Monday, May 18, 2009

ADDIS ABABA, Ethiopia | Eleni Z. Gabre-Madhin recalls 1984, when nearly 1 million died of starvation in Ethiopia. “There was a surplus in the fertile regions of the south but in the north people could not access it.”

They were captives of a market system whose failures could — and did — lead to famine.

The plight of her native Ethiopia took Ms. Gabre-Madhin, an American-trained economist, on a quest that would result in the founding of the Ethiopian Commodity Exchange (ECX), which celebrated its first year in business this April.

In that short time, the new exchange has begun a revolution in trade across one of Africa’s most populous nations.

The creation of the exchange was years in the making. After 15 years working in Washington think tanks and academe, Ms. Gabre-Madhin knew she didn’t have all the answers but was sure that she was “asking the right questions.”

Foremost was how market changes could work at the level of smallholder farmers; 80 percent of Ethiopia’s population fits the agrarian profile, and almost all of those live on small, subsistence-level family farms.

For 10 years she studied markets in Africa, coming to see that it would be possible to better people’s lives “even to the smallest actor” by transforming the structure of the marketplace for Ethiopia’s agricultural commodities.

She was convinced the problem was that the whole system of agriculture in Ethiopia, from the markets to the fields, was still rooted in outdated traditions and practices.

She knew it would be a huge task to make the necessary changes, but she saw an opportunity to remake the whole thing from top to bottom.

The country had been isolated for decades from the rest of the world, both geographically and politically.

Massive famines and political upheaval wiped away, by some estimates, over a million people. Generations had been lost, and with them a great deal of Ethiopia’s pride, culture and knowledge.

More recently though, the country had become more stable and was opening up to the outside world.

In 2004, Ms. Gabre-Madhin accepted an assignment from the International Food Policy Research Institute, and moving back to Ethiopia, led a study of policy and markets. As part of this process, she began to lay the groundwork for the Ethiopia Commodity Exchange.

To get a better look at the agricultural system, she had the inspiration to tag along with a few bags of grain as they traveled from the farmer’s field to the table.

She traveled across the country by truck, rail and ship, spending hours bouncing down dusty, rutted roads — often in the company of men not used having a woman in their midst.

She saw how a few bags from one farmer were combined with those of other farmers and sold to a trader who worked on the village level. The village trader then sold the grain to a consolidator, who then sold it to a bigger consolidator. Ultimately the grain might change hands as many as five times.

One of the things that struck her was that at each step in the chain, the grain was rebagged into a different sack. Because of the lack of standards and grading, this was the only way the buyer could be sure of the quantity and quality of the grain being purchased. This rebagging made handling costs extremely high and drove the final price even higher.

Through these travels, Ms. Gabre-Madhin got a feel for the nature and character of each transaction and all the disadvantages of the old system.

Lack of transparency and information made it at best inefficient and at worst rife for exploitation and abuse.

Farmers in Ethiopia often lived hours or days from the nearest town, with no means of transportation, electricity, radio or newspaper and no way to judge the fairness of a price offered for their crops.

Uncertainty and lack of information about prices discouraged farmers from investing in seed, fertilizers and technology. It also made it impossible for them to manage risk, thus protecting their investment like farmers in other countries. If too much was spent getting the crop planted and the market fell below the cost of production, the farmer lost money, often with disastrous consequences.

For example in 2001-02, Ethiopian farmers raised a “two-year bumper crop of wheat.” The abundance drove down prices and the market collapsed, dropping 80 percent. It became too expensive for farmers to even harvest their crop. 300,000 tons of wheat rotted in the fields.

Immediately afterward, in 2002, a food crisis put 14 million people in Ethiopia at risk of starvation, a famine on par with that of 1984.

Since these sorts of problems ran throughout the agricultural structure, the sector as a whole constantly failed to produce at anything near its potential. Planting, trading, marketing, warehousing and shipping all suffered, capacity withered and profits were reduced.

On April 24th, 2008, the bell on the trading floor of the Ethiopian Commodity Exchange rang for the first time.

Ms. Gabre-Madhin cites a visit to the Chicago Board of Trade as one of the main inspirations in the development of her ideas. It was founded in 1842 by a group of farmers to combat very similar problems.

That inspiration was part of a broad worldview that had its beginnings in Africa. Born in Ethiopia, Ms. Gabre-Madhin, whose father worked for the U.N., got to see more of the world in her youth than most see in a lifetime. Living in different parts of Africa, the United States and Europe, she saw things most Ethiopians could not even dream of.

She went to Cornell University, where she got a degree in economics. She earned a doctorate in applied economics from Stanford.

It was at Cornell where she had an epiphany of sorts, in the middle of a dormitory food fight. The flying carrots and hamburgers filled her with anger.

“My people are dying of starvation,” she yelled from the center of the fight, “and you are throwing food around like it was nothing.”

Ms. Gabre-Madhin remembers that she turned away, disgusted at the behavior of her classmates, but somewhere deeper down in her something ached and at that moment she resolved to find a way do something to stop the suffering of her own people.

Along the way, she has been a senior research fellow with the International Food Policy Research Institute in Washington and a commodity trading expert with the United Nations in Geneva.

In addition, she worked with traders and markets in at least nine African nations in the past 18 years, writing one of the definitive texts on the subject under the title “Reforming Agricultural Markets in Africa” from Johns Hopkins University Press.

Under her direction, The ECX tries to operate according to globally recognized best practices.

The ECX consolidates the trading floor systems, product grade certification, bank clearances, dispute arbitration, certification, licensing and market surveillance for compliance enforcement as well as observing trends.

Ms. Gabre-Madhin calls it “the entire ecosystem,” which she says is necessary in Africa because of the absence of reliable individual actors in those roles.

The first year has not been without challenges, however, and the first uproar, currently in the news, arose out of coffee trading.

There has been a “fierce tension between the public and private sector,” notes Ms. Gabre-Madhin, “with first a commodity inflationary crisis followed by a global financial crisis.” Ethiopia’s reputation for the past 40 years remains linked to sorrow, strife and disaster — almost guaranteed to be the next heartbreaking story on the evening news.

Ms. Gabre-Madhin, however, thinks that Ethiopia’s real destiny is to become the bread basket of Africa.

On the floor of the ECX, maybe one of the greatest signs of change is the women traders jostling on the floor next to their male competitors, trading an obsolete past for a future they can already see.

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