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Indonesia's cocoa output, produced mainly by smallholders on the island of Sulawesi, increased a phenomenal 26 percent a year (average, compounded) between 1980 and 1994. The government's hands-off policy was an important factor in this rapid expansion of output.This case study of Sulawesi's cocoa market is a counterpoint to investigations of highly regulated markets --- agricultural and otherwise. The Indonesian island's rapid expansion surprised the world cocoa market, especially because it came mostly from smallholders.Akiyama and Nishio examined the smallholders' production and marketing systems and the government policies implemented for smallholders to identify any policy lessons that might be useful for other countries. They found:The following factors contributed to the rapid expansion: the availability of suitable land, low production costs, a highly competitive marketing system (a result of the government's hands-off policy or limited government interventions), relatively good transport infrastructure, favorable macroeconomic policies, and the smallholders' entrepreneurship. Until the recent imposition of a value-added tax, Indonesia's government left cocoa marketing and distribution freer of government interventions than many other commodities --- in part because the Indonesian Cocoa Association recommended such nonintervention. Other commodities were affected by direct involvement of the National Logistics Agency, price controls, and exclusive trade licensing requirements. As a result of the competitive cocoa marketing system, the farmgate price of cocoa in Indonesia is about 90 percent of the f.o.b. price --- a much higher share than cocoa produced in other countries and than other commodities produced in Indonesia. This relatively free marketing and distribution system must be maintained for cocoa to develop further. Some general government policies have benefited the cocoa subsector as well as others. Exchange rates have been kept competitive, for example, no export tax has been imposed, and it has been government policy to build basic infrastructure in the outer islands.Several issues must be addressed for cocoa to be further developed: the quality of cocoa, the adding up problem (export revenues not increasing in proportion to export quantities, because of the price depressing effect of increased exports), the recently imposed value-added tax, the cocoa podborer, export marketing, research, retribution, local processing, environmental problems, and government interventions now being discussed for the cocoa sector.Government and industry must also resist the natural temptation for current players to become more conservative, to protect their interests.This paper --- a joint product of the Commodity Policy and Analysis Unit, International Economics Department, and the Agriculture Operations Division, Country Department III, East Asia and Pacific --- was presented at the conference, Building on Success: Maximizing the Gains from Deregulation, held in Jakarta, Indonesia, April 26 28, 1995. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Grace Ilogon, room N5032, telephone 2024733732, fax 2025223564, Internet address gilogon@worldbank.org. (44 pages)The full report is available on the World Bank FTP server
