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Cocoa and Development in Cote D'Ivoire

Permanent Link: http://ufdc.ufl.edu/UFE0041780/00001

Material Information

Title: Cocoa and Development in Cote D'Ivoire
Physical Description: 1 online resource (77 p.)
Language: english
Creator: Kotecki, Steven
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2010

Subjects

Subjects / Keywords: Geography -- Dissertations, Academic -- UF
Genre: Geography thesis, M.A.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: Both the rapid rise in the price of cocoa as it is traded in the international commodity exchange markets and the news of takeover bids in chocolate manufacturing brought cocoa to the fore of business news in 2009. The chocolate confectionary industry currently generates approximately one hundred billion dollars per year. Cocoa is produced in tropical regions around the globe, but production is currently concentrated in West and Central Africa which produces 70% of the world s supply. Production in that region is dominated by Co circumflexte d Ivoire, which produces 35% of the world total, twice as much as the next largest producer, its neighbor Ghana. The findings of this study suggest that there is a positive correlation between the amount of value added cocoa processing occurring within Co circumflexte d Ivoire and higher levels of development as measured by certain socio-economic indicators. However, the country is not experiencing significant economic growth relative to global growth. This suggests that industrialization of the cocoa industry, as it is currently implemented in Co circumflexte d Ivoire, will not lift the majority of Ivorians out of poverty.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Steven Kotecki.
Thesis: Thesis (M.A.)--University of Florida, 2010.
Local: Adviser: Silva, Julie.

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2010
System ID: UFE0041780:00001

Permanent Link: http://ufdc.ufl.edu/UFE0041780/00001

Material Information

Title: Cocoa and Development in Cote D'Ivoire
Physical Description: 1 online resource (77 p.)
Language: english
Creator: Kotecki, Steven
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2010

Subjects

Subjects / Keywords: Geography -- Dissertations, Academic -- UF
Genre: Geography thesis, M.A.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: Both the rapid rise in the price of cocoa as it is traded in the international commodity exchange markets and the news of takeover bids in chocolate manufacturing brought cocoa to the fore of business news in 2009. The chocolate confectionary industry currently generates approximately one hundred billion dollars per year. Cocoa is produced in tropical regions around the globe, but production is currently concentrated in West and Central Africa which produces 70% of the world s supply. Production in that region is dominated by Co circumflexte d Ivoire, which produces 35% of the world total, twice as much as the next largest producer, its neighbor Ghana. The findings of this study suggest that there is a positive correlation between the amount of value added cocoa processing occurring within Co circumflexte d Ivoire and higher levels of development as measured by certain socio-economic indicators. However, the country is not experiencing significant economic growth relative to global growth. This suggests that industrialization of the cocoa industry, as it is currently implemented in Co circumflexte d Ivoire, will not lift the majority of Ivorians out of poverty.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Steven Kotecki.
Thesis: Thesis (M.A.)--University of Florida, 2010.
Local: Adviser: Silva, Julie.

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2010
System ID: UFE0041780:00001


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1 COCOA AND DEVELOPMENT IN CTE By STEVEN KOTECKI A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS UNIVERSITY OF FLORIDA 2010

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2 2010 S teven Kotecki

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3 To Shannon and Scout

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4 ACKNOWLEDGMENTS I thank my wife for her tireless support. I thank my daughter Scout for her inspiration. I thank my parents, sisters, and brothers for their motivation. I thank Julie Silva for her priceless assistance. And I thank Barbara McDade Gordon and Renata Serra for their willingness to support my efforts.

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5 TABLE OF CONTENTS page ACKNOWLEDGMENTS ................................ ................................ ................................ .. 4 LIST OF TABLES ................................ ................................ ................................ ............ 6 LIST OF FIGURES ................................ ................................ ................................ .......... 7 PREFACE ................................ ................................ ................................ ....................... 8 ABSTRACT ................................ ................................ ................................ ................... 10 CHAPTER 1 INTRODUCTION ................................ ................................ ................................ .... 11 2 THEORETICAL PERSPECTIVES ON DEVELOPMENT ................................ ........ 14 Industrialization ................................ ................................ ................................ ....... 14 Trade ................................ ................................ ................................ ...................... 16 Resource B ased I ndustrialization ................................ ................................ ..... 18 Empirical W ork on I ndustrialization and D evelopment ................................ ..... 21 Research Q uestions and M ethodology ................................ ............................ 22 Methodology ................................ ................................ ................................ ........... 23 3 ................................ ................................ ............ 27 ................................ .............. 27 Why Grow Cocoa? ................................ ................................ ................................ .. 28 Encouraging Cocoa Production ................................ ................................ .............. 29 The De Evolution of the System ................................ ................................ ............. 32 Externally Mandated Changes ................................ ................................ ................ 33 Internal Upheaval ................................ ................................ ................................ .... 33 4 AN ANALYSIS OF COCOA PROCESSI NG IN ........................... 40 Commodity Chain Structure ................................ ................................ .................... 41 Resource Based Industrialization in C ................................ ................... 44 Correlation Between Changes in Manufacturing and Development ........................ 47 5 DISCUSSION AND CONCLUSION ................................ ................................ ........ 67 6 SUFFIX ................................ ................................ ................................ ................... 71 LIST OF REFERENCES ................................ ................................ ............................... 73 BIOGRAPHICAL SKETCH ................................ ................................ ............................ 77

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6 LIST OF TABLES Table page 3 1 Production of cocoa beans ................................ ................................ ................. 38 4 1 Value of cocoa exports ................................ ................................ ....................... 55 4 2 Top 10 Global Cocoa, Chocolate and Sugar Confectionery Manufacturing Firms ................................ ................................ ................................ .................. 57 4 3 Correlation data ................................ ................................ ................................ .. 64 4 4 Summary o f correlations ................................ ................................ ..................... 65

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7 LIST OF FIGURES Figure page 3 1 Global cocoa production ................................ ................................ ..................... 36 3 2 Pe rcent of cocoa production by region ................................ ............................... 37 3 3 Cocoa beans, monthly price ................................ ................................ ............... 39 4 1 GDP per capita PPP ................................ ................................ ........................... 53 4 2 The cocoa commodity chain ................................ ................................ ............... 54 4 3 Actors along the cocoa commodity chain ................................ ........................... 56 4 4 Value derived from cocoa, 1988 ................................ ................................ ......... 58 4 5 Value derived from cocoa, 2008 ................................ ................................ ......... 59 4 6 Value of cocoa based exports ................................ ................................ ............ 60 4 7 Value of processed cocoa as a percent of total cocoa exports ........................... 61 4 8 Volume of cocoa bean exports ................................ ................................ ........... 62 4 9 Volume of processed cocoa exports ................................ ................................ ... 63 4 10 GDP per capita PPP ................................ ................................ ........................... 66

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8 PREFACE The study of development, inequality, and poverty is an import ant field: urgent, in the sense that the issues addressed in these studies involve people who face great adversity. The particular issues are outlined by development organizations and have killed 2.2 million people, most of whom were under 5 years of age (WHO 2000 [in poor countries] raises the risk of state failure as well (Sa chs, 2001 p. 187 The their work to a global audience. The work of Sachs, Easterly, Dicken and Diamond is both praised and contested, yet they are recognized acro ss academic disciplinary lines. And the debate is not closed, as a new national bestseller challenges the current model of development (Moyo, 2009), and geographers have not been absent from contributing to the understanding of these issues (see Peet, 1975 ; Bell, 2002 ; & Leichencko, 2003 ; Dicken, 2007). This paper operates from the idea that geography is the study of landscape, structure, and function) compose[s] a re ality not captured by its constituent parts separately (Turner 2002 p. 58 So any given phenomenon or individual is described, Geography is a vehicle for understanding the wor ld. make sense of and order the world around them (Butzer 2002 p. 77 Some of the issues faced by the world today are questions about development, inequality, and poverty. As the study of landscape, geography can be used to study

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9 development through the economic landscape of production and trade. Many geographers have contributed to the advance of this understanding through the development of the field of economic geography (Bodman, 2010). Although h e is an economist, Paul Krugman has also developed models under the umbrella of New Economic Geography that examine the relationships between distance (physical and friction surface), manufacturing, economies of scale, supply and demand, and factors of pro duction (Krugman, 1991 ; Krugman & Venables, 1995). from the large literature of economic development theory and empirical studies testing these theories. This is a relevant top ic because cocoa is a lucrative agricultural commodity traded and used around the world. Unfortunately, like many tropical commodities, the production of that commodity does not seem to contribute significantly to a reduction in international inequality or development in the areas where they are produced. This paper focuses on the cocoa commodity chain structure, the impact developments within the cocoa sector have on the local economy, and the influence of the cocoa sector on other development indicators w

