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.