How Africa’s First Commodity Exchange Revolutionized Ethiopia’s Economy

Ethiopia Commodity Exchange
Ethiopia Commodity Exchange

AFRICANGLOBE – While government leaders, NGOs and corporations devise strategies to churn out more food for future generations, Eleni Gabre-Madhin is taking a different approach. Concerned by a 2002 famine in her home country of Ethiopia that followed bumper crops in 2000 and 2001, the Stanford-educated economist decided it was time to go beyond food production and take a hard look at distribution.

The result? Africa’s first commodity exchange. As the founder and outgoing CEO of the EEthiopia Commodity Exchange (CX), Gabre-Madhin established a reliable interface for buyers and sellers to meet – an idea that has inspired other African countries to follow suit. Gabre-Madhin won the Yara Award at the African Green Revolution Forum in Arusha, Tanzania, for her role in transforming Ethiopia’s commodity market. She told journalist Lauren Everitt how a formal market has revolutionized Ethiopia’s economy and empowered smallholder farmers.

What prompted your decision to found Africa’s first commodity exchange in Ethiopia?

I had been doing research on grain markets and other agriculture markets in Africa for many years and as it happened I did my Ph.D. on grain markets in Ethiopia. One of things that I kept seeing over and over, which I’d seen in other parts of Africa, was just how difficult it was for buyers to find sellers and sellers to find buyers and how difficult it was to enforce the contract.

And so you’d see over and over that a seller, such as a farmer, for example, who sold grain to a trader wouldn’t get paid for weeks, sometimes months. There were cases in the coffee market in Ethiopia where people had committed suicide because they had outstanding loans and their buyers hadn’t paid them. So there were all sorts of cases of contract default.

Then from the buyers’ perspective you’d hear over and over again that they’d have to visually inspect the grain or the coffee to check if it was really the quality they’d been told it was. They would have to reweigh it, re-bag it to see if it was the actual quantity and quality that they were contracting.

So these are all the problems in the supply chain that make us poor and make us food insecure. If people can’t get grain where it’s produced really efficiently to where it’s needed, then you have markets that are segmented. You have pockets of surplus where prices collapse and places in other parts of the county where prices shoot up because there’s a deficit and there’s no grain coming in.

That’s actually exactly what happened in 1984 in the big famine that claimed a million lives in Ethiopia. There was obviously a shortage in the north and yet Ethiopia had to go to the world and beg for food aid, but there was a grain surplus in the fertile parts of western Ethiopia.

When I found out as a student about this situation of the 1984 famine, I said, ‘It can’t just be about producing more – sure producing more is important but we’ve got to figure out how to distribute it. We’ve got to figure out how to make an efficient market work for everybody – for the farmers, for the buyers, because otherwise we’re always going to be in this cycle’.

The same thing was repeated in 2002 when there were two years of consecutive bumper harvests in 2000 and 2001 and Ethiopia was doing really well. Then six months later prices collapsed completely almost to zero, and farmers could not sell the grain. Six months later, in mid-2002, Ethiopia went to the world for emergency food aid for 14 million people risking starvation.

I was so shocked. By that time I had my Ph.D. and I knew this was the thing I wanted to work on. I think 2002 just crystallized that I needed to go back to Ethiopia and do something about this. I had the idea of a commodity exchange – I’d written about it in my dissertation, I did my Ph.D. at Stanford, which is really specialized on commodity markets.

What other sorts of dialogues are ongoing about distribution?

I think more so than 10 years ago, now there is an interest in markets and issues around distribution. In the Ethiopian debate about food security and famine, people would always say, ‘More seeds, more fertilizer, more irrigation – these are the things we have to do’. And yes, we have to do all of that, but then here you are – you get a bumper harvest and six months later people are still going to starve.

Every crisis leads to an opportunity so that crisis led me to tell the government: ‘We have 40 or 50 Ph.D.s in economics working on production issues, and there are exactly four of us who have written Ph.D.s on market issues, and that’s how skewed our development policy is – we’re always talking about production and we have to have a more balanced perspective on how we’re going to get out of hunger in Ethiopia, and we have to think about the marketing side’. That actually somehow resonated, and the government decided to start up a whole initiative on markets. That’s how I got invited to start the project on the commodity exchange and subsequently left the project and then started the exchange.

Has the idea of a commodity exchange gained traction elsewhere on the continent?

I think around Africa now our exchange in Ethiopia has really gained a lot of visibility. We’ve had 18 countries come to visit the exchange.

There has been a huge amount of interest. Many countries are writing it into their policies – that they want to have a commodity exchange. I think organizations like AGRA, FAO, Nepad, UNDP, the World Bank – all these organizations are now sort of saying, we have to take this seriously, and help countries think through initiatives like the Ethiopia commodity exchange.

As the outgoing CEO of the Ethiopian Commodity Exchange, what will you do next?

I’ve seen this enormous demand, and that’s going to be my next chapter – to sponsor that demand, which in a sense has been created by the initiative in Ethiopia. So that I feel this is the natural next step for me.

And how will you do that?

I’m setting up a company that will precisely do this kind of project for different countries, bringing in knowledge, technology and management experience. At this point there are about six countries, I would say, that are really moving quite aggressively on getting commodity exchanges set up in Africa, and that’s really exciting.