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10 Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Arts COCOA AND DEVELOPMENT IN C By Steven Kotecki May 2010 Chair: Julie Silva Major: Geography Both t he rapid rise in the price of cocoa as it is traded in the international commodity exchange markets and the news of takeover bids in chocolate manufacturing brought cocoa to the fore of business news in 2009 The chocolate confectionary industry currently generates approximately one hundred billion dollars per year. Cocoa is produced in tropical regions around the globe, but production is currently concentrated in West and Central Africa which produces 7 Production in t hat region is dominated by C world total, twice as much as the next largest producer, its neighbor Ghana. The findings of this study suggest that there is a positive correlatio n between the amount of value added cocoa processing occurring within C te d development as measured by certain socio economic indicators However, the country is not experiencing significant economic growth relative to global g rowth. This suggests that industrialization of the cocoa industry as it is currently implemented in C te will not lift the majority of Ivorians out of poverty. Keywords: economic development, commodity chain analysis, cocoa, Cte d

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11 CHAPT ER 1 INTRODUCTION Both the rapid rise in the price of cocoa as it is traded in the international commodity exchange markets and the news of takeover bids in chocolate manufacturing brought cocoa to the fore of business news in 2009. The chocolate confectio nary industry currently generates approximately one hundred billion dollars per year (IBISWorld, 2009) There is a long history of demand for chocolate goods in Europe and North America and a rapidly growing market in Asia. This appetite is supplied by mil lions of cocoa producers around the world. Cocoa is produced in tropical regions around the globe, but production is currently concentrated in West and Central Production in that region is dominated by Cte largest producer, its neighbor Ghana. internal conflict for almost a decade since the death of the president Houphouet Boigny who nurtured the cocoa industry in Cte d'I voire into the leader in the supply of cocoa for the global chocolate industry that it is (Woods, 2003) Tod ay, Cte d'Ivoire is a typical le ast developed country (LDC). There is widespread poverty, a majority of the population continues to work in agriculture, and it scores near the bottom of the Human Development Index. More specifically, C rd out of 182 countries ranked by the United Nations Development Programme in the 2009 Human Development R eport. As such, C included among the 24 countries designated as having Low Human Development. The negative correlation between commodity production and economic growth in many resource rich African countries is hard to miss. Regions that d ominate

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12 the production and export of commodities do not seem to enjoy a great measure of economic development. The global cocoa and chocolate industry is geographically segmented with the supply of cocoa predominantly concentrated in tropical developing co untries and the demand for chocolate concentrated in developed countries. Similarly, a good deal of the value added processing along the cocoa commodity chain is done in the developed countries. It is generally understood that the majority of the value of chocolate is captured in the later stages of manufacturing in Europe and the United States. It has been suggested that moving manufacturing closer to the source of the commodity, within the developed country, could contribute to the development of the regi on. R ecent literature points to cocoa as an industry with a great deal of potential given the large global demand for chocolate. However, the low labor versus capital requirements in the manufacturing of cocoa paste could impact the amount of economic grow th derived 2006). Cte d'Ivoire economy makes it a likely candidate for a development strategy based on the manufacturing on cocoa products befo re export Theoretically, Cte d'Ivoire should be abl e to capture some of that value, by moving up the chain of production through revenue and employment and linkages. This paper will attempt to systematically evaluate the merit of that idea for the cocoa sector in Cte d'Ivoire by analyzing the cocoa sector using a commodity chain approach and the links between the developments in the cocoa sector and other development indicators.

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13 The first section is a review of the relevant academic literature dealing wi th theories and empirical evidence of development, modernization, and industrial development strategies in the least developed countries (LDCs) The second section will outline the research question s and methodology used in this study The third section wi ll explore the historical context of the cocoa sector in C The last section will discuss the results and their implications for C

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14 CHAPTER 2 THEORETICAL PERSPECTIVES ON DEVELOPMENT The term development is used to refer to a rang e of ideas. Classical economic development is concerned with economic growth. Other perspectives view development in terms of social improvements in health and education, measured in terms of life expectancy and level of educational attainment for example. Still another definition of development was proposed by Nobel Prize winning economist Amartya Sen. He conceived of development as empowering people with the freedom and capacity to pursue the things they enjoy, including health and wealth (Sen 1999). In this paper, development will be understood particularly in terms of the mainstream economic definition of economic growth with the understanding that economic growth is one means by which some of the other forms of social development might be reached. In dustrialization Industrialization has long been understood as part of the process of economic growth The industrial revolutions in the United Kingdom and the United States established the development of manufacturing as the dominant vehicle for economic d evelopment In the 1950s, Nobel Prize winning economist William Arthur Lewis developed a model of economic development that illustrated the power of industrialization for econom ies that were previously tied to the of agriculture His model indicated that economic growth could be increased by concentrating capital in the manufacturing sector (Lewis, 1955). W. W. Rostow (1960) also formalizes this idea in his model of development, The Stages of Economic Growth. He described the economic development of a region in terms of the evolution of its economy from traditional societies to the modern, mass consumption economy.

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15 In his model, the traditional society does not have a system that can support rapid and continuous technological advance. Production capacity is dominated by food production, and the majority of surplus capital is not reinvested but rather spent on non productive outlays l ike war, religion, and luxury. create economic incentives to expand certain sectors using modern industrial technology. Developments in science and the expansion of trade through the exploration of foreign (non western) lands in the 1600 and 1700s created the economic incentive and technological capacity for Western nation s to develop certain sectors of the economy using modern industrial techniques This stage of development is the This industrialization lead to economic growth and the s pread of modern industrial technology into other sectors in western nations Rostow called t his process the drive to maturity. varies but, in this model, is eventually followed by the age of mass consumption. This stage is characterized by a shift in priorities away from the adoption and inclusion of modern technological production towards the development of more social and personal goals: the extension of security through the development of the insurance and investment sectors for example, or the extension of social benefits in terms of education, employment, and health care. It is important to note that Rostow does not predict that take off and the drive to maturity always follows the ad option of modern industrial technology in a sector. He stresses that certain preconditions and responses to industrialization are necessary for the application of industrial technology to spread to all sectors and lead to take off.

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16 Rostow explains that the preconditions and responses to industrialization can differ, but that the result, in some cases, is a take off that leads to a state of relatively consistent economic growth. It was in light of these pervasive theories on growth and development that m any of substituting industrialization because they saw the need to expand manufacturing in order to grow economically and enjoy the effects of prosperity seen in the West. Trade In order for manufacturing to provide the economic impetus for development, trade becomes critical. Modern views on the benefits of international trade are based on the theory of comparative advantage developed by David Ricardo in 1817. Ricardo theorized that if t wo countries were producing a range of goods wit h varying degrees of efficiency they would each reap greater returns by instead specializing in the production of those goods they had comparative advantages in, in terms of climate, raw materials, human capi tal and other production factors. concluded that regional specialization was the key to economic efficiency, and thus to greater potential for growth and prosperity. The caveat was that international trade was nece ssary in order for the consumers to have access to the products that were no longer produced within the borders of their nation once the consolidation in favor of specialization had occurred. Based on his model, Ricardo endorsed free trade. His model demon strated several implications for economics in the presence of free trade. Without barriers to trade, resources would naturally go to the party able to produce goods at the lowest opportunity cost. Barriers to trade could also be consi dered added costs to p roduction,

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17 as in an area where wheat is subsidized for local producers and tariffs are placed on wheat from foreign producers for example Added costs are incurred on both ends. In the local arena, taxes are used to pay for subsidies, increasing the cost for locals. In the foreign arena, the producers are barred from markets and lo se profitability. The removal of barriers to trade alleviate both of those costs, increasing producer profitability and consumer access and affordability. Removing barriers to tr ade thus has the effect of expanding markets. Larger markets allow for greater division of labor and specialization. Greater specialization can positively influence efficiency and technological development. All of these benefits have positive implications for economic development inefficient producers will be put out of business because they are no longer competitive (Stutz & Warf, 2005). Eli Heckscher, in 1919, expanded demand for labor in a global market would lead to convergence in real wages (Machlup 1977). This framework is known as the Heckscher Ohlin framework. Some of the key limitations of these trade theories were the e ffects that economies of scale and transportation costs have on determining the location and relative efficiency of production. Krugman and Venebales (1995) shed some light on this issue when they created a framework to model the location of industrial pro duction based on transportation costs. In effect, they showed that transportation costs can be considered a barrier to trade that is slowly being removed over time as technological advances improve efficiency. unhampered trade increases the potential for prosperity.

