The Ethiopian Commodity Exchange: transforming the way coffee is traded

Buyers and sellers make deals (Credit: John Humphrey)

By John Humphrey

Earlier this year I visited the Ethiopian Commodity Exchange (ECX). The ECX was set up by the Ethiopian Government in April 2008 as a private-public partnership – about 45% of the members of its Board of Directors are traders working within the exchange, and the other 55% are Government representatives.

The Exchange provides spot trading for five commodities, with coffee being the most important. Trading itself is relatively straightforward. It is spot market only, no future or forward contracts. This may change, but the Exchange decided at the beginning to start simple and instil the necessary discipline and understanding of standard trading terms before embarking on more complex derivatives contract trading.

Trading is open outcry in a pit. There are sequential 10 minute sessions devoted to different commodities. But the really interesting action is invisible. Behind the bustle of the Exchange floor lies a series of innovations that make it all possible:

1. Classification. A new domestic grading system, backed up by certification and labs, means that coffee can be classified into different internationally accepted grades.
2. The development of a warehouse receipt system. There are currently 16 warehouses with a storage capacity of 16 million bags. Coffee is taken to these warehouses and electronic receipts issued. This gives buyers' confidence about the existence of the coffee they are being offered and independent verification of its quality grade. 
3. The trading floor itself. Traders buy seats on the Exchange. Some are professional coffee traders, others from cooperatives. The green and brown jackets represent the two categories: buyers and sellers. Sellers can only sell coffee for which they have a warehouse receipt. Buyers can only buy up to the limits of cash balances which they have deposited with the Exchange. 
4. Settlement. Like many other developing countries, Ethiopia has no national clearing system. The Exchange wanted settlement within 24 hours. The government passed a law allowing the Exchange the exceptional right to use electronic signatures and so trades are reconciled overnight.
5. Information technology. The price information shown on the screens around the trading floor is transmitted within 2 seconds to 31 electronic display boards in rural locations. It’s also displayed on the Exchange’s website. An automated telephone system provides prices for different products and grades, and 156,000 subscribers receive real time data via SMS text messaging.
6. Regulatory powers. The Exchange is the only self-regulating agency in Ethiopia. It can discipline members and has applied civil penalties for offences such as attempted price-fixing and collusion.

More deals are made (Credit: John Humphrey)

These policy innovations make the spot market possible. Products have to be homogenised to enable trade (hence grades and standards). Buyers need assurances about sellers, and the warehouse system is one way of doing this. Sellers need assurances about buyers, and the cash balances held by the Exchange provide this.

In doing all this, the Exchange seems to have produced gains for farmers. A long succession of transactions between traders at various locations between the farmer and exporter has been replaced by a simple grower-warehouse-exchange model. Farmers and cooperatives have an easier and more transparent route to market, and the wide availability of price information allows the Exchange prices to act as reference prices throughout the country. The Exchange shows how much work goes into building markets.

Let’s not forget labour rights

By Stephen Spratt

This week marks the 100th anniversary of a fire at the Triangle Shirtwaist Factory in New York that killed 146 people, mainly young women and nearly all immigrant workers. Many were trapped in the flames because of an exit door being locked, or fell to their deaths from a broken fire-escape.

As described in The Economist, workers from the factory had been involved in a city-wide protest the previous year, where 20,000 garment sector workers went on strike for the right to union recognition, better working conditions and pay. This did not succeed, but the fire triggered a wave of reforms, with comprehensive new laws on labour rights and health and safety being enacted within a few years. This legislation became a template for other states and provided a basis for the New Deal in the 1930s. The Economist quotes Frances Perkins, Roosevelt’s Labor Secretary, as saying that March 25th 1911 was the day the New Deal began.

It is strange then that the anniversary of this event should coincide with moves in Wisconsin to remove the right to collective bargaining for public sector workers, with 100,000 people taking to the streets last week, and the Governor suggesting that the National Guard may be used to quash dissent.

Along with China, India and Mexico, the US is one of 23 countries that have not ratified the International Labour Organization’s (ILO) Convention 98 on the right to collective bargaining. Unfortunately, the fight for decent and humane labour rights is far from won it seems. When even the Economist – not exactly a publication of the hard left – argues that this week’s anniversary should ‘remind America why unions were needed’, those working in development should do likewise.

