Sulawesi's cocoa boom: Lessons of smallholder dynamism and a hands-off policy

The rapid expansion of cocoa production on the Indonesian island of Sulawesi over the last decade surprised the world, not least because it came mainly from smallholders. This paper examines government policies that have affected the subsector, and identifies issues it faces. The study concludes that the following factors contributed to the expansion: the availability of suitable land; low production costs; a highly competitive marketing system (a result of the government's policy of limited intervention); relatively good transport infrastructure; favourable macroeconomic policies; and smallholder entrepreneurship. It is particularly important that Indonesia's government left cocoa marketing and distribution free of many of the interventions applied to other commodities. Because of the competitive marketing system, the farmgate price of cocoa in Indonesia is very high relative to the export price. Issues that must be addressed if cocoa is to develop further include product quality, the 'adding-up' problem, pest control and VAT.