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18 the idea that there are benefits to unfettered international trade was essentially creating the platform from which modern perspectives on trade issues ar e framed. From these ideas about industrialization and trade, it is possible to conclude that developing economies should develop their export manufacturing sectors in order to grow economically (Rodik 2004 ; UNCTAD 2008). Resource Based I ndustrialization The theory of export based development has particular implications for resource rich African economies. By applying Ricardo and Hechscher Ohlin to African countries that are rich in resources and labor, i t has been argued that they have a comparative adva ntage in producing agricultural commodities for export (UNCTAD 2008). One counterargument, the Singer Prebisch thesis, contends that the terms of trade of primary product exporting countries deteriorate over time compared to countries that export manufact ured goods ( Prebisch, 1959) So part of the debate surrounding this theory of development relate s to these ideas about industrialization and trade in agricultural commodities. Rather than attempt to replace agricultural production with other industries, it has been suggested that economies that rely heavily on agricultural commodity export could move into manufacturing in that same sector by processing the agricultural commodities before export (Roemer 1978 ; Cramer 1999 ; Da Silva et al 2009). Michael Roe mer acknowledg ed that vertical integration is a goal in LDC s in order to gain some of the benefits of added value and link ages for economic development. He analyzed the effectiveness of the p rimary export processing strategy which is characterized by the p rocessing of primary products to capture m ore value added before export. Processing generally requires the input of lab or, capital, and other

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19 commodities to produce either an intermediate product or one ready for final consumption. Different industries or sect ors have different rent requirements. Different sectors also affect the local economy differently based on the kinds and extent of linkages generated. Examples of primary commodity processing are the processing of iron ore into steel or oil into petrol eum. The increased revenue, employment, and linkages would then be the bases of economic development in the country. Because the processing strategy may be applied there For example, rather than exporting raw cocoa beans, they can be roasted and ground and sold as cocoa paste an intermediate commodity In the case of LDCs, primary export processing is a relevant strategy (Athukorala & Sen, 1998) Less access to financi ng opportunities as well as a lack of expertise in alternate sectors in LDCs relative to what is available in developed economies limits the development of sectors completely unrelated to what is currently produced For example, the development of a comput er hardware sector in an economy currently dominated by the production of agricultural goods requires large capital investments into sectors that do not exist by a financial sector with limited lending capabilities In addition, weak domestic demand for ex pensive final products limit the sale of those kinds of goods to the export market. LDCs are also characterized by a lack of highly trained labor which limits the establishment of in dustries that depend on a specialized workforce. In light of these constra ints, primary export pro cessing currently holds promise for initial forays into industrialization

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20 In addition to these economic development theori e s, t here are also alternative theories that focus on the historic and political factors that have shaped tra ding routes and terms of trade in the LDCs. These theories tend to be critical of mainstream economic development strategie s. For example, structuralists may argue that developing nations are not just regions that are located somewhere within early stages of development but that LDCs exhibit a distinct structure from now developed countries ; their development would require a narrative that differs from that of past development narratives (see Seers 1979). Another alternative to economic growth through stag es of development is dependency theory. D ependency theory view s economies as connected through a core and periphery relationship rather than being parallel economies at different stages of development Although dependency theory employs a different narrati ve than some more purely economically based models, t he development method suggested by dependency theory tends to still be a linear narrative Namely, government intervention is necessary to direct the national economy towards industrialization in order t o counter the negative effects of core periphery relationships (see Prebisch, 1959) T hese other perspectives that deal with the structure and focus of development are beyond the scope of this paper, which tests the theoretically predicted benefits of indu strialization on development Nonetheless, t hey are an important component of the development policy debates as a whole The entrenched nature of underdevelopment despite a long history of development efforts encourages the application of interdisciplinary approaches to problem solving (Easterly, 2001 ; Harriss, 2002).

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21 Empirical W ork on I ndustrialization and D evelopment There is a large body of literature looking at primary commodity production and development in the LDCs. For example, Cramer analyses this i dea in the cashew sector in Mozambique (Cramer, 1999). He contends that forward integration, or the addition of processing industries traditionally completed after export, is a widely endorsed development strategy. In his study, he identifies several const raints to the development of industrial manufacturing in the cashew sector, including high international quality and hygiene standards for final products, price volatility due to fluctuating world supply and demand, and a shortage of technology and sector wide standards within Mozambique. He concludes that the merits of resource based industrialization, or forward integration, should not be made at a high level of abstraction, but that individual cases should be analyzed to discover the particular constrai nts of that case. In Mozambique, he proposes that a consistent strong and comprehensive domestic policy agenda would help to alleviate some of the constraints on the local industrial sector by creating a more agreeable business environment. Tybout (20 00) argues that the industrial sector in LDCs may suffer from the negative effect of oligopolies, i.e. a relative lack of competition may contribute to inefficiencies. He demonstrates that large firms tend to benefit from policies that make it easier for t hem to access subsidies, acquire licensing, receive special tax breaks, and obtain preferential access to credit, for example. As a result, small firms may avoid entering sectors that are controlled by large players. Case studies are needed before reachin g definitive conclu sions on the effects of monopolies in particular countries, but Tybout proposes that the current evidence does not support the idea that these problems do not necessarily block manufacturing sectors from being economically

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22 effective. He suggests that t he dominant issue is more likely the investment risk engendered by a bad business environment in terms of local policies, corruption, and physical security. Rodrik ( 2004 ) speaks about the role of industrial policy within the developing coun tries that are aim ing for industrialization. He contends that good industrial policy provides some of the same public goods that the mainstream development agenda calls for. He does not advocate one particular position on export policy but promotes a dynam ic search for appropriate policies. one where firms and the government learn about underlying costs and opportunities and engage in strategic coordination. (p. 3 ) is for this reason that good industrial policy be organi zed out of a balanced stra tegy of government intervention. UNCTAD 2008 report, Economic Development in Africa, posits that African L DC s have not responded well to the possibilities created by trade liberalization (see also Haque, 2004) The report shows L DC s as being unresponsive to global demand. The problems identified include low investment into production capacity, low productivity, small firm size, and limited access to credit. The conclusion is that L DC s manufacturing exports could be made competiti ve with large scale investment into production and trading infrastructure. In general, these studies find that industrialization can work as a development strategy but there are a lot of hidden constraints that need to be addressed on a country by country basis. Research Q uestions and M ethodology The methodological framework of this paper includes analyzing the cocoa commodity chain with an emphasis on its character in C challenges of resource based industrialization through the cocoa sector in C

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23 and the potential for development through this process. This thesis addresses three questions : 1 ) What is the relationship between industrial processing of cocoa and socio economic development in C 2 ) Is sector correlated with economic and non economic development in C 3 ) Does the case of C te d based theories of development? Methodology Some recent proponents of industrialization have looked at the problem from the perspective of commodity chain analysis. A commodity chain is a unit of analysis that considers the movement involved in the production of a commodity as a series of connected actio ns and processes. In 1977, Hopkins and Wallerstein first defined a commodity chain as a linked set of processes that trace a consumable item back through the inputs that culminated in that item the prior transformations, the raw materials, the tr ansportation mechanisms, the labor inputs into each of the material This understanding of commodity movement developed out of world systems analysis, which deals in part with movement of resources between a core and periphery. Commodity chain analysis was designed as a tool for understand ing the spatial distribution of value extracted along the commodity chain as well as the location and movement of processes within that chain over time (Bair 2009). The publicat ion of Commodity Chains and Global Capitalism (ed. Gereffi & Korzeniewicz) in 1994 was a major development in the study and understanding of

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24 commodity chains. In it, Gereffi outlined a framework for analyzing global commodity chains (GCC). He proposed that GCCs can be analyzed on the following three levels: output structure (i.e., a set of products and services li n ked together in a sequence of value adding economic activities); (2) a territoriality (i.e., spatial dispersion or concentration of production and distribution networks, comprised of enterprises of different sizes and types); and (3) a governance structure (i.e., authority and power relationships that determine how financial, material, and human resources are allocated and flow within a chain) ( p. He also suggested into two ideal types, the producer driven and the buyer driven. A producer driven commodity chains is one where the authoritative actor in the chain is at the producer en d, as in the case of a large industrial company like a car manufacturer. In such a scenario, the large industry brokers deal with subcontractors (down the chain) and retail outlets (up the chain). In buyer driven commodity chains the authoritative actor is located at or near the top of the chain, such as with retailers and brand owners (who may not be physically involved in production at all). Here, the brand owners stipulate that products conform to certain specifications. The products are then produced by subcontractors who are often located in developing nations. Commodity ch ain analysis is a fitting tool for study ing the development strategy of industrial development because forward integration in the industrial sector parallels the concept of moving up the chain. In 2001, in response to an article that charged GCC analysis as being too tied to a pessimistic dependency theory to make good policy recommendations (Cramer

