Lema 1

Keith Lema
Professor Cem Oyvat
Economic Development (Econ 366)
Literature Review
Brewing Development: Coffee Production in Ethiopia
Small, black, and ubiquitous; coffee beans are seemingly inconsequential
when they are poured from their trademark-strewn containers. However, there is a
very sober reality behind the production process that the Starbucks green mermaid
and the Fosters iconic red can represent. Coffee is a lucrative business. The small
beans are traded as a valuable commodity on the global financial market. In fact, at
an annual value of 140 billion dollars, coffee is second-most traded commodity
behind oil (Black Gold). Ignored by the consumer in the supermarket and the
speculator on Wall Street, is the true producer of that valued commodity. Indeed, for
a two-dollar cup of coffee, most coffee farmers only ever see a few cents.
Coffee is both consumed and produced around the world. There are over
5,000 genetic varieties of coffee (Direct from the source). Coffee is produced in more
than 50 developing nations and provides income for about 25 million producers and
employs 100 million people indirectly (Petit 226). This imbalance of profit and labor
is exemplified by every coffee producing nation, but perhaps most poignantly in the
birthplace of the drink itself, Ethiopia. Impoverished through low commodity prices
and a lack of economic diversity, about 45% of Ethiopians live on less than a dollar a
day (Petit 231). As a British coffee exporter once stated to millions in this
continent, coffee means the difference between too little to eat or enough
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(Pendergast 251). Indeed, over 15 million Ethiopians depend on the coffee trade for
whatever meager income they currently receive (Petit 225). Coffee also accounts for
60% of Ethiopias foreign exchange revenues and is vital to its GDP growth (Adebe
80). Any analysis of the Ethiopian economy requires an understanding of the coffee
market and its effects on the country. Before examining the economic policies and
variables however, it is important to examine Ethiopias natural resources.
With a population suffering from famine and food insecurity, Ethiopia is
losing over 100,000 hectares (HA) per year due to the need to open up farmland for
a growing population and the widespread use of wood as fuel (Chang 109).
Additionally, soil integrity of existing farmland has been degraded due to small
subsistence farm and the diversion of manure from fertilizer to a source of
household energy (Chang 113). Exacerbating this situation, the rural sector has
failed to take advantage of the countrys significant water resources. Only 5% of
suitable land has been irrigated while the remainder is rain fed, creating a dubious
vulnerability to drought and famine (Chang 109). This last statistic represents a
startling failure on the part of the government, which has made a concentrated
effort to make agriculture the engine of Ethiopian growth.
Ethiopia has produced world-renowned coffee for hundreds of years but the
economic disparity of the present day is a largely a legacy of its government and
asymmetric trade relationships with the world. A left leaning imperial government
ruled the country until 1974. During this time, the government favored Import
Substitution policies to support nascent industries and largely ignored the rural
sector. Ranking lowest among African countries in terms of budgetary expenditures
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on agriculture, the government shifted towards large-scale commercial farming.
Such practices led to tenancy and a lack of productivity. Also, excessive taxes,
unfavorable market prices, and lack of appropriate technology contributed to a low
savings and investment by peasant farmers (Chang 114). While this system failed to
create an entrepreneurial class with necessary skills, it did manage to achieve some
minor growth. In contrast, the political instability that followed led to stagnation.
From 1974 to 1991, a Marxist-Leninist military government took power and
instituted drastic reforms. Embracing central planning, this new government sought
to provide the most basic service lacking in the previous administration: to feed its
people by ending famine and easing inequality. In 1975, a land reform proclamation
transformed all rural land into public property, essentially abolishing the tenancy
system (Adebe 79). The reforms also nationalized banks and insurance companies,
as well as manufacturing companies. And the state created collective farms, viewing
them as more efficient. The forced relocation of thousands of farmers in
villagization programs sought to concentrate rural communities and increase
output (Chang 126). Like the government before, the military regime failed to
realize that productivity falls when farmers do not truly own their land and the fruit
of their labor.
Ultimately, these policies led to stagnated growth but a 2.9% population
growth rate instigated frequent famine (Chang 116). Additionally, the restrictive
land reforms severely curtailed rural-urban migration. Subsequent industrial
growth was virtually nonexistent. An important legacy of this regime however was
its creation of peasant associations, each encompassing about 800 HA and 250
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households, to work the land and adjudicate disputes (Chang 117). These peasant
associations eventually led to farming associations and the cooperative farming that
dominates the Ethiopian rural sector today.
By 1991, a new democratic government assumed control and steered the
country toward liberalization. The hallmark feature of the new administrations
economic strategy was Agricultural-Development-Led-Industrialization (ADLI).
ADLI employed the rural sector as a development springboard (Chang 121).
Ethiopian technocrats hoped that promoting agricultural growth, a natural strength
of Ethiopia, would increase the production of raw material and promote forward
and backward linkage between agriculture and the fledgling industrial sector (Petit
255). Most importantly, this liberal structural adjustment program placed Ethiopia
fully in line with the New Conventional Wisdom of the Bretton Woods institutions
and thus opened up far more possibilities for international assistance and
investment. Like many other nations, Ethiopia was largely compelled by the
International Monetary Fund to adopt such liberal Structural Adjustment Programs
(SAP).