Fundamental and universal labour rights are not a luxury to be considered once a certain income threshold has been reached, or ditched when fiscal constraints bite. As well as being a safeguard of basic human dignity and a foundation of development, they can be a matter of life and death. The Economist succinctly concludes: “A hundred years ago 400,000 people attended the memorial service for those who died, in part, because they could not unionise.”

The inclusive growth fashion parade

By Neil McCulloch

Yesterday I spent an interesting afternoon participating in a meeting convened by BOND, the UK membership organisation for NGOs working in international development, looking at inclusive growth.  There were presentations by Malcolm Ridout, head of the DFID Growth Team, Sven Kuhn von Burgsdorf, who leads the EU consultation on growth, Alex Cobham, the senior policy advisor from Christian Aid and me (see Bond website for the presentations).

Perhaps the remarkable thing about the event was that it was difficult to find much to disagree about. We all more or less agreed on three issues:

• Growth is good - we shouldn’t be against it
• But it isn’t the be all and end all of development – policies in many other areas are essential for ensuring inclusive and sustainable growth (whatever that means) and
• We know surprisingly little about how to create growth (never mind how to make it inclusive or sustainable).

Of course there has been a huge amount of research on growth over the years (for the latest information see the International Growth Centre’s work) and endless volumes written about growth policy.  But the striking thing about both the EU Green paper and other similar policy documents is how extraordinarily fashion conscious they are.  In other words, many donors put emphasis on exactly the same set of issues at any point in time, reflecting current beliefs about what the best policies are (currently it is infrastructure, aid for trade, and agriculture) – but this agenda changes over time (it used to be health, education, social protection, regulatory reform, macroeconomic stability, trade liberalisation etc etc). 

To some extent this is a good thing – agendas change as we glean new evidence about what matters in what contexts, or realise that we have forgotten lessons from the past.  But a bit of me finds the constant policy fashion parade a little tiring too.  We are constantly drawn into what William Easterley’s wonderful book called “The Elusive Quest for Growth”.  Yet the truth is that there is no magical elixir of policy that drives growth – the right policies depend on the country and evolve over time.  This, no doubt, is why Hausmann, Rodrik and Velasco’s Growth Diagnostics has become so popular, since it provides a simple analytical tool for how one might be able to identify the binding constraints to growth.  Too simple.  Although, such analysis, well done, can be very valuable, it often provides insights which are just too generic to be useful for practical policymakers in real countries. 

My suggestion therefore was, to some extent, to give up the hunt for the “right policies” for economic growth and instead draw on Dani Rodrik’s work on Industrial Policy for the 21st Century, and focus on the process for how policy gets made in individual countries.  I suggest six things that countries can do (and donors can help with):

1. Ensure that all voices are heard, including those of the poor and marginalised
2. Build accountability mechanisms, checks and balances to prevent collusive policymaking
3. Promote dialogue between the public and private sectors
4. Do good technical analysis
5. Monitor, evaluate and kill things that aren’t working
6. Build effective systems for domestic resource mobilisation.

None of these tell you whether to invest in roads, or schools – but they provide a way of facilitating a process that leads to (hopefully) better decisions about the sorts of priorities that are needed, and maybe, more inclusive and sustainable growth.

Japanese tragedy

By Neil McCulloch

I’ve been trying to find the right words to write about the disaster in Japan.  Watching the pictures coming from Japan as it struggles with the triple crises of earthquake, tsunami and nuclear emergencies, has been, frankly, horrifying.  My heart goes out to the thousands of families who have lost loved ones, as well as the hundreds of thousands who have lost their homes and possessions, and are suffering from immense stress and anxiety in these uncertain times.  Some of IDS’s Japanese students have recently given their own personal reflections on the tragedy.  They have also responded, raising funds and working hard to provide assistance in whatever way they can.

There are of course broader lessons to learn from this tragedy.  IDS Fellow Terry Cannon has already written about how we can help countries to be better prepared for such disasters and better equipped to respond to them when they happen.  And the financial media have made much of the knock on impact of the nuclear disaster.  The emergency at Fukushima’s power plants has damaged the prospects of a resurgent nuclear industry worldwide, seen by some as a key contributor in the fight against global warming.  The result will be booming prices for coal and gas (see the Financial Times on this), and higher carbon emissions, as Japan likely reduces its 30 per cent dependence on nuclear energy and replaces this with thermal coal and Liquefied Petroleum Gas (LPG).