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25 the issue of who controls glo bal trade and industry, and how agents locked into lower He contends that GCC analysis focuses on the opportunities and constraints within individual chains without preemptively conclud ing that the constraints will always outweigh the opportunities. relationship between supermarkets in the UK and vegetable producers in Africa (Dolan, et al. 1999). Dolan e t al. (1999) expl ains that the same forces that a ffect merchandise GCCs can also be seen in food GCCs. A reduction in the number (and increase in the size) of retailers, as well as the successful marketing campaigns of global brands (like Nike and Calvin K lein) has consolidated the influence of consumers on GCCs. The same consolidation of retailers (supermarkets) occurred in the UK, resulting in the increased influence of consumers on the food GCC and characterizing that chain as a buyer driven commodity ch ain. Further distinction can be made about the governance structure of the cocoa GCC. Niels Fold proposed that the cocoa GCC has two power brokers: the grinders and the brand owners. economies of scale in production and organization, capacity for brand marketing, and relative short term profitability (Fold These would correspond to the production of cocoa products by grinding and pressing on one end, and the brand marketing of chocolate products for consumption on the other. Raphael Kaplinsky has done one of the most recent GCC analyses on cocoa (200 4). In it, Kaplinsky looked at the concentration of power in GCCs, particularly in the

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26 buyer driven chains of coffee and cocoa. H is focus in his GCC analysis deals with concentration s within the chain. He contends that deregulation and liberalization at the producing end of the chain has reduced the profitability for producers. In addition, the number of actors or firms at the cons uming end of the chain has diminished, creating an imbalanced concentration of power that does not favor the producers and other local firms. He outlined the concentr ation of actors in final retail, food manufacturing industries, and (to a less robust deg ree) buyer intermediaries between commodity producers and retailers. In terms of the cocoa sector, Kaplinsky concludes that producing regions hardly benefit from any value added though industrial processes in part because 1) liberalization policies resulte d in the failure of local industrial efforts and 2) the concentration of influence on the consumer end of the chain has resulted in large firms that have gained a foothold in the sectors close to production.

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27 CHAPTER 3 Cocoa prod uction began in West Africa in the late 1800s. It was introduced predominantly as an indigenous, capitalist venture, rather than a colonial project (Hart, 1982; Woods, 2003). Cocoa had been produced in Latin America for hundreds of years but demand in Euro pe remained low from the Spaniards in the sixteenth century demand through the eighteenth century due to high import taxes. Early in the nineteenth century, the combined effects of reduced taxes and improved processing techniques caused the demand for chocolate to increase dramatically (Wood & Lass, 2001). The stage was set for cocoa to become an agricultural export density to make the most of that opportuni ty Figures 3 1 and 3 2 show a rapi d rise in production overtime a nd the growing dominance of the African region in overall production. rms in partially or fully cleared forests lands The cocoa plots tend to be between .5 and 2.5 hectares, small compared with its Latin American coun terparts (Wood & Lass, 2001), but the size of these plots do es not necessarily reflect the size of cocoa pla ntation holdings of any one producer. plantations and outsource their production to outside labor. As cocoa production is not undertaken for subsistence, cocoa farmers can be consider ed entrepreneurs, capitalists, and/or businessmen (Hart, 1982). As such, some of the profits of one plot of cocoa would often be reinvested in another. As holdings grew, the demand for labor

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28 increased. Migrant labor from the savannah/Northern region of Ct that labor. mobilization and small scale expansion of production in forested areas thanks to open borders and persuasive land policies initiated by President Fli x Houphout Boigny which will be explained further in this paper (Woods, 2003). Why Grow Cocoa? Hart (1982) outlines some important information that helps in understanding the he government of that state. The French colonial powers and the subsequent independent agendas in the area. The colonial powers were interested in taxing exports to generate Coc as a source of revenue for the French, and they seemed content to tax cocoa through the mechanism of export. The reason France wanted the revenue is not important for this discussion but the At its most basic, a state government has a need for revenue in order to govern, to provide social services, and to maintain security for example. As in every modern state, the government collects revenue by ta xing either through the people or the resources available to the country or some combination of the two independence. Cocoa is a valuable agricultural commodity and the high level of production in logical choice for that end. majority of the population was engaged in a decentralized agricultural economy that

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29 was not ac cessible to the tax collector so encouraging the production of an exportable agricultural commodity was tantamount to fostering the growth of tax revenue. Encouraging Cocoa Production has b een the object of many government policies and strategies. early involvement in cocoa, it is important to understand Flix Houphout Boigny. He s first president, and one of the longest enduring leaders in the region, but he cut his political teeth so to speak, as a cocoa producer. He was one of the founders of the Syndicat Agricole Africain (SAA) in 1944. The SAA was an organization created by and for coffee and cocoa producers. The initial goal of creating s uch an organization was to gain a measure of access to the French controlled agricultural credit fund. Once the organization was founded, other goals were brought to the front including the issue of control of labor (Zolberg, 1969). Cocoa production in C producers often controlled many plots and relied on access to labor in order to produce the crop. Under French colonial rule, available labor was first allocated to French firms and whatever was left was available for Ivorian firms. The SAA challenged to the cocoa boom by providing easy access to labor to Ivorian producers. In particular, Southern producers w ere able to negotiate contracts directly with chiefs in the North for the labor of their young men. This then encouraged the mobilization of international migrant labor (Woods, 2003). Houphout benefited greatly both financially and politically as the SAA closely aligned with the Parti D party through which he gained the presidency (Zolberg, 1969).

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30 cocoa production included labor law s, land rights, and price stabilization, as well as the legal enforcement of these policies. These policies were designed to benefit the state by increasing cocoa production and thus increasing state revenue. As mentioned before, access to labor is an imp ortant factor in the production of cocoa. sharecropping. The migrants would work the cocoa plot and collect approximately a third of the profits. They would also have access to additional lan d allocated for subsistence agriculture. President Houphout knew the benefits of using Northern migratory workers for increasing cocoa production. His government encouraged labor mobilization though policies of unrestricted migration and the right to vote for migrant workers. It is also possible that Houphout consolidated his power with the help of the migrant vote since many of his policies directly benefited them (Crook, 2001). Land right policies also benefited cocoa producers and migrant workers. Unde r administration. The subsequent independent state also then claimed supreme rights over land (as opposed to Ghana, where local laws were incorporated into the legal code) (Crook, 2001). This is a very telling mantra, as land right policies were not necessarily based on historical, cultural, or legal definitions but, rather, lan maximizing the

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31 price. As market prices for cocoa fluctu ate widely, the price stabilization provided more incentive for farmers to enter and remain with the cocoa business by reducing the uncertainty inherent in a fluctuating international market. The state provided all of these incentives through four main ins titutions. The stabilization fund (Caistab) financed the stabilization of cocoa prices for producers and licensed traders, transporters, and exporters. The regional administrations carried out government policy in dealing with producers. They were also res ponsible for policing local traders. The third and fourth institutions are related. The Ministry of Agriculture production wa s through the extension service. The extension service provided technical support and education t o farmers. These institutions wer e essentially the centralizing mechanisms for a decentralized region. The government was able to influence and control the production of cocoa and then collect revenue from the marketing of that cocoa (Crook, 1990). The e quote from Woods (2003): Until the 1980s, a positive dynamic existed between the state and cocoa foreigners. The state drew a significant portion of its revenue from direct and indirect taxes on commodity exports. These resources were used in three ways. First, they allowed President Houphoue¨t Boigny to consolidate his political position through the dispensation of patronage. Second, the rent allowed Houphoue¨t Boigny to manage elite, social and regional tensions (Medard 1982: 75 6; Woods 1990). Finally, the revenue 1970s (Mahieu1990: 105 9). T he state used the rent it siphoned from infrastructure and to promote costly agro industries such as sugar production. Without a doubt, the economic miracle of the 1960s and early

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32 1970s that transformed Ivory Coast into the pre eminent economic power in West Africa was due primarily to the revenue gained from cocoa exports. The D e E volution of the S ystem The combination of the expansionistic characteristic of cocoa production in the Southern f and cocoa producers led to ethnic and regional frictions. In the mid 1900s, cocoa production was concentrated in the Southeast of the country. Over the next thirty years, produc tion spread to the center and Southwest of the country. In addition, a large p ercentage of the producers in the East were Baoul, the same ethnic group as Houphout, and a large p ercentage of the laborers and Mali, Nige r, and Burkina Faso. T he local Southwestern ethnic group was predominantly Bt however (Woods, 2003). Here too the state sided with the cocoa But the ethnic conflict side of the story only ga ined prominence aft er the collapse of the price of cocoa on the world market. The price for cocoa dropped precipitately beginning in 1980. This obviously put stress on the Caistab, which was designed to be able to withstand price fluctuations. During boom years, the Caistab would benefit in two ways. Producers were paid below world prices, and licensed exporters agreed to pay the Caistab any extra profit they made from selling the cocoa above the agreed price. Technically, the Caistab was mandated to save 6 0% of these earnings to put towards slump years. This saving did not occur however, so the pricing crisis reverberated quickly. When the prices dropped below the government set price, the Caistab had to pay producers more than the cocoa was worth on the w orld market, and exporters were entitled to reimbursements if they had to sell their cocoa for less than the set price. The

