November 9th, 2010
What’s the new global source for fresh, shiny produce?
by Nancy Macdonald
Visit a supermarket in Abu Dhabi and you’ll be greeted by row after row of picture-perfect produce, most of it imported. The Indian subcontinent has long supplied food to the wealthy desert capital. These days, though, it’s likely those rows of shiny vegetables and fruit came from an improbable source: Ethiopia, a country practically synonymous with famine. Yes, Africa, where one in three people is malnourished, is now growing tomatoes and butter lettuce for export.
Ethiopia’s biggest greenhouse farming operation is kept hidden from curious, or hungry, eyes; even in Awassa, the southern city where it’s housed, few know it exists. Two kilometres down a dusty private road, past a checkpoint guarded with AK47s, hundreds of pristine, white greenhouses suddenly appear, alien to the setting. Farming in Ethiopia is still done by sickle and ox-driven plough. But inside Awassa’s cool, humidity-controlled greenhouses, vines are fed by a computerized irrigation system, the latest Dutch agricultural technology.
Every day, a workforce of 1,000 locals pick, pack and load hundreds of tons of fresh produce onto waiting trucks, including 30 tons of tomatoes alone. After reaching the capital, Addis Ababa, the produce is flown to a handful of Middle Eastern cities, entirely bypassing Ethiopia, one of the hungriest places on the planet. The trip from vine to store shelf takes less than 24 hours. It’s the latest project by Saudi oil and mining billionaire, Sheikh Mohammed Al Amoudi. And it may be the future of farming.
Over the past 18 months, plantations like this one have been sprouting across Africa. Middle Eastern countries like Saudi Arabia—rich in oil, but water-poor—as well as those dependent on imports like South Korea and Japan, and rising powers like China and India, have begun leasing vast tracts of land in Africa, outsourcing food production to the continent. Agribusiness and Western hedge funds are funnelling billions into the new projects, banking on future scarcity.
The controversial trend has been dubbed “outsourcing’s third wave”—following manufacturing and information technology (IT) in the ’80s and ’90s. The high cost of installing irrigation systems, and importing fertilizers, combines and tractors is no deterrent. Defenders of the new projects say they’re bringing desperately needed new technologies, seeds and investment to Africa. But opponents see the trend as a “land grab” that is forcing poor farmers off their land, and benefiting only the governments inking the deals.
Already, commercial farms dot the northbound highway to Addis Ababa. In the evenings, a steady stream of trucks loaded with fat, sumptuous berries and cherry-red tomatoes rumble past, rushing to Bole International Airport and Gulf state grocery stores beyond. The highway’s dusty shoulders, meanwhile, are littered with the carcasses of animals dead from starvation and disease, the bones bleached white from the sun. The contrast is grim, even by local standards.
The new scramble for Africa was triggered by a convergence of events: surging demand for biofuels, rising consumption patterns in China and India and the 2008 global food crisis, when the price of corn and wheat tripled, almost overnight. Responding to sudden hyperinflation, rioting and panic buying, at least 30 countries, including Argentina, Vietnam, Brazil, Cambodia and India, banned or sharply reduced food exports. In short order, Japan and South Korea, who import 70 per cent of their grains, joined a parade of countries turning to Africa to lock in means of production beyond their borders.
The scale of the effort is astonishing. More than 125 million acres—an area roughly equal in size to Sweden—has been or is being negotiated for lease or sale in poorer countries, mostly in Africa, according to a recent estimate. In Sudan alone, the U.A.E. and South Korea have leased one and two million acres respectively, for crops including corn, alfalfa, potatoes and beans; Egypt has enough land there to grow two million tons of wheat annually, and Saudi Arabia and Jordan have leased 25,000 and 60,000 acres each, mainly to grow wheat and corn. In February, the U.S. investment firm BlackRock launched a world agriculture fund, earmarking US$30 million for farmland acquisitions; Goldman Sachs and Morgan Stanley already offer investors access to similar funds. Calgary’s Agcapita, a three-year-old firm focused exclusively on farmland investment, says private equity firms have lined up some US$3 billion for farmland in developing countries.
Mostly, the deals fly under the radar. Sometimes, their size or sheer audacity triggers attention—like former AIG trader Philippe Heilberg’s deal to lease one million acres in Darfur. When it emerged that Daewoo, the South Korean giant, had signed a 99-year lease granting it close to half of Madagascar’s arable land, protests broke out in Antananarivo, the country’s capital, eventually sinking both the deal, and the president.