On a more hopeful note, some economists have said that this disaster could mark the turning point at which the Japanese economy finally recovers from its long period of stagnation.  Certainly the actions of the Bank of Japan – which has injected more than $300 billion into the economy over the last few days – suggest that the huge sums needed for reconstruction may generate quite strong economic performance in the medium term.

But at root, this is a human tragedy. Two weeks ago I had lunch with a Professor from Tohoku University and his staff.  They were running a Masters in Human Security and were keen to explore links with IDS.  Tohoku is in Sendai, one of the worst hit cities.  I do not know if he and his staff are safe – I pray they are.  The university is closed whilst everyone focuses their energies on trying to deal with the unimaginable devastation.  So this is not a time for economists to make forecasts – this is a time for solidarity with the suffering people of Japan.

Public perceptions of global interdependencies… threat or opportunity?

By Spencer Henson

There is much discussion amongst academics and policymakers about the consequences of globalisation for both industrialised countries and the developing world.  But do members of the general public appreciate the extent to which their lives are increasingly intertwined with those of others across the globe?  And, why does this matter?
 
My research with Joanna Lindstrom suggests that the public are more likely to support aid to developing countries if they see benefits ultimately flowing back to themselves and/or their country.  While there is concern about aid policies being driven by such self-interest concerns, they do appear to influence whether the public supports government spending on aid.  In turn, the degree to which such benefits are seen as mutually beneficial, whether in terms of trade, international influence, migration flows or security, reflect perceptions of global interdependence.

Survey research using the UK Public Opinion Monitor (UKPOM) based at IDS suggests that the general public are well aware that their economic and social wellbeing is increasingly linked to what goes on in the rest of the world.  Over 71 per cent of respondents in a 2010 survey considered the life of people in the UK to be dependent on what happens in other parts of the world. 

The greatest areas of perceived interdependency were the state of the economy and the level of terrorist threat.  Such perceptions exist in the wake of the global financial crisis and of concerted efforts by the UK and other governments to sell the ‘war on terror’.  Weak factual knowledge and strong political messages also often result in misplaced views about many less developed parts of the world.  Such misperceptions underpin common notions of aid ineffectiveness in the wake of corruption and wastage.

However, the fact that people recognise the existence of interdependencies and that global issues are relevant to their lives could be seen as an opportunity to engage on global issues.   It opens up the doorway for communication and education on global issues such as trade, immigration, security or global poverty. 

Whilst the moral arguments for supporting processes of development in poor countries remain central, many argue that a good dose of ‘self-interest’ is also required to push development up the political agenda.  If so, engagement on global issues, building on an appreciation of interdependencies but also correcting common myths, will be critical.  Maybe the door is now more open for this?

Export taxes? I wouldn't!

By Xavier Cirera

I just returned from Arusha, Tanzania, where I was giving some training on Trade Policy Analysis using Tradesift. This is a powerful software tool developed in a spinoff company, InterAnalysis, by our colleagues at the University of Sussex to support trade policy analysis and which complements the research work done within the university itself in CARIS. The training was hosted by TRAPCA the Trade Policy Centre in Africa, an institution which provides high quality postgraduate courses in trade policy analysis for African students.

It was encouraging to see the high level of analysis carried out by the participants and their commitment to trade policy, which will surely result in improved domestic trade policy strategies and increased ownership of their formulation. Participants were mainly from the East African Community (EAC) region, and we had the chance to discuss and analyse their main trade policy challenges:

• Regional integration
• Domestic policies
• Economic Partnerships Agreements with the EU.

One particular element that I found interesting was the relative preference that some participants still have for export taxes when trying to develop industries to process commodities, for example leather. While there is a clear need to increase producers’ value added and reduce price volatility, export taxes often depress domestic supply and farm gate prices. 

These taxes are easy to implement, which may explain why they are used so frequently.  But although the initial objective may be to increase producers’ livelihoods, the final outcome often has a perverse impact on income distribution affecting producers and poor households who are hit by lower prices and earnings. Export taxes are a clear example that trade instruments are often not the most effective measures to address agricultural and industrial policy objectives.

Export taxes also have an impact on food prices.  Although often neglected, when imposed on large exporters they reduce world supply, increasing world prices, and damaging net food importers.

As government objectives go, enhancing quality, productivity and processing of agricultural households and fostering domestic industries are fine. However, export taxes are by no means the way to achieve them.

