Only government can screw up markets this badly


A quite lovely piece in The Observer awailin' an' a moanin' about how cocoa is rising in price, which will make chocolate a luxury good, yet also complaining that the cocoa farmers aren't making enough to continue farming. We usually suspect that a rising price will feed through into a better income for producers so that's that problem solved then. Indeed, it's difficult to work out how it could be otherwise:

“In the next five years the price of chocolate will skyrocket, and we should think about it as very much a luxury,” said Alejandro Litovsky, founder of consultancy Earth Security Group. In a recent report, Earth Security forecast a cocoa shortfall of a million tonnes by 2020.

Scary, eh?

The chocolate industry is reaping the harvest of poor working conditions and rock-bottom prices in the cocoa heartlands of west Africa, a situation that is driving potential farmers out of the industry in droves.

But it's horribly difficult to understand how we can end up with both happening over time. Rising prices for the beans, and thus the chocolate made from them, will mean that farming those beans will produce a higher income and thus keep farmers in the process or attract more to it.

Unless, unless, of course, there's something screwing up that market mechanism. Ah:

Local investment is hampered by high taxes on farmers, with around 40% of the money paid by commodity buyers going to the government.

Ah, the government is taking a whacking great tax wedge out of the cocoa trade. Meaning that the transmission process of consumer prices to producer prices is prevented in part. And thus we have our problem, the market not working becuase of that governmental intervention.

This isn't all that much of a surprise either. Cocoa farmers in West Africa tend to be poor rural peasants. Political power in such countries comes from the rather richer urban voters. Thus the incentive is for government to sting the farmers and spend the money in the urban areas. This has in fact been going on since Ghana became independent under Nkrumah. There the mechanism was to set the exchange rate very higher. This benefited the urbanites, from whom political power flows, who were able to import at reasonable prices, and hit those rural farmers exporting the cocoa cash crop.

So it appears that there really is something wrong in the cocoa market. That is, there's too much government and not enough market going on. We do, of course, support the campaigners who are bringing such abuses to our attention. But we'd be a great deal happier about it if they could manage to divine accurately what the problem actually is:

But campaigners argue that manufacturers and retailers should do much more. “If the five biggest chocolate companies spent 1% of the $86m they spend on marketing on the Ivory Coast, they could train and support half of the farmers there,” Mechielsen says. “Where are the priorities of those companies?”

Why not suggest that the government lower that taxation rate so the market can have the room to breathe and work?