Ethiopian Commodities Exchange

Ethiopundit has a very lame critique of the Ethiopian Commodities Exchange. It's basically that the government is so corrupt and the rule of law so non-existent that the exchange is like a Potemkin village and therefore can't possibly work. The prototypical player in the market that Ethiopundit wishes were possible: "one bright young fellow outsmarts some TPLF conglomerate by cornering part of the coffee market on his own or with a few daring foreign investors. " That is a hollywood-inspired vision of markets, and even what it tries to represent, the succesful high-risk speculator is not what makes markets work.

Indeed the critique ignores the necessity of bottom-up success. I have no inside information at all (even though I happen to know the person spearheading it from childhood), but I imagine that the exchange will tap into existing markets. The exchange should initially represent traders of the actual goods. These people already engage in buying and selling the stuff wholesale, but they do it by negotiating one-on-one or in a fragmented market. Everyone knows there's berberé tera, for example, the more or less centralized place where people buy and sell that particular commodity wholesale in Addis Abeba. An exchange can give those buyers and sellers a place where they are always guaranteed to find each other easily, i.e. create liquidity, and market prices. Second, the exchange generates reliable, centralized price information. That information is available down the chain all the way to the producer. Farmers, transporters, storage providers, all would benefit from improved liquidity and access to price information.

Only after the market succeeds by serving the primary players does it create a environment fertile enough for secondary players like arbitragers, speculators, and the hot-shot that our pundit friend envisions, to try their luck. These purely financial players add value too of course, they make prices more accurate by eliminating temporary gaps, and bring more flexibility to the primary players by allowing them to trade-off risk and reward. But if they come, it's not as a pre-requisite for success, on the contrary it means it's already a success.

Of course there are many reasons why the exchange could fail. For example there's what I would call the "user interface". Not necessarily with computers but in general the means by which traders interact with this market. Do they go in person and stand in a pit, do they talk to a professional in a booth who then goes on a floor to bid/ask, or do they sit at desks and punch in or speak their orders. Those are tough design issues and the answers cannot simply be copied from other exchanges elsewhere.

But to say, as Ethiopundit does, that it will fail because government interference will prevent secondary activity is putting the butter before the slice of bread (to coin a phrase!). Even if you accept the premise of interference and kleptocracy, which I don't know enough about to accept or reject, it's still not a reason why the primary layer, people who already trade these goods, cannot benefit from an exchange platform. It may be many years before (or if ever) we see commodities trading fortunes built on this exchange, and kleptocratic government going after them, but long before that Hollywood scenario, the exchange could very well make a lot of people who are currently dealing in commodities somewhat better off. And that deserves to be looked at on its own merits, not lumped with everything in the country as part of a general critique of the government.