Graduate School of Development Studies

A Research Paper presented by:

Celeste Aida Molina Fernández
(Guatemala)

in partial fulfilment of the requirements for obtaining the degree of
MASTERS OF ARTS IN DEVELOPMENT STUDIES

Specialisation:
Rural Livelihoods and Global Change
(RLGC)

Members of the examining committee:

Prof. Dr Max Spoor
Prof. Dr Peter Knorringa

The Hague, The Netherlands
November, 2010

Disclaimer:

This document represents part of the author’s study programme while at the Institute of Social Studies. The views stated therein are those of the author and not necessarily those of the Institute.
Research papers are not made available for circulation outside of the Institute.

Inquiries:

Postal address: Institute of Social Studies P.O. Box 29776 2502 LT The Hague The Netherlands
Location: Kortenaerkade 12 2518 AX The Hague The Netherlands
Telephone: +31 70 426 0460
Fax: +31 70 426 0799

Acknowledgments

I would like to express my deepest appreciation to all the people who in one way or another contributed to the completion of this study, especially the interviewees, who generously shared their time and knowledge about the coffee sector in Ethiopia. My sincerest appreciation goes to Bilisuma Dito, who first introduced me to the ECX and provided me with key contacts for the fieldwork. Many thanks to Martha Kibru, Saba Yifredew, Taddese Mezgebo and Jim Schmitt for sharing valuable information and for pointing me in the right direction during my stay in Addis Ababa. I am greatly indebted to Christopher Jordan and the Technoserve staff for their support and for facilitating the trip to Jimma. I would also like to sincerely thank Max Spoor and Peter Knorringa for their guidance and constructive criticism throughout this process.

I will always be indebted to Adil and Yodit for their incredible support in Addis Ababa and their impromptu Amharic lessons. Bet‘am amesegenallo to all my Ethiopian friends for making me feel at home in their beautiful country.

To my RLGC ladies and ISS friends, it has been a true privilege to share this experience with you. You are all beautiful inside out.

Last but not least, I want to thank my two favourite ferenji, Sarita and Diego, for being the best companions in this adventure.

Contents

List of Tables iv
List of Figures iv
List of Boxes iv
List of Acronyms v
Abstract vi

Chapter 1 Introduction 7

Chapter 2 Governing the Markets: a literature review 10
2.1 A short review of the global chain framework 10 2.1.1 Defining ‘commodity’ 10 2.1.2 On ‘governance’ 11 2.1.2 Value distribution: producing material and symbolic quality 12 2.1.2 To upgrade or to trade down…that is the question 13 2.1.3 Integrating poverty concerns into ‘global chain theory’ 14
2.2 The question of embeddedness 15
2.3 The performativity of markets: putting the puzzle together 17

Chapter 3 International, regional and local context of coffee trade 19
3.1 The commodity problem and the impacts of trade liberalisation in Africa 19
3.2 The global coffee value chain 21
3.3 The Importance of Coffee for the Ethiopia 22 3.4.1 Agricultural Policy in Ethiopia 22 3.4.2 Ethiopian coffee and the economy 22 3.4.3 The Uniqueness of Ethiopian Coffees 23

Chapter 4 The Ethiopian Coffee Value Chain 24
4.1 Chain restructuring since the creation of the ECX 24 4.1.1 Domestic institutional framework 24 4.1.2 Mapping of key actors and institutions 26 4.1.3 Chain Structure 29 4.1.4 Quality standards and the issue of traceability 31
4.2 The Ethiopia Commodity Exchange 34 4.2.1 What is the ECX and how does it work? 34 4.2.2 Strengths and weaknesses of the ECX system 35

Chapter 5 Winners and losers in the Ethiopian Value Chain 39
5.1 The logistic bottlenecks in the chain 39 5.1.1 Areas for government intervention 40 5.1.2 Areas for ECX intervention 41 5.1.3 Areas for private sector intervention 41
5.2 The embeddedness of the chain 42 5.2.1 Top-down control of the domestic coffee chain 43 5.2.2 Struggles for favourable incorporation from below 44 5.2.3 How logistics and power relations affect chain governance 46 5.2.4 Performing the ECX? 47

Chapter 6 Conclusions 50
References 53
Appendices 57

List of Tables

Table 1 – Analytical Matrix for the characterisation of the embeddedness of the ECX 19

Table 2 – Types of interaction between chain actors in relation to the Government and the ECX 41

List of Figures

Figure 1 – Coffee flows for the different exporting channels 30
Figure 2 – Ethiopian domestic coffee marketing chain in 2010 33

List of Boxes

Box 1 – NGO Interventions 31
Box 2 – Grading Ethiopian Coffee 34
Box 3 – Material investments involved in the creation of the ECX 49

List of Acronyms

CEO Chief Executive Officer
CLU Coffee Liquoring Unit
DST Direct Specialty Trade
ECEA Ethiopian Coffee Exporters Association
ECFPEA Ethiopian Coffee Growers, Producers & Exporters’ Association
ECX Ethiopia Commodity Exchange
EGTE Ethiopian Grain Trade Enterprise
EPRDF Ethiopian People’s Revolutionary Democratic Front
FDRE Federal Democratic Republic of Ethiopia
FOB Free on Board
GCC Global Commodity Chain
GDP Gross Domestic Product
GPN Global Production Network
GVC Global Value Chain
ICA International Commodity Agreement
ICO International Coffee Organisation
IFPRI International Food Policy Research Institute
IMF International Monetary Fund
IT Information Technology
MNC Multinational Company
MoARD Ministry of Agriculture and Rural Development
NEAA National Exchange Actors Association (NEAA)
NGO Non-governmental Organisation
NIE New Institutional Economics
OCFCU Oromia Coffee Farmers Cooperative Union
SAP Structural Adjustment Programme
SCAA Specialty Coffees Association of America
TPLF Tigray People’s Liberation Front
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
USD United States Dollars
USAID United States Agency for International Development

Abstract

This research paper intends to study the Ethiopian coffee value chain in light of the recent creation –in 2008– of the Ethiopia Commodity Exchange (ECX). The ECX is Ethiopia’s latest attempt to enhance the performance of agricultural markets. Conceived as a meeting point for buyers and sellers of grains (sesame, haricot beans, maize, wheat) and coffee, the ECX seeks to organise efficient and transparent market operations. The study attempts to examine whether the creation of the ECX, and particularly the Government’s decision to make coffee trade through this mechanism mandatory for private traders, has resulted in significant modifications in the way Ethiopian actors in the coffee value chain interact and in their specific functions. A global value chain approach reveals the inner workings of chain and non-chain actor coordination, with its implications both at the domestic and international level. A new economic sociology approach takes the analysis beyond the logistical bottlenecks to reveal the motivations and interests of particular chain actors and their influence in allowing for change or maintaining the status quo.

Keywords

Coffee, commodities, commodity exchanges, Global Value Chains, new economic sociology, new institutional economics, performativity of markets.

Introduction

Imagine for a minute two friends meeting for coffee in New York city. The first one is wearing a shirt made with the finest Indian cotton. Her shoe soles are made from Indonesian rubber. She then walks to her car, which is fuelled by gasoline some transnational processed from Nigerian oil. At the café she is undecided between a cappuccino with Ethiopian Yirgacheffe and an espresso with Guatemalan Antigua. Her friend has already ordered a Ceylon Sri Lankan Tea with banana bread (the bananas were handpicked by Honduran peasants). The list could go on and on…yet they both know very little about the places these products have come from, and even less about the lives of the people that produced them…

Like the simple act of having a cup of coffee, so many things in our modern lives depend on primary commodities –for the most part produced by some of the World’s poorest countries. Understanding how our modern day consumption choices are determined by the market strategies of powerful companies, and furthermore how they affect the lives of peasants on the other side of the world, requires taking a look at the inner workings of international trade and its impact on developing countries. For the case of coffee alone, 6 million tonnes are produced annually by more than 50 developing countries –touching the lives of approximately 25 million producers, of which at least 80 per cent are small-scale farmers; on the buying side, only five companies purchase over 50% of the beans for processing (Robbins 2003). Behind these statistics lays a myriad of complex social relations and economic transactions.

This research paper intends to study the Ethiopian coffee value chain in light of the recent creation –in 2008– of the Ethiopia Commodity Exchange (ECX). The ECX is Ethiopia’s latest attempt to enhance the performance of agricultural markets. Conceived as a meeting point for buyers and sellers of grains (sesame, haricot beans, maize, wheat) and coffee, the ECX seeks to organise efficient and transparent market operations and thus –in their words– contribute to solving the country’s longstanding problem of starvation (Brown 2009). Although this last part could be a bit of an overstatement, it is important to mention it as it reflects the way in which the Exchange portrays itself. The mastermind behind the ECX is Eleni Gabre-Mahdin, an Ethiopian economist who grew up in the United States and decided to go back to her country with a project that, according to her, could revolutionise Ethiopian agriculture by ‘helping producers sell easier and faster, get higher prices and thus earn greater income –which would in turn serve as an incentive to increase production’. It is supposed to be an exchange made to suit ‘the little guy’ (ibid).

Although the ECX is intended as an innovative institution tailored to the particular requirements of the Ethiopian agricultural commodities, the country’s deficiencies in terms of infrastructure, access to technology and financial and technical services pose significant challenges to its ability to really transform the country’s agricultural markets. The Government’s decision in December of 2008 (8 months into operations) to trade all of Ethiopia’s coffee through the ECX came somewhat as a surprise to some sectors, although documents gathered during the field visit suggest the idea of a specific exchange for coffee goes back to 2003. The decision elevated the profile of the ECX, turning it into a key institution not only for the coordination of buyers and sellers, but also for the linkage with warehousing, grading and information systems. The new exchange created a great deal of tension during its first year of operations, particularly in the relationship between the Government and private exporters, some of which even had their exporting licenses suspended for suspicions of hoarding (Schwaner-Albright, 2009).

Originally the ECX started operating for easily standardised goods, so the introduction of coffee implied new challenges. One of the main challenges for the ECX regarding coffee is that of guaranteeing coffee differentiation and traceability for specialty, fair trade and organic markets, which is lost once coffee is deposited in the ECX warehouses and graded according to regional types and quality. This is currently being addressed through the Direct Specialty Trade (DST), a new platform created by the ECX through which producers of specialty coffee are supposed to transact directly with international buyers. The question is, which producers are able to access the differentiated markets and which ones are to stick to standardised production?

This study attempts to examine whether the creation of the ECX, and particularly the Government’s decision to make coffee trade through this mechanism mandatory for private traders, has resulted in significant modifications in the way Ethiopian actors in the coffee value chain interact and in their specific functions, with a particular emphasis on: 1) examining whether the ECX is contributing to address the asymmetrical power relations faced by smallholder producers in the global coffee value chain and facilitating a more beneficial integration; 2) the main socioeconomic implications of coffee trading through a national commodity exchange as a policy instrument to promote the coffee subsector and, thus, Ethiopia’s agricultural economy.

The study adopts a global value chain framework approach, complemented by literature concerned with issues of poverty, inequality and terms of incorporation, in order to provide further evidence of the links between global trade and the dependence of developing countries on the production of primary commodities –particularly in Africa. Furthermore, the experience of the ECX is analysed from an economic sociology perspective as a market mechanism embedded in a particular institutional environment and social context, in order to assess whether it will be able to ‘unleash the benefits of the market’ (and for whom).

The main research question is: what is the role of the ECX in addressing the constraints faced by the Ethiopian coffee sector, and particularly by smallholder coffee producers, to benefit from incorporation into the global value chain? To answer this question, the study seeks to determine whether and how the creation of the ECX has modified the structure of Ethiopia’s coffee value chain as well as which actors are most likely to benefit from involvement in it, with a particular emphasis on the participation of smallholder producers. In addition, the study attempts to establish what strategies the ECX is implementing in order to respond to different world coffee market requirements (both for standard and differentiated coffees) and how it is articulated with Ethiopia’s broader coffee sector policies.