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33 government did not have enough reserves to pay and soon had a debt problem (Crooks, 1990). Externally M andated C hanges The World Ba nk provided C a loan in 1989 that was part of an IMF Structural Adjustment Program (SAP). The SAP mandated a wide range of liberalization measures consistent with the economic theory of the time (Moss, 2007). The internal price controls that w Producers were then exposed to the international price of cocoa. The international price was low at the time so, t he producer price for cocoa was dramatically reduced. The system of licensing was privatized, and t he CFA was devalued in 1994 (The CFA is a currency used by many West African countries, most of which are previous French colonies. The CFA was tied to the French franc and is now tied to the euro at fixed exchange rates.) High domestic government spending resulted in high domestic inflation. This lowered the real cos t of imports but increased the real price paid by the buyers of C The devaluation made the C more competitive in the internation al market, but also seriously undermined the local population s purchasing power of imported good and thus, standard of living (East erly, 2001; Birdsall & Hamoudi, 2002) F inally the Caistab was challenged from all directions. Its influence w as slowly eroded, but because of its importance to the government, the Caistab was not completely dismantled until 1999 (Losch, 2002). Internal U pheaval the urban areas be gan to return inland. Houphout enc ouraged this with a program to This only served to increase ethnic tensions in the Southwest

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34 as young Bt men returned to find land occupied by Baoul and Northern cocoa farmers (Crooks, 1990 ; Woods, 2003). These tensions came to a head in the political arena in 1990 during t he first multiparty elections, w hich w ere also a product of external donor pressure (Woods, 2007).) The only serious competition arose out of the Southwest. The Front Popu lair e Ivoirien (FPI) was lead by the presidential candidate Laurent Gbagbo, a Bt. Houphout again appealed to his faction by promising citizenship to immigrant workers (Chirot, 2006). Houphout won the 1990 elections and appointed a Northern economic tec hnocrat, Alassane Ouattara as prime minister. When Houphout died in 1993, a constitutional amendment stated that the president of the National Assembly, Henri Konan Bdi was to succeed him. Ouattara resigned and presented himself as an opposition candida te for president in the 1995 elections. Bdi This policy was intended to exclude Ouattara from the elections as his citizenship was in question in (Crook, 1997 and 2001 ; Chirot, 2006). Bdi won the 1995 elections only to be overthrown in 1999 in a coup. In the su bsequent election in 2000, Gbagbo won the presidency. As a Bt, it could be assumed by Ivorians that Gbagbo would not support land rights for Northerners or Baouls in the Southwest. Violence soon broke out between the two factions in the Southern city of Abidjan and in the North. Gbagbo then began to remove Northerners from federal positions. As t he conflict progressed and the political stability of the country continued to deteriorate, internal violence seemed to

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35 concentrate in the Southwestern region of 2006). The long standing system of cheap access to land and migrant labor has thus passed. It might have been assumed that t he violence in the cocoa produc ing regions and the disruption of the long standing system of production would create a sharp Interestingly though, production in the region increased throughout the 1990s. This could be related to the conflict, as resource revenues have to potential to provide a way to finance hostilities. Losch (2002) notes that the 1995/96 cultivation year pro duced a record 1.25 million ton s. More recent figures indicate that that growth in production has continued into the new millennium. The average of the last three product ion cycles (2 006 2009) was 1.28 million ton s, with a pea k of 1.38 million ton s in 2007/8 (See Table 3 1). The downside for producers is that world cocoa prices declined during most of that period (Guilbert & Varangis, 2003). World prices only began to make major gains again in 2007 (see Figure 3 3).

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36 Figure 3 1 Global cocoa production ( Wood & Lass 2001 ; ICCO 20 09 )

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37 Figure 3 2 Percent of cocoa production by region ( Wood & Lass, 2001)

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38 Table 3 1. Production of cocoa beans (ICCO, 20 09 ) Production tota ls by region in thousand ton s 2006/07 2007/08 2008/09 1229 1382 1222 World (not including CI) 2205 2349 2293

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39 Figure 3 3 Cocoa beans, monthly price (IMF, 2010)

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40 CHAPTER 4 AN ANALYSIS OF COCOA PROCESSING IN The story of wide range of similar issues and actors that characterize much of the African continent. A lthough often praised for the peace and development that occurred during his long presidency, Houph out was the dictatorial leader His rule did not degenerate the country into a police state, but he was able to maintain his power in part through the vast wealth generated through the Caistab. The success of the Caistab came about through the land and labor policies implemented by Houphout that helped to quickly expand the production of cocoa. Those policies could be considered autocratic in that they did not necessarily reflect the will of the population, particularly on a regional scale. When cocoa prices f ell in the 70s, so did Houphou The subsequent donor bailouts came with conditions to liberalize the economy and democratize the political system. The weakened political system, exacerbated by the death of Hou phout in 1993, coupled with the volatile ethno regional friction created through previous cocoa policies, led to outbreaks of violence and political upheaval at the turn of the century. The liberalization of the government, economy, and particularly the cocoa sector, along with dramatic changes in government policy on immigrant labor, led to a new cocoa producing environment (Abbott, 2007) It is not entirely clear what the consequences of those changes are. Are producers benefiting from the liberalizati on of the sector in a global economy? being produced? More importantly, will the Ivorian people benefit from cocoa revenue?

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41 We know that C does more cocoa processing than other producing countri es, such as the second largest producer Ghana We also know that economic development appears to have stagnated in C as compared to global trends (see Figure 4 1 ). So it may appear on the surface that C is not accruing economic ben efits from participating in value added processing in the cocoa sector as mainstream economic theory predicts it should. So there is a need for a more in depth analysis of what is happening, using a commodity chain approach. Commodity Chain Structure As s hown in Figure 4 2 cocoa goes through five major stages along its chain: the cocoa pod, merchantable cocoa, cocoa past e cocoa butter and powder, and chocolate. The cocoa pod is harvested from the tree and opened. The cocoa seeds are extracted, fermented, and dried. This process occurs almost exclusively before export. The cocoa is not able to be transported or stored for any extended period of time unless these initial processes are carried out. These processes result in the merchantable cocoa bean. The b eans can then be roasted, winnowed, and ground into cocoa paste. Cocoa paste is then pressed and milled to separate the cocoa butter and the cocoa powder. These ingredients are then used to make chocolate products The confectioning of chocolate is solidly centered in the industrialized regions of Europe and the North America For example, Europe and North America produce respectively 55% and 30.2% of the global supply of cocoa, chocolate, and confectionery products Africa and the Middle East only command a .2% share of the industry (IBSWorld 2009). A look at the export values of these commodities at different levels of production gives an idea of the value added by processing. In Table 4 1 the representative value of these commodities at export is based on the 2008 export data for C The

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42 value increases as it move s along the chain. The value of cocoa powder seems like an anomaly, but the processing that results in butter and powder almost always occur at the same time; since they both come fro m the cocoa paste/liquor, their added values ($2.84) is a better representation of the value added through that process. Finally, it could be assumed that finished chocolate would have the highest unit value, but chocolate products often contain small amou nts of cocoa products by volume. Chocolate candy bars and box chocolates contain many added ingredients like nuts and other fillers that reduce the percentage of cocoa derived ingredients in the product. Similarly, chocolate bars are often categorized by t heir chocolate percentage which refers to the percentage of cocoa in the bar. Milk chocolate bars may have as little as 30 40 chocolate percentage. Dark chocolate bars can range from 50 85 chocolate percentage. So, based on the final value, it can be assum ed that the cost of the sugar, milk, and other additives in the finished chocolate are less expensive that the cocoa products and results in the lower value of the chocolate as a whole. If we could disaggregate the two, by finding out exactly how much coco a product makes up that one pound of chocolate, the unit value of the cocoa products that make up that chocolate would be higher. In terms of actors, the cocoa farmer is the first owner of the product and the first actor in the commodity chain. Individual farmers and farmer cooperatives sell their beans to certified buyers. At this point, the movement of the cocoa products becomes much m ore complicated Certified buyers sell the beans on the market to either processors/ manufacturers traders or exporters/t ransporters. The next time the