Empowering women is just plain good business sense

By Noshua Watson

Empowering women in developing countries isn’t a special interest, it’s good business sense. In honour of the centenary of International Women’s Day, I feel it is important to continue to emphasise the inequalities in economic opportunity that continue based on gender. Fully including and valuing the majority of Earth’s population as producers, not just as consumers, is ethical AND efficient.

MAS Holdings, an apparel manufacturer in Sri Lanka created the MAS Women Go Beyond Programme as part of their ethical branding scheme. Go Beyond provided MAS’ seamstresses with career development programmes, health and lifestyle education, entrepreneurship training and peer recognition and awards.

MAS Holdings identified the economic status of women as its realm of social impact because more than 90 per cent of their workforce were women, of whom an overwhelming majority came from low income families. Given their relationship to local communities and the unstable political situation in Sri Lanka, taking steps to secure the welfare of their female employees and in turn the larger community, seemed like a natural progression.

Before Go Beyond, MAS already provided transportation to work, ample bathroom breaks, free meals and classes, in contrast with conventional sweatshop models of apparel production. Implementing the Go Beyond programme increased costs by 3 or 4 per cent, yet resulted in greater profits for the company, due to higher productivity, lower downtime, increased efficiency and decreased absenteeism.

Empowering women was a means to financial success and development impact for MAS Holdings. MAS went beyond treating their workers well and took the time to understand the social, political and economic forces that defined their workers’ lives and living conditions. For MAS, in Sri Lanka, one of the defining forces was gender. And that is still the case for more companies than you know.

A few reflections on Fairtrade Fortnight

By Neil McCulloch

We’re in the middle of Fairtrade Fortnight at the moment (28 February – 13 March 2011). Organised by the Fairtrade Foundation here in the UK, it’s two weeks of campaigning about ‘why Fairtrade matters’.

The campaign was launched with the announcement that sales of Fairtrade products soared by 40% in 2010 to an estimated retail value of £1.17bn compared with £836m in 2009. Apparently UK consumers are now drinking 9.3 million cups of Fairtrade tea every day.

Added to this, a whole host of celebrities are putting their name and fame behind Fair-trade – Harry Potter star Emma Watson has just launched her new clothing collection for ethical brand People Tree.

Retailers are placing increasing importance on Fair-trade in their marketing practices. Last month The Co-operative, a diverse business whose products range from food to funerals, banking to pharmacy, announced plans to make 90% of its products Fair-trade. Chris Anstey, a consultant with over 30 years experience in the food industry (including for retail giant Tesco) gave a seminar at IDS last November about this very issue. He explained that the emotional aspects of a product, such as animal welfare or how the producers are treated (Fair-trade) are becoming more important to consumers. As a result, these aspects are also becoming more crucial to retailers, and many are incorporating these ethical properties in their private-label products, generating profits as a result.

But not everyone is so excited about the Fair-trade trend. Writing in the Daily Telegraph Philip Booth, Director of the Institute of Economic Affairs is critical about what Fair-trade achieves. He questions whether Fair-trade actually brings better working conditions to poor producers, due to weak monitoring. He also says that there are costs to producers of joining up to the Fair-trade movement. Booth is also critical of the Fairtrade Foundation’s connections to government and of its disapproval of free trade.

I don’t share Philip Booth’s scepticism about the Fairtrade Foundation’s achievements – perhaps I’m biased because it is lead by former IDS graduate Harriet Lamb! But the general issue about whether mechanisms like Fair-trade are effective at helping the poor is an important question. As an economist what Fair-trade does is pretty clear – it’s a brand and a very successful one. Like all brands, it allow the holders of the brand to capture market share and command a small price premium by differentiating their product from otherwise identical competitors. Hence I don’t doubt that Fair-trade businesses do pay better wages and ensure workers have slightly better conditions than others, precisely because the brand allows them to capture this premium.

However, in a sense, this doesn’t matter very much. The total number of people employed as a result of Fair-trade is miniscule compared to the overall workforce in the sectors in which they operate, so the benefits from them paying better wages or providing better conditions only go to a very small share of workers. What really matters is whether Fair-trade is successful in changing business norms of behaviour. I’m not aware of any studies that look at this issue (please someone enlighten me) – and yet it matters much more than whether the people directly employed as a result of Fair-trade are better treated.

So I will be raising a glass of (Fair-trade) wine to Fairtrade Fortnight – not because the people who grew the grapes were slightly better off, but because, hopefully, they help to change the way that businesses think about their role in, and obligations to, the society of which they are part.

Rich people have already ruined development. Get over it.

