Market Power and Structural Adjustment The Case of West African Cocoa Market Liberalization

Liberalization of the cocoa market in West Africa, due to structural adjustment reforms, has resulted in the elimination of para-statal marketing boards and initiated the creation of new institutions to replace the marketing services of those agencies. Concerns have been raised as to the effects of these reforms on prices of cocoa received by farmers, welfare measures and competitiveness of marketing channels. Of particular importance is backward integration of multinational processing firms, who take over exporting activities and may collect rents previously captured as export taxes. This paper uses a conjectural variations approach to estimate the degree of market power present in the post-liberalized cocoa bean markets of Ivory Coast and Nigeria. Evidence of market power is found in the Ivory Coast markets between the farmgate and U.S./EU15 imports. The market power, exercised by multinational exporter/processors, must be considered in concert with the Ivorian government who is still collecting export taxes. In contrast, no evidence of market power is found in the Nigerian markets or domestic (farmer to trader) markets of Ivory Coast. Market Power and Structural Adjustment: The Case of West African Cocoa Market Liberalization Introduction Historically, the incomes of West African smallholder cocoa farmers were determined by state-controlled entities. These para-statal marketing agencies set prices and marketing margins, and intervened in input markets, procurement of cocoa and subsequent export. Mandated farmgate prices aimed to protect the farmers from world price volatility while the taxes levied on cocoa exports were an important source of foreign exchange and government revenue. Recent liberalization of these markets, due to structural adjustment reforms, has resulted in the elimination of para-statals and created the need for new private institutions and market agents to replace the services of those government agencies (Bloomfield and Lass, 1992; Varangis and Schreiber, 2001). Initially, chaotic markets characterized by entry of many exporters emerged (Gilbert, 1997), but recently multinational cocoa bean processors took over exporting as well as processing and are backward integrating into domestic links of the cocoa supply chain. The main objective of cocoa market liberalization in West Africa was to ensure greater ‘pass-though’ of the world price to the farmer and to tie the dynamics of the entire chain to world market forces in an effort to improve efficiency (Gilbert and Varangis, 2003). However, if imperfectly competitive agents with market power replace para-statals this may widen the previously large gap between the farmgate price and the price received for exported beans in EU15 and the United States, as agents in a long supply chain reap rents that previously accrued to the government as taxes. This has arguably left farmers at the mercy of both the unstable world market and concentrated multinational corporations, leading to concerns as to the effects of structural adjustment reforms (Gilbert, 1997; McIntire and Varangis, 1999; Gilbert and Varangis, 2003; Dorin, 2003).