Economic Impact of the Cocoa Industry - Case Study Example

Economic Impact of the Cocoa Industry Côte d'Ivoire is one of the smallest countries in West Africa. Formerly known as Ivory Coast, it has been called the “Jewel of Africa”. It lies between Liberia and Ghana and borders the North Atlantic Ocean. Other neighboring countries are Mali and Burkina Faso in the north, Guinea in the east, and the Gulf of Guinea in the south. (Central Intelligence Agency) Its principal city is Abidjan, which is the economic and political capital of the country. Yamoussoukro is its official capital city. (Bureau of African affairs) Ivory coast plays a major role in the economic and political stability of the whole of Western Africa, with people from poorer neighboring countries relying on it to provide employment. Côte d'Ivoire became a French colony in 1842. Felix Houphouet-Boigny was the main political figure leading the rebuilding of the country after the World War II. Consequently, he became the country’s president after it achieved independence in 1960. He motioned for the improvement of the conditions of the African farmers and other laborers. He believed that the path to African harmony was through gradual economic and political cooperation, recognizing the principle of laissez faire in the internal relationships of other African states. The country began to prosper with the help and cooperation given by France. Up to now, France remains as one of the major markets of the country. (Cote d'Ivoire) In the 1980s the country's economy began to suffer as the population began to grow. This caused the decline in the county’s standard of living. “A failed coup in September 2002 left Cote d’Ivoire divided between a rebel-held north and government-controlled south transforming the country from a regional economic miracle to a conflict hot-spot.” (IRIN) Today, the Ivory Coast is struggling to maintain economic and political vitality. Ivorian Economy Since the colonial period, the Ivorian economy is chiefly market based and depends a lot on the agricultural sector. Together with forestry, and fisheries, the three sectors account for a considerable part of the country’s Gross Domestic Product and of exports. “Almost 70% of the Ivorian people are involved in agricultural activity in one way or the other” (Cote d'Ivoire). As a result, the country’s economy fluctuates from time to time, depending on the international prices of its agricultural products, and productivity according to whether conditions. Its main products and exports are cocoa beans, coffee, and palm oil. Other principal exports are banana, cotton, pineapple, tuna, rubber, and tropical woods. Table 1 shows the ups and downs in Ivory Coast’s economy from 1980 up to 2005. Table 1 Gross Domestic Product and Dollar exchange rate of Ivory Coast from 1980 to 2005 (International Monetary Fund) Year Gross Domestic Product US Dollar Exchange 1980 2,121,163 211.27 Francs 1985 3,077,900 449.26 Francs 1990 2,939,400 272.26 Francs 1995 5,490,706 499.10 Francs 2000 7,416,793 709.87 Francs 2005 8,532,387 526.56 Francs Year 1990 has the lowest GDP although the CFA stands strong against the American Dollar. There was no drastic change in the economy until 1990. In the succeeding years, there was noticeable increase in the country’s GDP, but the country’s currency value decreased. Increase in GDP may be due to the country’s oil produce. On the other hand, the slump of CFA Franc in 2000 is largely caused by loss of foreign investors and decrease in agricultural profit due to the civil war. “To reduce the economic fluctuations caused by price variability, the government encourages diversification in export and intermediate processing of cocoa beans”. (Bureau of African affairs) “Despite attempts by the government to diversify the economy, it is still largely dependent on agriculture and related activities, which engage roughly 68% of the population”. (Wikimedia Foundation Inc.) The government continues to be optimistic that the current exploration of Cote d'Ivoire's offshore oil reserves will give significant production that could improve crude production from 33,000 barrels per day to approximately 200,000 barrels per day by the year 2010. (Central Intelligence Agency) Up to date, petroleum exports have remarkably risen and became the country’s biggest foreign exchange earner. Direct foreign investment is very important for the country’s economy. It constitutes almost 45% of total capital in Ivorian companies. “France is no doubt, the most important foreign investor. In recent years, French investment has accounted for about one-fourth of the total capital in Ivoirian ventures, and almost 60% of the total stock of foreign investment capital”. (Bureau of African affairs) Ivory Coast’s economy grew rapidly in 1994 due to the devaluation of the French currency, increase in aid flows, meticulous macroeconomic strategy, and high international prices of goods. The country, being considered as one of the poor nations that is greatly in debt, also got a forgiveness initiative