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Agricultural Systems 63 (2000) 211±228
www.elsevier.com/locate/agsy

Assessing the expected welfare e€ects of
biotechnological change on perennial crops
under varying economic environments: a
dynamic model for cocoa in Malaysia
N. Gotsch a,*, R. Herrmann b
a
Agricultural Economics, Swiss Federal Institute of Technology (ETH), CH-8092 Zurich, Switzerland
Agricultural Policy and Market Research, University of Giessen, Senckenbergstr. 3, D-35390 Giessen, Germany

b

Received 1 July 1999; received in revised form 8 October 1999; accepted 16 February 2000

Abstract
A dynamic model is developed for the ex ante measurement of research bene®ts resulting
from the adoption of biotechnological innovations for perennial crops. It is implemented
empirically for cocoa in a large producer country, namely Malaysia, and all other countries as
an aggregate. The sensitivity of the model is investigated with regard to variations of exogenous factors (growth rate of supply, wages, discount rate). The price and quantity e€ects

resulting from the adoption of new cultivars in Malaysia are relatively small. Malaysian producers and consumers gain, whereas the fact that producers' losses are more or less o€set by
consumers' gains in the Rest of the World illustrates the distributive e€ect of Malaysia's
adoption of improved cultivars. The most sensitive reaction is exhibited by an increase in the
supply growth rate in the Rest of the World. # 2000 Elsevier Science Ltd. All rights reserved.
Keywords: Economic surplus; Supply shift; Vintage model; Biotechnological progress; Cocoa

1. Introduction
Biotechnology has become the major source of technological progress in agriculture and its greatest impact will be felt in production (Buckwell and Moxey, 1990)
where it will lead to an enhancement of the productive potential of plants and animals
* Corresponding author. Tel.: +41-1-632-48-29; fax: +41-1-632-10-86.
E-mail address: nikolaus.gotsch@iaw.agrl.ethz.ch (N. Gotsch).
0308-521X/00/$ - see front matter # 2000 Elsevier Science Ltd. All rights reserved.
PII: S0308-521X(00)00009-3

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N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

and a reduction of production losses attributable to pest and disease attack. Although
our knowledge regarding the economic impacts of research-induced supply shifts has

improved signi®cantly over the last decade (Alston et al., 1995), the economic impact
of agricultural biotechnology on both producers and society has not been elaborated
in detail for individual crops and countries. In particular, this applies to developing
countries. Given this background, the ®rst objective of this paper is to investigate how
the introduction of modern crop biotechnology on one major export market of
developing countries, i.e. cocoa, a€ects consumers, producers and the society in an
innovating developing country and the Rest of the World (ROW) as an aggregate.
Some hypotheses are already available concerning likely impacts of agricultural
biotechnology on producing countries. Improved resistance of plants and animals to
pests and diseases may lead to a reduction of expenditures on purchased inputs.
Another aspect is that many developing countries rely almost exclusively on agricultural exports as a source of foreign exchange. Kalter and Tauer (1987) expect that
the development and adoption of biotechnological advances will further aggravate
the long-term decline in real agricultural prices owing to enhanced physical output.
Possible impacts resulting from the adoption of these technologies must be anticipated in order to prevent potentially socially undesirable consequences.
Alston et al. (1995) describe a comparative-static model for the quanti®cation of
welfare e€ects resulting from research-induced supply shifts of competitive industries. This paper addresses the dynamic aspects of supply response. The standard
welfare approach of Alston et al. (1995) is adjusted to account for the time path
after initial adoption and then applied to the speci®c requirements of perennial
crops. The model is implemented empirically for Malaysia, on the one hand, and all
other countries (that are not in a position to adopt the same technology) as an

aggregate, ROW, on the other hand.
Producers and consumers in Malaysia bene®t as a general economic e€ect of their
country's adoption of improved planting material. The losses su€ered by producers
in the ROW are approximately o€set by consumers' gains as real prices fall. The
sensitivity analysis reveals that the most sensitive reaction is exhibited by an increase
in the supply growth rate of the ROW.