By Noshua Watson

Official development assistance (ODA) from the OECD is dwarfed by financial flows to developing countries from private sources. If you add together ODA, philanthropy, private sector investment and remittances, they equalled $677.5 billion in 2009. ODA represented less than one-fifth of those flows.

The development community has perceived but not yet fully articulated the problems with having the private sector in development. And there are definitely problems. Who holds private actors accountable? What gives them the right to interfere? Even if they are doing the right thing, who’s going to tell them no? These questions need to be answered, but their existence doesn’t mean the private sector should be pooh-poohed.

Jean-Michel Severino and Olivier Ray, the former head of Agence française de développement and his advisor, argue that the growth of the private sector’s formal role in development is largely because the development community has successfully expanded the agenda from reducing economic inequality to include access to basic services and protecting global public goods. The expansion of that agenda has created opportunities for private actors, both for-profit and not-for-profit.

Severino and Ray have identified that the way that funds are aggregated is on a spectrum from centralised and state-driven to market-driven and the timing of development funding is on a spectrum from discrete projects to continuous flows. Crossing the aggregation mechanisms and different time horizons creates a matrix of modes of financing.

Private actors are found all over that matrix. Microfinance organisations are an example of recurrent private financing that is more continuous, as it is intended to leverage the effect of other funds. This framing of where funds come from and how they are used exposes the importance of partnerships, whether with other private organisations or public institutions.

Most of the private funding of development comes from poor people themselves. Nearly half of the aforementioned financial flows from the OECD to developing countries were from remittances. The fragmentation of remittance flows and their person-to-person nature makes them difficult to track. But their flagrantly monetary and non-institutionalised nature may also explain some of the development community’s lack of interest.

Private or public, the challenge to development institutions is learning how to coordinate or incentivise diffuse actors (especially poor ones!), not elbow them out of the arena.

Don’t dismiss the impact of speculation

By Neil McCulloch

Last week’s Economist article on the food crisis (“Crisis Prevention”, 26 February 2011) has generated much debate within the development blogosphere – read Oxfam’s Duncan Green’s analysis and The Economist’s John Parker’s response for a couple of examples.

I was disappointed that the article so readily dismissed the role of speculation in driving up food prices using Friedman’s old argument that “for every buy, there is a sell”. It’s particularly surprising since The Economist has written repeatedly about the role of asset price bubbles in exacerbating the current financial crisis. 

Since Friedman’s work more than 50 years ago, economists have developed strong theoretical foundations showing how rational asset price bubbles can inflate for long periods of time (certainly long enough for a family to starve). Moreover, there is considerable evidence that speculation in assets linked to commodity prices had an important role in driving up prices in the last food price crisis in 2008 – see the United Nations Special Rapporteur on the Right to Food.

It is right, therefore, that the G20 should seek appropriate forms of regulation to discourage the formation of commodity price bubbles, in addition to addressing the trade and agricultural policy issues the article mentions.

When China met Africa

By Neil McCulloch

I saw a fascinating film, When China Met Africa, in the Brighton Documentary Film Festival (SEE) this weekend.

The film, by Nick and Marc Francis, follows the lives of two Chinese entrepreneurs in Zambia – one a farm owner, the other an employee of a Chinese firm responsible for building a major road. 

The film drew on research by IDS Globalisation Fellow Jing Gu. It gives a subtle and nuanced picture of the lives of Chinese entrepreneurs (for a different perspective see the BBC’s The Chinese Are Coming documentary last week). It shows the clash of cultures and the resentment by Zambian workers, but it also shows the pressure that Chinese entrepreneurs feel under. It’s clear that the Zambian government is in awe of Chinese firms’ ability to deliver on major projects much faster than their western counterparts. 

But perhaps the single feature that made the documentary distinctive in my view was that it had no voice over. Everything was simply observed, with the individuals speaking their mind in their own words. This was an extraordinary challenge because both the Chinese and the Zambians were speaking in local dialects unknown to the filmmakers. Thus Nick and Marc Francis didn’t really know what their film was about until after they had made it and read the translations of the dialogue. This gives the film an authenticity that is much more compelling than a more directed documentary.

Talking to the filmmakers at the end, they said that their next film will look at tax havens.  Hopefully they will be able to draw on the work of the new International Centre for Taxation and Development (ICTD) led by IDS Fellow Mick Moore, as well as the campaign on tax havens by Christian Aid.  Watch this space.