The data for the study was collected during a six-week field visit to Ethiopia that took place from July 21st to August 31st of 2010. The research methods employed were mainly qualitative, such as semi-structured interviews and a transect walk in Jimma –a coffee producing zone in the Oromia district and the location of one of the ECX warehouses. Given the short time available and the logistical constraints to move around the country, much of the qualitative data was collected through targeted interviews and through the snowballing technique from a variety of key actors in the coffee chain, including government institutions, different kinds of private intermediaries, service providers and private sector organisations, both involved and not involved with the ECX. In total, 21 interviews were conducted (for a complete list see Appendix 1). The information collected aids in understanding the general chain structure but it is in no way exhaustive in portraying the positions and opinions of all the actors. In addition, quantitative data regarding the performance of the agricultural sector in Ethiopia, as well as official data regarding local and international coffee trade was gathered both from the primary sources and from the International Coffee Organisation.

The remainder of this paper is structured as follows: Chapter 2 provides the theoretical framework and analytical tools necessary to the objectives of the study; Chapter 3 presents the international, regional and local context in which the Ethiopian value chain is embedded; Chapter 4 analyses how the chain has been restructured in light of the recent changes in the institutional framework and the creation of the ECX; Chapter 5 aims to shed light on the bottlenecks and power relations impinging on the Ethiopian coffee value chain and the possibilities for the new market mechanism to address the constraints of the coffee sector and of small-scale producers to benefit from global coffee trade; Chapter 6 concludes.

Governing the Markets: a literature review

“The market is no longer that cold, implacable and impersonal monster which imposes its laws and procedures while extending them ever further. It is a many-sided, diversified, evolving device which the social sciences as well as the actors themselves contribute to reconfigure.” (Callon 1998:51)

This chapter –organized in three sections– intends to establish a wide-ranging theoretical framework for the study of the Ethiopian coffee value chain, the power relations between its actors, the social context in which they interact and the role of institutions in configuring a particular developmental path in a commodity dependent country. To that effect, the literature review is twofold: firstly, it will address the body of work that has come to be known as ‘global chains literature’ and, secondly, the critique to the principles of neoclassical economics and markets led by Granovetter, known as new economic sociology. The combination of both streams of literature aims to allow for each to compensate for the other’s shortcomings and thus be able to look at the macro (global) and micro (local) dimensions of the value chain in their due perspective.

The first section addresses the general ideas regarding the global value chain (GVC) framework, with an emphasis on the aspects that will be of particular use for the research: the role of institutions, as well as issues of governance, poverty, inequality and terms of incorporation. The second section, drawing on a new economic sociology approach, will focus on the embeddedness of value chains in complex social networks in order to analyse how the coffee value chain is linked to broader structural issues and power relations that characterise the Ethiopian context. A brief third section introduces the concept of the performativity of markets, aiming to explain how specific economic theories relate to their implementation in the real world.

1 A short review of the global chain framework

1 2.1.1 Defining ‘commodity’

A lot has been written about commodities, their relationship with trade and development and the organisation of their production processes, yet there does not seem to be a clear consensus regarding what a commodity actually is. A commodity could be simply defined as any kind of good produced to be exchanged in the market rather than for personal use. Daviron and Ponte (2005) define commodities as ‘goods with a world market where most participants and transactors use the same global quality standard to discover the same measurable quality attributes’. Bernstein (2006a) notes Daviron and Ponte’s elaborations on the features of commodities deal more with the symbolic value of the highly differentiated products that reach the consumerist society and less with producer and intermediate goods.

This study aims to distance itself from definitions such as that of Gordon et al. (1999), which claim that in the context of food and agricultural industries the term refers to products whose price is determined by a specific set of characteristics which makes them homogenous but that can increase profitability through marketing and promotion. In other words, through product differentiation, market segmentation and niche markets, products can become non-commodities. The latter is an example of the recently widespread, and rather misleading, idea of the possibility of de-commoditisation through product differentiation. This definition fails to point out that nothing is intrinsically a commodity (Nevins and Peluso 2008) and that it is rather the process through which value and property rights are assigned to a product, which results in their commoditisation.

Another often disregarded characteristic of commodities rescued by Hartwick (1998) (drawing on Marx) is their direct link to specific contexts, conditions of production and power relations which are often hidden from the final consumers through a process called ‘commodity fetishisation’. Daviron and Ponte acknowledge a process of double fetishisation in which the masking of the social relations of production is combined with the commoditisation of sustainability and certification in the coffee sector, which often do not deliver the desired benefits for small producers. Bernstein (2006b) regards this as adding new nuances to Marx’s concept rather than a departure from it, as the authors suggest; most importantly, ‘the physical, market or cultural/symbolic value of goods and services does not remove them from the domain of commodity production in the Marxist sense’.

2 2.1.2 On ‘governance’

The GVC framework is based on the work of Gereffi and Korzeniewics (1994) and is described as a methodology for studying global economic governance, which has been used across disciplines within the social sciences interested in the international organisation of industries in different sectors. According to Ponte, Gibbon and Bair (2008), three main approaches to GVC have emerged through the years: governance as driving, governance as coordination and governance as normalisation.

The first approach, originally known as Global Commodity Chain Analysis (GCC), is rooted in Hopkins and Wallerstein’s (1986) world-system theory and their concern for the global division of labour. GCC addressed the way in which inter-organisational networks around a certain commodity interact in the world economy through three key dimensions: 1) the input-output structure and geographical coverage; 2) their internal governance structure (entry barriers and chain coordination); 3) the institutional framework – that is, how local, national and international policies shape the way actors interact in a globalised context (Daviron 2002). It distinguished between two main types of governance structures: producer-driven, more typical of capital-intensive chains in which producers tend to retain control of operations; and buyer-driven, more typical of labour-intensive sectors where actors in charge of marketing, design and retailing are the ones setting entry barriers (Bair 2008).

In recent years, the term GCC has been abandoned in the literature and substituted by that of GVC, which is focused more on the conceptualisation of governance as coordination. Gereffi, Humphrey and Sturgeon (2005) suggest that the structure of global value chains depends upon three main variables: a) the complexity of transactions; b) the ability to codify transactions and c) the capabilities in the supply-base. Based on these variables, they outline five possible categories of governance: market, modular, relational, captive and hierarchy.

Finally, governance as normalisation emerged out of more recent contributions criticising Gereffi, Humphrey and Sturgeon, which emphasised ‘the knowledge content of transactions and the capacities of suppliers’ (Gibbon, Bair and Ponte 2008). The theoretical framework used by Daviron and Ponte (2005) combines ‘historical political economy’, GVC analysis and Convention Theory to explain the ‘coffee paradox’. Their work ‘elaborates on the normative environment within which value chains operate and the broader normative frameworks influencing their designations attached to the products and services they exchange’ (Bair 2008). The introduction of convention theory as a complement of GVC analysis (Gibbon and Ponte 2005), is as an attempt to counteract the transaction cost economics approach so characteristic of early commodity chain analysis (Bair 2008).

3 2.1.2 Value distribution: producing material and symbolic quality

In applying GVC to the specific case of coffee, Daviron and Ponte (2005) add to the literature on quality and standards by drawing a link between quality and value. By doing this, they are able to go beyond the traditionally measurable attributes of the product itself (appearance, taste, cleanliness, etc.) and its production methods (authenticity of origin, environmental and socio-economic conditions). Using convention theory they explain how value is conveyed at different points in the value chain and in different markets. Gibbon and Ponte (2005) argue that global value chains are becoming increasingly ‘buyer-driven’ due to the buyer’s ability to embed complex quality information into widely accepted standards. They develop a typology based on material, symbolic and in-person service quality attributes:

a. Material attributes are understood as measurable attributes that are intrinsic to the product and independent from the buyers. Whereas in new institutional economics approaches standards allow the existence of market transactions, Daviron and Ponte suggest that they also impose constraints on downstream production processes. b. Symbolic quality attributes are based on reputation and embedded in trademarks (enterprise), geographical identification (consumption of place, in some ways similar to a brand) and sustainability (consumption ethics which work as distinctive labels). Once again, the actors that are capable of defining these standards obtain a key governing position in the value chain. c. In-person service quality attributes deal with those immaterial characteristics of the commodity, such as the services offered by those in contact with the actual consumers.

The three types of attributes come together when coffee is sold at any given café: material attributes relate to the taste, aroma and appearance; symbolic attributes are linked to the specific brands or establishments and can even be copyrighted; in-person service refers to the relation between the employees and the consumer. This classification is useful to understand the ‘coffee paradox’. Producers of tropical commodities in developing countries are physically detached from the consumption places and hence are unable to obtain gains from the attributes embedded in the product as they go down the chain. Thus, market power is not only about market share but also about the ability to capture the value of symbolic and in-person service attributes (ibid).

4 2.1.2 To upgrade or to trade down…that is the question

In GVC literature, upgrading refers to the paths developing country firms can follow to respond to competition and market requirements in a context of globalisation. Traditionally these include improving the products, improving the production processes and shifting to new functions (which requires more skills); these strategies are known as the ‘high road’ to upgrading and deal with the flow of knowledge and information between buyers and suppliers (Gereffi 1999). On the other hand, more recent work by Gibbon and Ponte (2005) suggests that increasing production volume and creating economies of scale –which would normally be considered as ‘downgrading’ in GVC literature– could also be considered upgrading paths as they may be more favourable for developing country producers. Ponte and Ewert (2009) identify two broad orientations in the GVC literature regarding upgrading. The first one relates to the sources of capabilities and accessing new market segments. The second one pays more attention to the conditions that are most likely to lead to ‘a better deal’ for developing country firms participating in global value chains.

In ‘The Coffee Paradox’’, Daviron and Ponte (2005) analyse how the dichotomy between the tendency towards standardisation in the mainstream and towards differentiation in the specialty market pose both constraints and opportunities to developing countries. However, the research will also consider the contributions of Gibbon and Ponte (2005) stating that greater recognition should be given to upgrading paths that seek to achieve economies of scale and to secure a stable supplier position in buyer-driven chains. By ‘trading down’ Gibbon and Ponte refer to two distinct processes. On one hand, the processes through which developing countries, especially in Africa, have experienced exclusion and marginalisation due to the constraints in meeting buyer requirements concerning quality, delivery times, volumes and prices (ibid: 201-202).

5 2.1.3 Integrating poverty concerns into ‘global chain theory’

This section outlines different approaches that constitute important attempts to build a bridge between the transaction cost economics approach that GVC analysis often draws from and other perspectives closer to economic sociology. The first step is to understand what Nissanke and Thorbecke (2006) call ‘the openness-growth-inequality-poverty nexus’. They argue that although openness through liberalisation of trade and capital movement are generally assumed to have a positive impact on growth through increased exports, imports and enhanced capital flows, positive openness is neither automatically guaranteed nor universally observable. In the same way, the impacts of inequality on growth have been linked to a wide range of causes: political and social instability leading to lower investment and weak credit markets, underinvestment in human capital (education, health, etc.) leading to low worker productivity, low capacity to shift towards non-agricultural activities. Other channels through which globalisation produces winners and losers include: differences in cross-border factor mobility associated to global market and power structures, uneven diffusion of technological processes, the nature of modern information flows. The authors contend that pro-poor growth needs not only to reduce poverty but also decrease inequality, which requires clear pro-poor and redistributive growth policies (ibid).

For example, policy prescriptions such as the ones issued by governments, in compliance with World Bank or IMF programmes and donors alike, say very little about the impacts the terms of integration have on poverty, inequality, gender and the environment. The World Development Report (2008), for instance, prescribes ‘establishing efficient markets and value chains, accelerating smallholder entry to agricultural markets and raising smallholder innovativeness and competitiveness’ as pathways out of poverty. But as Amanor (2009) points out, this prescription for smallholder participation disregards the struggles of the dispossessed making the transition to labour, alternative livelihoods or migration. The agribusiness development agenda fails to examine the processes of exclusion that often result from market governance, differentiation and quality controls.

