Why Markets?

Because they solve problems. Here's one example:
[from wsj online]

Ethiopia Taps Grain Exchange
In Its Battle on Hunger

February 27, 2008; Page A1

MOJO, Ethiopia -- This country has some of Africa's most fertile land, with fields of wheat and corn stretching to the horizon. Yet a few years ago, 14 million Ethiopians stood at the brink of starvation, saved only by vast international aid.

Now Ethiopia has hopes of breaking its deadly cycle of famine. Not with a Green Revolution, but with a market revolution.


The means is the Ethiopia Commodity Exchange, which is expected to open next month in the capital, Addis Ababa. The dawn of modern trading here comes 160 years after the Chicago Board of Trade transformed American agriculture by giving farmers more choice in how and when they market their crops. Economists in Ethiopia foresee similar gains from an exchange, believing it will encourage farmers to think longer-term and avoid decisions that can turn an ordinary crop shortfall into a calamity.

Their timing couldn't be better, with global grain prices soaring. From a world-wide perspective, more-productive farming here could help meet a surge in grain demand that has Western growers straining to keep up. World stockpiles of one crop that will be traded on the exchange here, wheat, are projected to reach 30-year lows.

First, though, the new exchange will have to succeed in a land long stalked by poverty, hunger and conflict. Ethiopia presents many challenges for a sophisticated free-market instrument: spotty telecommunications and other ragged infrastructure, an economy trying to shake a legacy of Marxist thinking, and an unstable neighborhood of Sudan, Somalia and Eritrea.

Good Rains
Still, blessed by good rains in recent years, agriculture has been propelling double-digit economic growth. Emblematic of the tension between Ethiopia's poverty and possibility is a vendor on the street in front of the glistening green-glass building that will house the new exchange: He sells books like "The Power of Positive Thinking" and "You Can Win" from a plastic tarp laid on the dirt.

"The biggest revolution of the exchange is that our farmers will start to think national and global instead of local," said Eleni Gabre-Madhin, an economist who is the force behind the exchange. Today, "they think only of their nearest market down the road," she added. But "if they can see that global markets are up, that there is demand for the harvest, they will make better decisions on how much to plant, how much to invest in seeds and fertilizer, when to sell. We'll start seeing bigger gains in agricultural productivity."

As she spoke, welders were finishing the exchange's trading pit. There, buyers and sellers will engage in "open outcry" bidding on corn, wheat, beans and sesame, and later coffee and a local grain called teff. (The exchange won't handle nonagricultural commodities, at least at the beginning.)

Around the country, a network of exchange warehouses will offer places where farmers can deposit their crops until they want to sell them. No longer will most farmers have to sell right after harvest, depressing prices, for lack of storage.

Electronic screens set up in about 20 market towns, meanwhile, will display real-time prices, helping farmers decide when to sell. Farmers and buyers will benefit from standardized grading and certification of crops at the warehouses, producing a level of quality control now missing.

It's a radical shift from an existing system of middlemen and donkey-drawn wagons that's not much changed since the Middle Ages. Small farmers with a few acres produce 95% of Ethiopia's crops. They commonly sell to the first merchant to stop by after harvest, taking whatever price is offered. Reflecting the small scale, grain in Ethiopia is packaged in sacks, a labor-intensive system that farmers in the U.S. Midwest wouldn't dream of.

Produce moves from one trader to another before reaching the consumer. At each stop, it's re-inspected and repackaged, and the price is increased. The Ethiopian farmer may get only one-third of the final price.

Some small farmers belong to large cooperatives, but methods remain primitive. At a co-op in the village of Mojo on a recent day, dozens of women sat on a floor preparing a bean harvest the way their ancestors did. With quick hands, they plucked weeds, stems and pebbles from several tons of white pea beans and then tossed them in the air to shake off any remaining dirt, catching them in reed baskets.

Demere Demissie, the co-op's general manager, strode into this backward scene, looking forward. "Soon, we'll be connected to the world," he proclaimed.
When the exchange opens, he will take the beans and other crops grown by the co-op's 19,000 members to one of the new warehouses, where they'll be weighed and graded. Individual farmers can do the same. In return, farmers will receive a warehouse receipt that they can sell on the commodities exchange, either right away or later when prices have recovered from harvest-season lows.

The exchange system, by showing current trades and prices, will help farmers decide when to sell. "If a trader in Addis [Ababa] offers us, say, 200 birr," says Mr. Demissie, citing the Ethiopian currency, "we can say, 'No, Chicago is at 250, London is even higher.' Before, we have to take the Addis offer. Now we will know what's out there."

Mr. Demissie expects to be able to trade for the co-op, as a member of the exchange. Other farmers can trade through brokers. After they sell a warehouse receipt, the produce it represents will move from storage to the buyer.

The exchange will begin with spot trading and later add futures, or contracts for delivery of a set amount at a set date. Among other innovations, farmers will be able to lock in a price for a crop they haven't yet grown, just as Iowa corn farmers do through the Board of Trade.
Futures and other aspects of the system should help spread the risk of price swings, which until now has been borne solely by Ethiopia's farmers. This is what made a crop shortfall in 2003 far worse than it might have been.

The previous two years had produced bumper crops. But farmers -- needing cash to repay planting debts, and having no way to store their surplus -- flooded local markets with produce right after the big harvest. Prices collapsed by as much as 80%. There was no market system to sell and move these surplus crops efficiently to food-short regions in Ethiopia or elsewhere. With prices so low, some farmers didn't even go to the expense of harvesting crops and hauling them to market, leaving 300,000 tons to rot in the fields.

