In 2010, the Indonesian government introduced a 15 per cent export tax on cocoa beans to promote investments in downstream value-added activities. This paper examines the impact of this tax on domestic welfare and whether the government has imposed optimal taxes on cocoa beans. The research uses a partial equilibrium approach to analyse effects of policy by upstream sectors on downstream cocoa manufacturing. It also presents econometric estimates of import demand and export supply elasticity. The findings demonstrate some positive effects of export taxes, including diversion of some cocoa crop to domestic use. However, this results in significant losses to cocoa bean producers and does little to encourage the development of a downstream processing industry, the stated objective of the policy. The findings also show evidence of interdependence between the policies of major cocoa exporting countries. The authors acknowledge that due to limited available data, better econometric techniques do not necessarily lead to improved robustness of estimates of elasticity. This could significantly affect estimates of optimal export taxes and, therefore, analysis of welfare effects.

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