Kaplinsky (2004) argues how particular ways in which developing countries participate in the process of global production can sometimes result in what he calls ‘immiserising growth’ –that is, ‘increasing economic activity (more output and more employment) but falling economic returns’. The question is how local actors can participate in the global economy while securing a sustainable and equitable growth. According to Kaplinsky, global value chain analysis focusing on governance relations can be useful to identify the major institutional actors and the policy levers that may influence the behaviour of key stakeholders in the value chain and examine the particular barriers to entry and rent (ibid). Hickey and du Toit’s (2007) ideas about the linkages between adverse incorporation, social exclusion and chronic poverty are also useful to understand the relationship between impoverished groups and individuals and the social systems (societies, communities, markets and institutions) shaping their lives. In their view, global value chain analysis might be useful to examine the power relations involved in commodity production that determine whether the poor benefit or not.

While main contributors of the global chains literature conclude that working towards an integrated theory will have to be the object of further research, the GVC framework offers a useful methodological tool for the analysis of the impacts of globalisation on economic production (Bair 2008). The research will borrow mainly from the application of GVC analysis to coffee as proposed by Ponte and Daviron, which emphasises issues of quality standards and upgrading paths and opportunities, especially for actors in developing countries. However, due attention will be paid to the institutional context, particularly the role of the state, not only as a regulatory actor but also as a chain actor itself. The issue of the institutional framework is strongly highlighted by another stream of literature known as global production networks (GPN). GPN in fact emerges as a critique to the lack of the institutional and geographic dimensions in the GCC literature (ibid). Although GPN aims to distance itself from the GCV approach, there are also potential complementarities between the two: mainly the possibility of examining how the coordination structures are affected by previously existing forms of power (or new ones arising from them).

2 The question of embeddedness

All the reviewed global chain literature identifies to some degree with the question of embeddedness in social relations, albeit in an often biased and sometimes contradictory fashion. This section will thus aim to rescue relevant elements from the academic discussions regarding new economic sociology in order to provide a stronger basis for the analysis of the social relations and behaviour of chain and non-chain actors in a given context.

New economic sociology stems from Granovetter’s article “Economic Action and Social Structure: The Problem of Embeddedness” (1985). This article revives and broadens Polanyi’s (1944) concept of embeddedness, arguing that social structure is often neglected in economic analysis and that economic actions should be ‘embedded’ in social structures of ongoing interpersonal relations (Granovetter and Swedberg 2001). Drawing on social network ideas, organisation theory and the sociology of culture, Granovetter and Swedberg define new economic sociology as based on two main theoretical concepts: ‘embeddedness’ and ‘the social construction of economic institutions’ (ibid). Economic action, they argue, is embedded in social networks, which are understood as “a regular set of contacts or social connections among individuals or groups” (p. 11). It emerges as a critique to new institutional economics (NIE) represented by the work of Williamson (1975), North (1990) and others, which emphasises institutions as efficient ways to solve market failures. In NIE the social analysis concerning ‘why actors do what they do’ takes a back seat to a ‘rational choice’ approach. For Granovetter, interpersonal relations within social networks can constrain malfeasance and opportunistic behaviour. Contrary to the formal institutional approach of transaction cost economics to solve the problem of trust, the embeddedness approach proposes informal solutions (Nee 2005).

However, Granovetter’s approach has not gone without criticism either. Bair (2008) observes the bias towards the positive aspects of embedded networks, the tendency to under-examine the market as a socially constructed institution shaped by the political, cultural or ideological context and an inclination towards the local dimension. Nee (2005) adds the lack of an explanation for the ‘decoupling’ of economic actors from interpersonal networks to pursue personal interest through market transactions. As a result, more recent contributions, grouped into what is being called ‘new institutionalism in economic sociology’, argue for a more clear emphasis on the mechanisms through which formal institutional structures interact with social networks to shape and govern economic actions (ibid). Institutions, from a social constructionist stance, are regarded not as external realities but rather as the result of a gradual process in which particular ways of doing things become the norm. Nee defines institutions as “a dominant system of interrelated informal and formal elements –custom, shared beliefs, conventions, norms, and rules– which actors orient their actions to when they pursue their interests” (p.55); the alignment of interests, norms and power is thus a condition sine qua non for institutional change.

The use of the ‘embeddedness’ approach to complement the shortcomings of the global chain literature has been a recurring trend in recent years. The case studies edited by Helmsing and Vellema (2011 forthcoming) are examples of different ways to unpack the mechanisms through which particular ‘institutional complexities’ have a bearing on determining the winners and losers in a given chain –that is, on the general developmental outcomes. More specifically thus, the study will be looking at the interaction and interdependency between social embeddedness and specific aspects of chain governance, such as: the nature and role of the state as a regulator and/or as a chain actor; the role of international public and private organisations; the dynamics between public/private interests; the influence of ethnicity, kinship, religion or political affiliation on the coordination between chain actors.

3 The performativity of markets: putting the puzzle together

The previous sections have provided the necessary analytical tools to address the social relations and institutions underpinning markets within specific a context. However, one last concept within economic sociology is relevant for the analysis of the particular case in hand, consisting in the creation of a market exchange for a primary commodities: the idea of the performativity of markets –that is, of the relation between market theories and the markets themselves. This concept was coined by Michel Callon in the late 1990s.

Callon’s (1998:2) central idea is that ‘economics performs, shapes and formats the economy rather than observing how it functions’. Following the concept of embeddedness introduced by Polanyi and revisited by Granovetter, Callon also acknowledges that social relations constitute the underlying environment in which the co-ordination of market transactions takes place, but he argues that society is also the outcome of a process in which the social sciences and the theories they propose are stakeholders. Based on this, he concludes that ‘hommo economicus’ does exist, but as a social construction capable of mobilising material investments and property rights (legal rights and norms) rather than just an a-historical reality (ibid).

However, Aspers (2007) shows that the idea of theories about the world constantly creating that same reality is not new: Husserl ([1954] 1970) argues that theories are gradually taken for granted and in this way lead to social change; Giddens (1987) claims that social and economic phenomena are ‘made to happen’ through the knowledgeability of the actors themselves. Aspers believes the limitation of Callon’s approach is that it lacks a broader notion of markets (as inclusive of culture, values, etc.) and focuses exclusively on economics performing the widespread neoclassical price mechanism paradigm, thus neglecting the fact that not all markets that are performed follow the neoclassical model. Based on this, he proposes a typology of markets based on two pairs of distinctions that indicate identity, role and market order (Aspers 2007:384-387):

a. Fixed-role markets: economic actors are identified with a permanent role as a buyer or a seller (example: markets for cars, garments, etc.) b. Switch-role markets: economic actors shift roles between seller and buyer (example: stock exchange) c. Status markets: order is maintained because the identity of the actors is more socially entrenched than the traded commodity. d. Standard markets: order is maintained because the commodity is a more entrenched social construction than the identity of the actors in the market.

Among the illustrative case studies on the embeddedness and performativity of markets, García-Parapet’s ([1987] 2007) analysis of the creation of the strawberry auction at Fontaines-en-Sologne proves quite useful for the analysis of the case in hand. She sets out to examine whether the creation of the strawberry auction is the realisation of a market of pure competition or a market mechanism in which social factors intervene all throughout the implementation process. Drawing from the case of the strawberry auction, Table 1 will serve as an analytical matrix that brings together the issues of embeddedness and of performativity in the case of the ECX:

The combined theoretical framework presented in this chapter will help in analysing the social factors that play out in the creation and implementation of the ECX and how they relate to broader structural issues that characterise the Ethiopian agricultural economy.

International, regional and local context of coffee trade

The three sections in this chapter aim to describe the international, regional and local setting in which the ECX emerges. The first section examines what has come to be known in the literature as ‘the commodity problem’, with an emphasis on commodity exchanges as a new coping mechanism. The second section presents an overview of the transformations in the global coffee value chain in recent years and the constraints global market requirements pose for producing countries. The last section shows the importance of coffee for Ethiopian economy and culture.

1 The commodity problem and the impacts of trade liberalisation in Africa

The relation between commodity trade and development –also known as ‘the commodity problem’– has been an issue since the nineteenth century.[1] As Gibbon (2005) explains, this question has been widely debated in trade literature and is usually defined by two central elements, commodity price volatility and decline in relative prices, which can be explained by the Prebisch-Singer (1950) hypothesis. They argued that the decline in relative prices of commodities was structural because, over time, the transformation costs for manufactures would increase at a higher rate than the production costs for raw materials; hence demand for commodities was inelastic while demand for manufactures was elastic. Gibbon adds a third element: the emergence of oligopolistic market structures on the demand side. These three elements are useful to understand how policy regarding primary commodities has been shaped over most of the twentieth century and still has not been resolved.

The International Commodity Agreements (ICAs) were setup for products such as tin, cotton, coffee and others to compensate for the volatility of the commodities market and provide greater certainty to developing countries regarding export earnings (Lines 2005). The ICAs aimed to control price fluctuations through the opportune buying and selling of buffer stock or, for the case of perishable commodities like coffee, through exports quotas. Lines points out that ICAs were an unusual mechanism, as they required the cooperation of both producers and consumers.

Throughout the 1970s and early 1980s, the commodity problem became an issue of national development agendas; thus tropical commodity prices remained relatively stable. After the ideological shift towards neo-liberalism, consumer countries no longer felt the pressure to comply with export quotas and buffer stock policies, thus one by one the ICAs were all abandoned; Structural Adjustment Programmes (SAPs) were gradually implemented in practically all commodity-producing countries (Lines 2005:3-5).

There seems to be a consensus among governments and international aid actors that developing countries should trade their way out of poverty. However, despite all sorts of measures, small producers are still poor. The problem is not that they are not trading; the problem is they are not earning much from trade. They produce similar agricultural and labour-intensive products that flood the markets and depress prices (Daviron and Ponte 2005).

As in most countries that implemented trade liberalisation, export performance and diversification in Africa remained low. The effects of liberalisation have been particularly severe in the agriculture sector, where productivity has notoriously fallen as a result of the withdrawal of the state, which has negatively affected public investment in agricultural research, extension services, education and infrastructure (Chang 2009). African countries, which have historically been the most affected by falling commodity prices, depend on agricultural commodities for approximately 50% of their export earnings. According to UNCTAD (2008), Africa’s market share has dropped from 6 per cent of world exports in 1980 to about 3 per cent in 2007. Within Africa, Sub-Saharan countries are among the most dependent on agriculture for exports. Furthermore, because many of these countries are also heavily indebted, their governments are forced to adopt extreme austerity policies, which often reduce expenditure on health, education and infrastructural development – thus perpetuating adverse conditions for participation in global trade.

In the context of globalisation, commodity exchanges have become an increasingly popular tool in development countries to face ‘the commodity problem’. UNCTAD (2007:19) defines commodity exchange as “a market in which multiple buyers and sellers trade commodity-linked contracts on the basis of rules and procedures laid down by the exchange”. A comparative study on commodity exchanges stress the wide range of development impacts they may have on development countries in terms of ‘price discovery, risk management, investment, development of commodity markets and finance, industrial development, market internationalisation and use of IT services’ (ibid). Nonetheless, the specific outcomes may vary depending on the needs they are designed to fulfil and the combination of organisations, institutions and regulatory frameworks found in each particular context.

Supporters of commodity exchanges, which include UNCTAD and various development aid organisations, see them as an alternative to former stabilisation mechanisms like the ICAs, which can compensate for the services formerly offered by parastatal marketing boards. UNCTAD also notes that exchanges seldom contemplate the direct participation of farmers; they participate instead through cooperatives and other intermediaries, who in turn facilitate benefits in terms of access to information and infrastructure services (ibid).

An UNCTAD review (2006) reveals that nearly half of the commodity exchanges are in the development world; agriculture has been the leading sector in commodity exchanges over the past years, with a 46% increase in agricultural contracts in 2006 compared to the previous year. In Africa exchanges exist now in Malawi, Kenya, Uganda, Zambia, Nigeria, Ghana, Tanzania, South Africa (the only one with a futures market) and Ethiopia (CTA 2009, Santana-Boado 2010).

