Explaining Ghana's Recent Good Cocoa Karma: Smuggling Incentive Argument

The paper contends that the current boom in cocoa exports from Ghana is primarily in response to reversal in price incentives to smuggle Ghana cocoa to La Cote d’Ivoire and not due to productivity gains in the Ghana cocoa supply chain. Using recent data; ADF, Perron and KPSS tests of stationarity; Engle and Granger and Johansen co-integration tests; Granger causality tests; single and vector error correction models; as well as partial adjustment models, we estimate the Ghana cocoa supply response to determine the most pertinent factors that explain the cocoa boom. Different from previous research, the VECM and ECM models are modified to be more reflective of current conditions in the Ghana cocoa sector by including prices of relevant substitutes in cocoa production. Furthermore we carefully account for the time series properties of the data and address endogeneity problems that plague the estimation. For example, in testing for the order of integration of different series, we account for the possible existence of structural breaks. We find that the “price incentive to smuggle” argument adequately explains the current boom in Ghana cocoa supply response. This finding is important because it questions claims in the literature that substantial productivity gains in the cocoa sector in response to good policy is the main reason behind the Ghana cocoa export boom.