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43 chain. In general the final chocolate products are then sold to retailers and consumers. C ers. Some of those farmers are represented by cooperatives and some sell directly to buyers. The Ivorian government lists 38 accredited cooperatives and 188 certified buyers ( BCC 2010 ). The government also lists 47 accredited exporting companies and 20 ac credited small and medium exporters. Of those 67 exporting companies, four have manufacturing plants in C (Bass 2006). In the diagram below (Figure 4 3 ) local processors, exp orters, and foreign processors are listed separately. In reality, some firms span all three functions. A good example is ADM. ADM runs a processing plant in C The company also runs a global transportation network and cocoa processing plants in Asia, Europe, South America, and North America. As shown in Figure 4 3 there are a relatively small number of actors in the middle of the cocoa chain ( Fold, 2001 ; Vorley, 2004) Although there are many cocoa processers and chocolate confectionary firms, their number is dwarfed by the millions of farmers at the one end and the millions of consumers at the other. It is also clear that although no company owns a majority of the market share in processing or cocoa confectionary, a small number of firms enjoy a great deal of influence in the sector. Part of this influence is derived from the extent of their presence along the chain. For example, ADM is involved in cocoa farming research and development at the beginning of the chain, and sells finished chocolate products to retailers near the end of the chain. Barry Callebaut, Cemoi, Petra Foods, and Nestle are also involved in the chain from

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44 farming support projects to finished chocolate However the leading firms take a more dominant role in either the cocoa processing or the chocolate manufacturing/branding (Fold 2002). ADM is not a major player in the confectionary industry, but they are one of the largest processors and sellers of intermediary cocoa products in the world. In contrast, Mars Inc. is not heav ily invested in the early processing stages of cocoa but is ranked as approximately the second largest confectionary of cocoa products in the world (after Cadbury/Kraft). Some authors have noted a gradual concentration of influence in the processing and c onfectioning of cocoa and chocolate due to firm mergers and buyouts (Fold, 2001 ; IBISWorld 2009 ; Kaplinsky, 2004 ; Vorley, 2004) Some notable examples are the incorporation of Trebor Bassett in 1989, and the Adams Group in 2003. Nestle has a long track record of acquisitions in many food sectors. Some recent cocoa related acquisitions include Pierre Marcolini and Ruzskaya Confectionary Factory in 2007. In that same year, Nest le and Barry Callebaut entered into a long term agreement stipulating that Barry Callebaut will supply cocoa products to Nestle and confection Cadbury completed in Fe bruary 2010. Even before the acquisition, Cadbury was considered to have the largest market share in the cocoa, chocolate, and sugar confectionary manufacturing sector and Kraft was 8 th Together, they will command a substantial market share in the sector (See Table 4 2 ). Resource Based Industrialization in C When analyzing the potential for resource based industrialization as a development strategy in the cocoa sector in C

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45 connections between the the oretical benefits and the current actors. In a scenario where there is no added value in the country, the benefits of the cocoa industry are paid to the farmers as the cocoa sale price, the certified buyers as markup profits, and the government as buyer li censes, exporter certification, and export tariffs. The value is then re circulated though the system to farmers as extension services and to the general public as government expenditure Figure 4 4 illustrates the movement of the value derived from cocoa within C ft the country for the international market in 1988. Of the cocoa that was exported that year, 94% of the value extracted from those exports was derived from unprocessed cocoa beans. The problem with this arrangement is that there are many more opportunities for cocoa manufact uring beyond the cocoa bean and that these activities generally generate more revenue. By increasing local manufacturing, there are more direct benefits for the general population through employment at manufacturing firms and linkage firms. The government also receives more revenue from business taxes and wage taxes that can then be used to increase government spending. The work force also benefits from training for more highly skilled jobs All t hese o utcomes would benefit the general population more than the scenario presented in Figure 4 4 Figure 4 5 represents the changes in the cocoa manufacturing sector in C te the last twenty years. There are five major cocoa manufacturing plants in plants that account for the growth in manufacturing seen in Figure 4 5. The International Cocoa Organization (ICCO) reports that a great deal of cocoa is processed w ithin Cte 09 production

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46 the largest grinder, the Netherlands, at 475 thousand tons, and outdoing the next two largest grinders, the United States and Germany, at 355 and 335 thousand tons largest producers, Ghana and Indonesia, only ground 255 thousand tons combined. Figure 4 5 also illustrates some of the theoretical benefits of industrialization. For example, the presence of one industry can create incentives for linkage firms to locate nearby This growth produces increased revenue for the state through taxes and other regulations. It also benefits the local population by providing waged labor and other business opportunities. The situation illustrated in Figure 4 5 deviates from the ideal because manufacturing still makes up a minor share of the sector. A continue d increase in the percentage of manufactured exports should compound the economic benefits just mentioned. As a result, C ould be able to achieve the expected benefits of increasing their share of the processing of raw goods. In summary, the c ommodity chain analysis highlights several important issues. The first is that raw beans are provided to the market mostly by small farmers. These farmers enjoy limited economies of scale and limited negotiating power when dealing with the relatively sma ll number of licensed buyers. It is also clear that cocoa which is a positive economic development. On the other hand, the processing plants responsible for that growth are owned by TNCs. In addit ion, a few of these TNCs involved in processing control a great deal of the market, which again limits the negotiating power of suppliers, buyers, and

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47 competitors. This situation implies that some economic growth may be occurring, but that the structure o f the sector makes it more likely for TNCs to reap the most benefits Correlation B etween Changes in Manufacturing and Development A statistical analysis of development data was conducted i n order to test the relationship between increases in manufacturing and higher levels of development Statistical tests cannot prove the existence of a theoretical relationship, but they can provide evidence to support or refute theoretical claims. In order to conduct a statistical analysis for this study there first ha s to be some determinant of changes in manufacturing in C Using the trade data available from the United Nations Commodity Trade Statistics Database for the last twenty years it is possible to track some of those changes. Figure 4 6 shows the total value of cocoa exports, the value of the most basic commodity form (beans), and the sum value of more processed forms of the commodity. The big dip can be explained by the coup that occurred in 1999. The disruption of exports accounts for the dip, an d the bulge immediately after is most likely due to the clearing out of some stockpiling that occurred while exports were disrupted. However there is an upward trend in the value or revenue generated from cocoa based exports. Figure 4 7 shows the share of value that is generated by more processed forms of cocoa. There is also steady growth there. It should be pointed out that despite the growth 67% of the export value of in the cocoa sector is still derived from the export of cocoa beans. These beans repre sent the potential for more processing to take place in C Figures 4 8 and 4 9 demonstrate that the growth in export value is not just a function of higher commodity prices but is made up of real growth in the pounds of processed product export ed. In addition the increased production in processing is not

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48 just due to larger supplies of cocoa beans. The pounds of beans being exported are falling while the pounds of processed cocoa are increasing. There is actually a replacement of the bean export s by more processed exports. Again, development can be defined differently by different people. Two major forms that development can take theoretically are economic and social. Growth in the industrial sector in a country should contribute to growth in ge neral economic indicators like GDP. In turn, this economic growth can have positive implications for social development in the form of improved health and education indicators. Using the value of processed cocoa as a percent of total cocoa exports as an in dicator of increased processing within C The World Bank World Development Indicators database was the source of the data used in this study. Regularly updated data is not available for many development indicators in C For example, the World Bank database only has two years of data for the adult literacy rate in C In light of these limitations, the indicators used in this study w ere cho sen because of their relatively frequent sampling (see Table 4 3 and 4 4) In addition to measuring both economic and social phenomena, the data used was selected based on its use by the Human Development Index in estimating and comparing holistic standard s of development across time and region. The GDP per capita calculated at purchasing power parity represents an indicator of economic growth. Since cocoa exports comprise an average of 33% of the value of exported commodities in C in the last t en years (UNCTSD 2009 ), a growth in cocoa exports would be responsible for a similar growth in export revenue and GDP

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49 would in turn increase. If industrialization leads to economic growth, the data should demonstrate a positive relationship between the tw o. The GDP data was not normally distributed (see Figure 4 10 stringent assumptions about the distribution of the data The result of the test was a positive correlation coefficie nt between the growth in manufacturing and GDP per capita PPP between 1988 and 2008 of .783 significant at the 99% confidence level, suggesting some evidence of the theoretical ly predicted outcome. I ndustrialization theory also assumes that industry growth will create growth t hrough linkages to other businesses, compounding the benefits of growth. This study uses changes in the number of domestic companies as a measure of the effectiveness of this benefit A manufacturing firm needs inputs for its operation and produces new out puts. The theory predicts that the establishment of a new firm will create new demands for inputs and a new supply of its outputs. This then creates incentives for local firms to provide those inputs and for other s to make us e of the new supply of outputs to set up further processing. These linkages compound each oth er and create a positive business environment by reducing the costs of shared factors of production. These incentives encourage the creation of new firms and the growth of existing firms. In thi s case the number of domestic companies is used as an indicator of the effectiveness of cocoa manufacturing in creating linkages and economies of scale Listed domestic companies are the domestically incorporated companies listed on the country's stock ex changes at the end of the year (World Bank definition ). A growth in manufacturing should be positively related to increases in the number of domestic businesses. In this study t he correlation between increased cocoa manufacturing and