2 The global coffee value chain

The world coffee market has undergone dramatic transformations over the past couple of decades due to changes in international policies and new requirements both on the supply and demand sides. These factors, together with technological innovations, have deepened the power asymmetries between the various actors in the global value chain and made it more difficult for poor producing countries to rip the benefits of coffee trade (Petit 2007).

On the supply side, due to increased volumes and quality, Brazilian and Vietnamese coffees strengthened their market positions and marginalised other producers. On the demand side, new market trends such as specialty/gourmet, fair trade, decaffeinated and flavoured coffees have developed, making traceability of origin, as well as economic, social and environmental conditions, an important element for the establishment of long term partnerships between producers and roasters (229-230).

The resulting phenomenon, by which actors downstream in the global chain (such as traders, roasters and retailers) obtain a higher value than those upstream (mainly the producers), is what Daviron and Ponte (2005) call ‘the coffee paradox’. The paradox is described as a ‘boom’ in the consumer countries and a ‘crisis’ in the producing countries, mainly due to the fact that producing countries sell coffee for its ‘material quality’, while consumers buy coffee for its ‘symbolic value’ (ibid).

Oligopoly is another important element of the commodity problem that is linked to the substantially smaller shares of final prices going to developing country producers (Gibbon 2005). According to 1998 figures, ‘the largest five coffee roasters (Philip Morris, Nestlé, Sara Lee, Proctor & Gamble and Tchibo) controlled 69 per cent of the world market, while the largest eight international trading companies (Neumann, Volcafé, Cargill, Esteve, Aron, Man, Dreyfus and Mitsubishi) controlled 59 per cent’ (ibid:159).

3 The Importance of Coffee for the Ethiopia

. 3.4.1 Agricultural Policy in Ethiopia

Agriculture remains the largest sector in the Ethiopian economy, contributing about 47% of GDP and providing employment to more than 80% of the rural population (World Bank 2010). In addition, it continues to be the major source of export earnings. The low levels of agricultural technology and rural infrastructure, together with land degradation, recurrent droughts and the demographic pressure on rural areas, are among the main causes of low agricultural productivity, poverty (44.2% of the population lives below the poverty line of USD1 per day) and low social indicators (ibid). In this context, a better performance of the agricultural sector is vital in order to: guarantee food security; produce exportable goods to pay for imports; aim to generate a surplus for the development of other sectors; secure a sustainable use of natural resources and improve the living conditions of rural dwellers (Gebre-Selassie 2003). The fact that the Ethiopian economy has shown mixed results in the past years –with GDP growth rates going from 3.8% in 2002/2003 to an unprecedented 11.8% in 2005 and down to 8.7% in 2009– is an example of the direct link between the performance of the agricultural sector and the performance of the economy as a whole; (Petit 2007, World Bank 2010).

Although the performance of Ethiopian agriculture as a whole has improved over the past decade –partly due to the reforms introduced in 1992 and partly because of brief periods of favourable international conditions– productivity levels remain low compared to the increase in rural population (Petit 2007).

. 3.4.2 Ethiopian coffee and the economy

Ethiopia is known for being the birthplace of Arabica coffee, which still grows wild in the forests of the Kaffa region. It is also the country’s main export crop, accounting for approximately 40% of export earnings (IMF 2006) and responsible for the livelihoods of an estimated 1.3 million producers and 15 million people between producers, wageworkers, transporters and their families (Petit 2007). For this reason, analysts and policy-makers alike regard coffee as one of the key subsectors of the economy in terms of its potential to raise agricultural production and increase both smallholder’s income and government revenue. However, during the last decades, the world coffee market has evolved into a highly specialised and complex global chain involving a wide range of actors that interact in order to satisfy an even wider range of market demands. This global context poses particular challenges to a poor coffee-producing country such as Ethiopia.

Ethiopia is currently the largest coffee producer in Africa and among the ten top producers in the world, after Brazil, Vietnam, Colombia and Indonesia. According to preliminary data (ICO 2010), production fell to approximately 4 million bags in 2009; however exports increased from to 1.5 million bags in 2009, to an estimated 2.5 million bags in 2010 –a 70.3% increase. The bulk of Ethiopia’s production is exported to Germany and Saudi Arabia in green bean form for roasting (ICO 2009). According to recent Government figures, the revenue from coffee during the 2009/2010 fiscal year was approximately USD526 million, an increase from USD 376 million the year before (Addis Fortune 2010).

. 3.4.3 The Uniqueness of Ethiopian Coffees

Ethiopia’s role in the global value chain lies not in the volume of its exports but in the fine quality of its coffees (Ponte and Daviron 2005). In order to understand the relationship between domestic and international chain actors, it is important to first understand how, where and by whom coffee is produced in a country. Ethiopia, as mentioned earlier, produces only Arabica coffee, which is believed to have originated in the Kaffa region. Coffee-farming systems in Ethiopia can be classified into four categories: forest coffee, semi-forest coffee, garden coffee and semi-modern plantation. Most farmers cultivate without the use of fertilizers, pesticides or herbicides, which is why yields are fairly low in Ethiopia compared to other countries. Geographically, coffee districts –called woreda[2]– are classified by their extension into major, medium and minor producers. Coffee production is concentrated in the Oromia and the Southern Nations, Nationalities and People’s Region. Each woreda produces a coffee variety with distinct characteristics; the most renowned internationally are Yirgacheffe, Limu and Harar. Dry and wet processing are the most widely used methods in Ethiopia; historically about 90% of production was sun-dried, but washing has become more popular in recent years because of significantly higher premiums in the market. Petit (2007) reported smallholders produced about 95% of total production, against 4.4% of state-owned farmers and 0.6% private investor plantations. Evidence from the field suggests these share may have changed over the past years.

The Ethiopian Coffee Value Chain

In a highly fragmented and regulated chain, understanding who does what and who is allowed to interact with whom can be a difficult task. This chapter will address the major changes in the structure of the coffee value chain since the creation of the ECX. In order to understand the role of ECX in the coffee sector, the first section will provide an overview of the institutional and regulatory framework, the main actors involved in the chain and the new chain structure. The second section describes the ECX as a marketing mechanism for coffee and other commodities and analyses its strengths and weaknesses. The findings presented in this chapter are based on the interviews conducted during the fieldwork with representatives of the private and public organisations involved in the coffee chain. The researches conducted by Daviron and Ponte (2005) between 1999-2003, and particularly by Petit (2007), constitute the most important basis for comparison in this study.

1 Chain restructuring since the creation of the ECX

. 4.1.1 Domestic institutional framework

As mentioned in Chapter 3, the liberalisation process started in Ethiopia in 1991 with the fall of the socialist Derg regime and the arrival of the Ethiopian People’s Revolutionary Democratic Front (EPRDF), which implemented a series of reforms in line with the usual IMF and World Bank prescriptions. However, liberalisation was only partial, as policies to promote the participation of the private sector were combined with strict government controls in certain areas. According to Nicolas Petit’s depiction of the Ethiopian value chain in 2006, the reforms were introduced gradually through the years and consisted mainly in the abolition of: the former state monopoly for trade and marketing in favour of private exporting firms, price controls, the quota system for traders and the export coffee tax (2007: 247-247). State control remained firm through: the mandatory National Auction; the strict licensing requirements for collectors, suppliers and exporters; the policy to keep only non-export quality coffee for domestic consumption; and the prohibition for Multinational Corporations (MNCs) to register as exporters (ibid: 246). Many of the mentioned state controls have suffered only minor variations or remain unchanged to this day, keeping the Ethiopian coffee chain highly fragmented and with limited possibilities for vertical integration of producers with final buyers.

Following a period of reorganisation of the powers and duties of the institutions involved in the coffee sector, the Government decided to abolish the National Auction in 2008 and to “harmonize coffee marketing with the organisational work of the Ethiopia Commodity Exchange” (FDRE Proclamation n. 602/2008, also known as ‘the Coffee Quality Control and Marketing Proclamation’[3], and its Directives 159/2009 and 161/2009). This took place only eight months after the ECX began operating with other primary grains, but the idea of trading coffee through a commodity exchange was not new, it was an idea in the making since 2003 –as will be discussed in further detail in the following chapter.

The new proclamation aims to establish a more cost effective coffee quality control and marketing system in order to efficiently supply the international market, and to enable coffee producers to increase their income. This can also be read between the lines as a twofold strategy: to strengthen the coffee sector as a one of the main pillars of the economy, and diminishing the effects of market distortions created by private exporters. Interviewees from both the public and the private sectors confirm what Daviron and Ponte (2005) acknowledge was becoming an increasingly common practice among private exporters: to register as suppliers through sister companies, thus ensuring the possibility of reacquiring their own coffee by bidding higher prices, which increases the risk of making the chain non-competitive.

The new regulation introduces important changes in terms of the processes for quality control and coffee transactions. First, quality control procedures are enhanced by adding a pre-inspection at the locality of production and an official grading at a regional coffee quality and liquoring unit (according to the agro-ecology of the production area). Second, the lawful places for the transactions to take place and the duties and obligations of the different types of actors are specified (such as having the necessary capital and facilities to operate in a given capacity). In this regard, the figure of the collector –formerly recognised as an independent actor operating between the producer and the supplier– is eliminated and collection ascribed to suppliers. Third, a warehousing system is setup where coffee is stored until sold at the ECX.

On the other hand, certain regulations remain unchanged, such as the need to obtain a quality certification prior to export and the prohibition to sell export-quality coffee in the domestic market. Coffee exporters, domestic consumption wholesalers and coffee roasters still require licenses to operate; suppliers are said to require a competence certificate from the corresponding executive body in order to collect, process, store or transport coffee. Above all, strict government regulation remains a means not only to ensure quality but also to guarantee the timely collection of foreign currency. This is evidenced in the new proclamation by the emphasis on requiring suppliers to deliver processed coffee to the ECX within six months of processing, and export coffee purchased or collected from private farms to be sold before the next harvest.

1 4.1.2 Mapping of key actors and institutions

For an easier understanding of how the chain structure has changed, actors will be grouped into five categories: regulatory government institutions and parastatals, private intermediaries, cooperatives, coffee producers and sector associations. The table in Appendix 2 offers further details about how duties and functions have been restructured.

. Government Institutions and Parastatals

The State in the Ethiopian coffee chain has to be analysed from two different perspectives: as a market regulator and as a chain participant itself. The main regulatory body for the coffee sector is the Ministry of Agriculture and Rural Development (MoARD)[4], mainly through the Agricultural Marketing Directorate –in coordination with the regional bureaus at the zone and woreda levels for aspects regarding extension services and with the Coffee and Liquoring Unit (CLU) for quality control. This has undoubtedly given greater coherence to the general coffee sector policy; however, one of the main constraints posed by the new organisational setup is that the Marketing Directorate is responsible not only for coffee but also for all other agricultural products. Because of its particular complexities, ‘coffee demands most of the time and efforts of the staff and would be better managed under a division of its own’ (Interview, MoARD Marketing Director, Addis Ababa, 13.08.2010). In addition, the Ethiopia Commodity Exchange Authority (ECEA) emerged as a new regulatory body for the marketing system. Created alongside the ECX and responding directly to the executive power, it has the task to oversee the implementation of the ECX rules, extend licenses to its members and audit its performance.