2. Calculation of the research-induced supply shift for perennial crops
2.1. The new planting decision
Signi®cant adjustment costs are incurred by changes in tree stock in general and
the technical change represented by new planting material in particular. Long-run
responses include changes in capacity and are more complicated. One source of dif®culty is the need to make assumptions on how much signi®cance economic agents
attach to their expecte d future earnings in their decision-making. Burger and Smit
(1997a) provide an overview of the central issues in the theory of replanting perennial
crops. However, no study on perennial crop supply has explicitly surveyed the farmers on their expectations. It has generally been assumed that there is a relationship

N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

213

between prices and costs in the recent past, or in the present and those expected to
prevail in the future. While the same approach is pursued, it is also determined
which of the past prices appears most informative. Actual net presents values
(NPVs) are used incorporating technical information for each tree age group with
regard to bene®ts and costs and for two types of planting material. The NPV, with a
suitable discount factor r, indicates the present value of an investment, in our case of
new planting 1 ha of cocoa. In addition, anticipated prices determine the lengths of
the life-cycles. This permits the application of the same function to a situation where
a new technology becomes available.
Burger and Smit (1997a) stress the importance of the time-frame to be considered
in the analysis. They propose that not merely one cycle of trees of age i (i=1,. . .,I)
should be considered for the calculation of the NPV but an everlasting series of
cycles, each lasting I years. If the decision-maker considers growing the crop, it will
be replanted at the age that is felt to be the most advantageous and this continues in
all future cycles. INCi,t is de®ned as the net income from i-year-old trees, as expected
in year t, and age I as the age for replanting. In this case, the NPV due to the net
income from 1 ha of cocoa in year t for one cycle of I years duration amounts to:

NPVONEI;t

I
X
INCi;t
…1
‡ r†i
iˆ0

…1†

To convert NPVONEI,t into the NPV of an expected net income from an everlasting series of I years, NPVINFI,t, NPVONEI,t is divided by 1ÿ1/(1+r)I which
results in:

NPVINFI;t

NPVONEI;t
1
1ÿ
…1 ‡ r†I

…2†

The decision rule with regard to the optimum tree age for replacement is that tree
age I is preferred to tree age Iÿ1 if the NPV of an expected net income from an
everlasting series of trees replanted at age I is higher than the NPV of an expected
net income from an everlasting series of trees replanted at age Iÿ1. In particular,
NPVINFMAXI,t is the NPV of that tree age I for which the expected net income
from an everlasting series reaches its maximum. This stipulates that, in order to
calculate NPVINFMAXI,t, the expected net incomes from i-year-old trees in year t
for all tree ages i must be known. These are di€erent for old and new planting
material and amount to the di€erence between the expected revenue and the total
production costs per hectare from i-year-old trees in year t. The expected revenues
are obtained by multiplying the corresponding normal yields for each tree age i by
the corresponding producer price in year t when old and new planting material is
supplied. The detailed formulae can be found in Gotsch (1999).

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N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

2.2. Research-induced supply shift

In the case of cocoa, which is used as an example of a perennial crop in our model, an
expert survey by Gotsch (1997) has demonstrated that new planting material with
improved resistance to insects, pests and diseases may be available to producers in
about 25 years. After this research lag, research bene®ts are calculated in the model for
a period of 30 years, which means that the total time horizon of the model is 55 years.
Changes in supply function parameters due to the adoption of a new crop o€ering
both higher yields and lower costs per hectare are calculated. The relative change in
yields is given by EYt and the relative change in costs is given by EACt. Dividing
EYt by the supply elasticity " converts EYt into a relative gross reduction in marginal cost per ton of output with new planting material, EMCt. Dividing EACt by
(1+EYt) yields the relative change in production costs per ton of output with new
planting material, ECIt. Subtracting ECIt from EMCt yields the relative net cost
change per ton of output in year t with new planting material, ENCt. Multiplying
ENCt by the initial producer price yields the downward supply shift on a per-unit
basis induced by the adoption of the new planting material, kt. Once the technology
is available, it is assumed that all farmers will be aware of it and adopt it in their new
planting decision. This is a logical consequence of the decision rule. Nevertheless, it
will be a long time before the technology is fully adopted because many farmers will
only plant when their present stand is exhausted.
2.3. Calculation of the variables de®ning kt
According to Akiyama and Trivedi (1987), long-run responses for perennial crops

in the form of changes in capacity require an intrinsically dynamic supply theory
which is embodied in the so-called vintage production approach. A so-called vintage
matrix indicates age distribution of an area under cocoa according to the age of the
trees and over a period of years. The rows of the matrix represent tree age i starting
with year i = 0 (year in which the trees are planted) and ending with age i = l. The
columns represent years. The values in each cell represent the area under cocoa per
tree age and year. The discarding of cocoa is taken into account in the vintage matrix
by means of a discarding fraction which is related to the age of the tree. The fraction
disc(i) of the remaining acreage of age i which is being discarded is represented by:
ÿ1

disci

1 ÿ e r

ÿi

1 ‡ e r

where  is the age at which discarding reaches half the maximum share, and r

represents the speed at which discarding increases as trees grow older (Burger and
Smit, 1997b). In order to obtain the proportionate yield change resulting from the
adoption of the new cultivar, EYt, and the proportionate change in production costs
per hectare in year t at that speci®c adoption level, EACt, the total area of old and
new planting material in the year t must be calculated for each tree age i and each
year t. The next step involves the calculation of the proportionate yield change per

