First World Solutions Are Not Resolving Third World Problems

Gabre-Madhin (2007) had great hopes for the Ethiopia Commodity Exchange. She deserves tremendous praise for her deeply compassionate and sincere work to resolve complex and intractable problems. Her intended solution seemed to temporarily solve surface-level problems for some, but ultimately exacerbated even deeper-rooted challenges of economic sustainability. Nearly a decade later, her solution was announced by Bloomberg Businessweek to be clearly a failure:

Exchanges are a distraction from other initiatives that would better serve poor farmers, says Nicholas Sitko, a Michigan State University agricultural economist…‘We’ve learned that no amount of money pumped into them and no amount of government effort to get them off the ground can force them to work.' (Bjerga & Davison, 2015, para. 2)

The following are key points to be learned from top-down imposed solutions, even when they are proposed by persons whose ethnic background matches the recipients. 

1. The best course of action for the overall long-term food security of a region is the local farmers' withdrawal from the global market and investment in locally-generated solutions, possibly funded thru microcredit lending.

2. While access to the global market brings periodic (but not certain) benefit for some productive farmers, as they can demand higher prices, one result is that the locals too must pay those higher prices, which many cannot afford. This creates local food shortage and increased wealth inequality.

3. An alternative is withdrawing from the global market and creating effective storage by which to serve local markets over a period of time. This is in the long term a benefit for the farmers withdrawing, because they are not subject to the fluctuations of the market. At times of high yield, farmers become each others’ competitors, and commodity traders are able to pay them all less than their local markets would over time. Yet, once the trade channels are established, the products may be shipped before the price is set, so the farmers can be stuck with low-to-negative profit.

4. This alternative of local farmer withdrawal is frustrating for the commodities market, because it does not allow them to make a gain off the farmers’ losses; however, these traders could choose to do productive work for a living rather than gamble.

5. Farmers withdrawing from the global market is appreciated by the locals. The locals can thrive by persevering in serving their own regional needs, rather than shipping their goods out and then relying on foreign food aid in periods of famine or scarcity.

6. It is an unhealthy condition for African villages to be dependent on foreign aid, and it has created chronic dependency that cannot be reliably met by charitable organizations. Foreign assistance should be focused on locally-designed solutions to create self-sufficiency.

7. As charitable organizations shift their focus to supporting local self-sustainability without global markets, withdrawal of aid can be gradually achieved with everyone in agreement. Short-term losses can be recognized to be necessary for future growth.

8. Farmers should not be legally constrained to choose a local market, but the farmers should create the foreign markets on their own. Many will eventually choose to serve local markets if they are not aided by profiteering foreigners interested in accessing these markets.

9. The U.S. has benefitted from developing agricultural resources of other nations. We can still live abundantly with fair trade, and pay commensurate with the value we receive, not exploiting free trade agreements that pressure foreign farmers into stress and subsistence living standards. Exploitation should be investigated and fined.

10. Foreign involvement makes farmers vulnerable to predatory lending and predatory marketing (e.g., Monsanto and others offer hybrid seed so seed has to be continually re-purchased). It also allows for corrupt foreign government officials to make self-serving deals with international organizations. When markets are kept local, it is not as easy to hide culpability of bad actors. Humanitarian organizations seeking to assist should educate foreigners about these issues rather than merely ameliorating the effects of exploitation. Aid efforts that make up for exploitation ultimately serves to prolong it.

These points are explained further in response to the TEDtalk transcript in that follows. The italicized quotes from the TEDtalk are debated in detail.

The great Indian economist, Amartya Sen, was awarded the Nobel prize for demonstrating that famine is not so much about the availability of food supply, but rather the ability to acquire or entitle oneself to that food through the market. In 1984, in what can only be considered one of the greatest crimes of humanity, nearly one million people died of starvation in my country of birth, Ethiopia. Not because there was not enough food — because there was actually a surplus of food in the fertile regions of the south parts of the country — but because in the north, people could not access or entitle themselves to that food. (0:55)

Why not assist in home-grown solutions to help farmers grow and store surplus locally, rather than insist they must get surplus from elsewhere when a need arises locally?

