Cashew processing in Ghana – A case for infant industry support?

Abstract

West Africa produces almost half of the world's cashew nuts. With the domestic cashew processing industry still in its infancy, however, most of it is exported as raw material and processed in India and Vietnam. In Ghana, this is provoking discussions about market interventions to support domestic processing. Since different price policies have diverging implications for farmers and processors, the choice of the policy instrument leads to conflicts of interest between the two groups. In this study, we analyse the short- and long-term economic impacts of enhancing cashew processing through (i.) a temporary export tax on raw cashew nuts, (ii.) a temporary subsidy to cashew processors, and (iii.)a temporary export tax on raw cashew nuts, with government revenues passed on to cashew growers. For this purpose, we develop a partial equilibrium model for the Ghanaian cashew market including the processing from raw cashew nuts to kernels. We find that in the short run, all price policies lead to a substantial increase in processing at the expense of net welfare. We argue, however, that the sector may experience productivity gains through learning by doing and thus, after price policies are phased out, stick to its increased level of output such that short-term welfare losses could be recouped. Therefore, temporarily introduced price policies could help the infant cashew processing industry to grow up, promote the development of the domestic cashew sector, and be welfare-enhancing in the long run. A subsidy to processors is the most appropriate option to achieve this.