Ethan Zuckerman’s online home, since 2003

Gabre-Madhin’s big bet

It’s morning in Arusha. The Sox and the A’s are still going at it in Oakland last night… which is to say, now… tied four-four. I’ll be watching the box score as the conference sessions start this morning.

I’ve already had one of the highlights of my day, the drive from Arusha to the conference center. The conference is held about 30km outside of the city at a golf resort (!) and lodge. On the way from near downtown Arusha, we pass by dozens of small shops, roadside nurseries, lush green fields. Kilimanjaro is shrouded by clouds, but there are numerous smaller hills int he foreground. We turn a corner and there’s a cataract of white water framed by two steep, green hills covered with vegetation. I want to get out and walk, and find myself thinking I could stay here for weeks, months, years enjoying the wet, cool lushness of the place. The drive is over too soon, and I’m sad I get only two more before heading south to Cape Town.

Boston loses 5-4. That’s a drag. But now we’re underway here at the second day of TED.

Eleni Gabre-Madhin is the founder of the first Ethiopian commodity exchange. She begins our morning talking about markets and choice. She notes that Bhutan has chosen to seek “gross national happiness” rather than gross national product – this is a choice. “Well functioning markets provide choices, opportunities to seek happiness.” Amartya Sen, who famously connected development and choice, discovered that famines are less about food supply and more about the inability to access food in the market.

This was true in the 1984 when famine wracked Ethiopia. There was a food surplus in the South of the country, but people in the North couldn’t access it. There are multiple reasons for this – poor road networks and poor market information were major forces. Across the board, African farmers face serious constraints – they use about 1/8th as much fertilizer as Asian farmers, less irrigation, lots fewer tractors. Their circumstances give them very little choice.

Nobel prize winner Theodore Schultz discovered farmers are poor, but rational economic actors – they are profit-minded and make choices designed to improve their lot. But despite market-based reforms, taking agricultural prices out of the hands of governments, we haven’t seen market rationalization in Africa. Instead, we see the most volotile market for farmers in the world. This is a result of high transaction costs, poor market information, few ways of connecting buyers and sellers, and problems with goods actually reaching the market.

Gabre-Madhin’s study of grain prices in Ethiopia suggests very closed markets – small networks of trust between buyers and sellers. Grain changes hands 4 to 5 times between producer and consumers, and changes sacks each time – this is the only way people know what they’re getting in terms of quantity and quality. This system is very vulnerable to price shocks. In 2001-2, Ethiopia had a bumper cross in maize. This depressed crop prices 80% and led some farmers to leave 300,000 tons of grain to rot in the fields. By July 2002, there was another major food crisis in Ethiopia with 14 million people facing food insecurity.

Gabre-Madhin left her job as a World Bank senior economist in Washington DC in part because she was disturbed by this 2002 famine. Her proposed solution – a commodity exchange, inspired by the Chicago mercantile exchange. She points out that the Chicago exchange historically functioned with farmers putting grain on barges and shipping that product to market – if grain prices dropped, barges would sometimes dump grain in Lake Michigan rather than pay the cost of returning goods to farmers. The key breakthrough for the Exchange was a certification system which allowed people to trade grain without physically delivering it – instead, they traded grain as much as 18 months ahead of time. This innovation helped establish Chicago as a trading superpower.

There’s huge growth in emerging market commodity exchanges. Exchanges in India have seen 270% annual growth. There’s tremendous potential for an exchange in Ethiopia, which is the largest grain producer in Africa, producing 30% more grain than South Africa. The exchange – EXEC (Ethiopia Commodity Exchange), launching in 8 months, integrates numerous facets of the agricultural market, simultaneously creating arbitration boards, market information systems, trading systems, rural access through VSAT-empowered data centers, warehouses, certification centers and exchange banks. The goal is to give farmers information on what’s most needed, as well as increased income… and ultimately, increased choice over their lives.

12 Responses to “Gabre-Madhin’s big bet”

  1. Jachkeliye Satyagraha says:

    Bhutan has not chosen. The Bhutanese people have not chosen. The Bhutanese King has chosen. Do markets provide choices for citizens or kings? The two seem to be conflated in this analysis.

  2. Mersha says:

    Did Eleni mention a small detail? It is all government controlled. The PM wants to control everything and anyone talking about grain markets except him and the few people he picked does on their own risk.

    Mersha Mulugeta

  3. Gobezu Sewu says:

    This is a project, as it should be, led by the government and a one that should be very admired.

    But during my recent journey to Ethiopia, from which I returned 2 weeks ago, I have noticed the following which should be dealt with prior to opening this exchange.

    The Ethiopian people, I would dare to say, up to the level of middle class, are facing already a dire situation with a double digit yearly inflation digging so deep in their empty pocket, and as you might guess without any kind of compensation through the salary for this increase.