African farmers only use some 22 kilograms of fertilizer per hectare, compared to 144 in Asia. Road density is six times greater in Asia than it is in rural Africa. There are eight times more tractors in Latin America, and three times more tractors in Asia, than in Africa.

Here is a bias toward industrialization and modernization. With traditional small farming methods where animal and plant byproducts are recycled back into the soil, there isn’t a need for as much chemical fertilizer. Possibly none is needed. More tractors means establishing a whole industry around tractors, leading to larger farms run by fossil fuels. These farmers may not be helped by creating a reliance on expensive equipment and oil.

His livelihood is predetermined by the conditions of grinding poverty. He comes to the market when prices are lowest, with the meager fruits of his hard labor, just after the harvest, because he has no choice. She comes back to the market some months later, when prices are highest, in what we call the lean season — when food is scarce — because she has to feed her family. (01:51, emphasis added)

He actually does have a choice. He chose to sell it off at low prices to foreigners, possibly because (a) he didn’t want to store it and sell it gradually to locals for prices that would be reasonable to them; (b) he might simply have wanted a large payout sooner, instead of a bigger payout over time; or (c) he might be misled by predicted high price forecasts and was gambling that he could get a better price in foreign markets.

Another notable economist, Theodore Schultz, in 1974 won the Nobel prize for demonstrating that farmers are efficient, but poor. Meaning, in fact, that farmers are rational and profit-minded just like everybody else…..Over two decades ago, the world insisted to Africa that markets must be liberalized, that economies must be structurally adjusted. This meant that governments were to remove themselves from the business of buying and selling — which they did rather inefficiently — and let the private market do its magic. Well, what happened over the last 25 years? Did Africa feed itself? Did our farmers turn into highly productive commercial actors? (03:17) ….We know that, in fact, Africa is the only region in the world where hunger and malnutrition are projected to go up over the next 10 years, where the food import bill is now double what it was 20 years ago, where food production per capita has stagnated. (04:30)

Yet Abate et al. (2015) gives a glowing report of modern grain production:

The expansion and productivity change in maize production in Ethiopia is attributable to multiple factors. These include (a) increased availability of modern varieties, (b) increased commitment to enhance farmer access to and use of modern inputs through better research-extension linkages, (c) wider adaptability of the crop and modern varieties, (d) better production conditions and low production risks, and (e) growing consumption demand and market access for producers to support market-based production to absorb surplus supply. (para. 20)

Is this propaganda to convince nations to use their natural resources to produce low-cost food for westerners, which then creates famine when locals cannot access or afford food? Westerners can then rush in to provide aid and reassure themselves of their virtue. No doubt it is a virtue to feed the hungry, but the left hand needs to know what the right hand is doing.

Their reported poverty, measured by U.S. dollars, doesn’t necessarily define their quality of life. Small farmers in their long-standing cultures may have plenty of leisure time, rich social connections, and means of pooling resources to get thru challenging times.

Here Gabre-Madhin (2007) points out that the neoliberal free trade agenda hurt rather than helped Africa.

Africa’s markets are weak not only because of weak infrastructure in terms of roads and telecommunications, but also because of the virtual absence of necessary market institutions, such as market information, grades and standards, and reliable ways to connect buyers and sellers. Because of this, commodity buyers and sellers typically transact in small circles, in narrow networks of people they know and trust. And because of that, as grain changes hands — and I’ve measured that it changes hands four, five times in its trajectory from the farmer to the consumer — every time it changes hands — and I’ve seen this all over rural Africa — it also changes sacks (05:27). I have measured that 26% of the marketing margin is simply due to the fact that, because of the absence of grades and standards and market information, sacks have to be constantly changed. And this leads to very high handling costs. (06:35)

Again, Gabre-Madhin (2007) is judging African markets in comparison with western markets, not by a measure of how well the local villages are served. Better efficiency, in a global market, will enrich the financiers more than the farmers. These inefficiencies are not much difficulty when they are on a small scale. Bags can be re-used when returned by local customers.

