(Fortune) -- Outside the village of Sinikosson in southwestern Ivory Coast, along a trail tracing the edge of a muddy fishpond, Madi Ouedraogo sits on the ground picking up cocoa pods in one hand, hacking them open with a machete in the other and scooping the filmy white beans into plastic buckets. It is the middle of the school day, but Madi, who looks to be about 10, says his family can't afford the fees to send him to the nearest school, five miles away. "I don't like this work," he says. "I would rather do something else. But I have to do this."

Sinikosson, accessible only by rutted jungle tracks, is a long way from the luxurious chocolate shops of New York and Paris. But it is here, on small West African farms like these, that 70 percent of the world's cocoa beans are grown - 40 percent from just one country, Ivory Coast. It's not only the landscape that is tough. Working and living conditions are brutal. Most villages lack electricity, running water, health clinics or schools. And to make ends meet, underage cocoa workers, like Madi and the two boys next to him, spend their days wielding machetes, handling pesticides and carrying heavy loads.

This type of child labor isn't supposed to exist in Ivory Coast. Not only is it explicitly barred by law - the official working age in the country is 18 - but since the issue first became public seven years ago, there has been an international campaign by the chocolate industry, governments and human rights organizations to eradicate the problem. Yet today child workers, many under the age of 10, are everywhere. Sometimes they're visibly scarred from their work. In the village of Lilo a young boy carrying a machete ambled along a road with a bandaged shin. He said he had cut his leg toiling in a cocoa patch.

The big cocoa exporters - Cargill, Archer Daniels Midland (ADM, Fortune 500), Barry Callebaut and Saf-Cacao - do not own plantations and do not directly employ child workers. Instead, they buy beans from Ivorian middlemen called pisteurs and treton. These middlemen own warehouses and fleets of flatbed trucks that travel deep into the jungle to buy cocoa from the small independent farmers who grow most of the crop. But labor and human rights activists charge that Big Chocolate has an obligation to improve working conditions on the farms where so many children toil. They argue that the exporters and manufacturers bear ultimate responsibility for conditions on the farms because they exert considerable control over world cocoa markets, essentially setting what is called the farm gate price.

A mandate versus protocol

The controversy came to a head in 2001, when U.S. Rep. Eliot Engel (D-N.Y.) and Sen. Tom Harkin (D-Iowa) introduced legislation mandating a labeling system for chocolate. The industry fought back, and a compromise was reached establishing a voluntary protocol by which chocolate companies would wean themselves from child labor, then certify that they had done so. The certification process would not involve labeling of products, but it would call for public reporting by African governments, third-party verification and poverty remediation by 2005. When none of those deadlines was met, the protocol was extended until July 2008. To turn up the heat, the U.S. Department of Labor contracted with Tulane University to monitor progress.

Tulane recently released its first report, and though the tone is polite, the picture isn't pretty. Researchers found that while industry and governments in West Africa have made initial steps, such as establishing task forces on child labor, conditions on the ground remain bad: Children still work in cocoa production, regularly miss school, perform dangerous tasks and suffer injury and sickness. The report criticized the governments of Ivory Coast and Ghana for lack of transparency. And it said the industry's certification process "contains no standards."

In some respects the situation only got worse after Harkin-Engel. From 2002 to 2004, Ivory Coast was gripped by civil war. As militias and renegade soldiers killed and raped their way across the lush interior, income from cocoa exports helped fuel the fighting. Like diamonds and timber, cocoa became a so-called conflict resource. "Blood chocolate" was providing fast cash for armed groups and creating misery for common people. Since 2004, Ivory Coast has settled into an armed peace, with French and UN troops keeping the warring factions apart. But chocolate exporters and manufacturers say the war and its aftermath have hampered their efforts to eradicate child labor.

The industry's two main trade groups, the Chocolate Manufacturers Association and the National Confectioners Association, say tens of millions of dollars have been spent on building a socially responsible cocoa sector across West Africa. But the Tulane report criticizes the industry for not providing specifics to back up those assertions. And on the ground there is little evidence anyone is paying much attention. "What protocol?" asks Ali Lakiss, the director general of Saf-Cacao, the largest cocoa exporter in Ivory Coast, which controls about 20 percent of the trade. "The farmers don't get the best price. If the cocoa price is good, then kids go to school. No money, and kids work at home."

Ivorian government officials likewise describe their efforts to stop child labor as robust, but they remain fuzzy about details. "This is our No. 1 export," says N'djore Youssouf, the technical adviser to Ivory Coast's presidential task force overseeing Harkin-Engel compliance. "This issue is taken seriously at every level of the government." But Youssouf acknowledges that remediation "has not yet begun."