Regarding the State as chain actor, Petit (2007) points out how the liberalisation policies introduced in the 1990s and until 2007 showed a clear tendency towards reducing government involvement and promoting private sector participation. This holds true for certain segments of the chain such as the state farm dating back to the Derg Regime, which according to the MoARD accounts for less than 5% of total production and is now in the process of being privatised. Another example is the dissolution of the coffee purchasing and exporting enterprises in the early 1990s. The government retained only its Coffee Processing and Warehouse Enterprise, whose services are also available to private actors. Therefore, state enterprises have rather discrete roles in the chain and their participation is decreasing, as private actors grow stronger. However, there is one case contradicting the general tendency. The government has since the creation of the ECX re-engaged in coffee exporting through the Ethiopian Grain Trade Enterprise (EGTE), which formerly traded only cereals, legumes and oil seeds with the purpose of stabilising the domestic grain market. Interviewed EGTE officials (17.08.2010) argue that ‘the decision to re-engage in the exporting business came as a response to abuses and malpractices committed by private traders, such as defaulting on contracts, failing to report real income and to repatriate export earnings, tax evasion and even fraud’. The implications of the re-appearance of the State as a chain actor shortly after the creation of the ECX will be analysed in depth in the next chapter. Hence, only three pre-ECX parastatals remain actively involved in the coffee chain, the fourth -the ECX itself- will be looked at in depth in the following section.

Private Intermediaries

Private intermediaries include all those actors in the chain who play an intermediary role between producers and final consumers at the local and international levels, such as suppliers, private processors, service providers, exporters, wholesalers and roasters.

Exporters are clearly the most powerful of the private intermediaries as they hold the contacts with international buyers. They are centralised in Addis Ababa and own their processing plants where coffee is transformed into export quality green beans. Although MNCs are not allowed to buy coffee directly from suppliers, they oftentimes have locally-run representation offices and well-established relationships with exporting firms.

However, the most notable change in this group regards suppliers. As noted earlier, coffee collectors –that is, individual agents collecting coffee directly from producers in remote areas– known as ‘sebsabies’, are no longer recognised by law because, according to the MoARD, they do not carry out a value-adding activity. Nonetheless, almost all the interviewees agreed that ‘sebsabies’ most likely continue to perform their duties as employees of suppliers. Even if suppliers now reach the primary markets, their role is considered necessary, as they are able to reach remote areas despite the country’s poor infrastructure.

In addition, since the creation of the ECX, a wide array of service providers has emerged, particularly around the regional warehouses, as was verified during the transect walk in the Jimma zone. What has happened /…/is new actors have come up, like transit agents, people who will sit in Jimma and facilitate the loading on behalf of the exporter, transport service providers, freight managers, information people (people who actually stand in front of the tickers and inform others about prices in areas where there are no tickers (Interview, Eleni Gabre-Madhin, ECX Chief Executive Officer –CEO, Addis Ababa, 26.08.2010).

Licensed wholesalers and coffee roasters operate mainly in the domestic market –that is, trading non-export quality coffee. Wholesalers buy coffee from the ECX; roasters can buy either from the ECX or from wholesalers and are allowed to export roasted and grinded coffee, although this market niche is quite minimal.

. The Cooperative Sector
In 2001 the government allowed cooperatives to be formed (with support from a USAID-funded project) which could by-pass the national auction and become direct exporters (Dempsey and Campbell 2001). Their main functions are to help service cooperatives in improving farmer’s incomes, establishing producer/buyer linkages, exporting members’ coffee and providing a variety of technical services, such as warehousing, transportation, promotion, financing. Social services (health, water and education) are provided for members and their families (Petit 2007). Through this process, cooperatives and smallholders have invested in different certification programs (Fair Trade, organic and others), thus opening the way to more direct relationships between producers and final buyers.

. Coffee Producers
Most literature on Ethiopian coffee attributes at least 95% of total coffee production to small-scale farmers. Although there are no recent official surveys, the Ethiopian Coffee Growers, Producers & Exporters’ Association (ECGPEA) claims large-scale plantations have grown considerably over the past years and account for approximately 10% of total production, divided in roughly equal parts between the state and commercial farms (Kidan 2009). “Large-scale plantations cover at least 50,000 hectares, out of the total 700,000 hectares covered by coffee in Ethiopia; approximately 30,000 hectares are privately owned, the rest are state plantations” (Interview, Yilma Kidan, General Manager ECGPEA, Addis Ababa, 24.08.2010).

1 Sector associations

According to an International Food Policy Research Institute (IFPRI) survey, the majority of traders are not organised in formal or informal trade associations; thus sector associations have had a weak role in the marketing system (IFPRI 2003). The transition to the new system may have started to change that. The oldest and most well known is the Ethiopian Coffee Exporters Association (ECEA), whose membership has increased from 65 in 2006 (Petit 2007) to 90 in 2010 (according to its General Manager), including the state-owned EGTE; its members are responsible for 90% of total coffee exports. In addition, the ECGPEA was established in 2007 and has now 70 members with holdings that range from 30 to 5,000 hectares. Most recently, the National Exchange Actors Association (NEAA) which groups all trading members of the ECX, that is suppliers and exporters of pulses, oil seeds, grain and coffee with full ECX membership (ECX 2010a). Aside from providing different services, such as information and training, interviewees state these associations have become more active as of late and constitute important dialogue spaces between the actors and with policy makers. However, evidence suggests that such dialogue takes place in Addis Ababa circles and usually excludes primary producers associations, whose voices are channelled only through the cooperative unions that represent them.

2 4.1.3 Chain Structure

From the mapping of the actors, it follows that coffee in Ethiopia can be exported through three main channels: a) private traders, b) farmers’ cooperatives, c) large-scale farmers. Figure 1 illustrates coffee flows for each of the channels.

[pic]

As mentioned earlier, although there is no recent official measurement of market shares, interviews suggest that the large-scale farming sector may have grown to 10% in recent years (Interviews, MoARD 13.08.2010 and ECGPEA 24.08.2010). This comes as no surprise, considering the availability of land in Ethiopia and the Government’s pro-private sector policies.

The cooperative sector has also grown considerably since 2001, especially as a result of the intervention of numerous NGOs and international cooperation agencies and the increasing international atten-tion to fair trade initiatives (see Box 1). Dempsey (2006) reports cooperative unions’ sales of specialty coffee alone increased from USD 0.27 million in 2001 to 31.9 million in 2005. Interviewees had different estimates but their market share is believed to be approximately between 4-5% and in any case less than 10%. This means that most coffee is still channelled by private traders. Small-scale coffee producers have rudimentary, low input-output agricultural and coffee harvesting practices, low incomes, weak organisations and little bargaining power (Cabi 2009); they sell their coffee to private traders or to their primary cooperatives.

Commercial growers, better able to implement intensive agro-ecological practices, aim to increase productivity and quality in order to enter the specialty markets; like cooperative unions, they are allowed by law to bypass the ECX. Several ECGPEA members have recently started implementing out-grower schemes through which they provide technical assistance to small-scale farmers in the vicinity of their plantations and serve as an outlet for their production (Interview, Addis Ababa, ECGPEA, 24.08.2010). However, it was not possible to verify the conditions under which such schemes take place, or the degree to which the emergence of contract farming in the coffee sector –alongside a continued policy to promote the growth of commercial plantations– could transform the structure of the coffee chain in the coming years.

Although the ECX marketing system is primarily the private traders’ marketing channel, both cooperatives and commercial growers use it to sell the coffee they are not able to trade through their own channels. Like the old auction system, the ECX platform also implies trading coffee at a central market in Addis Ababa, yet there are several important differences. First, producers can only sell coffee at rural primary transaction centres (approximately 7.300 according to ECX). ‘Many of these primary markets already existed, but they were designated by the new proclamation as official transaction centres where recognised suppliers can buy red cherries or dried pulped coffee directly from producers’ (Interview, MoARD Marketing Director, 13.08.2010). From the perspective of the ECX, transaction centres make tracking markets easier and create a more competitive environment. However, there is no available information on how these centres are operating since the creation of the ECX. Interviewees from all segments of the chain acknowledged that the wider access to information regarding coffee prices has improved the bargaining power of producers and acted as a constraint on manipulative practices on behalf of suppliers. On the other hand, a recent study from Mekelle University (unpublished), in the northern Tigray Region, argues that trust is still the main factor determining market transactions at the local level. Only an in-depth look at primary markets could help determine whether the conditions in which local coffee transactions are taking place have changed as a result of the introduction of the ECX.

Second, the introduction of the warehousing and clearance system means that coffee is no longer physically moved to the sight of the Auction. Instead, after processing (usually at their own processing plants), suppliers have their coffee graded by the regional coffee and liquoring units and stored in the regional warehouses where they are given a receipt. It is important to note that both cooperatives and commercial growers are inevitably linked to the ECX despite their ability to export directly as all coffee, without exception, is mandated by law to be graded at the regional level.

Third, coffee trading between suppliers and buyers takes place at the Addis Ababa ECX trading floor through an ‘open outcry’ system based on electronically transmitted information. This has two main implications: 1) whereas with the old system exporting firms would bid openly based on samples they could actually see, now they bid based on coffee type and grade only; 2) the transportation costs from the production area to Addis Ababa (where the coffee necessarily has to go for further processing and final grading before export) has shifted from the supplier to the exporter. Figure 2 illustrates the re-structured Ethiopian coffee value chain after the creation of the ECX.

3 4.1.4 Quality standards and the issue of traceability

Even before the new coffee proclamation, regulations mandated coffee to be sealed by government officers at the production area before delivery in Addis Ababa or Dire Dawa and checked for moisture before the auction and prior to export (Daviron and Ponte 2005). However, coffee was bought at one price and without incentives for different qualities. The new quality control system, in which coffee is graded according to its agro-ecological zone, type of processing and physical attributes (see Box 2), has helped increase awareness about price differentials in relation to quality. During the first year of operations the sale of specialty grades (1 to 3) has tripled (Interview, ECX CEO, Addis Ababa, 26.08.2010).

[pic]

Throughout the years Ethiopian coffees have maintained their place in the market due to their rich genetic varieties and the low use of agrochemicals, which makes them naturally organic. Yet, two important factors are to be considered regarding quality. The first is that there is still room for improvement when it comes to processing. A common problem is ‘farmers are not used to see more compensation for more effort of picking red cherries’ (Interview, MoARD Marketing Director, 13.08.2010), thus they pick early or from the ground. Extension services aim to teach farmers the link between good processing techniques and final quality, but institutional capacity is limited.

The second factor is the issue of traceability, which is lost once coffee is graded and warehoused. The new system allows for differentiation between coffees coming from different regions, but not from individual producers or farms –a basic requirement for specialty markets, which offer higher price premiums. Despite Ethiopia being ‘naturally endowed’ for the specialty market, in the current circumstances only commercial growers and cooperative unions are able to offer full traceability, thus Ethiopia’s specialty market share is only 20%, compared to Kenya’s 40% (the highest in Africa), Guatemala’s 60% (the highest in Central America) or Colombia’s 33% (the strongest in terms of specialty volume) (ECX 2010b). Estimates suggest that Ethiopia has the potential to increase its specialty coffee production to two thirds of total production, or even 80% of production adding organic or rainforest certified coffee (ibid).

Asked about this potential, the MoARD representative explained the rationale behind the current quality system is to consolidate Ethiopia’s place in the standard international coffee market by improving overall quality, although the government might establish an organic certification system in the near future: We find certification systems are not entirely reliable /…/, people will give certificates without auditing properly and this could hamper the image of the country. So even if there is a premium to be gained, we need to focus on strengthening our institutions and marketing system. Our regulatory directorate is evaluating an organic certification proclamation but our institutions are not strong enough (Interview, MoARD Marketing Director, Addis Ababa, 13.08.2010).

2 The Ethiopia Commodity Exchange

. 4.2.1 What is the ECX and how does it work?

The ECX is defined as a marketplace, ‘where buyers and sellers come together to trade, assured of quality, quantity, payment and delivery’ (ECX 2010a). The exchange has a trading floor in Addis Ababa, eight warehouse delivery locations, and 21 electronic price tickers in major market towns. It aims to provide a trading ground for sesame, haricot beans, maize, wheat and coffee. The ECX is supposed to guarantee: 1) market integrity: guaranteeing the product grade and quantity and operating a system of daily clearing and settling of contracts; 2) efficient coordination of buyers-sellers and standardized contracts; 3) market transparency: disseminating market information in real time to all market players; and 4) managed risk (Gabre-Madhin 2007a). For the time being the ECX is focusing on spot market trading but future delivery contracts may be introduced at a later time.