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50 the number of domesti c companies has the expected positive relationship, with a positive correlation coefficient of .858 significant at the 99% confidence level. This is more evidence in support of industrialization theory. At this point, the relationship between the amount of cocoa processed within the borders of C have a positive correlation to the economic growth of the region, just as the economic development models would predict. The social development indicators result in some similar conclusions b ut with an exception. Primary school enrolment is used in this study as an indicator of human capital. The percentage of children enrolled in primary school can indicate both the level of government services provided and the economic incentives parents h ave to send their children to school. The links between human development indicators and manufacturing are not as direct, but industrialization theory predicts that the economic growth of industrialization can create opportunities for education over time The theory predicts a positive relationship between manufacturing and education. The relationship between cocoa manufacturing and primary school enrollment is characterized by a correlation coefficient of .806 significant at the 99% confidence level This provides evidence that the theoretically predicted outcomes may be true. One possible explanation for this positive correlation is that people with more money are more likely to send their children to school. Another possible explanation is that the gove rnment is using the revenues to increase their provision of public services, such as primary education. Similarly, the infant mortality rate is used as an indicator of human development in terms of health. Industrialization should create an environment tha t is conducive to the expansion availability of health services. Manufacturing and infant mortality rate should

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51 show a negative relationship as better health care should decrease the instance of infant mortality. T he infant mortality rate has a Pearson cor relation of .953 significant at the 99% confidence level So evidence from this study suggests that increases in cocoa manufacturing are correlated with the reduction of the infant mortality rate. One possible explanation is that government revenue is be ing used to increase the availability of health services. Those directly benefiting from employment in the manufacturing sector could also be using their income to access health services. Interestingly, there is no significant correlation between cocoa ma nufacturing and life expectancy. The most likely explanation for this disparity is the f act that the c ivil conflict dramatically a ffected the life expectancy in C century. Another possible explanation is the short time span o f the study. One reason we may not see evidence of the theoretically predicted outcomes is that it may take more time to see an impact on life expectancy. In summary, when considered alongside the commodity chain analysis, the statistical data provides mo re perspective on the issue. The statistical analysis is limited by the few development indicators available, as well as by the short time span for the analysis. Nonetheless, this analysis suggests that c ocoa manufacturing in Cte is positively correlated to improvements i n some development indicators. This lends some support to the industrialization hypothesis. The commodity chain analysis suggested that some economic growth was occurring, but that the structure of the sector favored internati onal actors in terms of benefits. The statistical data suggests that increases in manufacturing is correlated with higher levels of economic growth The

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52 analysis a lso finds a positive correlation between the level of manufacturing and other development i ndicators.

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53 Figure 4 1 GDP per capita PPP (World Bank, 2010)

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54 Figure 4 2 The cocoa commodity chain Cocoa Pod Cocoa Paste Merchantable Cocoa Coc oa Butter Cocoa Powder Chocolate Harvest Fermentation Dry Grinding Pressing Confectioning

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55 Table 4 1 Value of cocoa exports (UNCOMTRADE, 2010) Value (per pound) (2008) Percent of cocoa export r evenue (2008) Bean s $1.02 62.5 Paste $1.45 15.4 Butter $2.06 10.1 Powder $0.78 2.2 Chocolate $1.33 5.8

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56 Figure 4 3 Actors along the cocoa commodity chain Farmer Buyer Cooperative Exporter Local Processor Foreign Processor Retailer Consumer 1 Million 38 188 4 67 100 200 Thousands Millions

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57 Table 4 2 Top 10 Global Cocoa, Chocolate and Sugar Confectionery Manufacturing Firms ( IBISWorld 2009 ) Company Estimated market share in 2009 Cadbury 10.20% Mars 9.70% Ferrero 8.20% Nestle 8.00% Hershey 5.10% Wrigley 4.80% Barry Callebaut 3.70% Kraft Foods 3.10% Perfetti Van Melle 2.30% Lindt 2.00% Total 57.10%

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58 Figure 4 4 Value derived from cocoa, 1988 Value Derived from Cocoa, 1988 C Farmers Buyers Exporters Government General Population Coc oa 94% value = unprocessed International Market

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59 Figure 4 5 Value derived from cocoa, 2008 Value Derived from Cocoa, 2008 C Farmers Buyers Exporters Government General Population Cocoa 67 % International Market Manufacturing Linkage Firms 33 %

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60 Figure 4 6 Value of cocoa based exports (UNCOMTRADE, 2010)

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61 Figure 4 7 Value of processed cocoa as a percent of total cocoa exports (UNCOMTRADE, 2010)

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62 Figure 4 8 Volume of cocoa bean exports (UNCOMTRADE, 2010)

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63 Figure 4 9 Volume of processed cocoa exports (UNCOMTRADE, 2010)

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64 Tab le 4 3 Correlation data (World Bank, 2010) Year % total GDP per capita, PPP (current internati onal $) Listed domestic companies, total School enrollment, primary (% gross) Mortality rate, infant (per 1,000 live births) Life expectancy at birth, total (years) 1988 6.15 1340.71 24 .. .. .. 1989 12.49 1381.79 23 .. .. .. 1990 12.05 1369.38 23 66.24 104.49 57.38 1991 13.40 1367.96 25 63.77 .. .. 1992 12.56 1347.45 27 .. .. 57.50 1993 11.89 1328.74 24 .. .. .. 1994 14.62 1322.37 27 .. .. .. 1995 13.58 1399.26 31 63.22 99.73 56.80 1996 12.12 1488.68 31 .. .. .. 1997 15.07 1552.38 35 .. .. 56.34 1998 16.19 1597.41 35 .. .. .. 1999 18.74 1602.15 38 69.10 .. .. 2000 17.24 1537.25 41 69.28 95.13 55.76 2001 18.78 1537.77 38 72.02 .. .. 2002 24.12 1509.29 38 73.59 .. 55.37 2003 24.63 1486.35 38 70.39 .. .. 2004 27.04 1524.58 39 .. .. .. 2005 27 .93 1560.06 39 .. 90.79 56.52 2006 28.28 1584.94 40 70.56 89.90 56.90 2007 30.90 1617.97 38 72.13 89.08 57.28 2008 32.98 1651.23 38 .. .. 57.76

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65 Table 4 4 Summary of correlations Value of Processed Cocoa Exports as a Percent of Total Value of Cocoa Exp orts, 1988 2008 Correlation Significance level Sample size GDP pc PPP 0.783 99% 21 Listed Domestic Companies 0.858 99% 21 Primary School Enrollment 0.806 99% 10 Infant Mortality Rate 0.953 99% 6 Life Expectancy NA Not Significant 10

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66 Figure 4 1 0 GDP per capita PPP (World Bank, 2010)

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67 CHAPTER 5 DISCUSSION AND CONCLUSION From this analysis, it can be concluded that there is a positive correlation between cocoa processing between 1988 and 2008 in Cte d'Ivoire and some economic and social develo pment indicators. It is also clear that cocoa processing is increasing in Cte d'Ivoire. With cocoa production leveling off in the last nine years, the export of processed cocoa goods has been slowly replacing some of the export of raw cocoa beans. This in creased volume of yearly processing of cocoa in Cte d'Ivoire is essentially growth in the manufacturing sector in the country Consequently, the corresponding improvement in development indicators lends some support to the theory that industrialization, r esource based industrialization in this case, increases economic growth, which in turn can improve social development indicators. It seems likely that Cte d'Ivoire would benefit from increasing the share of cocoa processed because there are still large qu antities of beans that leave the country without any additional value added. However, some of the results raise questi ons about the efficiency of res ource based industrialization through the processing of cocoa in C Although there is a positi ve relationship between cocoa processing and socioeconomic indicators in C not ideal ( refer back to Figure 4 1 ). For example, the World Bank groups countries by income into high, medium, and low income co untries, with medium income further subdivided into lower middle income and upper middle income. C enough to be considered a lower middle income country. Unfortunately, at the current rate of growth it would take C

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68 the upper middle income category with a GNI per capita PPP of $3,856. Industrialization theory is not silent on this issue. off of industry only begins the process th at he describes as the drive to maturity. According to his definitions, many currently industrialized nations like the United States, Great Britain, Germany, and Japan took sixty years to reach maturity after take off. Rostow notes many econ omic developments and changes in society that took place historically during the drive to maturity. For example, capital accumulation though compounding interest created the capital base that sustained economic system. In addition, the composition of the w orkforce changed. Labor organizations helped to shape the labor market. New generations grew up in an urban, working class environment. New levels of consumption became the norm. Political activism was embraced. The science of management was developed. All of these changes took time and grew organically from the new economic environment so efforts to replicate them artificially may not be effective, let alone expedient. Along different lines, the dependency theor ists emphasize the economic relationships be tween developed and developing countries. The structure of the industrial process in developing nations is described as relying heavily on foreign capital, the result of which is often foreign ownership of the local manufacturing firms through TNCs. This m odel is confirmed in the cocoa commodity chain in C As noted earlier in this paper, a ll of the cocoa processing plants in C owned by some of the largest TNCs in the industry. The drawbacks of this arrangement are that profits a re less likely to be reinvested locally. A TNC like Archer Daniels Midland will collect the profits from all of their ventures around the world and choose