Poverty breeds child labor

Outside Sinikosson, El Hadj Madi Sankara cultivates 27 acres of cocoa, from which he usually harvests ten tons of beans, earning about $9,000 a year but remaining deeply in debt. Sankara and his 11-year-old son, Ibrahim, are preparing a large mound of cocoa pods for processing. "I want to help my father," says Ibrahim, standing on a pile of pods, toying with his machete. "I need to learn how to be a farmer." His sentiment captures the complexity of the child-labor issue here: Typically it is poverty that compels child labor, not greedy overseers.

Soon a group of young men and boys join the work. Among them are 8-year-old twins Hassan and Hussein. The boys, the children of a neighbor, are helping Sankara make his harvest on time. Their payment won't be in cash, but in reciprocal help from Sankara's family to their father. Not one of the kids goes to school. "We're all doing a hard job," says Sankara, "but we do not get a just price."

Cocoa prices have been declining in recent years - currently about 90 cents a kilo - because of corruption and a poorly planned economic liberalization. President Felix Houphou�t-Boigny, who ran Ivory Coast from the late 1950s until the mid-1990s, borrowed heavily against his country's assets and wasted the money on megalomaniacal vanity projects, such as the world's largest basilica - built in the country's desolate interior. During his reign, Houphou�t-Boigny invited in hundreds of thousands of Muslim farmers from neighboring Mali and Burkina Faso to grow cocoa. These immigrants produced abundant and profitable crops, and Ivory Coast became one of the region's more prosperous and stable countries. But the newcomers were not given citizenship, identity papers or legal rights.

When the bills on Houphou�t-Boigny's squandered loans came due in 1999, the government imposed fiscal austerity and liberalized the economy. Its marketing board, Caistab, was defanged, prices were deregulated and new oversight agencies and development funds were created to support the market and aid farmers hurt by lower farm gate prices. According to European Union and World Bank audits, these new government bodies now collect three times as much money from the cocoa sector, much of it from exporters, as did the old system, but they spend little on infrastructure or subsidies. In short, not much money gets past corrupt officials and down to the farmers.

Economic hard times followed, and many native Ivorians turned against the immigrants from Burkina Faso and Mali. Demagogues preached a xenophobic creed that they called Ivorit�, and in 2002 ethnic tensions exploded into civil war. Now, with the front lines frozen and the armed peace holding, the many non-Ivorian cocoa workers, like those who live in Sinikosson, are trapped on remote farms. The dirt roads connecting them to the main markets are controlled by hostile, corrupt police and soldiers who threaten them with deportation or shake them down for bribes. "I've not been into the main town for four years," says Aladji Mohamed Sawadogo, the chief of Sinikosson. "The last time I tried to go I did not have enough money to pay all the bribes at the checkpoints. I am just stuck. These are the conditions in which we live."

Better prices make a difference

With a wispy beard and a thin, weather-beaten face, Sawadogo looks older that the 55 years he claims. He admits that the village children work, including his own. He even allows them to be interviewed. "I'd like to be a mechanic," says one of his kids, who looks to be about 7 but says he is 11, "but I have to farm cocoa." Adds Sawadogo: "We are not happy that we ourselves live and work like this. Of course we don't want it for our children. But there is no choice."

What would make a difference? "Better prices."

Down the road from Sinikosson is the warehouse of Aboulaye Troor�, who buys the cocoa harvested in the area. "It is all going to Cargill," Troor� says, as some of his men unload 150-pound bags of cocoa from a truck.

The farmers in Sinikosson do not know that Cargill buys their beans, but other farmers in the area are on painfully intimate terms with the Minnesota company. In the town of Thoui, members of a local farmers' cooperative say that borrowing money from Cargill has trapped them in debt and forced some of them to take their kids out of school and put them to work. "There is no other way we can buy fertilizer or feed our families throughout the year," says N'guessan Norbert Walle, a former president of the cooperative.

If farmers can't pay back their debts, they risk arrest. When Walle ran the co-op, his manager was jailed, he says, on orders from Cargill. The arrested manager, Lucien Adje, a former accounting student, says he was taken to the port city of San Pedro and put in a small cell. "You had to do everything in one place - you know, urinate, defecate. I couldn't eat much, it was so filthy."

The correct procedure for collecting debts is to go to court and seize collateral, so Adje's arrest was illegal. But, as one farmer explained, "In Ivory Coast, the illegal is normal." An executive at an Ivorian export company confirmed that such arrests take place. "I don't know the specifics, but I do know that some exporters have arrested people who owe them money."