from the International monetary Fund World. The country’s GDP then grew at an annual rate of 6% to 7% from 1994 to 1998. (Bureau of African affairs) The economy of the country dropped in years 2000 to 2003 together with the drop in the prices of its major exports. The country found it difficult to meet the requirements and conditions of its international customers due to government corruption and financial mismanagement. The country also suffered from the civil war during these times. The coup d’état and the consequent declaration of military rule caused foreign investors to withdraw their assistance. As a result, the economy dropped 2.3% in 2000. (Central Intelligence Agency) In 2004, the economy further dropped due to political disorder and chaos bought about by rebel groups. Foreign investments, including French businesses, decreased due to the increasing risk of investing in the country. Also, there was an increase in transportation cost, consequently increasing the cost of investing in the country, that is why investors sometimes choose to invest in nearby countries like Ghana. (Central Intelligence Agency) The cocoa industry is keeping the country alive financially despite its problems, constituting 90% of its total foreign exchange earnings. On the other hand, about 10% to 20% of harvested cocoa are smuggled by northern rebels to other countries where cocoa prices are higher. The profit is said to fund the rebels’ activities. (Central Intelligence Agency) Strong economic growth is not expected until peace is finally reestablished and international financial institutions agree to reduce the country’s large debt profile to the World Bank. The Cocoa Industry "Cocoa is Cote d'Ivoire," said Daniel Abo, vice president of the National Cocoa and Coffee Board. "It has built the country." (Pitman) Ivory Coast supplies as much as 40% of the world's cocoa, producing more raw materials for chocolate than any other country in the world. An estimated seven million Ivorians or about 40% of the country’s population depend directly on cocoa for a living. They are either farmers, farm hands, jute bag makers, or truck drivers. (IRIN) Cote d'Ivoire has several farms in different areas that produce cocoa beans that are used in making chocolate. The beans are grown from trees, picked and then dried to make chocolate. It is mixed and transferred to processing factories, as well as to importing countries. (Chanthavong) All major international chocolate makers depend on its crop, including the popular Cadbury and Nestle chocolates. “In West Africa, planting in watery forests is the most common farming method in cocoa planting”(The Cocoa Industry in West Africa) The plant is naturally prone to pests and diseases. Because of this, new areas are constantly opened from time to time to provide more fertile soils for the plant, and to avoid pest build-up and the spread of plant diseases. Considerable amount of labor is needed to clear the forests for cocoa planting. “The main harvesting is done during October to January with a secondary one in May-August”. (The Cocoa Industry in West Africa) It is estimated that the cocoa industry of the Ivory Coast earns $2 billion a year, producing 1.2 to 1.4 million tons of cocoa every year. This does not include cocoa that are smuggled to other countries to avoid paying the high taxes in Ivory Coast. In 2004, it was estimated that 150,000 tons of cocoa are smuggled to Ghana, the second top producer of cocoa beans in the world, because cocoa prices there are better. Also, cocoa taxes and transportation cost has increased in the Ivory Coast (Pitman) Table 2 Top 10 producers of cocoa beans in 1999-2000 (Chanthavong) Country Quantity of beans (thousand tons) Cote d'Ivoire 1,250 Ghana 410 Indonesia 410 Nigeria 170 Brazil 135 Cameroon 125 Ecuador 95 Malaysia 80 Dominican Republic 47 Colombia 40 Cote d'Ivoire's leads cocoa production by any country with a large margin. Ghana comes in second with less than half of Ivory Coast’s annual production. The country's production constitutes 43% of the total cocoa production of the world. There is a long history of deliberate policymaking designed to develop the country’s cocoa industry. “It was only in the late 19th century that cocoa production began on any significant scale. The first large-scale production was in the 1880s from Portuguese plantations on the islands of São Tomé and Principe. The price of cocoa then was very high, while palm oil and rubber prices are decreasing. Between1894 and 1908 a Ghanaian farmer could earn around ten times more from cocoa than palm oil. From 1886 the authorities also encouraged cocoa cultivation, providing some support including seed and training. The French tried to make cocoa planting obligatory, but it was not popular with farmers”. (The Cocoa Industry in West Africa) “After the country’s independence, forest lands were opened by the government for the expansion of cocoa plantation”.