The government began to devalue the exchange rate, re-privatize the banking
and insurance sector, liberalize product markets, deregulate prices, and eliminated
or reduced subsidies. Perhaps the new administrations biggest shift was the
abolishment of collective farming and its endorsement of small-scale farming
(Chang 122). Such liberalization efforts place private property back into the hands
of the people, providing a much-needed boost to domestic savings and investment.
And ADLI policies continue to this day.
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Believing small-scale farms could enhance domestic food supply, government
officials sought to stimulate productivity. Today, small farmers produce 95% of
Ethiopian coffee (Lee 142). A key component of this was the establishment of
Farming Training Centers within each farming association as well as 25 agricultural
Technical Vocational and Education Training colleges to retool and expand the
agricultural workforce (Chang 123). Through these efforts, Ethiopia had trained
60,000 development agents by 2008. These agents work to advise, assist, and train
farmers (Chang 124). In respect to its goal of achieving small-scale farming, ADLI
was a complete success. These policies and others have led to a shift and budget
allocations as agricultures share of the total budget has risen to 17% in recent
years. As a result, Ethiopias real growth rate has more than doubled (Chang 127). In
spite of such domestic progress, millions of Ethiopians are living in poverty and are
victims to the speculation of wealthy nations.
Ethiopia also has a host of structural problems inhibiting its transition to
prosperity. Describing Ethiopian infrastructure as poor would be an
understatement. Dirt roads, a lack of irrigation, and limited electricity all inhibit
growth. The coffee producing region of the south also has very high population
pressure, with an average rural density exceeding 400 people per square kilometer
(Abebe 79). This is likely due to the large families common in the rural sector. In
addition to that, members of these families often branch off into their own family
units. This leads to even smaller farms. Additionally, a lack of market information,
limited credit, and low purchasing power have locked many farmers into
subsistence farming. Making matters worse, coffee farmers are price takers and they
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lack the pricing information necessary for bartering with middlemen. One benefit of
Ethiopias situation is that the highly active rural sector keeps domestic food prices
low and together with food aid, contributes to a relatively low inflation rate. (Hope
67). However with Gini Coefficient was .28 in 2000, inequality is also serious
problem (Hope 68). The government has addressed many of these issues but the
much larger problem is Ethiopias position in the coffee market.
The plight of the Ethiopian coffee farmer cannot only be addressed by
domestic policy. Harsh international trade policies and diminishing prices have left
coffee farmers trapped in poverty. A key contributor to low prices has been the
collapse of the International Coffee Agreement. In 1963, President Kennedy stated
no program of economic development can be effected unless something is done to
stabalize commodity prices (Pendergast 251). Indeed, due to volatile coffee prices,
the United States and a plethora of coffee importers and exporters entered into the
International Coffee Agreement (ICA) in 1965. Under the ICA, a system of quarterly
quotas helped maintain stable and fair prices for coffee. Seven successive ICAs were
entered into but the agreement collapsed in 1989. Subsequently, prices crashed by
over half and coffee producers lost an estimated 4 billion dollars in annual revenue
(Pendergast 33). In 2002, coffee prices plummeted to a 100-year low in real terms
(Petit 225). Prices have risen again but they will always be vulnerable to
speculation. Unfortunately, attempts to restore the ICA in 2007 ended in failure.
Ethiopian farmers have few options. Describing his sense of helplessness and
inequity, one farmers son stated that he did not want to become a coffee farmer
because my grandfather who was a coffee farmer got minimal reward for his work.
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My father who toils until his back breaks cant get a fair price for his coffee and
generate sufficient cash to meet the demands of his family. It has trapped him in the
hardships of life and me also (Black Gold). Volatile price setting in New York and
London has severe consequences for such farmers.
Attempting to stop price speculation, coffee producing nations have
attempted to negotiate fair prices through the World Trade Organization.
Unfortunately, these efforts have also failed. Exemplifying the exasperation and
frustration of disadvantaged African nations, Representative Irene Ovonji-Odija of
the East African Assembly plainly stated that the WTO is supposed to be a rules
based organization, but it is power based organization that manipulates the
developing world (Black Gold). Indeed, the actions of the developed world appear to
convey that it is content to simply subsidize African poverty through aid. Ethiopian
Minister of Commerce Sam Mpasu expressed the predicament of Africa as a whole at
a WTO conference, stating trade is more important to us than aid (Black Gold). Aid
is not and never has been the answer to Africas problems. With massive food
shipments swarming African ports, the continent has gotten poorer over the past 20
years. If Africas share of world trade increased by 1%, it would generate 70 billion
dollars a year, an amount five times larger than what the continent receives in total
aid (Black Gold). Thus improving trade balance by inducing rising commodity prices
in the short run is paramount.