N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

215

hectare for each year t in which new planting material is adopted. Average yields
depend on the yield pro®le of old and new planting material (per hectare yield of
tree-age i) and on the fractions of various tree-age classes on the total area cultivated. The yield pro®le of cocoa is re¯ected in the model by means of the so-called
normal yield. Normal yields for old planting material are obtained from statistical
sources such as the International Cocoa Organisation. Normal yields for the new
planting material must be derived with the help of expert surveys. So-called ``normal
production'', i.e. the production capacity in a speci®c year, is obtained by multiplying the normal yield of a speci®c tree age by the area of that tree age in a speci®c
year and adding up for all tree ages. The total production costs per hectare is calculated for each tree age i in year t. The next step is to derive average production
costs per hectare when all new plantings are undertaken with old planting material

and average production costs per hectare when new planting material is available.
The proportionate change in production costs per hectare due to the adoption of
new planting material is then calculated. The formulae for the calculation of all
these parameters are presented in Gotsch (1999).
The remaining elements of the model for the measurement of the economic surplus
of research bene®ts are in line with Alston et al. (1995, Section A5.1.2) for a parallel
shift of the supply function. The modi®cations which must be made to the model
when a pivotal rather than a parallel shift of the supply function is assumed are described in Gotsch (1999). Supply and demand are linear functions of the producer price
and the consumer price, respectively. The slopes for supply and demand are assumed
to be constant for all time periods, whereas the intercepts may change over time to
re¯ect underlying changes in supply caused by changes in the vintage structure and
growth in demand. The parameters of the supply and demand equations are de®ned
by beginning with initial values for quantity demanded, quantity produced, producer
price, consumer price, elasticity of supply and elasticity of demand (Table 1). Market
clearing is established in that the sum of quantities supplied by the countries included
in the model equals the sum of quantities demanded.

3. Results
This section contains a presentation of the empirical implementation of the model
for Malaysia. Table 1 shows the initial parameterisation and initial values of the

market model for the year 1995, while production costs and yields for di€erent tree
ages of old and new planting material are presented in Table 2. A more detailed
description of production systems, production costs and market data is provided by
Gotsch (1999).
3.1. New plantings
In this subsection, the explanatory power of di€erent models for the estimation of
the area newly planted as a function of NPVINFMAXI,t is tested. The calculations
are based on a time series for the years 1980±94. For each year, real 1995-values for

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N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

Table 1
Initial parameterisation and initial values of the model for the year 1995
Parameter

Malaysia
PB1995

a

World market price
($/MT)
Cocoa bean exports (1000 MT)b
Cocoa bean imports (1000 MT)b
Quantity demanded QDBt (1000 MT)c
Quantity supplied QSBt (1000 MT)d
Elasticity of supply " (relative)e
Elasticity of demand  (relative)f
Population growth rate (relative)g
Income growth rate (relative)h
Income elasticity (relative)i
Growth rate of demand (relative)j
Growth rate of supply (relative)k

ROW
1433.3

52.5
39.7
92.2
105.0
0.57
ÿ0.47
0.026
0.062
0.30
0.045

2638.9
2626.1
0.35
ÿ0.27
0.017
0.029
0.49
0.031
0.020

a

ICCO (1995).
ICCO (1996).
c
Malaysian demand: di€erence between supply minus exports plus imports. Demand of the ROW:
di€erence between total demand (ICCO, 1996) minus demand in Malaysia.
d
Malaysian supply: Burger and Smit (1997b); supply in ROW: di€erence between total world supply
(ICCO, 1996) and the supply in Malaysia.
e
Burger and Smit (1997b) for Malaysia; Evans et al. (1992) for ROW.
f
ICCO (1993) for Malaysia; Evans et al. (1992) for ROW.
g
UNDP, DGVN (1994).
h
Average annual GDP per capita growth rates are used as a measure of future income growth rates. It
is assumed that growth rates for the period 1980±93 (World Bank, 1995) will continue in the future.
i
ICCO (1993).
j
The growth rate of demand equals the population growth rate plus the product of income elasticity
multiplied by income growth rate (Alston et al., 1995).
k
Burger and Smit (1997b).
b