(Chanthavong) The industry surged in 1970 when the government encouraged farmers to grow cocoa by providing them with incentives. The government also funded research and studies on cocoa plantation, aiming to ensure greater cocoa propagation and production. Different planting technologies were developed including machines for planting and harvest, and pest control techniques. With the government’s full support and focus, cocoa exports doubled. In 1977, Cote d’Ivoire overtook Ghana as the world’s largest producer and became the number one exporter of cocoa beans in the world. (Chanthavong) Table 3 Top exporters of cocoa beans in 1998-1999 (Chanthavong) Country Quantity of beans (thousand tons) Cote d'Ivoire 977 Ghana 308 Indonesia 212 Nigeria 142 Cameroon 91 Papua New Guinea 48 “The United States is the biggest cocoa bean importer in the world, buying about 70% of Island Coast’s crop”. (Chanthavong) France, the most important investor of the country, ranked 5th in cocoa beans importation during 1998 to 1999. Table 4 shows the top 10 cocoa beans importers in the world. Table 4 Top 10 importers of cocoa beans in 1998-1999 (Chanthavong) Country Quantity of beans (thousand tons) United States 408 Netherlands 396 Germany 312 United Kingdom 206 France 112 Singapore 88 Russian Federation 78 Italy 71 Belgium-Luxembourg 60 Spain 55 The over-all economy of the country dropped since the beginning of the civil war in 2000. In 2004, Ivory Coast produced 1.23 million tons of cocoa, which is 10% lower than the production in 2003. Although there was chaos in the government and uprising rebel groups during this time, the U.N. reported that the decrease in production is blamed generally on bad whether conditions. (Pitman) Nonetheless, the civil war has clearly affected the country’s economy. First, some cocoa farmers and migrant workers have evacuated their farms in fear of the ethnic discrimination and harassment from the rebel groups. Though the country has experienced tranquility from the 2003 peace agreement, there were still incidences of violence among farmers. Such occurred when cocoa farmers in Duekoue clashed with ethnic Guere communities. This hostility resulted to the death of 100 people. (Pitman) These 7,000 emigrants have been a key asset, ensuring the transfer of cocoa beans from distant fields in the heart of the country to the harbor cities of Abidjan and San Pedro. This massive emigration will cause additional costs in crop transportation, requiring the government to release additional funds. (Bennhold) Second, investments from other countries dropped, together with the drop in cocoa exports due to its increasing prices and the risks involved in investing in a chaotic and unstable country like Ivory Coast. Third, although most of the cocoa farms are owned by the government, a portion of cocoa production is said to have been used by the rebel groups for funding their military activities and for other personal gain. “Profits from the industry help sustain the loyalist south and its army, as well as cocoa-smuggling rebels who control the northern half of the country. The government strongly denies that cocoa is fueling the civil war. Cocoa is not produced to fund war, Daniel Abo said. "We use this money to pay civil servants, build schools, and develop the country." (Pitman) Lastly, funds for the cocoa industry is being cut in favor of funding the war against the rebels. According to Global Witness, $58 million, which was supposed to be used in improving the cocoa industry, was withdraw and was used to re-supply the army and fight the rebels instead. They also concluded that “the lucrative cocoa trade has been at the heart of the war economy and continues to serve the interests of protagonists to the conflict, to the detriment of the Ivorian population,” (Blood and Chocolate: Civil war in Cote d'Ivoire) The revenue cut is also used for the daily function of the nation and for payment for its civil servants and the military. Also, the Forces Nouvelles raises about $30 million every year from taxes on cocoa. Since the IMF suspended aid to Cote d’Ivoire over allegations of corruption and mismanagement in 1999 and the World Bank suspended assistance in 2004 over non-servicing of loans, cocoa earnings have became even more vital to the survival of Ivory Coast. (IRIN) When the economy dropped in 2004 due conflicts in the nation, there was a shortage in cocoa beans production, causing prices to rise dramatically. Chocolate companies, including Barry Callebaut, the world's biggest supplier of bulk chocolate, were forced to temporarily close factories and stop operation for several days. Consequently, chocolate producers have stalled their prices for the following months to protect themselves from the dreadful price raise. (Bennhold) “Producer income remains little because major chocolate and cocoa processing companies have refused to take any steps to guarantee stability and sufficiency of prices for cocoa producers. World cocoa prices vary widely and have been well below production costs in the last decade. Though cocoa prices have shown moderate increases in the past few years, cocoa producers remain to be in excessive