The Price Incentive to Smuggle and the Cocoa Supply in Ghana, 1950-96


WP/98/88-EAWP/98/88



The paper examines the price-output relationship in Ghana.s cocoa sector during
the 1950.95 period. In the early 1980s, the officially recorded production of
cocoa was 60 percent lower than during its peak in the early 1960s, and it
remains below peak levels despite recent increases in production. Economic
theory predicts that movements in the supply of an agricultural commodity
depend on the relative return to the commodity. Although Ghana has been a price
taker, the authorities have frequently intervened in the market, thereby
driving a wedge between the international price and the domestic producer
price. For much of the postindependence period, the taxation of cocoa producers
in Ghana has been higher than in most other cocoa-producing countries.


Traditional studies based either on technological capacity functions or the
partial adjustment supply model have been unable to explain the massive decline
in the officially recorded output. Meanwhile, some have suggested that the
long-term gap between .potential. and .actual. outputs.the .missing cocoa
supply..can be explained by cocoa smuggling to neighboring countries, notably
to Côte d'Ivoire. A wealth of anecdotal evidence and persistent price
differentials between Ghanaian and Ivoirien domestic markets support this
hypothesis.


This paper examines the cocoa-smuggling hypothesis using the cointegration and
error-correction techniques to establish long- and short-term cocoa supply
functions. Cocoa supply is found to be cointegrated with international prices,
which act as an expectation of producer prices, and with the Ghana-Côte
d.Ivoire producer price differential, which proxies the motivation to smuggle.
More than one-third of the deviation from the long-run equilibrium translates
into the current supply decisions made by farmers. The short-run variations in
output are not proportional to the Ghana-Côte d.Ivoire price differential, and
smuggling seems to be based on long-term decisions rather than on immediate
price signals. The price differential seems to explain some 40,000.60,000
metric tons of missing cocoa supply.