NPVINFMAXI,t are calculated by de¯ating input costs and bean prices by the
consumer price index as indicated in IMF's International Financial Statistics (IMF,
various volumes). A di€erent de¯ator for wages is chosen as no time series data on
real wages were available, except for the 1995 wages for hired labour and opportunity costs for family labour as provided by experts. Hence, as a proxy for real wages,
it was assumed that wages develop proportionately to the gross domestic product
(GDP) per capita. Forecasts of absolute values for GDP/capita in Malaysia
are obtained from Burger and Smit (1997c) and converted to relative values
(1995=100).
Table 3 shows the results of six models estimating the area newly planted with
cocoa as a function of the natural logarithm of the NPV of the maximum stream of
net income from an investment in 1 ha of cocoa of tree age I. Semi-logarithmic
functional forms are chosen because they provide better estimates than linear or
double-logarithmic models. The distinction between the various models lies in the
di€ering assumptions regarding the time horizon relevant for expectation formation
and also with respect to the discount rate. The investment decision is based on the
expected net income resulting from an investment made on the basis of cost and

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Table 2
Yield pro®le (kg/ha) and production costs ($/ha and year) for old and new planting material at di€erent
tree ages
Tree
age

Yield pro®le
Old

0
1
2
3
4
5
6±10
11±15
11±20
21±25
26±30
31±41

0
0
0
400
800
900
950
950
800
500
200

Weed
control

New

0
0
0
440
660
880
990
1045
1045
880
550
220

15
112
112
112
112
44
44
44
44
44
23
23

Othera

Fertiliser

Activity

Old

Pathogen
control

Harvesting/
processing

Old

New

Old

New

45
76
76
76
76
67
67
67
67
67
47
47

27
45
45
45
45
41
41
41
41
41
28
28

0
67
67
67
67
215
242
255
255
215
134
53

0
74
74
74
74
236
265
281
281
236
147
59

128
159
159
159
159
145
163
171
171
145
43
18

New

128
172
172
172
172
159
178
188
188
159
47
19

Total

Old

New

Old

New

1627

1614

1815
414
414
414
414
471
516
537
537
471
247
141

1785
403
403
403
403
480
528
554
554
480
245
129

a

These include other costs such as planting material, land opportunity costs, labour costs for establishment.

price data from the preceding year (Model 1), the year when the investment takes
place and the preceding year in the case of Model 2, or on the average of several
preceding years (2 years in Models 4±6 and 3 years in Model 3). The sensitivity
analysis (see below) requires a variation in the discount rate (Models 5 and 6). If it is
assumed that the discount rate amounts to 4%, the di€erences between the models
are quite small, apart from a clear superiority of using lagged prices rather than
current prices. Therefore, all results that are discussed in this paper are based on new
plantings estimated with the help of Model 4, with the exception of the sensitivity
analysis of a variation in the discount rate which is increased to 6 and 8% in Models
5 and 6, respectively. The statistical reliability (signi®cance level of parameter esti2
mates) of Models 4 and 5 is comparable. The explanatory power (R ) diminishes
slightly when 6% is assumed. Both the explanatory power and statistical reliability
decrease when an 8% discount rate is assumed in Model 6. The application of the
concept of discounting in the context of our model means that the present value of
an expected return on an investment in new plantings for a speci®c time in the future
¯uctuates in response to the discount rate. A higher discount rate assigns a lower
present value to a particular expected return the farther in the future this return
accrues. The regression results indicate that Malaysian cocoa producers attach more
importance to gains on investments in a nearer future than in the more distant
future. The sensitivity of the model to an increase in the discount rate will therefore
be investigated in the last subsection using an alternative discount rate of 6%.

218

Model

1

2

3

4

Years relevant to expectation formation (t=year when new plantings are carried out)
tÿ1
[t+(tÿ1)]/2
[(tÿ1)+(tÿ2)+(tÿ3)]/3
[(tÿ1)+(tÿ2)]/2
Discount rate
r (%)

4.00

4.00

4.00

4.00

5

6

[(tÿ1)+(tÿ2 )]/2

[(tÿ1)+(tÿ2)]/2

6.00

8.00
73.14 (5.12)

Estimated value
b (1000 ha)
Estimated value
constant a (1000 ha)
F-value
2

R (%)
Durbin±Watson
coecient
a

14.39 (5.86)

16.90 (5.77)

18.57 (4.64)

17.33 (5.59)

15.31 (5.38)

ÿ17.99 (ÿ2.15)

ÿ26.14 (ÿ2.65)

ÿ36.92 (ÿ2.66)

ÿ29.92 (ÿ2.81)

ÿ18.22 (ÿ2.03)

ÿ7.41 (ÿ1.00)

34.38

33.31

21.54

31.21

28.97

26.23

71.97

71.31

65.12

71.57

69 .98

67.77

2.43

2.54

2.24

2.52

2.46

2.38

The regression equation is given as: plantBt ˆ a ‡ b  ln…NPVINFMAX1 †.

