Why do Africa’s commodity exchanges fail and why do donors love them?

Commodity exchange trading floors have failed in in Zambia, Uganda, Nigeria, Zimbabwe, and Kenya. However, this has not deterred donors, according to a recent article on Bloomberg, and at least 8 commodity exchanges started in sub-Saharan Africa over the past 20 years with the aim of improving food security for local populations.
Exchanges are a distraction from other initiatives that would better serve poor farmers, Nicholas Sitko, a Michigan State University agricultural economist who’s based in Zambia, where a commodity exchange closed in 2012, is reported as saying: “We’ve learned that no amount of money pumped into them and no amount of government effort to get them off the ground can force them to work,” he says.

Attracting donors
Why were donors attracted to commodity exchanges, which analysts said suffered from the same flaw: a top-down approach that’s better at attracting foreign aid than at improving farming practices and developing transportation and communications networks. Donors like exchanges because they look like institutions in their own countries, says Peter Robbins, a former commodities trader in London who’s studied African exchanges. And “African leaders like to show off trading floors to show how modern their countries have become,” he says.
Even the famous Ethiopia Commodity Exchange, started in 2008 with the help of foreign donors including US and United Nations to improve food distribution in a country where millions often went hungry, has not proved as effective as desired. This is despite strong Government backing, including decrees that almost all buying and selling of coffee, sesame seeds, and navy beans for export must take place on the exchange.
According to Bloomberg: “With its buyers and sellers in coloured jackets and open-outcry trading floor displaying real-time market data from around the world, the ECX has been a prime example of what an exchange can and can’t do. The government ordered export coffee trading onto the exchange shortly after it opened, hoping it would jump-start activity and help attract other business. That didn’t work: Small amounts of corn and wheat are traded, but coffee and sesame seeds account for about 90% of exchange volume.

Enough warehouses
“Eleni Gabre-Madhin, who founded the ECX and served as its first director, says one obstacle for the exchange was that the state didn’t build enough warehouses to store bulky items such as cereals.” ECX Chief Executive Officer Ermias Eshetu said ECX will re-strategize from the bottom up in the Government’s next 5-year Growth and Transformation Plan II starting in July so that it can handle staple foods and is now allowed to license private warehouse operators to expand storage capacity.
Fekade Mamo, general manager of Mochaland Import and Export and a former ECX board member, was reported saying that Ethiopia’s fragmented, barter-based agricultural economy would have to modernize before it can benefit from a Western-style commodity exchange, according to: “The objective was to bring about an equitable food supply system.. That has completely failed.”
On the positive side, founder Eleni says farmers who use the exchange have seen benefits: Posting prices publicly has boosted their income, and centralized trading means buyers don’t default on contracts. Gary Robbins (no relation to Peter), chief of the economic growth and transformation office at the U.S. Agency for International Development in Addis Ababa, says commodity exchanges can encourage a consistently higher crop quality, a key condition for global trade, says. ECX
Eleni left the ECX in 2012 and has been working with investors, including International Finance Corp.—an arm of the World Bank—and Bob Geldof’s 8 Miles private equity fund, to establish an exchange in Ghana. Next she hopes to help set up one in Cameroon.
Shahidur Rashid, a food-security analyst with the International Food Policy Research Institute in Washington, says the problem is that conditions for success, such as large trading volumes, a strong financial sector, and a commitment to transparency, don’t yet exist in most countries: “A new institution should add value, and I struggle to find that value,” Rashid says. “Every country does not need an exchange. Nor is it any good to establish them in places where they will fail.” But he also says that under the right circumstances, exchanges can make sense.

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