Facing prices below production costs, many farmers are turning to other
crops. Chat, a narcotic that is illegal in many countries, has become a tempting
alternative for coffee farmers hoping for crops with better prices (Black Gold).
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Nevertheless, coffee will remain a primary engine for GDP growth for years to come.
The crop is such an integral component of the economy that protecting its viability
is paramount. Thus short and medium run goals must focus increasing productivity,
reversing soil degradation, and most importantly raising prices through
international agreements. These efforts will have the largest marginal benefit for
impoverished works and help decrease poverty. In 2002, the United Nations
Industrial Development Organization cited Ethiopia as having the weakest industrial
performance in the world (Hope 66). Despite the praises of ADLI and its success,
that statistic represents a serious failure by the government and must be addressed.
In the long run, Ethiopia must diversify both its agricultural sector in general as well
as its economy as a whole.
To generate higher prices, Ethiopian farming cooperatives must explore
multiple routes to strengthen their market position and trademark their world-class
product. Since coffee is a buyers market, small Ethiopian farmers have banded
together into cooperative unions in order to cut out middlemen and negotiate better
prices for their product. Groups like the Oromia Coffee Farmers Cooperative Union,
as shown in the film Black Gold, are giving Ethiopian farmers parity with the large
plantation producers of Brazil (Lee 149). Global growth may also promote Ethiopian
prosperity.
In recent years, global development and growth has led to two trends, which
could give coffee producers hope for rising prosperity. First, as rising nations like
India and China grow, their growing middle class is gaining an affinity for coffee.
Opening a market in two countries, which represent nearly a third of global
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population, could stimulate demand to unprecedented levels. Meanwhile, the
developed world is switching to higher-quality coffee. In 2008, Both of these market
shifts have drove coffee prices to their highest level in a decade (Direct from the
source). There is no reason why fine coffee should not demand higher prices like
fine wine does.
This is crucial to Ethiopia, whose premium coffee represents 40% of its total
production (Direct from the source). What had been a single competitive coffee
market is beginning to become differentiated. While Latin America dominates in
pure yield, its quality is lower and could satisfy countries emerging from
development. Simultaneously, the African nations whose natural resources and
climate make them predisposed for high quality coffee can gain some level of
leverage in transactions with wealthy markets hungering for a sophisticated brew.
Beginning in 2004, the Ethiopian Intellectual Property Office spearheaded an
effort Ethiopia to trademark the local Harar, Yegarcheffe, and Sidamo beans due to
their universal acceptance as world-class coffee beans (Lee 150). However,
Starbucks is attempting to use its market leverage to avoid such step, which would
drastically increase its operating costs (Storm in a coffee cup). Starbucks and other
coffee conglomerates risk being painted as ethical pariahs if they continue to
oppose trademark and free trade efforts (Storm in a coffee cup). Appealing to the
moral aspirations of consumers, Coffee producers have attempted to shame such
corporate behavior and push the free trade movement.
Ultimately, the commodity problem is a combination of short-term price
instability and declining terms of trade in the long run. (Petit 227) It would appear
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that Ethiopia is doing many things right to combat this problem. If successful, it
attempts to strengthen market position and trademark quality coffee could raise
many out of destitution. Unfortunately, the government has not done enough to
promote industrialization and modernization outside of the rural sector. Coffee can
be an important component of the economy, but such a ubiquitous commodity
cannot be the engine of growth forever. For a brighter future, Ethiopia must try to
raise coffee prices in the short term, but reinvest its profits in economic
diversification and modernization in the long run.















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Works Cited
Abebe, Tatek. "Changing Livelihoods, Changing Childhoods: Patterns of Children's
Work in Rural Southern Ethiopia." Children's Geographies 5.1 (2007): 77-93.
Print.
Black Gold. Dir. Nick Francis and Marc Francis. Perf. Tadesse Meskela. SpeakIt Films,
2006. DVD.
Chang, Ha-Joon. Public Policy and Agricultural Development. London: Routledge,
2012. Print.
"Direct from the Source." The Economist. The Economist Newspaper, 17 Apr. 2008.
Web. 15 Apr. 2012. <http://www.economist.com/node/11058477>.
Hope, Kempe Ronald. "Economic Performance, Trade, and the Exchange Rate in
Ethiopia, 1990-2002." African and Asian Studies 3.1 (2004): 61-76. Print.
Lee, Daniel E., and Elizabeth J. Lee. Human Rights and the Ethics of Globalization.
New York: Cambridge UP, 2010. Print.
Pendergrast, Mark. Uncommon Grounds: The History of Coffee and How It
Transformed Our World. New York, NY: Basic, 1999. Print.
Petit, Nicolas. "Ethiopia's Coffee Sector: A Bitter or Better Future?" Journal of
Agrarian Change 7.2 (2007): 225-63. Print.
"Storm in a Coffee Cup." The Economist. The Economist Newspaper, 30 Nov. 2006.
Web. 13 Apr. 2012. <http://www.economist.com/node/8355026>.