Indonesia's Cocoa Boom: Hands-Off Policy Encourages Smallholder Dynamism

Abstract

This case study of Sulawesi's cocoa market is a counterpoint to investigations of highly regulated markets - agricultural and otherwise. The Indonesian island's rapid expansion surprised the world cocoa market, especially because it came mostly from smallholders. The authors examine the smallholders' production and marketing systems and the government policies implemented for smallholders to identify any policy lessons that might be useful for other countries. Following is a brief description of what they found: 1) the following factors contributed to the rapid expansion: the availability of suitable land, low production costs, a highly competitive marketing system, relatively good transport infrastructure, favorable macroeconomic policies, and the smallholders' entrepreneurship; 2) until the recent imposition of a value-added tax, Indonesia's government left cocoa marketing and distribution freer of government interventions than many other commodities. Other commodities were affected by direct involvement of the National Logistics Agency, price controls, and exclusive trade licensing requirements; 3) as a result of the competitive cocoa marketing system, the farmgate price of cocoa in Indonesia is about 90 percent of the f.o.b price - a much higher share than cocoa produced in other countries and than other commodities produced in Indonesia. This relatively free marketing and distribution system must be maintained for cocoa to develop further; and 4) some general government policies have benefited the cocoa subsector as well as others. Exchange rates have been kept competitive, such as the absence of export tax and the building of basic infrastructure in the outer islands. Several issues must be addressed for cocoa to be further developed: the quality of cocoa, the adding-up problem (export revenues not increasing in proportion to export quantities), the recently imposed value-added tax, the cocoa pod-borer, export marketing, research, retribution, local repressing, environmental problems, and governmental interventions now being discussed for cocoa sector. Government and industry must also resist the natural temptation for current players to become more conservative, to protect their interests.