Cargill denies wrongdoing

Cargill denies any wrongdoing. "We have never paid for, or requested, the detention of managers or members of farmer cooperatives, and we do not support illegal detention," says company spokesman Steven Fairbairn. As for child labor, Fairbairn says the company is working hard to fix the problem: "We require that all our direct suppliers of cocoa beans in West Africa sign a statement acknowledging that they understand that we are committed to the elimination of the worst forms of child labor in the cocoa supply chain. If suppliers are found to be employing such practices, their contracts are subject to termination."

But Cargill has yet to terminate any contracts over the issue of child labor. And it and other exporters say they don't have an obligation to pay higher prices. "We are just an intermediary," says Saf-Cacao's Lakiss, "between the farmers and international markets in London."

Hershey (HSY, Fortune 500), like other major chocolate firms, signed the Harkin-Engel protocol and maintains it is working. "The protocol's value is seen in measurable progress on the ground," says Kirk Saville, a Hershey spokesman. "It has created greater community awareness of child welfare issues and increased incomes for family farms and access to education."

But Hershey has no direct role in implementing reforms in Ivory Coast. Instead, the protocol required the industry to create a foundation to oversee certification. That body is the International Cocoa Initiative, or ICI, headquartered in Geneva and funded by the chocolate industry to the tune of about $2 million a year. The foundation began its work in Ivory Coast in 2003, and it claims to have six pilot projects underway there. "We are doing high quality, scalable work," says Peter McAllister, ICI's executive director. "We've not yet had a significant effect, but it's a journey." He is unfazed about the looming July 2008 deadline: "We don't see it as ending in 2008. Our process works, and we're committed for the long term."

But the foundation has only one staff member in Ivory Coast, Robale Kagohi, and his activities appear limited. "One of the main problems is the moral poverty of the people," says, Kagohi, sitting in a tiny office in the basement of a building in Abidjan that houses a corporate law firm. "That is why we are spending so much time on education." He explains that the anti-child-labor campaign has so far favored "sensitization" - workshops with local officials, police and farmers to explain that child labor is wrong and that if it continues Ivory Coast will be shut out of world cocoa markets. On the roads there are billboards urging people to say no to child labor.

Education or intimidation?

Farmers describe these efforts as more akin to intimidation than to education. "People are worried that America will not buy our cocoa anymore," says Julien Kra Yau, director of a farmers' cooperative in Thoui. "That would be very bad." Adds the co-op's treasurer, Raymond Kouasse Kouadio: "It would be a total catastrophe!"

ICI's other work involves helping a nongovernmental organization called the Movement for Education, Health, and Development, or Mesad, provide accommodation and education to homeless street children. But no children from the cocoa sector were staying at the shelter on a visit last fall, and the group's director, Kouakou Kouadio Watson, says ICI has supported only eight underage former cocoa workers, who lived at the shelter for periods of between one and four months. The shelter is a squalid mess, smelling of urine, and a few filthy children sleep on the concrete floors.

The industry's evident lack of compliance with Harkin-Engel puts everyone involved in a difficult position. New coercive legislation requiring "child-labor-free" labeling could cause trouble for the large cocoa exporters and chocolate manufacturers if there were boycotts of non-labeled chocolate. But impoverished farmers in Ivory Coast say loss of markets would also hurt them and their children. Since the idea was first floated in 2001, the chocolate industry has taken the same position: Labeling "would hurt the people it is intended to help," says Susan Smith, a spokeswoman for the Chocolate Manufacturers Association and the World Cocoa Foundation.

There is fair-trade chocolate on the market, but it accounts for no more than 1 percent of global supply - and the movement has little traction in Ivory Coast. A more effective way to combat child labor would be for the government of Ivory Coast to invest some of the revenue it gets from high taxes on cocoa exporters in education and social services to help poor farmers. But the government of Ivory Coast is ranked among the most corrupt in the world by Transparency International, a nongovernmental watchdog group. And it seems happier making excuses than changes.

Angeline Kili, head of the government body tasked with financing and regulating the cocoa sector, blames farmers from Burkino Faso and Mali for whatever child labor violations may be occurring. "They need labor, so they have kids working, sometimes with the bad consequences," she says. "Sometimes they traffic children. Child labor wasn't a big problem, but it became a big problem recently. You have to remember, all cocoa farmers worked as kids. Our president worked on a farm with his parents for no money."

Rep. Engel, for one, isn't happy with the lack of progress. He and Senator Harkin plan to travel to Ivory Coast soon on a fact-finding mission of their own. "We have given the industry plenty of time," Engel says. "I am not prepared to give another extension."