in the US growing isolation after the Vietnam War
which developed a kind of hostility to the developing world. The
other part of the reason stems from the fact that the country
worried about the economy as inflation was a big issue
at that time. So, American politicians wanted to conduct a clear
policy that would not increase prices particularly food prices.
furthermore, the American attitude reflected the free-market
philosophy which implies that prices should not be controlled until
their level threaten  producer countries .
     The " Cocoa Agreement" itself has not worked efficiently since
then. Because unprecedent high prices came into force with the
first agreement, and the mechanisms for defending the price
range had not been put to the test. Therefore, it is likely that
only export quotas and buffer stock transactions have operated
which means reduction of quantities in the world market. 
     For a country like the Cote D'Ivoire whose previous success in
cocoa trade boosted the country's economic development, the damage
to the environment is now a national concern. From 12 million
hectares in 1960, the ivorian rainforest decreases to 9 million
hectares in 1966 then to 2.6 million nowadays. As to the number of
plantations, from 200,000 cocoa plantations covering 500,000
hectares and involving around 650,000 people in the production in
1975 (Priovolos, P. 7), one can assume that plantations, under the
government agricultural diversification program, now cover four
times the 1975 hectare used. The impact on the environment is the
huge deforestation of one of the remaining rainforest in Africa
(see TED CASE Ghana Forest Loss), since deforestation is not only
for cultivation but also for logging industries as the country does
also export timber . Timber production has been an important part
of the ivorian prosperity if not the first as trade product at
independence in 1960. The production reached its peak in 1975,
contributing to 23% of foreign earnings. By the 1980s, timber
production declined because of overexploitation. In 1984,
log and sawed wood exports declined to 2.1 million cubic meters
representing 12% of total exports (see Robert Handloff, P 113). 
     Another aspect of the diversification process has been the
development of rubber trees, the planting is preceded by the
cutting of the natural vegetation before the planting itself.  That
process entails the loss of rare species due to the loss of their
habit. The typical example of species loss is the case of the
ivorian elephant that can now be referred to as a " prehistoric
animal" because there are very few left. They can be seen only at
the zoo or in national reserve parks. 
     In addition, agricultural development goes along with
infrastructure building up which destroys kilometers of forest. The
construction also displace villages and their inhabitants.
Moreover, chemical use for cocoa quality improvement has led to
soil and water pollution. Different plants cultivation ; for
example cocoa tree that is dissimilar to coco tree or rubber
distinct from coffee tree, introduce different chemicals in the
planting process. Those chemicals affect the biological
composition of the soil and have a negative impact on the
bio-diversity. An example of this fatalistic impact is on rivers
and streams that carry less fish because of the natural environment
change.  
     Chemicals in the soil are drained by rains into rivers and
that modify the aquatic life. Above all is the visible
desertification in the northern part of the country that has
altered the climate as well as the raining season. 
     As Richard P. Tucker, points out in "Five hundred years of
tropical forest exploitation", a normal rainforest tree takes 150
to 200 years to grow. Since cocoa and other raw material production
have depleted two thirds of the Ivorian environment, one can easily
understand the government when few years ago, it launched its
program : "One Ivorian, one tree" to stop the desert like area in
the north of the country. 
     However, although world trading rules permit countries to
protect their environment with the support of the World Bank, if
commodity business is not protected from competitors who are not
members of commodity agreements and so can sell their products
without quotas constraints, only countries with the strongest
economies will be able to pursue environmental protection, and
those like the C“te D'Ivoire will be a victim of their own success.

3.   Related cases
    (1): trade product          = COCOA
    (2): Bio-geography          = humid tropical forest [TROP] 
    (3): Environmental problem  = [HABITAT]
4.   Draft Author: Ange-Berthe Gnoan
B.   Legal Clusters
5.   Discourse:  Agreement and Complete
     The International Cocoa Organization was established in Geneva
in 1972. The main feature of what is now known as Cocoa Agreement
is to maintain the price of oca beans in the international
commodity market based in London.
     In 1980, the third International Cocoa Agreement was held
under the auspices of the United Nations Conference on Trade and
Development UNCTAD and became the United Nations Cocoa Conference.
In 1986 at the fourth conference, the representatives of 74 states
participated in the Conference as did the European Community and a
number of specialized related agencies of the United Nations as
well as some Non-Governmental Organizations (ONG).
     Some of the Agreement objectives are to promote the
development of international co-operation in all sectors of the
world cocoa economy, prevent excessive fluctuations in the prices
of cocoa which affect the prospects for accelerate economic growth,
and assure adequate supplies at reasonable prices, equitable to
producers and consumers. 

6.   Allegation: DISagreement
 
  The impact of expanding the commodity exports of developing
countries has received a great deal of attention since the "export
pessimism" hypothesis (Prebisch, 1950). The hypothesis was based on
the fact that developing countries concentrated on exporting
primary commodities, while industrialized countries were producers
of manufactured products. Primary commodity demand tends to be
inelastic with respect to income, therefore, if supply grows faster
than demand, this leads to lower prices and deteriorating net
barter terms of trade vis-…-vis  industrial products. Moreover,
commodities tend to be inelastic to price, so that in the short
term higher production leads to price declines. Since the 1950s,
this theory has been proved not only to true but still affects raw
material trading. 

7.   Forum and Scope :  Cote D'Ivoire and Multilateral

     The C“te D'Ivoire has ratified most international agreements,
legislation or regulation referring to cocoa, and has enacted them
in domestic rules and regulations.