And I thought that was incredibly peculiar. And really realized that that was because — as traders would tell me over and over — that’s the only way people know what they’re getting in terms of the quantity and the product quality.

This is not accurate. It is not the "only way." In a local economy where products are primarily sold to locals, standardization can remain local and quality can remain reputation-based.

And that actually has huge implications for the ability of markets to quickly respond to price signals, and situations where there are deficits, for example. It also has very high cost implications.

When markets quickly respond to price signals, this benefits foreigners trading in commodities, and disadvantages the farmers who have less access to those minute-by-minute updates. Again, the Gabre-Madhin is using an analysis based on Western standards that are not attuned to the needs of local farmers and consumers.

Just like anywhere else, free markets under the ideology that promotes unrestricted global market have created the largest ever income and wealth gaps. This is not what small farmers need. This is not what Africa needs.

I currently lead, in Ethiopia, an exciting new initiative to establish the first Ethiopia Commodity Exchange, or ECX. Now, the commodity exchange itself, that concept, is not new to the world.… the Chicago Board of Trade, which is the most famous commodity exchange in the world….Well, the need to avoid these huge risks and tremendous losses led to the birth of the futures market, and the underlying system of grading grain and receipting — issuing warehouse receipts on the basis of which trade could be done. (11:49)

On the surface, it seemed a reasonable solution. Yet the idea that it would result in wealthy small farmers in Africa should have been suspect, because the same "solution" did not lead to wealthy small farmers in the midwest. When considering the effect on the local towns from which the wealth was extracted and funneled toward financiers, it is not surprising that rural farm communities are now among the most impoverished in the United States, similar to the former mining towns. The worst, most selfish opportunistic side of people can continue to come out when there is no accountability. There is now little social or legal accountability in the global economic system.

From there, the greatest innovation of all came about in this market, which is that buyers and sellers could transact grain without actually having to physically or visually inspect the grain….There’s been explosive growth in India, for example, where rural farmers are using exchanges — growing here over the last three years by 270% a year. This is powered by low-cost VSAT technology, aggressively trying to reach farmers to bring them into the market. China’s Dalian Commodity Exchange, three years ago, 2004, overtook the Chicago Board of Trade to become the second largest commodity exchange in the world. Now, in Ethiopia, we’re in the process of designing the first organized Ethiopia Commodity Exchange. We’re not trying to cut and paste the Chicago model or the India model, but creating a system uniquely tailored to Ethiopia’s needs and realities, Ethiopia’s small farmers (13:42).

I don’t see where the benefits of these exchanges were realized for farmers in India or China; in fact, evidence points to obvious downturns for small farmers in these two nations (see Thomas & De Tavernier, 2017; TVO, 2018).

We’re creating a system that serves all market actors, that creates integrity, trust, efficiency, transparency and enables small farmers to manage the risks that I have described. In the design of our commodity exchange in Ethiopia, we’ve done something rather unique, which is to take the approach of an integrated perspective, or what we call the ECX Edge. The ECX Edge pretty much creates the entire ecosystem in which the market will develop itself. And this is because one of the things we’ve learned over the last decade of studying market development in Africa is that the piecemeal approach does not work. You’ve got one donor trying to develop market information, another trying to work on or sponsor grades and standards, another ICT, and yet another on warehousing, or warehouse receipts. (14:52, emphasis added)

The piecemeal approach does work, but only at a local level. The level of complexity of a large international exchange makes it impossible for farmers to figure out when they are paid fairly and when they are not.

And in turn, we’ll operate an in-house clearing system, to assure that payment is done appropriately, in the right amount and at the right time, so that basically, we create trust and integrity in the system. Obviously, we work with exchange actors, and as we’re developing the exchange market itself, we’re also developing the regulatory infrastructure and legal framework, the overarching legal framework for making this market work. (16:35)

What could go wrong? We have regulators! Here's what goes wrong with these idealistic plans: There will always be someone making it their full time job to figure out how to game the system. The farmers always lose in the long term even if they have a few gains that keep them hopeful.