The ECX is a state-owned public-private partnership enterprise established as a ‘demutualised corporate entity with clear separation of ownership, membership and management’ and governed by a Board of Directors constituted by relevant public institutions and ECX private members[5]; it operates through the sale of membership seats, which are privately owned -by wholesalers, cooperatives, exporters, processors, food agencies and even the EGTE (ECX 2010a).

According to ECX officials interviewed by Aaron Brown in the PBS Documentary ‘The Market Maker’, the ECX could contribute to eliminate food shortages and hunger in Ethiopia by creating an efficient marketing system for agricultural commodities, and increasing smallholder’s income by allowing them opportune information in order to decide when to sell. The latter may seem as an overstatement, yet it is helpful to understand how the rationale behind the creation of the exchange is based mainly on a New Institutional Economics approach. Gabre-Madhin (2007b) claims a properly implemented exchange tailored to the country’s particular characteristics and needs can help strengthen the bargaining power of weak groups such as smallholder farmers and more actively engage them in the market economy, but at the same time recognises that the role of strategic public and private partners is key to achieving the adequate policy mix.

. 4.2.2 Strengths and weaknesses of the ECX system

By law, the ECX has become a key institution for the coffee sector, providing a link to: a) an integrated warehousing and receipt system with quality standards that allows the product to be transferred only after its sold; b) an information system which disseminates market information to all market actors; c) a trading platform that guarantees payment against delivery through an electronic system for clearance and settlement in collaboration with partner banks (Alemu and Meijerink 2010). Its promoters claim these features constitute solutions to the bottlenecks that create high transaction costs and coordination risks. Gabre-Madhin (Interview, Addis Ababa, 26.08.2010) admits no systematic study has been done yet regarding the actual impact of the ECX on transaction costs. However, an assessment can be made of the strengths and weaknesses of the ECX after almost two years of operations. In doing so, a special emphasis will be made on the ECX’s role in lifting or reducing constraints for different market actors.

. Membership

Membership is acquired through the purchase of a Membership Seat –i.e. a permanent and transferable right to trade in the Exchange. Full members are allowed to trade in any commodity while limited members (usually smaller actors) can trade only for limited periods, specific commodities and in limited positions as buyer or sellers. In addition, each type of member can be a Trading Member (TM), trading in his or her own account, or an Intermediary Member (IM), trading for him or herself or on behalf of clients (ECX 2010a). Because demand for membership is high, seats are being auctioned from time to time; full membership is currently closed but may be available again in the near future, according to the ECEA. The membership cost varies depending on the type of member; it was 50,000 Birr (circa USD 3.760[6]) in 2009 but has since increased. According to Alemu and Meijerink (2010: 17) “the OCFCU bought a seat for 200.000 Birr and one businessman in the coffee business was reported to have paid 3.3 million Birr by the end of 2009”. Members are also required a minimum net worth of 500.000 Birr (circa USD38.000) for TMs and 1.000.000 (circa USD75.000) Birr for IMs in order to ensure immediate payment of the contracts.

Consequently, current membership conditions favour well-established traders who are able to fulfil the abovementioned financial requirements. Evidently, farmers are not able to become direct traders at the ECX; at most, they are represented by member cooperative unions. Clients are usually small private traders or traders without member seats, rather than individual or organised farmers. On this matter, Gabre-Madhin argued that ‘what prevents them from direct involvement is their lack of capital to carry out their own processing and to comply with the minimum volume requirements’ (Interview, Addis Ababa, 26.08.2010).

. Warehousing

According to ECX, there are currently six warehouses operating for coffee; two more will be opened shortly. Although the warehousing and receipt system has brought order in terms of classifying and grading coffee, interviewees agree there is a considerable weakness in physical infrastructure (roads, grounds facilities, buildings, drainage). A visit to the warehouse in Jimma, one of the most important coffee zones in the Oromia region, confirmed the ECX’s strong dependence on physical infrastructure. At the time of the visit, a long line of trucks waiting to enter the liquoring facilities was observed. Warehouse officials claimed the long line obeyed to a high incidence of arrival coffee exceeding the accepted moisture levels due to the rainy season. Moreover, a tour of the liquoring laboratories revealed rather modest facilities and amount of personnel compared to the number of trucks arriving. According to the supervisor, in those conditions their operative capacity was down to 30-40 trucks a day, compared to the normal average of 70. Whether the delays are due to high moisture levels at arrival or by overwhelmed local facilities, they are bound to have negative effects on coffee quality. Gabre-Madhin explains: In the case of telecommunications and the financial sector we really have built a system that goes around these infrastructure problems. /…/ If the fibre optic doesn’t work we do dial-up, and if that doesn’t work we do satellites. /…/ In the case of warehouse function, /…/ we are very vulnerable to this thing we have no control over…physical infrastructure (Interview, Addis Ababa, 26.08.2010).

1 Information System

The information system, both in the warehouse and trading components, is one of the most evident accomplishments of the ECX. According to ECX Trading Operations Manager, electronic warehouse receipts are transmitted to the ECX Central Depository so inventories are immediately updated as trading takes place. Market prices are displayed at the trading floor and transmitted in real time to market actors via: electronic tickers located in 21 locations around the country, the website and, recently, through mobile phone service. In addition, after the sales take place, the system orders partner banks to transfer funds from the buyer’s to the seller’s accounts and warehouses to update the seller’s inventory.

Establishing a real-time market data system in a country like Ethiopia is certainly an enormous challenge, which seems to have been dealt with through a considerable investment in IT systems, made possible with the financial support of the World Bank and other international organisations (Alemu and Meijerink 2010). Interviewees agree that chain actors now have improved access to updated information regarding market fluctuations and price differentials based on quality. However, from the farmer’s standpoint, improved access to information and greater awareness of what should constitute fair prices is no guarantee of automatically getting them.

. Trading, Clearance and Settlement

‘Trading takes place through ‘open-cry’ bidding in which buyers and sellers use their hands to negotiate prices and quantities; deals are sealed through a clash of palms’ (Interview, ECX Trading Operations Manager, Addis Ababa, 6.08.2010). Clearance and settlement of everyday transactions take place through the information system explained above. According to ECX, this ensures the payment to the supplier takes place within 24 hours. Nonetheless, some exporters claim that although the time for monetary transactions has decreased, delivery time of the actual product has increased due to inadequate infrastructure at the regional warehouses and transportation services.

. Direct Specialty Trade (DST)
As mentioned in the previous section, one of the main challenges for the ECX is that of guaranteeing coffee traceability for specialty, fair trade and organic markets. This is currently being addressed through the Direct Specialty Trade (DST)[7], a new platform created by the ECX through which producers of specialty coffee are supposed to transact directly with international buyers. The DST works through bidding sessions in which small farmer cooperatives and commercial growers may deposit specialty grade coffees at the ECX warehouses. Farmers are supposed to receive a minimum of 85% of the final price (ECX 2010b). According to Gabre-Madhin, ‘the two core issues they now face are: a) the farmers’ capacity to regularly produce the quality standard coffees, b) the international buyers’ demand for fully traceable coffee of lower grades’; DST could thus phase out if there is no demand from the actors involved (Interview, Addis Ababa, 26.08.2010). So far, only two auctions have been held (in February and April 2010).

Another step in responding to criticism about traceability was the agreement signed with the Specialty Coffees Association of America (SCAA) aimed at “developing a specialty coffee strategy which protects the mutual interests of the Ethiopian Coffee sector and specialty coffee buyers” (ECX 2010). When interviewed, Gabre-Madhin added ECX would become SCAA’s partner for specialty grading certifications.

Winners and losers in the Ethiopian Value Chain

Although the ECX has meant an improvement in terms of order, transparency in market transactions, access to information and the introduction of clear quality standards and grades, there are still important bottlenecks that constrain the coffee market. Furthermore, the result is that small producers are being excluded from or incorporated adversely into the chain. The first two sections in this chapter attempt to analyse how these bottlenecks may be related to the particular institutional environment, but also to the embeddedness of chain and non-chain actors’ interactions in particular social networks and power relations that simultaneously affect and are affected by the implementation of the ECX. The third section will address how the combination of these two factors translates into concrete possibilities for the Ethiopian value chain in the international market. The last section addresses the ECX phenomenon from a ‘performativity of markets’ perspective.

1 The logistic bottlenecks in the chain

In the case of coffee, logistical constraints do not affect only the transactions between the actors, but have also a significant impact on coffee quality due to its high susceptibility to moisture. Most of the bottlenecks discussed in Chapter 4 have technical solutions. In order to better understand what the most pressing bottlenecks are and to determine who’s intervention is needed to solve them, it is necessary to establish how the different chain actors are positioned with regard to the government and to the ECX. Two aspects have to be established: first, does the government interact with them exclusively as a regulatory body, by providing the rules and norms of the game; as an enabler, by providing specific incentives or prerogatives; or as a chain actor, by directly transacting with actors or competing with them in the market? Second, is participation at ECX mandatory or optional? These interaction typologies are illustrated in Table 3 below.

With these interaction typologies in mind, the bottlenecks can be summarised and exemplified with specific cases observed throughout the fieldwork. For analytical purposes they will be classified into areas for government, ECX and private sector intervention, which does not preclude the need for coordination and co-intervention.

1 5.1.1 Areas for government intervention

Extension services need to be strengthened in order to improve agricultural, harvesting and quality control practices. The efforts of the state are insufficient and the extension units (see Table 2 in Chapter 4, MoARD regional bureaus) in each ‘kebele’, with only one agent dedicated to crop production, cannot adequately cover the specific needs of coffee producers. Other than providing training, information and demonstration, extension services need to reinforce organisational and marketing aspects. Development aid initiatives seem to be filling this gap but in a dispersed, overlapped and often-unsustainable way. Furthermore, technical assistance needs to be coupled with agricultural credit. Despite the efforts in the early 1990s to liberalise the financial sector, economic reforms have failed to effectively direct credit to the agricultural sector (Gebre-Selassie 2003). Limited assets and access to credit constrains small-scale farmers to short-term investments and, thus, to lower income activities.

Infrastructural deficiencies in Ethiopia are huge: the road network needs to be improved in order to connect the coffee producing villages with the market outlets; village markets completely lack adequate buildings, storage facilities and transportation hubs, parking spaces. Together with poor transportation services, inadequate infrastructure is largely responsible for the delay in coffee delivery from the regional warehouses to the exporter’s processing plants. Additionally, the existence of only two coffee and liquoring stations (in Addis Ababa and in Dire Dawa) has caused processing plants to be centralised in the capital. New CLU stations in different regions would increase the rate at which clearance for export is given, decentralise processing activities and foster regional investment and employment.

2 5.1.2 Areas for ECX intervention

The ECX, operating from a NIE approach, has worked mainly on lifting what are believed to be the factors that cause market failure, such as inadequate market information, a weak system to enforce contracts, lack of standards and grades and the inexistence of the necessary institutions that support proper market functioning. However, its system also has bottlenecks to address.

Although soon there will be eight warehouses operating for coffee, opening new ones would allow for a more even distribution in the grading and storage of arrival coffee. This goes hand in hand with the government’s ability to improve the physical infrastructure. In addition, the ECX needs to operatively reinforce regional liquoring units by expanding their facilities with equipment and personnel. The latter needs to be increased and continuously trained. Interviewees agreed that improving warehousing functions could help solve the long lines of trucks observed in Jimma and other regional warehouses while better-trained personnel would have a direct effect on coffee quality.

ECX has been successful in introducing different IT services that allow information transmission in real time. Nonetheless, Internet and telecommunications in general are still quite deficient (some times non-existent) in rural areas. Reaching remote areas would require a significant investment: on behalf of the ECX, in terms of getting new electronic tickers and finding new ways of efficiently delivering information to the local level; on behalf of the Government, in terms of the necessary ‘meso’ infrastructure. Even with these technical problems solved, the issue of people learning how to use and benefit from IT services remains.