debt, which was accumulated when prices went below production costs. Producers also usually get only half of the profits, because their products must go through some abusive middlemen to sell their crops”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) According to Jean-Michel Boehm, commodity analyst at ABN AMRO in London, "If market prices went up by 30% to 40%, which is not impossible, most chocolate producers will suffer and will have to put their own prices up." It is therefore very important for the country to achieve political stability, or else, the cocoa industry may be forced to hoard cocoa and bid up the price in the market. (Bennhold) Chocolate Labor Force Cote d’Ivoire has been attracting immigrants for decades due to its fertile farms. These farms provide a living for laborers and farmers from other poor countries. Because of this, it is estimated that 40% of the country’s population is made up of immigrants. “In the year 2000, US State Department reported that about 15,000 children with age ranging from 9 to 12, have been sold into forced labor on cotton, coffee and cocoa plantations in the northern part of the country”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) “The International Institute of Tropical Agriculture (IITA) followed up these information with an extensive study of cocoa farms in top cocoa-producing countries, particularly Ivory Coast, Ghana, Nigeria and Cameroon”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) The study directly involves more than 4,500 cocoa producers. In August 2002, it was found that an estimate of 284,000 children is working on cocoa farms. “These child laborers cut cacao pods from high branches using long-handled machetes to split them open and to scoop out the beans. They carry out jobs such as using machetes and applying pesticides and insecticides to the farm without the necessary protective equipment”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) These tasks may prove to be very dangerous to the child’s health and safety. Most child laborers work on family farms. Sometimes, poverty leaves these children to work rather than go to school in order for them to survive everyday living. Part of the child laborers population are children of cocoa farmers who are not earning enough money for their family, making them decide to keep their children out of school, and work in farms to help them provide for their families. “The IITA also found out that about 12,500 children working on cocoa farms had no nearby relatives in the area, which is an indication that the children are possibly trafficked for child labor”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) “Children who are involved in the worst labor abuses come from nearby countries such as Mali, Burkina Faso, and Togo”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) These countries are even poorer than the Ivory Coast. Poor parents in the said countries are pushed to sell their children to child traffickers in hopes that their children will find honest jobs and will be able to send them money from their salaries in Ivory Coast once in a while. What they do not know is once their children arrive in their farms, they are made to work for little or nothing and become more of a slave. Child laborers work long and hard day in and day out. They usually start working from 6 o’clock in the morning, and may stay in their farms for more than 12 hours until the dark comes and they can not work anymore. They then rest for next day’s work. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) The IITA further found out that 66% of Ivory Coast’s child laborers did not have the opportunity to go to school and get some education. Moreover, 64% of these uneducated child laborers are aged below 14 years. This concludes that more than half of the working children may not even reach high school. Poverty in cocoa farms mainly comes from the lack of income from cocoa production, affecting both the producers and their community. IITA also found out that, on the average, a typical West African household only earns $30 to $110 per head. This inadequacy makes it difficult to have sufficient incomes to meet even their basic needs. Furthermore, farmers were put at the mercy of the market when free enterprise of agriculture in West Africa was approved. This forced them to reduce their labor cost, making teir income more inadequate. “These small farmers and their children remained trapped in a cycle of poverty, without hope for sufficient income or access to basic education or health care.” (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) It is astounding to learn that some places in cocoa-producing countries do not even have a supply of clean drinking water for daily consumption. Instead, they use dirty water coming from the rivers. This causes the natives to be sick and unhealthy. This should definitely be a major concern for the government. Profits from the sales of cocoa products should be used to fund the water systems and buying materials or pumps for their own supply of clean water. