Microeconomics [50 marks]
In one of the attached reports titled “Transformative Industrialisation and Trade in the Context of the [Africa Continental Free Trade Area (ACFTA)] agreement: Opportunities and Challenges” Ismail XXXXXXXXXXreports the following:
The magazine Africa Quartz recently reported that, “over 2 million small-scale farms in Ivory Coast and Ghana produce nearly 60 percent of the world’s supply of cocoa. But despite exporting almost 3 million tons to support the multimillion dollar industry, farmers earn an average of 67 cents per day – just 6.6 percent of the final price” (Quartz Africa, 2017).
On his 3-day visit to Ghana in August 2017, the President of the African Development Bank (AfDB) Akinwumi Adesina pointed out that while Ivory Coast produced 54 percent of the world’s cocoa they play no role in controlling the market (AfDB, XXXXXXXXXXAdesina urged Ghana to work closely with Ivory Coast to move up the value chain by processing and adding value to its cocoa. This sentiment was echoed by the Minister of Finance of Ghana, Ken Ofori-Atta, who stated that, Ivory Coast and Ghana controlled 60-70 percent of cocoa in the world, but remained price-takers. He stated that, “we are now working together to transform this industry” (AfDB, 2017).
Source: Kaplinsky, 2017
In Ghana, Cocoa is cultivated mainly by smallholder farmers with an average of 2 hectares per farm with only 10 percent of the estimated XXXXXXXXXXhectares under cultivation by large-scale farmers (AfDB, XXXXXXXXXXThe grinding of cocoa to produce the primary cocoa product used for confectionaries and manufacturing is done outside the country, aside from small-scale domestic grinding including the Cocoa Processing Company, a subsidiary of the COCOABOD (AfDB, 2017)
In the Ivory Coast, it is estimated that about 6 million people are dependent on the earnings from cocoa – more than a quarter of the entire population. Cocoa constitutes about a quarter of total exports and around 15 percent of state revenues (BBC News, 24/02/2017).
However, a drive towards investment in large commercial cocoa production and increased domestic processing of cocoa and manufacturing of chocolate is underway in both Ivory Coast and Ghana.
In October 2016, Bloomberg reported that in central and eastern Ivory Coast, a cocoa plantation that will be Africa’s biggest, spanning an area equal to about 3000 soccer fields, was taking shape (Bloomberg, XXXXXXXXXXThe report indicated that the company, Solea (a subsidiary of Brussels based, KKO International) was developing about 2000 hectares of land (with an additional 1000 hectares to be purchased). Solea was to plant about 4 million cocoa trees on 3000 hectares by the end of 2018 with a target to produce XXXXXXXXXXmetric tons of beans annually and a yield of 5 tons a hectare. Ivory Coast’s small farmers currently produce a yield of about 500 kilograms of beans per hectare. Solea has set up a micro-irrigation system that supplies each of Kotokonou’s trees – with drip irrigation. Solea’s head of finance stated that drip irrigation was used already in Europe about 40 years ago and has never been applied to Africa’s cocoa production (Bloomberg, 2016).
In the next step of the value chain too – the grinding of the cocoa bean – new investors have begun to arrive in Ivory Coast. In 2015, Olam International, the third largest grinder, opened a $75 million factory in San Pedro, the nations second largest port (Quart Africa, XXXXXXXXXXWith a production capacity of XXXXXXXXXXtons, the factory has helped to catapult the Ivory Coast to the top as the world’s largest processor.
Africa consumes fewer than 4 percent of chocolate sold globally – but the regions consumption pattern is changing due to the rising middle class. This has assisted the governments to also support the efforts of local griders of cocoa and producers of chocolate. In the Ivory Coast a small local artisanal chocolate company called “Instant Chocolate” grew from selling 3.5 tons of chocolate a month to about 50 tons a month in 2016. It was reported that the company produces chocolates in the range called “Made in Ivory Coast” selling bars of chocolate and pralines to individuals and corporate clients such as Air France. In Ghana, locally produced chocolate brands such as “57 chocolate are branding themselves as “Ghanian Luxury” (Quartz Africa, XXXXXXXXXXLocal chocolatiers, like “Midunu Chocolates”, the brainchild of Ghanaian chef Selassie Atadika – are aiming to attract the native born and returnee Ghanian middle class as well as expatriates and tourists (Quartz Africa, 2017).
Foreign investors in the chocolate manufacturing sector are beginning to take an interest in production in Africa. The French chocolatier, Cemoi opened its first major chocolate factory in 2015 in the Ivory Coast, with a capacity to produce over XXXXXXXXXXtons of chocolate per year (Quartz Africa, 2017).
The largest producers of chocolate in the world still produce outside of Africa and will need to be persuaded by policy makers to locate their chocolate making facilities in Africa. These companies include: Mars Inc (USA); Mondelez International (USA); Ferrero Group (Luzembourg/Italy); Meiji Co. Ltd (Japan); Nestle SA (Switzerland); Hershey Co (USA); Pladis (UK); Chocoladenfabriken Lindt & Sprungli AG (Switzerland); Ezaki Glico Ltd (Japan) and Arcor (Argentina) (ICCO, 2017).