3 5.1.3 Areas for private sector intervention

The potential for private investment is high throughout the chain, and public-private partnerships could boost it even further. There are plenty of chain-related entrepreneurial opportunities, such as financial and technical services, commercialisation of coffee by-products and transportation services. Interviewees agree that transportation services are poor, have high costs and are concentrated in Addis Ababa. The General Manager of the Oromia Farmers’ Union (Interview, Addis Ababa, 26.08.2010) argued that if transportation companies were decentralised and had operating bases in the different regions, coffee delivery would be more cost and time efficient. There is also great potential in the domestic consumption side. Already a variety of cafés have sprouted throughout the bustling business areas of Addis Ababa, where coffee is enjoyed Western-style alongside the traditional coffee ceremony, in an attempt to capture the so-called ‘symbolic’ and ‘in-person service’ quality attributes of coffee[8].

2 The embeddedness of the chain

Before going into the power relations underpinning the coffee value chain, two important premises are to be made: first about the structure of Ethiopia’s agricultural economy; second, about the current political context. According to Abegaz (2005), peasant differentiation is deeply influenced by environmental conditions, ethnicity, religion and market connectedness. He argues that stifled agrarian development can partly be explained by the ruling class’ historical decoupling of security of income from security of access to land, which led to a ‘political culture of autocracy and patronage that persist even today’ (ibid: 327). Ethiopia’s ruling coalition since 1991 (the EPRDF), established a system of ethnic federalism dominated by the Prime Minister’s political party –the Tigray People’s Liberation Front (TPLF), which is viewed by the political opposition as serving its own interests through the control of land and state resource allocation (Aalen 2002, Bevan and Pankhurst 2007).

Although measuring the extent to which political affiliation affects the relations between the actors in the chain was quite beyond the possibilities of this study[9], a contained tension between the government and certain chain actors was evident. This tension was most noticeable in interviewees’ refusal to comment or in statements such as: ‘the system is new and it has to evolve and adapt to address the actor’s concerns’. Criticism to the Government is commonly expressed through blogs and newspaper articles, especially from the Ethiopian Diaspora.

Based on empirical data, the interplay of power relations in the coffee value chain will be addressed from two opposite perspectives. Firstly, the study will describe the tensions arising from the Government’s attempts at a top-down control of the chain –i.e. its relations with exporters, commercial growers, private intermediaries and farmers. Secondly, the focus will shift to the relations that depict the struggles of chain actors to incorporate into the chain from below, namely the conditions in which small-scale farmers and suppliers participate in the chain.

1 5.2.1 Top-down control of the domestic coffee chain

So far the study has attempted to illustrate the contrast between tight government control of the chain and free market policies that characterises the Ethiopian value chain. Nowhere in the chain is this clearer than in the Government’s involvement through its parastatal enterprises. State intervention in the coffee chain ‘serves the political purpose of ensuring the centralized collection of foreign currency necessary to keep the ruling party in power’ (Love 2002 cited by Petit 2007), and more recently, also of securing a source of revenue through direct participation in the exporting segment.

The enactment of the new coffee proclamation and the introduction of coffee into the ECX sparked protests from private exporters and sent shockwaves across international buyers –particularly of specialty coffee (Mezlekia 2009). Tensions heightened in the first months of 2009 when the Government’s announcement regarding its comeback as an exporter coincided with some of Ethiopia’s larger exporters having their licenses removed on hoarding accusations. The Government’s actions were perceived as a sudden decision to take over the coffee sector. However, the design for a commodity exchange can be traced back to an IFPRI study (2003), which indicates a well-planned strategy to gradually transform the legal framework and the market institutions in order to reinforce coffee marketing control. The inconformity of private exporters towards the Government is twofold: a) the constraints posed by the new quality control system to purchase traceable coffee; b) having to compete with a parastatal for a share of the market.

Traceability directly affected private exporters’ inward and outward relations. Inwardly, they were no longer able to go around the regulations in order to establish direct relations with specific suppliers and farmers for fully traceable coffee, a prerogative given rather to cooperatives and commercial growers, which have small market shares. Outwardly, the inability to guarantee the indication of origin hampered, or at least stalled, relations with international specialty buyers.

The Government’s participation in the export segment is justified as having a double purpose of curtailing the power of exporters, who for decades controlled the auction, and to take over defaulting companies to keep the image of the country as a reliable coffee supplier to the international market. However, it is quite clear by now that the EGTE’s role is not only to keep a balance in the exporting sector by taking over defaulting firms’ contracts, but also to get a share of the market. EGTE officials claim they compete in equal conditions with private exporters despite having facilities and staff in the coffee areas; already it is the second largest exporter (Interview, Addis Ababa 17.08.2010). Furthermore, critics have suggested that some private exporting companies are owned by the TPLF or are within its circles of power (McLure 2009, Tesfaye 2010). Regarding this situation, the exchanges between the actors involved are considered in the study not as given facts but rather as a thermometer of the power struggle between the Government and the exporting sector.

Commercial growers, on the other hand, have been favoured by the new regulation, which makes them the alternative for traceable coffee together with cooperatives. Members of the ECGPEA said to be quite satisfied with the ECX marketing system; this explains the association’s strategy to increase productivity and promotion. (Telephone Interview, 4.11.10).

Another top-down action from the Government that has affected chain relations is the elimination of the ‘sebsabies’ as legally recognised actors. Although reducing the number of intermediaries in the chain may seem justifiable, the question is whether it may have also resulted in driving a portion of independent traders, whose livelihood depended on coffee, into subordinate positions within or outside the chain. Moreover, their disappearance as formal actors did not eliminate the concrete need to collect coffee from remote areas, which leads to hypothesise that at least some may have become employees of suppliers.

2 5.2.2 Struggles for favourable incorporation from below

On the other end of the domestic chain are the approximately 1 million small-scale farmers and their struggles to incorporate favourably into the coffee chain. Petit (2007) rightly points out that small-scale farmers are not a homogeneous group, and thus are affected differently by international prices and local policies and deploy different coping strategies. Given that no farmers were interviewed for this study, the underpinnings of a favourable or adverse incorporation into the chain were gathered from interviews with other chain actors, particularly a cooperative union, private traders and several NGO projects supporting small-scale coffee farmers.

Historically, the Ethiopian coffee value chain’s extreme segmentation has resulted in the dominion of private exporters and the impossibility for small-scale farmers to establish direct relations with the final buyers, except through extraordinary channels established more recently, namely Cooperative Unions. According to Gabre-Madhin (Interview, Addis Ababa, 26.08.10), ‘exporters have had no interest in building the capacity of the farmers, because the farmer would want to get the premium himself. The political economy has been such that exporters kept the farmers down’. Several interviewees suggested that suppliers and exporters did establish relations with specific producers in the context of the previous auction system. However, no information could be acquired regarding what became of these relationships and, furthermore, how transactions are taking place within the primary markets between farmers and intermediary traders (including ‘sebsabies’, provided they continue to exist), which still represent the main outlet for small-scale producers. A possibility is that farmers continue to operate within their usual social networks at the ‘kebele’ level.

In terms of income, the best bet for small-scale farmers continues to be trading through cooperatives, which offer 70 to 75% of its profits to the farmer in two payments (Interview, OCFCU, Addis Ababa 26.08.10), against the approximately 30% of FOB Djibouti price they get through private traders (Interview, Gabre-Madhin, Addis Ababa 26.08.2010). In addition, small-scale producers get technical and social services from cooperatives. However, primary organisations are weak, thus the number of farmers groups able to get into this form of participation is still low. As in other developing countries, the cooperative sector is subject to weak organisational capacities, debt and, in the case of Ethiopia, a reputation of having political links that dates back to the socialist period (Dempsey 2006). In the case of coffee, the contact with international buyers is one of the most significant challenges. Although the increased interest in fair trade over the past years and the intervention of development aid programmes has facilitated these contacts, not all the Cooperative Unions have the same level of international exposure. This is also oftentimes linked to the personal abilities of their leadership. That is the case of the OCFCU Manager, Tadesse Meskela, who is well known in international circuits: Our coffee is appreciated because of its characteristics. Our relationship with them [the international buyers] is not hit and run, we have established good relationships with them over the years. (Interview, Addis Ababa 26.08.10)

Farmers’ struggles from below could also include the recent emergence of out-grower schemes between commercial growers and small-scale producers. Because this is a new phenomenon in the coffee value chain, a deeper research would be needed to establish the conditions and motivations behind it. One option could be small-scale farmers are increasingly entering contract farming as a way to cope with low incomes or to avoid abandoning coffee production altogether. On the other hand, it could be a strategy of commercial growers to increase productivity or a social responsibility action, as implied by one of the interviewees (EGCPEA member, Addis Ababa, 4.11.2010).

There seems to be a consensus among interviewees that the ECX system has resulted in a general improvement of access to information about price fluctuation and price-quality relations. It is clear, however, that the mechanism addresses the relations between coffee buyers (i.e. suppliers) and sellers (i.e. exporters), but leaves out the farmers who don’t have direct participation. Suppliers, on the other hand, appear to have been favoured by the new system not only because they are exonerated from transporting coffee to Addis Ababa[10], but because they have now more bargaining power in relation to exporters.

3 5.2.3 How logistics and power relations affect chain governance

What about the international buyers? Ultimately, the bottlenecks constraining the coffee market, as a result of both logistical issues and social dynamics, pose a risk in terms of the relations with final buyers. Evidence from the field suggests the absence of locally operating MNCs is compensated through the establishment of close links between local exporting companies and their international buyers; these business partnerships rely on strong and long-standing personal ties. The adjustment to the ECX system has been different for different kinds of firms.

Two major international buyers were interviewed[11]: one with presence in both standard and specialty markets (Interview, Addis Ababa 17.08.10), and one dedicated exclusively to specialty coffees of the highest quality (Telephone Interview, 10.11.10). When asked about the major difficulties faced, the first one spoke mainly of the logistical bottlenecks, particularly the effects of poor infrastructure and delivery times on quality and costs. For the specialty buyer, on the other hand, the current regulatory environment poses serious difficulties in terms of the lack of traceability. Through its local exporter this firm had been able to establish what was described as a ‘high quality, high added value, well managed, ethical chain’ in which farmers received technical assistance and fair prices for their coffee. In the old auction system, traceability was guaranteed through a ‘code of honour’ established among participating exporters. According to the interviewee, in the current conditions, supplying the same high quality coffee implies buying higher quantities and more processing, which also speaks of the deficiencies in the grading system.

From the ECX standpoint, its DST platform could potentially open new spaces where international buyers could have a direct participation in the Auction. However, the platform allows for interaction with Cooperative Unions and is not open to private exporters. ECX claims it is a way of reinforcing the position of organised small-scale producers. This key point exemplifies the power struggle between the ECX and various specialty buyers. The question is if ECX will respond to international criticism to its standards system by making certain concessions to private exporters and their international clients or if it will continue on the same path, which could either result in leading international buyers to work closer with cooperatives or in excluding Ethiopia from certain niche markets.

Chain reform is certainly government-driven in Ethiopia; however, because the global value chain is buyer (or roaster driven), domestically exporters have a great deal of power in terms of permeating the requirements of the international market upstream. Therefore, in the current Ethiopian context, lowering entry barriers to production and trade depends on the ability of chain actors in the different segments to overcome the different bottlenecks at the domestic level. Upgrading strategies, on the other hand, are conditioned by the exporting channel assigned to each different type of actor.

4 5.2.4 Performing the ECX?

