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.

1 comment:

  1. "if you build it, he will come"...

    that's the famous line from the movie field of dreams - the movie ethiopundit (EP) compares to the ethiopian commodities exchange (ECX). the comparison is clumsy, but EP stumbles on something of value - the quote actually applies to the ECX. obviously not in the way EP would like, so let me try my hand at connecting the quote with the initiative.

    you see, if you build a mechanism that coordinates better than an existing market, that links profit incentivized buyers and sellers faster than the methods available, that protects the interests of both participants equally in a trade by providing a clear set of balanced trade rules in advance, if you provide quality and quantity inspections in a reliable and efficient manner, if you make the trade beneficial to both sides of the trade, then - surprise, surprise - market participants will come. ECX is built and, guess what, they (producers and buyers) are coming. guess what else, they’re alive!

    throughout EP's critique, you hear a meta-explanation for ethiopia's varied and complex economic woes. EP blames it all on the government. at one point, EP laments the fact that ethiopia produces less and less food for more and more people (the principal concern that ECX is trying to address), but rather than examine how ECX could actually fill a void in ethiopia's economy, EP reverts back to his/her global reason for ethiopia's ills - Meles Inc., corruption, feudalism, blah, blah, blah. must be nice to have a short answer for all of ethiopia’s woes.

    but, what if less food is being produced because of disconnections in the market? putting EP's knee-jerk explanations for ethiopia's market failures aside for a moment, let's try our hand at some other explanations: could producers be producing less than capacity because (1) they tend to trade only with those they know to avoid dealing with unknown actors and the risks associated with such dealings? (2) could it be that trade is done in a way that makes quality/quantity inspection inefficient and costly (i.e., visual/in person), depressing the price producers receive and thereby reducing the amount of resources the producer is willing to invest in producing goods? (3) could small-scale farmers, who produce the vast majority of ethiopia’s output, come to market with incomplete/outdated information regarding price per type/grade of commodity and thus opt to produce less than capacity due to unknown returns? (4) could access to merchants in the nearest and only market these small-scale farmers know affect the liquidity of their goods and tip the balance in favor of merchants when negotiating price? (5) could asymmetric information lead these small-scale farmers to get less for their goods than a more transparent market would yield and thus affect their motivation to produce? last question, i promise - could a centralized market with clearly defined rules and an efficient/reliable delivery system work to minimize the issues i just listed? EP, chew on it a while like quanta (i.e., take your time).

    on second thought, NAAAAHHH, don’t waste your time. a centralized system to trade commodities in a corrupt, kleptocracy will never, ever work - that's just a silly dream! kinda like building a baseball field amongst stocks of corn and hoping dead baseball players of old come and visit. JUST LIKE IT actually. mental note - *write a script based on the improbable result of building a commodities exchange in ethiopia…better yet, build the commodities exchange in a field of teff - james earl jones isn’t doing much these days and he kinda looks ethiopian, it’ll be a hit!*