N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

Table 3
Regression results for the area newly planted (t = 1980±94), as a function of the expected net present value (t-values in parentheses)a

N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

219

3.2. The impact of new cultivars with increased yield
In this subsection, the e€ects of the adoption of new planting material with
improved resistance to insects, pests and diseases, resulting in a 10% yield increase
and reduced crop protection requirements, are compared with the situation when no
such planting material is available. No spillover of resistant cocoa varieties to other
producer countries is assumed since many cocoa diseases occur at a regional level
only. In Malaysia, for instance, the cocoa pod borer and vascular streak dieback are
the most important cocoa pathogens. They do not occur in South America or Africa.
The sensitivity of the model is investigated with regard to variations in exogenous
factors such as the growth rate of supply, wages and the discount rate.
Fig. 1 shows that the annual area newly planted with cocoa when only old planting material is available (Old low) increases continuously from approximately 16 000
ha in the ®rst year of the simulation period to roughly 33 000 ha in the last year.
When new planting material is available (New low), the annual areas newly planted
increases from about 24 000 ha in the ®rst year to approximately 35 000 ha in the last
year. The continuing increase of area newly planted over time is due to steadily
increasing producer prices, depicted as Old low and New low in Fig. 2 which, in turn,
can be explained by the fact that the demand for cocoa in the ROW grows faster
than cocoa supply (3.1% compared to 2%; see Table 1). This price increase is in line
with the forecast made by other authors (e.g. ICCO, 1993).
From Fig. 3, it can be seen that when old planting material (labelled Supply old
low) is used, cocoa supply in Malaysia increases from about 89 000 MT in the ®rst
year to 306 000 MT in year 30. This increase is even more pronounced when new

Fig. 1. Areas newly planted with old planting material (old) and new planting material (new) at lower
growth rates in supply in the Rest of the World (ROW) (low) and higher growth rates in supply in the
ROW (high).

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N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

Fig. 2. World market prices with old planting material (old) and new planting material (new) at lower
growth rates in supply in the Rest of the World (ROW) (low) and higher growth rates in supply in the
ROW (high).

Fig. 3. Supply (supply) and demand in Malaysia (demand) with old planting material (old) and with new
planting material (new) at lower growth rates in supply in the Rest of the World (ROW) (low) and higher
growth rates in supply in the ROW (high).

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N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

planting material is available, when the supply rises from 87 000 to 315 000 MT in
the period under consideration (Supply new low). Malaysia remains a net importer of
cocoa for 8 years of the simulation period with new planting material and for 10
years with old planting material (the years after which the demand function Demand
low intersects the supply functions in Fig. 3). If the vintage model approach were also
applied to the ROW, instead of constant supply growth rates, an adjustment of production capacity may be expected as a reaction to increasing producer prices in the
ROW too. This would lead to a cyclic movement of the world market price as
reported, for instance, by UNCTAD (1991).
Basically, one purpose of the model is to quantify the welfare e€ects generated by
the adoption of new cultivars among di€erent social groups in the innovating
country and the ROW. The calculation of net present values was suggested as a
means of aggregating annual bene®ts. The ®rst horizontal block of Table 4
(``Reference'') shows that over all bene®ts amounting to $87.2 million are calculated
for producers in Malaysia. The corresponding aggregate losses for producers in the
ROW are $131.1 million. The second column shows the aggregate gains for consumers. The changes in total surpluses are obtained by adding up welfare e€ects for
producers and consumers in each country. In the case of Malaysia, a signi®cant
gain amounting to $92.9 million is calculated. On the other hand, the total surplus
for the ROW is only slightly above zero, due to the fact that consumers' welfare
gains o€set the welfare losses su€ered by the producers. Since these losses/gains
represent roughly the same amount, this implies a redistribution of welfare from
producers to consumers with only negligible net gains.
3.3. The impact of faster growth rates in supply on the ROW
The continuing price increase in the preceding subsection was explained by the
fact that cocoa demand in the ROW grows faster compared with cocoa supply. This
Table 4
Net pres ent values of producer, consumer and total surpluses in Malaysia and the Rest of the World
(ROW) arising from the adoption of new planting material (million $)
Country/region