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) “After a series of media exposes and the threat of government action exposing their image, the chocolate industry finally agreed to take action on child labor in 2001. Unfortunately, the plan does not guarantee stable and sufficient prices for cocoa, or any guarantee that cocoa farmers will finally receive a fair income. Without a guarantee, there is now way to ensure that abusive child labor on cocoa farms will stop for good”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) Fair Trade Chocolate Luckily, there is a means to correct the economic disparity of the cocoa industry. This is called the Fair Trade chocolate system. “Fair Trade is an international supervising and certification system that assures a minimum price under direct contracts, prohibits abusive child labor, and promoted environmental sustainability”. The Fair Trade system promises that farmers will receive a minimum income of at least $.80 per pound for non-organic cocoa and $0.89 per pound for organic cocoa. “To determine Fair Trade chocolate and cocoa products, they are marked with the Fair Trade Certified and Fair Trade Federation labels”. (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) “This system will definitely give farmers the stable and sufficient income they need to support their families. Fair Trade also prohibits cruel child labor and forced labor. Farms are monitored once per year to ensure that all conditions are met” (The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness) The campaign for fair trade chocolate is now making essential moves in the USA. Advocates are hopeful to encourage major chocolate companies to sell fair Trade chocolates and cocoa products and stop child labor. Summary and Conclusion Cote d’Ivoire or Ivory Coast is the world’s largest cocoa producer and exporter. Cocoa is the country’s main source of income. Consequently, its economy is largely based on cocoa production, rising when cocoa production and prices are good, and falls when the cocoa industry declines. Furthermore, cocoa production fluctuates depending on world prices and weather conditions. Almost 70% of the country’s population depends directly on the cocoa industry Since the country has achieved its independence, the economy has began to boom due to the government’s encouragement and incentives for planting cocoa. Foreign investors have suddenly surged the country due to its promising future. Unfortunately, the country experienced major problems in the beginning of the 21st century due to the rising civil war. The country was divided and suddenly became chaotic. The danger caused by the rebel groups caused the fleeing of thousands of emigrant cocoa farmers, leaving their farms with very low production. Also, foreign companies have withdrawn their investments in the country due to risks and uncertainties. By the year 2004, Island Coast’s economy has hit the slump. Chocolate production is greatly associated to child labor and slavery. This is due to the insufficiency of income for the families of cocoa laborers. Due to desperation, children are therefore forced to quit school and resort to being slave laborers. Fortunately, Fair Trade is established to guarantee that farmers will be rightfully paid. Farms are also checked every once in a while to make sure that proper working conditions are met. Child labor and slavery is also strictly prohibited by this system. This aims to alleviate poverty in cocoa nations. Island Coast has been considered the “Jewel of West Africa” due to its promising future. But the civil war has caused sever problems to the cocoa industry, and therefore the country’s economy. Today, the country is struggling, and they are not about to rise again unless they achieve political stability. Works Cited Bennhold, Katrin. "In Ivory Coast, Violence Leaves Economy 'Fatally Hurt'." 20 November 2004. International Herald Tribune. 15 November 2007 . "Blood and Chocolate: Civil war in Cote d'Ivoire." 29 October 2007. Africa Flak. 15 November 2007 . Bureau of African affairs. " Background Note: Cote d'Ivoire." November 2007. U.S. Department of State. 14 November 2007 . Central Intelligence Agency. "Cote d'Ivoire." 1 November 2007. CIA World Factbook. 13 November 2007 . Chanthavong, Samlanchith. "Chocolate and Slavery: Child Labor in Cote d'Ivoire." April 2002. The Mandala Projects. 14 November 2007 . "Cote d'Ivoire." 2005. Geographia. 14 November 2007 . IRIN. "Cote d'Ivoire: Cocoa producers threaten strike over non-payment of dues." 10 April 2006. IRIN Humanitarian News and Analysis. 15 November 2007 . Pitman, Todd. "Cocoa Industry Is Booming in Ivory Coast." 6 December 2005. International Labor Rights Forum. 13 November 2007 . "The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness." 31 October 2007. Global Exchange. 13 November 2007 . "The Cocoa Industry in West Africa." 2004. Anti-Slavery International. 16 November 2004 . Wikimedia Foundation Inc. Wikipedia, the free encyclopedia. 2007. 29 October 2007 . Read More