Farmers lost not just money but motivation. Unlike U.S. and European growers of certain crops, those in Ethiopia don't receive subsidies that would lead them to plant even if they expect market prices to be low. So the following season, farmers did whatever they could to cut expenses -- reducing fertilizer use, shutting off irrigation systems and simply not planting some fields. Many planted just enough to feed their families.

Relying on Food Aid
Bulbula Tulle, a commercial corn and wheat grower, had his best harvests in 2001 and 2002 yet lost $200,000 when the bumper crops drove down prices. In 2003, he let 2,200 of his 2,700 acres sit idle. When drought struck, the result of such cutbacks was a drastically reduced harvest. Famine spread. While his countrymen relied on international food aid, weeds grew in Mr. Tulle's fields.

"If we had the exchange then, maybe we wouldn't have had the famine," he says. In the bumper-crop years, "maybe China or Chicago could have bought the surplus grain and kept the price from falling. If we had known we could sell our surplus, we would have planted as normal" in 2003. "Instead, we were blind." Mr. Tulle was among the first to sign up to be a member of the commodity exchange.

Says Mr. Demissie: "Only price creates incentive to produce as much as possible."

Boosting Food Output
Seeing the famine develop, Ms. Gabre-Madhin seethed. For years, while at the World Bank and the U.S.-based International Food Policy Research Institute think tank, she had advocated modernizing Ethiopia's farm markets. The country had made a big push to boost food output after an epic famine in 1984, but she warned that the effort would falter unless there were markets that could sop up periodical huge harvests without radically depressing prices. "The market side hadn't been thought about at all," says Ms. Gabre-Madhin, who returned to her native Ethiopia to study the markets.

Elsewhere in the developing world -- in China, India and South America -- commodity exchanges proliferated as the Green Revolution took hold. But in Africa, which largely missed out on the scientific and technological advances of the Green Revolution, only South Africa, with its modern agriculture system, established a flourishing exchange.

After the 2003 famine, the Ethiopian government made a commodities exchange a priority, and contributed about $2.4 million to its $21 million startup budget. The rest came from the World Bank, United Nations agencies and individual countries such as the U.S. Ms. Gabre-Madhin, heading the project, gathered a staff and set out to study exchanges in India, China and South America.

The biggest revelation came in Chicago. "Wow, there it is. It's right in front of us!" she shouted as her taxi turned onto Chicago's LaSalle Street last spring, with the Board of Trade tower looming ahead. Later, after exploring the trading floor, she said, "This is what it really is -- the color, the people, the excitement, the numbers."

Her enthusiasm grew as she learned about the state of the American farm trade in the early 1800s, before the Board of Trade was formed. Most grain went to market in the weeks following harvest, hammering prices. Farmers sometimes ended up dumping their crops at a loss. "Pretty much like Ethiopian farmers today," she said to her colleagues.

She returned home convinced the planned new commodities exchange could bring Ethiopia the same innovations the Board of Trade brought the U.S.: uniform quality standards, fair "price discovery" and futures contracts. And if it's successful, she thinks, it could be the catalyst for other development, such as better rural telecommunications and greater irrigation from the country's bountiful water resources.

Others also have big hopes. The U.N.'s World Food Program, which feeds the hungry, sees the exchange as possibly helping it reduce food-distribution expenses. Rising food and fuel costs are squeezing the WFP's budget. If it can buy more of its food from places within Africa such as Ethiopia, the agency can cuts its transport costs to feeding stations on the continent. The WFP also believes consistent purchases on the exchange would encourage greater production by Ethiopia's small farmers.

Having a commodity exchange won't do anything about drought or insects, nor about the backward technology most farmers here still use. The exchange faces many challenges in introducing a modern financial instrument in a land of such poverty. Many farmers have little formal education, and still do their plowing walking behind oxen. Farm-to-market transport relies on donkeys or five-ton Isuzu trucks that race over the rugged roads. (They're called "al Qaedas" for the way they terrorize other traffic.) Layers of traders accustomed to setting prices between themselves will be exposed to the transparency of a trading floor.

At a training session for exchange members, traders said they were counting on the new system to end their isolation from traders elsewhere in the world. As things stand, "we're dependent on the information provided by our buyers who contact us," said Solomon Tekeba, who deals in beans, corn and sesame seeds. "They won't tell us somebody else is offering a better price."

He pointed to another trader: "I don't even know what price he's selling for, and he doesn't know what I'm getting."

Ingida Kelkilay, a small farmer from the Mojo region, was looking forward to having more flexibility about when to sell his crops. "In the past, we've had to take what we can get," he said. "Now finally we'll be able to profit from our sweat."
Because they solve problems.<snip>

This is neo-liberal Milton Friedman/Thomas Friedman propaganda of the kind the WSJ adores. Take it with a pinch of salt -- sorry, take it with a mountain of salt.

More specifically, we've had free enterprise and exchange economies for millennia: I knit you a sweater, you catch me some fish, we trade, we're both happy. But a bunch of academic and ideological crooks constantly attempt to conflate this natural order of things with the highly artificial capitalist system of the last few centuries, where oligopolistic and monopolistic actors, aided and abetted by state regulation and military coercion, siphon off the wealth of the world. This can clearly be seen with agribusiness crooks like ADM, Cargill, Nestle, and so on. These are not -- I repeat not -- free markets. These are markets rigged by the biggest firms who use their financial and marketing clout, and their monopoly and cartel powers, along with military coercion (as a last resort) to fix their things their way. No moral outrage on my part: just a dispassionate look at what really does happen.

By the way, this economist -- Eleni Gabre-Madhin -- is she another U of Chicago acolyte?