A fundamental aspect to understanding how the ECX came to be and how it quickly acquired such a pivotal role for the coffee sector requires a closer look at the agents involved, the nature of their particular agendas and the material investments surrounding its creation. The mastermind behind the ECX is its CEO, Eleni Gabre-Mahdin, an Ethiopian economist who left for the United States at age 10 and decided to go back to her country with a project that, according to her, could revolutionise Ethiopian agriculture by helping producers sell easier and faster, get higher prices and thus earn greater income (Brown, 2010). Later, as a World Bank official and researcher at the International Food Policy Research Institute (IFPRI) in Washington, she dedicated an important part of her career to the study of the Ethiopian grain markets.

Gabre-Madhin (2001) first mentioned the idea for a commodity exchange in her empirical analysis of the nature and extent of the transaction costs faced by traders in Ethiopia and the role of brokers. A few years later she argued that in the light of the low impact of the market reforms of the 1990s on agricultural growth and poverty reduction, Ethiopia needed to move from ‘market reform’ to ‘market development’ through the reinforcement of key institutions such as market information, grades and standards, contract enforcement and regulation (Gabre-Madhin 2005). Prior to the launch of the ECX in 2008, at the TED Global Conferences[12], she argued that the pursuit of happiness is about freedom of choice and that one way of expressing it is through the markets (Gabre-Madhin 2007b). This concept is then linked to Sen’s (1981) explanation of famines as a problem of inability to acquire food rather than one of availability.

There is no doubt the ECX became a reality as a result of Gabre-Madhin’s ability to get the government on board and of the important financial support of international partners such as the World Bank, UNDP and IFPRI. Box 3 summarises the material investments contributed by the different supporting organisations.

The first two years of operations of ECX have shown that creating a market takes more than material investments and modified regulatory frameworks. The bottlenecks discussed above confirm that removing market asymmetries is more than improving access to information and enforcing contracts between two actors in a long value chain. Aspers’ typology of markets is helpful to visualise the complexity of the social embeddedness of the Ethiopian coffee value chain. Buyers and sellers continuously switch from buyers to sellers as coffee moves downstream, but becoming one or the other is determined by factors embedded in specific power relations. Depending on what segment of the chain is examined, it can be considered both a status and a standard market; while the bulk of coffee traded through ECX pertains to the standard typology, specialty, fair trade and organic coffee qualify are status markets in which the quality of the product is intrinsically linked to the people who produced it and their particular social context.

Overall the ECX as a marketing mechanism for coffee has intervened in the middle part of the chain, mainly by regulating the way in which suppliers and exporters interact. In this regard, evidence gathered through the study suggests the ECX is creating changes in the institutional environment in ways that touch power relations between the actors. For example: the increased bargaining power of suppliers in relation to exporters; the emergence of contract farming with commercial growers; or the new challenges faced by exporters vis-à-vis their international buyers in the specialty market. Vice versa, the interactions between chain actors, embedded in a particular institutional and social context, are constraining a better functioning of the market. For example, small-scale farmers, despite a better access to information, still lack the necessary assets, organisational structures and bargaining power to participate in more favourable terms; the tensions between the government and exporters curtail the potential for a mutually beneficial public-private partnership.

The NIE approach adopted by the ECX in terms of removing market asymmetries, reducing transaction costs and ensuring an appropriate institutional environment reflects the agendas of the technical and financial promoters as well as the economic background of its CEO. Regarding the infrastructural constraints faced by ECX Gabre-Madhin explains: ‘We have two choices: a) this is one of the poorest countries in the world, our system is too sophisticated and needs all this basic things that don’t yet exist so let’s only work where there’s perfect infrastructure and wait until it becomes a middle-income country, or b) let’s go swim in the mud, and because we’re there and making these demands on the infrastructure, that will incentivise the building of the infrastructure to meet our needs.’ (Interview, Addis Ababa, 26.08.10)

To expect that the system’s demand of infrastructure will lead the responsible institutions to find technical solutions to the market constraints is reasonably feasible. Whether these pressures are also pushing power forces to readjust is a more complex question. The thesis of this study is that it is; however, as every social process, it is much slower and at times almost imperceptible. Further change will require considerable concessions from the public and private sectors as the two stronger forces and, most importantly, it will remain unavoidably linked to the political stability of the regime.

Conclusions

The study started by placing the Ethiopian value chain in its global, regional and national context. A global value chain approach revealed the inner workings of chain and non-chain actor coordination, with its implications both at the domestic and international level. A new economic sociology approach took the analysis beyond the logistical bottlenecks to reveal the motivations and interests of particular chain actors and their influence in allowing for change or maintaining the status quo. All of these factors combined are important elements that will determine the paths that may lead to face the commodity problem in Ethiopia.

It is clear that coffee sector policies in Ethiopia are oriented towards maintaining a strong Government control of the domestic chain in order to increase the revenue and the foreign currency needed both to promote investment and to guarantee the political stability of the regime. In this sense, the current coffee policies are not directly pro-poor. Ethiopia seems to have opted, for now, through the current regulatory framework and through the State’s participation in the chain, to consolidate its international position in the standard coffee market because moving too aggressively towards the differentiated markets would mean incurring in higher costs and drastically offsetting the power relations between the actors.

The path chosen to do this has been to improve the marketing system, as shown in the previous chapters. The role of the ECX has been to specifically address the ways suppliers and exporters transact, with more efficient and transparent ways of trading as the main outcome. Improving access to information and thus strengthening the bargaining power of farmers has come almost as a trickle-down effect. Issues like improving farmers’ agricultural practices, working capital, access to finance, organisational capacities, as well as improving the massive deficiencies in public infrastructure, are widely recognised as necessary elements for promoting a more favourable participation in markets and depend on a variety of actors. However, investment in these areas is nowhere near the radical investments directed toward creating and improving market mechanisms. The State’s meagre resources in terms of assistance to farmers tend to be compensated with bilateral or multilateral aid programmes, without a coherent intervention strategy.

The case of the Ethiopian coffee chain remains interesting and different from other African countries because of its ability to partially implement liberalisation, especially by strongly promoting private sector participation, while at the same time maintaining strict state control. State control is exercised not only through regulations but also through direct state participation in the exports segment. The most noticeable changes observed through the study lead to a series of new questions as to their short and long-term effects on the chain structure: a) how has the elimination of the legal status of one intermediary actor –the collector or ‘sebsabie’– impacted the livelihoods of this group and what activities have they moved on to? b) how have farmers’ trading networks evolved at the ‘kebele’ and how are primary markets working? c) what are the conditions and implications of the emerging out-grower schemes between small-scale farmers and commercial growers? In terms of the ECX as a marketing system, an evaluation of its actual impact on transaction costs after two years of operations would give further elements for future improvement. Further analysis regarding all these issues could give a clearer idea of the possible paths to follow.

The challenges ahead are many and quite complex. Public and private sector intervention is needed to address the identified bottlenecks: deficient and insufficient infrastructure, weak extension services, lack of access to finance being the more pressing ones. As for Ethiopia’s position in the international market, resolving the issue of traceability in a way that satisfies international buyers while strengthening the position of farmers and cooperatives is one of the most complex challenges at the moment.

Regarding the performativity of markets, it is interesting to ponder the idea that implementing a specific market mechanism could generate a sort of Polanyian double movement, in which the traditional modes of interaction between social groups would start an adaptation process as a result of new market practices. However, evidence presented by this study suggests that in order for this to happen, the efforts to remove social constraints preventing participation in favourable terms need to be as incisive and determined as those demonstrated in the design and implementation of the ECX. In other words, the social, institutional, and physical environment would have to be such that different interests could be reconciled.

So far, the ECX has jump-started a process for the improvement of Ethiopia’s agricultural commodity markets. However, the embeddedness of this process in long-standing dynamics of social interaction poses a series of market constraints that NIE approaches alone cannot lift. In this sense, dissolving or at least toning down the confrontation between private coffee exporters and the Government is key to start solving other equally pressing, but rather technical, issues. Moving forward will require for the actors involved to seek a fine balance in which the private sector could continue to make a profit, farmers could manage to improve their livelihoods by incorporating favourably into the chain and the Government could ensure a steady revenue and foreign currency inflow. In the Ethiopian coffee value chain today, ‘the standard dichotomy between the public and the private sector continues to cripple policy imagination’ (Chang 2009).

In the current stage of affairs, in which many of the market-oriented or innovation strategies have so blatantly failed to improve the life conditions of small-scale farmers, international organisations and academics warrant for a variety of ‘ways forward’: renewed international commodity agreements, global regulation of oligopolistic behaviour, elimination of subsidies to Northern commodity producers, actions on the demand side (Daviron and Ponte 2005). It is likely that these types of actions would allow poor countries to strengthen their positions in global trade. However, improving conditions for poor producers also requires actions that start to offset the historical power relations between chain actors. In solving the current constraints, Ethiopia is faced with the challenge of finding solutions that are more clearly pro-poor and that have stronger overall developmental outcomes for the country.

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Appendices

Appendix 1 –List of Interviews

Addis Ababa • Endris Negus Nuru, Director, ECX Authority (August 3, 2010) • Hussen Ahmed, Managing Director, Farm Organic International PLC (August 4, 2010) • Taddese Mezgebo, Department of Economics, University of Mekelle (August 5, 2010) • Abenet Bekele, Trading Operations Manager ECX (August 6, 2010) • Mekonnen Kabtyimer, General Manager, Kalmeks Engineering (August 10, 2010) • Christopher Jordan, Regional Deputy Director, Coffee Initiative, Technoserve (August 11, 2010) • Assefa Mulugeta, Director of Marketing Department, MoARD (August 13, 2010) • Akalu Woube, Owner TO.MO.CA. (Torrefazione Moderna di Caffé), (August 16, 2010) • Mengistu Tadesse, Director, Coffee Liquoring Unit Addis Ababa (August 17, 2010) • Gebere Egziabher Abay, Marketing Officer, Ethiopian Grain Trade Enterprise (August 17, 2010) • Local Representative of an international coffee buyer (August 17, 2010) • Ghebremedhin Belay, General Manager, Ethiopian Coffee Exporters’ Association (August 23, 2010) • Yilma Kidan, General Manager, Ethiopian Coffee Growers, Producers & Exporters’ Association (August 24, 2010) • Dessalegn Jena, Deputy General Manager, Oromia Coffee Farmers Cooperative Union (August 26, 2010) • Tadesse Meskela, General Manager, Oromia Coffee Farmers Cooperative Union (August 26, 2010) • Eleni Gabre-Madhin, CEO Ethiopia Commodity Exchange (August 26, 2010)

Jimma • Girma Adugna, Jimma Agricultural Research Centre (August 19, 2010) • Anwar, ECX Warehouse Manager Jimma (August 20, 2010) • Cupper, ECX Warehouse Jimma (August 20, 2010)

Telephone Interviews • Group interview with commercial growers, members of ECGPEA (November 4, 2010) • Specialty Coffee International Buyer (November 10, 2010)

Appendix 2

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[1] By the end of this century Latin America was independent while the process of decolonisation in Africa and Asia began after World War II, with most countries gaining independence towards the 1960s (Robbins 2003).
[2] Ethiopia is organised in ethnically based regional zones, districts (woredas) and villages (kebele).
[3] This law will be referred to throughout the study as ‘the coffee proclamation’ or ‘the proclamation’.
[4] Reorganised in 2005 into four sectors: crop production, animal husbandry, natural resources and agricultural marketing
[5] Including the Ministries of Agriculture, Finance and Economic Development, Trade and Industry, the Commercial Bank of Ethiopia, the EGTE, private exporters and suppliers and a representative of a Cooperative Union.
[6] 1 Birr:13 USD
[7] Introduced by the ECX in February 2010.
[8] Also as a result of the strong Italian influence in Ethiopia.
[9] Particularly for a foreign researcher
[10] According to the interviewed exporters, the adjustment of prices due to this shift has not been automatic and transportation costs are higher partly because of external factors but also because of longer delivery times.
[11] Both asked to remain anonymous.
[12] TED (Technology, Entertainment and Design) is a non-profit organisation that organises conferences about innovative ideas.

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Trading Coffee Through the Ethiopia Commodity Exchange:
Social embeddedness and performativity of markets

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