Producer surplus

Malaysia
ROW

87.2
ÿ131.1

Malaysia
ROW

57.7
ÿ130.6

Malaysia
ROW

99.4
ÿ138.1

Malaysia
ROW

40.4
ÿ58.3

Consumer surplus
Reference
5.7
132.0
Faster growth of supply in the ROW
5.8
129.2
Constant real wages in Malaysia
6.0
139.6
Six per cent discount rate
2.5
58.8

Total surplus
92.9
0.9
63.5
ÿ1.4
105.4
1.5
42.9
0.6

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N. Gotsch, R. Herrmann / Agricultural Systems 63 (2000) 211±228

subsection therefore investigates the sensitivity of the model to a relatively brisk
growth of supply in the ROW, for instance as a result of rapid expansion of the
area newly planted with cocoa. It becomes evident from Fig. 1 that this increase
in the growth rate of supply causes a dramatic reduction in the areas newly
planted in Malaysia. When only old planting material is available (Old high), new
plantings decrease from 23 000 ha in year 3 of the simulation period to 15 000 ha in
year 30. The adoption of improved planting material (New high) slows down this
reduction: in year 3 of the simulation period 26 000 ha are newly planted at 2%
growth rate of supply and these new plantings decrease to roughly 20 000 ha in
year 30.
With reference to Fig. 1, an explanation must be furnished for the upward kinks in
the lines representing areas newly planted at higher growth rates of supply in year 11
of the simulation period for old planting material and in year 16 for new planting
material. They are due to the fact that, in the model, the development of bean yields
and input requirements are constant for a number of tree ages, as can be seen from
Table 2. Consequently, expected net incomes for di€erent tree ages do not change
smoothly but stepwise, which means that the optimal age for replacement also progresses in steps when the ratio between factor prices and revenue changes. This
speci®c implementation of the decision rule for new plantings results in a change of
the optimal tree replacement age and, consequently, in a jump in the NPV of
expected net incomes from investment and areas newly planted.
The higher growth rate for supply in the ROW causes supply expansion in that
region, inducing a decrease in world market prices. Bean prices amount to approximately $2600/MT in year 30 at a 2% growth rate, whereas they only reach roughly
$1680/MT at a 3% growth rate of supply. Fig. 2 illustrates this development in
world market prices. It also describes the minor e€ect generated by the adoption of
improved planting material on world market prices, as already mentioned before.
This is due to the fact that Malaysia's share of total global supply is relatively small.
Lower world market prices reduce the incentive for new plantings in Malaysia. The
reduction in areas newly planted in Malaysia lowers its production potential and
hence the actual supply, as shown in Fig. 3. Malaysia's pattern of supply over time is
S-shaped and amounts to 173 000 MT in year 30 with old planting material (Supply
old low) and to 181 000 MT with new planting material (Supply new low). As discussed in the preceding subsection, Malaysia remains a net importer of cocoa for 8
years of the simulation period with new planting material and for 10 years with old
planting material assuming a growth rate of supply of 2% in the ROW. In contrast,
the country remains a net importer at a supply growth rate of 3% in the ROW for
the entire period of simulation, which can also be seen in Fig. 3, where the demand
curve (Demand high) lies above the corresponding supply curves (Supply old high
and Supply new high). This means that even the availability of cocoa cultivars with
considerably enhanced agronomic and economic characteristics does not suce to
render Malaysia a competitive actor on the world cocoa market when the international market (price level) does not favour national cocoa production. While low
prices have a supply-decreasing e€ect on Malaysian cocoa production, they induce
an increase in demand. It can be concluded that the quantity and price e€ects of the

