04 July 2008

Why cocoa-growing countries shouldn't make chocolate

It's an obvious economic development strategy: add value to your natural resources. After all, why should coffee growers only get a few cents when a cup of coffee sells for $3? Why should Liberians export their rubber raw to Ohio when they could earn more by making tyres? And why should Ghana and Côte d'Ivoire send most of their cocoa to Europe for processing? Isn't this just the legacy of colonial exploitation and underdevelopment?

Of course, adding value in the source country doesn't pay for multinationals, otherwise they'd be doing it. Now a team at the Center for International Development at Harvard show that it doesn't pay for the country either.

West African countries have lots of rain, cheap labour and an ideal soil for growing tree crops: in other words, a comparative advantage in growing cocoa. Processing cocoa requires entirely different factors: cheap power, semi-skilled labour, a stable environment for big capital projects and cheap transport links. Making chocolate out of cocoa butter is a different business again, calling for more specialized equipment and skills. There is one company making chocolate in Ghana, but it doesn't sell well even here. In fact it's highly unlikely that any country could have comparative advantage in such completely different activities. We shouldn't expect Ghana to specialize in chocolate any more than we would expect Belgian or Swiss chocolatiers to source their cocoa from European greenhouses.

Hausmann, Klinger and Lawrence conclude their paper as follows: "Policies to promote greater downstream processing as an export promotion policy are misguided. Structural transformation favors sectors with similar technological requirements, factor intensities, and other requisite capabilities, not products connected in production chains." (Policy brief here)

Now if only I could figure out what that actually meant in Ghana . . .


Sahil said...

While making chocolate would be a branding & technology intensive business, processing cocoa butter & liquor is less technology intensive. Ivory coast has close to 400,000 MT of processing capacity & growing. Perhaps MNC's (and local players) see value in local processing. It does give quality employment, technical expertise & business exposure to the local people.

Elizabeth Jansen van Vuuren said...

'What that actually means in Ghana' and elsewhere on the continent is surely that we need to continue as resource-extractive economies depending on factors like cheap low-skilled labour, good resources, and limited technical infrastructure. Perhaps we can push this competitive advantage by limiting public schooling to primary level. I agree Ghana that making top grade chocolate may not be feasible in Ghana right now, but that doesn't mean there should be no movement in that direction.

J said...

I tend to disagree as well. There are several small producers of high quality chocolate here in Ecuador. They are adding value to a product that is usually exported at low rates, and thus bringing valuable cash back to the country. I am also involved in adding value to chocolate products and then sending them for export. There is no reason cocoa-growing countries should continue to have economies based primarily on resource-extraction.

As well, there is a a consumer trend in the developed world where people now want food products with authenticity and traceability. Many consumers now want food products that are not made by an MNC in a factory with a well-known mega-brand. They would rather have something they know has direct links (and thus traceability) to where it originated from, which is has some "hand-made" element to it and thus authentic, rather than mass-produced.