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69 how and were to reinvest them based on economic incentives and shareholder interests. In addition, TN Cs may import their own upper management and technical staff. With these conditions in mind, one of the few reliable benefits of manufacturing within the borders of C become available. This is a net gain as those job s would not be available without the local manufacturing plant, but the scale of the benefit is drastically reduced. Another possible explanation for the slow rate of growth is the political instability within C Some of the dynamics at play i n the political arena were explored earlier. In addition to the continued military standoff that divides the country, new elections have been continuously delayed in the country. A recent example of the continued instability was the dissolution of the inte rim government on February 12, 2010 by the acting president, Laurent Gbagbo over alleged voter registration fraud. The conflict disrupted the supply of cocoa at the turn of the century, and the threat of similar problems in the future keeps new investors at bay. The increased risk associate with poor security and economic instability does not create an environment that encourages the growth of industry and investment in the country. Future studies should look at political factors, such as civil conflict, i n determining the viability of export based development. And finally, t here may be better ways to effect development. Coco a manufacturing tends to be capital intensive. The cost of specialized machinery needed to process cocoa is high, while the number of employees needed to run it is somewhat low. Some research suggests that industries with a lower capital to labor ratio enjoy more direct benefits to the local economy. On the other hand, the linkages an industry produces

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70 could even out some of these differ ences. Looking at the linkages the cocoa industry enjoys could inform this debate. Some other possibilities for continued research include doing case studies of manufacturing projects and their effects on t he local and national economy. For example, how do government policies affect the incentives for establishing manufacturing firms in the country? When a TNC sets up operations in C what is the composition of their employees in terms of nationality? What kinds of specialized training do employ ees receive? How do the economic decisions of the industrial workforce differ from those employed in the agricultural sector? In addition, extending the study to include the industrial sector as a whole would allow comparison of the effects that different sectors have on the economy. This kind of study would also shed some light on the question of how dependent industry is on the availability of locally produced commodities in terms of the costs of inputs. Furthermore a look at the government revenue that is generated from the cocoa sector could be very useful. An analysis of the government expenditures and their dependence on different sources of income could expand our understanding of the economic incentives at play in the political arena.

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71 SUFFIX This study has analyzed the particular contributions of the cocoa manufacturing This is an important topic, for Cte d'Ivoire in particular, because the cocoa industry is the keystone of the economy. It is also an impor tant topic as it relates to the academic understanding of development. The cocoa manufacturing industry in Cte d'Ivoire acts as a case study for testing the theories about the economic benefits of forward integration. It also looks at the relationship bet ween industrialization and economic growth in a developing country. These observations then contribute to the broader understanding of development theories and methods. Forward integration into commodity manufacturing within the borders of a producing cou ntry is often deemed a positive development for that country. In the context of Cte d'Ivoire, this relationship proves to be complex. Forward integration is occurring in Cte d'Ivoire in the sense that more manufacturing is occurring within the borders of the country. In contrast, the ownership of that manufacturing industry makes it more accurately characterized as either backward integration by TNCs, or simply the relocation of TNC capacities to Cte d'Ivoire. So although the location of the manufacturin g within its borders may benefit Cte d'Ivoire, the foreign ownership of those facilities reduces the benefits of said forward integration in Cte d'Ivoire. This study does lend support to contributes to economic development. It also finds a positive link between economic and social development. In that v ein, it is important to emphasize that this study does not lay to rest the debate about the linearity/non linearity of development, but it does

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72 corroborate the po sitive link between industrialization and economic development noted in the linear understanding of development. Finally, this study contributes to the development discourse by investigating the case of Cte d'Ivoire which fills the need for case studies that look at the specifics of particular places to inform broader theoretical discussions. This study looks at the interactions of industrialization, human development, conflict, international trade, and foreign investment in Cte d'Ivoire to create a spec ific picture about the current state of development in that country. This paper does not completely solve any general academic questions dealing with development, but it does apply the general theories and presuppositions found in broader scale work to a p articular case. The accumulation of these kinds of smaller scale studies will create a record against which more theoretical work can be compared and tested.

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73 LIST OF REFERENCES Abbott, P. (2007). Distortions to agricultural incentives in C orld Bank Agricultural Distortions Working Paper 46. Athukorala, P & Sen, K. (1998). Processed food exports from developing countries: Patterns and determinants. Food Policy, 23 (1), 41 54. Bair, J. (2009). Global commodity chains. In Bair, J. (ed.) Frontie rs of commodity chain research Stanford, CA: Stanford University Press. Bass, H. H. (2006). Structural problems of West African cocoa exports and options for improvements. African Development Perspectives Yearbook, 11 245 263. BCC (2010). Bourse du Caf et du Cacao. Retrieved from: February, 2010. Bell, M. (2002). Inquiring minds and postcolonial devices: Examining poverty at a distance. Annals of the Association of American Geographers, 92 (3), 507 523. Birdsall, N. & Hamoudi, A. (2002). Commodity dependence, trade, and growth: When 7. Bodman, A. (2010). Measuring the influentialness of economic geographers during the approach using the h index. Journal of Economic Geography 10 141 156. Butzer, K. W. (2002). The rising cost of contestation. Annals of the Association of American Geographers, 92 75 78 Journal of Democra cy, 17 (2), 63 77. Cramer, C. (1999). Can Africa industrialize by processing primary commodities? The case of Mozambican cashew nuts. World Development, 27 (7), 1247 1266. Crook, R. (1990). Politics, the cocoa crisis, and administration in Cote d'Ivoire. Th e Journal of Modern African Studies, 28 (4), 649 669. (1997). Winning coalitions and ethnoregional politics: The failure of the opposition in the 1990 and 1995 elections in C African Affairs, 96 (383), 215 42. (2001). Cocoa booms, the legali sation of land relations and politics in C te d IDS Bulletin, 32 (1), 35 45. Da Silva, C. A. et al. (2009). Agro industries for development UK: MPG Group. Dicken, P. (2007). Global shift: Mapping the changi ng contours of the world economy New York : Guilford Press.

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75 ICCO (2009). Production of cocoa beans. ICCO Quarterly Bulletin on Cocoa Statistics 35 (4 ). IMF (2010). Monthly primary commodity prices: 1980 current. Retreived from: , January, 2010. Kaplinsky, R. (2004). Competitions policy and the global coffee and cocoa value chains. Paper prepared for UNCTAD. Krugman, P. (1980). Scale economies, product differentiation, and t he pattern of trade. Journal of International Economics, 65 489 505. __. (1991). Increasing returns and economic geography. The Journal of Political Economy, 99 (3), 483 499. Krugman, P. & Venables, A. (1995). Globalization and the inequality of nations. T he Quarterly Journal of Economics, 110 (4), 857 880. Lewis, W. (1955) The theory of economic growth Allen and Unwin, London. Losch, B. (2002). Global restructuring and liberalization: C international cocoa market? Journal of Agrarian Change, 2 (2), 206 227. Moss, T. (2007). African development: Making sense of the issues and actors Boulder, Colorado: Lynne Rienner Publishing. Moyo, D. (2009) Dead Aid: Why Aid is not Working and How There is a Better Way for Africa Farrar, St raus and Giroux. Annals of the Association of American Geographers, 93 (1), 89 103. Peet, R. (1975). Inequality and poverty: A Marxist geographic theory. Annals of the Association of American Geographers 65 (4), 564 571. Prebish, R. (1959). International trade and payment in an era of coexistence: Commercial policy in underdeveloped countries. The American Economic Review. 49 (2), 251 273. Rodrik, D. (2004) Industrial pol icy for the twenty first century. United Nations Industrial Development Organization. Roemer, M. (1978). Resource based industrialization in the developing countries: A survey. Journal of Development Economics, 6 163 202. Rostow, W. (1960). The stages of economic growth. University Press, Cambridge. Sachs, J. (2001). The strategic significance of global inequality. The Washington Quarterly, 24 (3), 187 198.

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77 BIOGRAPHICAL SKETCH Steven Kotecki was born in Pullman, Washington in 1982. He moved to Cte d'Ivoire with his parents when he was 7 after spend ing two years in France. He completed high school in Cte d'Ivoire in 2001 and returned to the United States. He joined the US Army reserves in 2002, graduated from the University of Pittsburgh in Johnstown in 2008 with a b achelor s degree in g eography an d e nvironmental s tudies, and graduated from the University of Florida in 2010 with a m aster s in g eography.