    Such exchange is simply bound to escalate the inflation due to the fact that we have neighboring countries as far as Uganda that are knocking on the Ethiopian doors to come and buy grains once there is some kind of open market where the price is available and certain quality is guaranteed, and as if it was not enough the Ethiopian people is going to have to compete with yet another group of relatively strong consumers. I think the oil-seed market should serve as example on how things can go once you let the international market come, where Ethiopia is a major exporter to Middle East, India, Turkey and China, the prices have gone so much high in such short time, that the local oil producers are no longer able to make any profits out of their business, including the government owned one in Bahir Dar, 500km North of Addis, and in the papers I read there were hints that some have already discontinued their production, and the oil prices have within a year gone from 12-13birr to 20-21birr, and the rest from the oil production which is used as food for milk cows have within a period of 3 months gone from 70birr to 170birr, which in turn has led to increased price of milk. Now this is simply the tip of the iceberg, and there is a lot of other things happening in relation to the rising inflation which makes the life of not only the poor but up to the middle class very difficult, which I hope the government should learn to deal with on a permanent basis, i.e. inflation control, before opening the exchange.

    Yet another, seemingly rather minor, detail is that the Ethiopian Telecommunication (ETC) which since the 2005 election has closed down the SMS service which would have made price information distribution so much simpler, due to the fact that many already have cell phones. Releasing this service and enabling this kind of SMS based services would energize many other business types, and is therefore quite perplexing why the ETC and by that the government insist on closing down that part of the already established network.

  4. Florad says:

    I appreciate the ECEX venture, and closely follow the news of its progress. I don’t think that ECEX has anything to do with opening up for international markets or to inflation. It is just for domestic farmers and traders as well as consumers. It provides fast information, so that farmers and traders will spend less time searching for info and transaction is facilitated. Furthermore, it introduces a modern system of exchange, which might prove to be useful and thus applied widely.

    I agree with the SMS issue Gobezu Sewu mentioned. I also have no doubt that, if the government feels that ECEX somehow serves an ‘unwanted’ political motive, it won’t hesitate to close it down. It is pitty, but we are still under dictators.

    I wish Eleni all good luck. I like her book and papers, all are impressing.

  5. lulit Gizaw says:

    I believe what Eleni is trying to achieve is going to make such an impact on our globalized world. It is about time someon remebered that we do exist.we must not forget that trading, with the assistance of technology, has advanced to such a higher extent that even the somewhat developed nations like Brazil and India are trying to keep up with the pace. Developing African nations like Ethiopia are to far behind in this world and any opportunity than can alter this must not be taken lightly. Ofcourse, the goverment might surpress the ECEX as it usually does with innovative projects that threaten its power but I hope the people at the top will put their countries economic interest first and think about their citizens.

  6. Girma says:

    Oh! do not worry that all will happen. The best is to remain optimitic than worrying that it will be soon. All the ideas made and suggestions are heard by everyone in the country and would be a concern. let everyone work for the best of the poor. Let all of us hear each other. God bless Ethiopia and Africa too.

  7. Girma says:

    Am proud of the ideas of Dr. Eleni that it is the best creative one soon be benchmarked too. The most ones fear is because such ideas may be a threaten for some cultural leaders not for those like the PM, who daily think of what to help with ideas of intellectuals.

  8. Conrad Schulman says:

    How does one profit off of a commodities exchange that will open in a foreign country like Ethiopia?

  9. Alex says:

    Here is My comment

    Helen G/medin has admired for establishing the 1st african stock exhange market in Ethiopia. Before she start this project she was Indian for a working visit with project group. However ; at that time the indian economic proffessional told her that it will not going to work in Ethiopia seeing the economic infra stracture of the land , where the regim is controlling every thing in one way or another. Now when her stock exachange system geting fel she is forcing the farmer and the business man to sale to her the coffe with direct order of the priminister ethiopia Meles Zenawi, which is emabaracing for those you who are supporting her with out skeptism.
    Now sooner or leater many farmer and business man are going to be killed or end in prison for her un workable stock exchange market.

  10. Istanbul says:

    Lulit: Are you an idiot? You have 90% of the population in the rural areas. When I say rural I mean deep in the arid mountains; lush green areas where access is difficult to City markets.
    Where do you think you are – Chicago. Think from the perspective of the little Ethiopia.
    Stop being focused on what the world wants and think of what the Ethiopians need and want. It is a simple problem. But with pigs like you how can people that are supposed to be educated thing outside the box to solve their problems.
    Sorry if I was abit harch but I think you need someone to tell you something so you start thinking about it.

  11. To Whom It May Concern:

    I’m trying to get in touch with Eleni Gabre-Madhin. I’m really frustrated because I tried several websites, and couldn’t even find a way through the sites by Oprah or Ted… Just that I needed to send a message to them first. I would like for Ms. Gabre-Madhin to know that I can help her with free websites and multimedia. Please have her contact me at her convenience so that I may help out.

    Thanks,

    Damien P Garcia
    619-414-8606 (USA)

  12. David Kimani says:

    Good stuff i think is all said information is power and providing information to farmers is like empowering them to hel them make optimal decision about how to sell their harvests

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  1. afrotechie » Blog Archive » With the cheetahs at TEDGlobal 2007 - [...] were no fewer than four Ethiopians on stage – Eleni Gabre-Madhin of Ethiopia’s coming commodity exchange; Ted Kidane, the …

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