Living Income: a way to alleviate Poverty in the Cacao Sector in Ghana?

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In festive seasons like Christmas or Easter, supermarket shelves in Europe are full of chocolate Santas, Easter bunnies and sweets. Germany, for example, is known to be one of the largest chocolate consumers in the world with estimates suggesting an average German consumes roughly 9kg of chocolate a year[1]. Nevertheless, consumers are increasingly also asking themselves the question: where does the cacao in the chocolate come from and how is the cacao grown? Especially in recent years since media reports about child labour on plantations and deforestation in the tropics have become more and more frequent. But above all, a question gradually emerges: is poverty the main ingredient in chocolate?

In spite of chocolate being a thriving business, most cacao producing families live below the World Bank’s poverty line of $1.90. According to the International Cocoa Initiative (ICI) it is estimated that less than 7% of the value of cocoa sold in Europe is received by the producers[2]. Ghana is the world’s second-largest cocoa bean producer, after neighboring Côte d’Ivoire, with an average estimated production of about 900,000 metric tons of cocoa beans per year [3].

Cacao has shaped the history and economy of Ghana considerably, making it the most important agricultural export crop and accounting for almost a third of total export earnings and 10% of the GDP[4]. Today, the industry employs over a million people in cacao growing areas of the country, with the livelihoods of some six million people depending on the crop. Yet, most live in poverty, because the income generated with cocoa farming is simply too low and the present price for cocoa is too low to close the gap between present income and living income.

In the 2016-2017 farming season, the world price for cacao experienced a dramatic fall that impacted the livelihood of producers, both in Ghana and Côte d’Ivoire, where farmers saw their income reduced sharply, making it difficult for them to cover their basic costs and to improve, or sustain, a decent life. As a result, in 2019 the governments of Ghana and Côte d’Ivoire tried to tackle the price issue by collaborating and advocating for a higher common floor price to ensure a living income for their rural populations and proposed a floor price of $2,600 per ton. Instead, a $400 per ton differential was agreed upon by the major cocoa buyers and is expected to be written into export contracts that would kick in should market prices fall below $2,600 in the 2020-2021 season. This differential is only slightly above the current market rate but could protect farmers from fluctuations.

In order to address poverty reduction sustainably, the cocoa sector is witnessing the rise of a new approach called “living income”. This approach seeks to address the entire value chain by sharing responsibility among all actors in the sector and making the concept of a ‘living income’ pro-poor and beneficial to producers.

“Living income” is comparatively like the concept of a living wage but varies in that living wage refers to the wage earned by an employee; living income is used for smallholder farmers who depend on income generated from farming[5]. Although a uniformly acceptable methodology for calculating living income is yet to be adopted since approaches vary greatly depending on the crop and geographical specification. All actors, however, share the same definition of the concept: living income should cover the costs of food, water, housing, education, healthcare, transport, clothing, and other essential needs, including provision for unexpected events.

Recent studies done by Fairtrade International and The Living Income Community of Practice, an alliance of partners dedicated to a vision of thriving and economically stable rural communities, is helping put numbers behind this relatively new concept. The studies have estimated the living income to be approximately US$2.16 per person per day in Ghana[6]. Accordingly, in October 2019, Fairtrade raised the minimum price for fair trade certified cocoa and launched a Living Income Reference Price according to these estimates, making them a forerunner in the cocoa sector.  This example results in paying producers higher prices in the short term. However, such short-term measures need to be tied with other measures in order to have sustainable effects and avoid long-term unintended negative consequences of increasing oversupply. The Living Income concept is only a starting point for a discussion about an adequate income for cocoa producers, not the goal of such a discussion. Hence, it is important to develop further the methodology of “living income” and to adapt it to local conditions. This must be done together with the Ghanaian regulatory authorities and must result in increased cooperation with the private sector. Processors, retailers and chocolate manufacturers must commit themselves to pay living income prices and premiums, as shown in the example of Fairtrade. Furthermore, consumers who are at the end of the value chain need to make it a point to support such initiatives by purchasing certified and fair-trade chocolates.

[1] https://www.statista.com/statistics/516073/chocolate-per-capita-consumption-germany/

[2] Cocoa Barometer 2018: https://www.suedwind-institut.de/files/Suedwind/Publikationen/2018/2018-09%20Cocoa%20Barometer%202018%20English.pdf

[3] Statista 2018/2019 https://www.statista.com/statistics/263855/cocoa-bean-production-worldwide-by-region/

[4] http://siteresources.worldbank.org/AFRICAEXT/Resources/258643-1271798012256/Ghana-cocoa.pdf

[5] Fairtrade International, Living Income Reference Prices for Cocoa: An Explanatory Note (2018) https://docs.wixstatic.com/ugd/0c5ab3_96ae8e48e7a745bea74e4e9982a7cc3e.pdf

[6] Fairtrade International, Living Income Reference Prices for Cocoa: An Explanatory Note (2018) https://docs.wixstatic.com/ugd/0c5ab3_96ae8e48e7a745bea74e4e9982a7cc3e.pdf

“The views represented in this opinion piece do not necessarily represent those of the Willy Brandt School of Public Policy.”

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Julius Abila Abagi is a currently Master of Public Policy candidate at the Willy Brandt School of Public Policy specializing in International Affairs and Development as well as Public and Non-Profit Management. He is particularly interested in working on topics relating to Development Cooperation, Sustainability and Political Communication. He spent the last 4 years working as Communications Advisor for the German Development Cooperation’s Umbrella Programme on Agricultural Value Chains for Sustainable Development (GIZ/A4SD).