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223

adoption of new cultivars in Malaysia are much less pronounced than the impact of
changes in the growth rate of supply in the ROW.
Malaysian producers' welfare gains sustain the strongest impact from a higher
growth rate of supply (see ``Faster growth of supply in the ROW'' in Table 4). Their
aggregate welfare gains are cut by approximately one-third to $57.7 million. Changes in aggregate welfare losses for producers in the ROW and welfare gains for
consumers in the ROW and in Malaysia are only marginally in¯uenced when a
higher growth rate of supply in the ROW is assumed. This is due to the fact that a
higher growth rate of supply actually in¯uences absolute price and quantity levels
but has only a minor in¯uence on price and quantity di€erences before and after the
adoption of improved planting material. The latter are relevant for the calculation
of changes in welfare.
3.4. The impact of constant instead of increasing real wages in Malaysia
All the results presented so far are based on real costs and prices. Labour costs are
the biggest item in total cocoa production costs in Malaysia (Gotsch, 1999). Therefore, developments in wages can be expected to have a decisive in¯uence on the
future competitiveness of Malaysian cocoa production. In this subsection, we
investigate the e€ects of wages remaining at a constant 1995 level instead of undergoing a relative increase by the factor of approximately 2.8 which has been assumed
so far up until year 30. Since no time series data are available for wages, it is
assumed that real wages develop proportionately to the GDP per capita. Based on
GDP and population forecasts for Malaysia by Burger and Smit (1997c), the relative
development of GDP per capita in the simulation period is calculated. All the results
presented in the preceding subsections are based on this development. For example,
when constant wages are assumed, total production costs in year 30 of the simulation period are 33±49% lower than with increasing wages.
Fig. 4 shows the development of areas newly planted with old planting material
(old) and with new planting material (new) at increasing (increasing) and constant
(constant) wages. From year 3, annual new plantings with both old and improved
planting material grow faster at constant wages than at increasing wages. This is due
to the fact that labour costs decrease continuously compared with the reference
situation.
Constant wages, rather than increasing wages, induce an additional bean supply
by Malaysia which grows continuously during the simulation period with both old
and with improved planting material. In year 30, for instance, 316 000 MT are supplied at rising wages when only old planting material is available, whereas 357 000
MT are supplied at constant wages. The additional Malaysian supply lowers the
world market price. In year 30 of the simulation period, for instance, the e€ect of
constant wages on the world market price is similar for old planting material and
new planting material: prices are $26/MT lower than for a situation with increasing
wages. This means that the economic environment in Malaysia (wage level) has a
greater e€ect on the global market than the adoption of new cultivars Ð the latter
causes price decreases of $8/MT in year 30 for constant and increasing wages.

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It is interesting to note that, although there are signi®cant quantity and price
e€ects, the aggregate welfare e€ects of constant rather than increasing wages are
small, with the exception of the e€ect on producer surpluses in Malaysia (compare
``Constant real wages in Malaysia'' in Table 4 with ``Reference''). This is due to the
fact that constant (rather than rising) wages in¯uence absolute price and quantity
levels, as discussed in the preceding paragraph, but have only a minor impact on
price and quantity di€erences. Additional gains for producers in Malaysia can be
explained by the fact that the supply at constant wages with old planting material is
considerably higher than the supply with old planting material at rising wages and
this value enters the quantity term for the calculation of producers' welfare gains.
3.5. The impact of a higher discount rate
Alston et al. (1995) suggest that the discount rate should correspond to a long-term,
risk-free rate of return, for instance from long-term government bonds which in many
cases fall in the range of between three to 5%. They further suggest a sensitivity analysis to assess the e€ects of alternative assumptions regarding the discount rate on the
NPV of research bene®ts. Therefore, the e€ect of a discount rate of 6% is investigated
in this subsection instead of the discount rate of 4% used so far.
The simulation results show that more new plantings are carried out at a 6% discount rate than at a rate of 4% in spite of the fact that world market prices are
higher with a 4% discount rate. Net present values of expected net incomes are
lower at a 6% discount rate inducing less new plantings; NPVs of expected net
incomes at 4% are higher and thus encourage more new plantings. This may seem
contradictory. However, it can be explained by taking into account that higher

Fig. 4. Areas newly planted with old planting material (old) and new planting material (new) at increasing
wages (increasing) and constant wages (constant).

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225

discount rates not only reduce NPVs of expected net incomes but simultaneously
also modify the parameters of the regression estimates for areas newly planted
(compare Models 4 and 5 in Table 3).
The only substantial impact of a higher discount rate a€ects the aggregate
research bene®ts for the di€erent social groups. Comparison of ``Six per cent discount rate'' of Table 4 with ``Reference'' shows that NPVs for producers and consumers in Malaysia and the ROW are cut by more than half at a discount rate of
6%. This can be explained by the fact that annual bene®ts in year t are divided by
(1+r)t where r is the discount rate. All other the e€ects of higher discount rates, for
example, on the development of areas newly planted, quantities supplied and
demanded, world market prices and annual changes in producer and consumer
bene®ts, are less important.