Dealing With Surplus

What this does is transforms, fundamentally, the farmers’ relationship to the market. Whereas before the farmer used to think local — meaning that he or she would go to the nearest local market, 8 to 10 kilometers away on average, and sell whatever they happened to have, without any idea of what the price premium or anything else was — now farmers come with knowledge of what prices are at the national market. And they start to think national, and even global. They start to make not only commercial marketing decisions, but also planting decisions, on the basis of information coming from the futures price market. And they come to the market knowing what grades their products will achieve in terms of a price premium. (17:16). So all of this will transform farmers. It will also transform the way traders do business. It will stop them from doing simple, back-to-back, limited arbitrage to really thinking strategically about how to move grain across long distances from [surplus regions] to [deficit areas].…(18:23)

It sounds great in theory, but if those “deficit areas” are poor, those in most need of the food aren’t going to get that surplus, especially if the farmers have to pay to get their product to the deficit areas, not without some inefficient government intervention.

Centralization

The exchange will operate a trading system, which will initially start as an open outcry, because we don’t think the country’s ready for full electronic trading….farmers and small traders can actually come to a terminal center — what we call the remote access terminal centers — and actually, without having to buy a computer or figure out how to dial up or any of those things, simply see the trading that’s happening on the Addis Ababa trading floor (15:48). At the same time, what’s very fundamental to this market is that — and again, an innovation that we’ve designed for our exchange — is that the exchange will operate warehouses around the country, in which grade certification and warehouse receipting will be done.

Again, this means efficiently moving food away from the hungry villagers, toward the overfed rich in the cities. A better answer is funding small local farms thru microcredit such as offered by Kiva and the Grameen Bank. This offers sustainable change, initiated locally. Then villagers won’t need to give up their land to try to make it in the city as low-wage workers serving the over-fed.

Abate et al. (2015) notes a change since the neoliberal agenda took hold:

Whereas farmers historically received seasonal input credit for seed and fertilizer through cooperatives and development banks, this has changed significantly over time. Following the structural adjustment and liberalization policies implemented since the early 1990s, there has been no direct input or credit subsidy provided by the government. (para. 46)

Abate, T., Shiferaw, B., Menkir, A., Wegary, D., Kebede, Y., Tesfaye, K., Kassie, M., Bogale, G., Tadesse, B., & Keno, T. (2015). Factors that transformed maize productivity in Ethiopia. Food Security, 7, 965–981. https://link.springer.com/article/10.1007/s12571-015-0488-z

Biello, D. (2008, June). Fertilizer runoff overwhelms streams and rivers — creating vast “dead zones”: The nation’s waterways are brimming with excess nitrogen from fertilizer — and plans to boost biofuel production threaten to aggravate an already serious situation. Scientific American. https://www.scientificamerican.com/article/fertilizer-runoff-overwhelms-streams/

Bjerga, A., & Davison, W. (2015). Trading floors can’t feed Africa: Exchanges aren’t helping farmers as foreign backers hoped. Bloomberg. https://www.bloomberg.com/news/articles/2015-04-02/africa-s-commodity-exchanges-fail-to-bring-hoped-for-benefits

Gabre-Madhin, E. (2007). A commodities exchange for Ethiopia. https://www.ted.com/talks/eleni_gabre_madhin_a_commodities_exchange_for_ethiopia?language=en

Thomas, G., & De Tavernier, J. (2017). Farmer-suicide in India: debating the role of biotechnology. Life Sciences, Society, and Policy, 13, 8. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5427059/

TVO. (2018). Exodus of 100 million farmers. [NHK documentary transcript, Ep. 4]. https://www.tvo.org/transcript/127428X/ep-4-exodus-of-100-million-farmers