Question 1
Use appropriate economic frameworks and/or models including the Production Possibility Frontier (PPF) to graphically describe and discuss the potential implications for economic costs, economic growth, allocative efficiency in the West African economies producing cocoa beans from proposals made in the extract above. Discuss with graphical explanations how these economies would be affected by the efforts to move their production high up on the value chains of cocoa bean cultivation to primary and secondary products including the branding and marketing of those products. In your discussion, present real economic data (e.g. www.tradingconomics.com or any other credible economic and data sources) as evidence on how these economies would potentially be affected in terms of indicators including their relative GDP sizes, local employment opportunities, etc., in the process of internalising the processes that are located high up in the cocoa bean value chains.
[25 marks]
Question 2
Use the relevant trade theories of comparative advantage to describe and discuss the potential benefits and losses of cocoa production sectors in West African countries, like Ghana, when the signed Africa Free Trade Area Agreement (summarised in the attachments) is implemented from year 2020.
From both the potentially exporting (e.g. Ivory Coast) and importing country (e.g. RSA) perspectives, of these products, discuss with graphical illustrations the potential economic implications on variables including consumers, producers and governments stemming from a widening of African markets for cocoa products as a result of this FTA’s implementation. To support your discussion use the relevant economic data from sources (e.g. tradingeconomics.com and others of trade data).
[25 marks]Macroeconomics issues [50 marks]
The Business News of Ghana (7 May XXXXXXXXXXSource: citibusinessnews.com) reported the following:
IMF warns of revenue shortfall if Africa Free Trade Agreement is implemented
The International Monetary Fund (IMF) has warned that Ghana could face revenue shortfall if the country starts the implementation of the African Continental Free Trade Agreement (ACFTA) this year.
The IMF maintains that although the agreement will boost trade on the continent, it will affect earnings and employment opportunities in some sectors of the economy. “Our policy message is to try to put the necessary of infrastructure or policies to shelter part of the population that will be affected”, Albert Touna Mama, Country Representative for the IMF noted. The African Continental Free Trade Agreement is to boost trade within Africa by removing trade barriers. So far, 22 countries including Ghana have ratified the agreement. The CFTA will amongst other requirements enable countries that are signatory to the agreement access to a market of 1.2 billion people with a combined Gross Domestic Product of 2.5 trillion dollars. The benefit notwithstanding, the IMF is warning that Ghana lose revenue due to requirements to reduce and scrap some tariffs. The effect of this, will include the influx of foreign goods on the Ghanaian market with a trickle-down effect on local manufactures. Speaking at the launch of the IMF’s spring 2019 Regional Economic Outlook, Deputy Trade Minister, Carlos Ahenkorah, said the government has begun working with trade unions in the country to find ways of reducing possible shocks from the agreement. He stated that “we are bringing GUTA, AGI and the GNCCI just to ensure that we can cushion them against any shock.” In addition, revenue generated from imports is likely to drop due to the reduction in tariffs on goods brought into Ghana from beneficiary countries. But Finance Minister, Ken Ofori-Atta who was also at the event said alternative measures are being considered to curtail the impact on the country’s fiscal balance. “The issue of diversification also goes to talk about an outward reach in terms of our production, so we move more into an export oriented base. If we are able to link in positively to the Free Trade Continental Zone, that becomes a 2.5 trillion economy”, he noted. Over all, the IMF believes that although the Continental Free Trade agreement will boost trade significantly, the move will benefit some industries and hurt others, therefore policy makers must consider structural reforms to improve agricultural productivity and strengthen the competitive advantage of the other economies.
Question 1
In light of the warnings from the IMF reported in the article above, identify from Diagram 1 (also Fig 2.1 in the attachment - IDD-Reg&AfCFTA) a group of countries for which to prepare and write a report to the ministers of Trade and Development as well as of Foreign Affairs.
Diagram 1: Country groups by level of development
For the chosen group of countries, in your report identify three sectors (goods or services) that would require tariff protection from the ACFTA. Discuss how each of the identified sectors of goods or services would benefit from atemporary trade protection (e.g. tariffs remain in place for ten years).Discuss for example how the sectors would benefit in terms of protection of local employment as well as how governments and citizens may benefit in terms of protected tax revenues. In the discussion, include an analysis of how your chosen sectors could be strengthened to enable them to compete after the initial 10 years of trade protection.
[25 marks]
Question 2
For the case of a more developed economy in Africa (e.g. South Africa), with relevant economic data on current trends, discuss the possible implications or impacts post 2020 of the ACFTA on the following variables:
- National consumption within South Africa
- Investment by local stakeholders into the continent
- Net exports
- Government trade revenues
- Potential employment effects within the country and on the continent
[25 marks]