4. Areas of future research
This paper has concentrated on the introduction of agricultural biotechnology and
focused on its e€ects on the cocoa market from the perspective of consumers, producers and society in a country which adopts this innovation, and the ROW. There
are many other important issues which could be addressed in future studies. The
dynamic model suggested here could be applied to other important export markets
for perennial crops which are of interest to developing countries. Furthermore, the
dynamics of competition between producing countries in introducing agricultural
biotechnology could be investigated within a game-theoretical framework, either for
cocoa or other perennial crops. Redistributive implications will depend crucially on
who participates in the new technology and who gets ®rst-mover advantages.
Policy issues have been excluded here. Given the long-run horizon of the dynamic
model, the paper started from the free-trade assumption which is the target of the
trade-liberalisation debate, and concentrated on impacts for consumers and producers in the welfare analysis. It is known, however, that agricultural policies in
developing countries are still extremely unfavourable for agriculture, in particular
on the question of export crops (Schi€ and ValdeÂs, 1992). This also applies to cocoa
(Gotsch et al., 1996). It would be an interesting exercise to include the implications
of given distortions in cocoa policy in this model and to elaborate the welfare
implications of agricultural biotechnology for individual cocoa-exporting countries
within the existing policy framework. In addition, the normative question remains for
future research, i.e. whether governments in developing countries should promote the
introduction of agricultural biotechnology or not.

5. Conclusions
In this paper, a welfare model for the ex ante measurement of research bene®ts
resulting from the adoption of innovations for annual crops developed by Alston et
al. (1995) is adapted to the biological and economic characteristics of perennial

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crops. For this purpose, an expectation-formation model based on NPV calculations
resulting from an investment in new plantings was integrated in the model so that
annual areas newly planted are determined endogenously within the simulation
procedure. The empirical implementation of this model for Malaysia exhibits a
comparatively high explanatory power and the parameter values are of considerable
statistical reliability. Di€erences in parameter values when the time horizon for
expectation formation and the discount rate are varied indicate that land owners in
Malaysia base their new planting decisions on a rather low discount rate and on
relatively recent information on product and factor prices.
The integration of biological characteristics of perennial crops into the welfare±
economic model is yet a further contribution of the research described in this study.
Due consideration is given to the e€ects of the gestation lag, variations in tree productivity over time on supply and the shifts of the supply function when improved
cultivars are adopted. An important result of the empirical analysis are the relatively
small price and quantity e€ects resulting from the adoption of new cultivars. The
sensitivity analysis reveals that the most sensitive reaction exists with respect to an
increase in the supply growth rate of the ROW. This leads to a considerable increase
in supply and demand in the ROW and causes a dramatic reduction of the areas
newly planted in Malaysia. In addition, it transforms the country from a net exporter into a net importer, irrespective of the type of planting material available. This
means that even the availability of cocoa cultivars with considerably enhanced
agronomic and economic characteristics does not suce to render Malaysia a competitive actor on the cocoa world market when the national economic environment
and the international market do not favour national cocoa production.
The assumption of constant rather than increasing wages for Malaysian cocoa
production also has a signi®cant e€ect on the simulation results. These induce substantial additional new plantings. The additional production potential resulting
from more new plantings causes a moderate increase in Malaysian bean supply
which is not signi®cantly in¯uenced by the type of planting material. Again, the
wage level in Malaysia has a greater e€ect on the global market than the adoption of
new cultivars. In spite of marked quantity and price e€ects, the welfare e€ects of
constant rather than increasing wages are small, with the exception of the impact on
producer surpluses in Malaysia.
The only substantial impact noted when the discount rate is varied a€ects aggregate research bene®ts for the di€erent social groups, which are more than halved at
a discount rate of 6% compared with 4%. All other e€ects are less important.
Malaysian producers and consumers gain as a general economic e€ect from their
country's adoption of improved planting material. However, producers' losses are
approximately o€set by consumers' gains in the ROW which illustrates the distributive e€ect of Malaysia's adoption of improved cultivars. When evaluating the
policy implications of the adoption of improved cocoa cultivars for the economic
development of producer countries, it must be borne in mind that consumers are
mainly cocoa processors, chocolate producers and consumers in the economically welldeveloped northern hemisphere. Thus, the latter group of countries may well bene®t
from a considerable share of the welfare gains generated by this biotechnological

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227

progress, partly at the expense of producers in countries which do not immediately
adopt improved cultivars.
Acknowledgements
Valuable comments and suggestions made by Michael Wohlgenant, North Carolina State University, were very much appreciated as was the support provided by
Kees Burger, Free University Amsterdam. The empirical implementation of the
theoretical model was possible thanks to the numerous cocoa production system
experts who completed the questionnaires for the collection of agronomic and economic data on cocoa production systems in Malaysia. The remaining errors are the
authors' responsibility. The study represents part of a research project funded by a
3-year research grant from the Swiss National Science Foundation, Bern, Switzerland, for which the ®rst author wishes to express his sincere gratitude. Helpful
comments of two anonymous referees of this journal are greatly appreciated.
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