8.   Decision Breadth : Multi dimensional

     Based on the 1986 participation in the cocoa agreement which
include sovereign states, the United-Nations agencies, and ONG, the
decision breath is multi dimensional.

9.   Legal Standing : TREATY

     The legal standing of the cocoa case is by regulations that
are the UNCTAD level and may be in the form of mutual agreement
between countries.

C.   Geography

   a  geographic Domain : Africa
   b   geographic site :  West Africa
   c   geographic impact : Ivory Coast
     Even though the domain of cocoa production in this case is in
West Africa, the Sub-Saharan Africa site, the geographic impact is
totally in contrast with that of the site. Countries that consume
the Ivorian cocoa are European, Asian (mainly Japan) Canada, and
the USA. In Europe, Switzerland is the major importing country
importing C“te D'Ivoire cocoa because Nestle one the world famous
chocolate manufacturer has a subsidiary in the country. Other
countries like France, Austria and now countries of eastern Europe
import from C“te D'Ivoire. Lately Russia and China have the join
the group of importers of the Ivorian cocoa. Brazil is considering
importing cocoa rather than increasing its production . As Brazil
and the C“te D'Ivoire have a good diplomatic relationship, that
country could be an interesting prospect for the Ivorian cocoa. 

10.  Type of habitat : TROPical

     The Ivorian habitat type is the humid tropical forest similar
to the Brazilian mato-grosso.

D.   Trade clusters

11.  Type of measure: Regulatory Standard [REGSTD]

12.  Impact: Indirect

     Regulation of cocoa trade has a direct impact on the country's
foreign earnings, and an indirect impact on rural workers revenues
since the purchasing price of cocoa to local producers is related
to the international price fixed in London at the beginning of each
cocoa trade season called cocoa campaign. 

13.  Relation to environment impact

   a Direct related :  yes cocoa
   b Process related : no
   a Not related :     no
   b Process related : yes HABITat Loss

14.  Trade product Identification : COCOA

15.  Impact of measure on trade competitiveness : LOW

     The principle of the international cocoa agreement is quotas
concede to each country during each campaign. Thus, the buffer
stock board can efficiently regulate the market and ensure good
prices. In fact, it is a constrain on individual country marketing
policies, while no member countries can sell and buy in a free
market. This has been one the major problem with the cocoa or other
commodity agreement.

16.  Industry sector : FOOD

     A state owned enterprise and Nestle company transform part of
the Ivorian cocoa into manufactured chocolate products or cocoa
butter for the domestic as well as for export.

17.  Importer : IVORY COAST AND EUROPE

E.   Environmental Clusters

18.  Environmental problem : HABITat Loss

     The main environmental problems are the extinction of wild
animals, the disappearance of medicinal plants, water pollution by
chemical and the advance of the desertification.

17.  Impact of Measure on Trade Competitiveness:  REGSTD

18.  Industry Sector:  COCOA

19.  Exporter and Importer:  IVORY Coast

E.   ENVIRONMENT Clusters 

20.  Environmental Problem Type:  HABIT

21.  Name, Type, and Diversity of Species

          Name:          COCOA
          Type:          Plant/tree/hardwood
          Diversity:     NA 

22.  Impact and Effect:  NA 

23.  Urgency and Lifetime:  MEDIUM, and 100s of years 

24.  Substitutes:  Conservation 

VI.  OTHER Factors 

25.  Culture:  NO

26.  Trans-Border:  NO

27.  Rights:  Yes

28.  References

Abraham A. Usman and Andreas Savvides, "A differentiated good model
of coffee and cocoa exports with refernce to the CFA franc
zone.(Communaute Financiere Africaine; French franc), Applied
Economics, June 1994 v26 n6 P 583 (8).

Africa cited as obstacle to global cocoa agreement. (Internatioanl
Cocoa Agreement) (Industry Overview), Journal of Commerce and
Commercial, July 19 1992 v393 n27767 p 5A (1).

Coleman, Jonathan Roger, "How policy changes affected cocoa sectors
in Sub-Saharan African countries+, The World Bank policy research 
working papers ; wps 1129, 1993.

Coote, Belinda, " The trade trap : poverty and the Global Commodity
Markets ", The United Kingdom, Oxford 1991.

Deaton, Angus, "The living standards survey and price policy
reform: a study of cocoa and coffee production in Cote D'Ivoire,
The World Bank working paper no. 44, c1998.

Francis, paul A. " Land and tree tenure in humid West Africa ",
Addis-Ababa, Ethiopia: International Livestock Centre for Africa,
1987.

Gombeaud, Jean-Louis, " La guerre du cacao: histoire secrete d'un
embargo", Calman-levy, Paris 1990.

Hodd, Michael, "The economies of Africa ", University of London,
Publisher G.K. Hall & Co., Massachussett 1991. 

Kouyate-Ethui, Mamou, "Optimal  Pricing model for primary
commodities", 1989, Addis Ababa, Ethiopia, p 1, 20.

North London Haslemere Group, " Cocoa- the beginnings of a trade
union of the third world?

A study of the international cocoa agreement.  Oxford. Third      
World First. 1973. 

Priovolos, Theophilos "Coffee and the Ivory Coast : an econometric
study, Levington, Mass. 1981.

Robert E. Handloff, C“te D'Ivoire: A country study, 1991, P 3.

Short, Joseph "American business and foreign policy : cases in
coffee and cocoa regulation, 1961-1974, New York : Garland, 1987,
p. 325-340.

The European connection. (imports of confectionery into the UK).
Grocer Sept 23 1995 v217 n7221 P80(1).