Why Africa? Not only is land roughly one-tenth the price of land in Asia, it’s likely the “final frontier,” says Paul Christie, marketing director at Emergent Asset, a London investment firm investing several hundred million dollars in commercial farms in Africa. Some 90 per cent of the world’s arable land is thought to be in use. Also, as Heilberg told the German magazine Der Spiegel after closing the deal in Darfur, “When food becomes scarce, the investor needs a weak state that does not force him to abide by any rules.” Sudan, a dictatorship ranked among the five most corrupt countries on the planet, certainly qualifies. Heilberg’s deal was approved by the deputy commander of Sudan’s People’s Liberation Army (SPLA), the official army of semi-autonomous southern Sudan. “This is Africa,” he recently told Rolling Stone. “The whole place is like one big mafia. I’m like a mafia head. That’s the way it works.”
He’s now looking to double his Sudanese holdings. In so doing, he’ll also gain access to hundreds of million of gallons of scarce water resources—the hidden impulse behind this new play on Africa, says Michael Taylor, with the Rome-based International Land Coalition. “Saudi Arabia has no shortage of land.
Its interest in Africa,” he says, “is water.” What we tend to think of as a dry continent actually has more water resources per capita than Europe, and drought-ridden countries from the Persian Gulf to Asia want in. In places, Taylor warns, investors are walking away with two-page contracts covering 99-year leases. No matter what the harm—over-consumption of water, over-fertilization, deforestation—“governments will be powerless to make changes.” South Korea’s Sudanese plantation will draw from the Nile, threatening Egypt’s food security downstream. Already experts warn of a brewing conflict between the nine Nile states—including favourite destinations for foreign farms: Sudan, Ethiopia, Tanzania and Kenya. Can the region shoulder the added water strain?
But the land deals also offer a chance to reverse decades of under-investment in Africa—which was bypassed by the Green Revolution that, in the ’60s and ’70s, transformed India and China. In much of the poor world, “land is not primal forest,” says Oxford economist Paul Collier; “it is just badly farmed.”
Collier, among the best-known voices on global poverty, argues that the West’s “love affair with peasant agriculture” is clouding the development debate on Africa. “Our peasantry vanished for a simple reason—it was inefficient,” says the author of The Bottom Billion, pointing to emerging market successes like Brazil, where large-scale industrial farms have replaced small holdings. “Commercial farms innovate,” he writes, “because scale helps to overcome the impediments faced by the small.” Some African intellectuals bridle at Western criticism of the play on Africa. “They’re here because we want them here,” says Teshome Gabre-Mariam, one of Ethiopia’s top lawyers. “We can’t ignore the development potential of this venture. We have everything to gain, nothing to lose.”
These days the severity of the food crisis has eased, but not forever. By 2050, when the global population tips nine billion, demand for food will have risen by as much as 70 per cent, according to the UN Food and Agriculture Organization. Food commodity prices continue to climb alongside rising energy prices and desertification is accelerating from Australia to China to Spain; the rising temperatures are predicted to slash yields. In places, that’s already begun. Like it or not, hungry eyes will increasingly zero in on Africa. The world, it seems, may come to depend on it.
November 9th, 2010
Fear expressed over India’s massive land grabs in Gambela
by Desalegn Sisay
Gambela, one of the nine regional states of Ethiopia is fast growing into what the local media has described as “a land grabbing” hub among Indian companies.
Gambela’s new tag as a land grabbing hub comes as BHO Agro Plc becomes the third Indian firm to begin operations in the region after two other Indian companies, Karuturi and Ruchi Group, moved into Gambela in 2008 and early 2010, respectively.
Official reports have indicated that Ethiopia’s Ministry of Agriculture and Rural Development, responsible for the regulation of land acquisition by foreign entities, has allowed the lease of 27,000 hectares of land to BHO Agro Plc.
The size of the property, on which BHO Agro Plc plans to grow bio-fuel seed, observers say, is almost half the size of the Horn of Africa country’s capital city, Addis Ababa.
In 2008, Karuturi became the first Indian company to lease 300,000 hectares of land [an area larger than Luxembourg], in Gambela, for the production of wheat which is to be exported to its home country.
Like BHO Agro, Ruchi Group, the second Indian firm to take advantage of the Gambela land grab, is expected to cultivate bio-fuel seeds on its allotted 25,000 hectares of land.
Several companies and governments have so far made land deals with the central government. Early this year, the Ethiopian Government approved the lease of 22,000 hectares of land to the National Bank of Egypt (NBE).
Neighbouring Djibouti has also acquired 3,000 hectares of land in Bale, whilst Saudi Star Plc, a company established by billionaire Sheikh Mohamed Al Amudi, an Ethiopian born Saudi national, also received 10,000 hectares of land in the region to grow and export rice to Saudi.
According to Ethiopian authorities, the land grabs will have a significant economic benefit. But critics have slammed the government for using the Gambela region as a commercial farming center.
Meanwhile, analysts argue that the concentration of foreign companies in one region could impact local farmers negatively and also risks whipping up controversy among riparian countries of the Nile basin owing to the region’s only water resource, Baro river, an important tributary of the White Nile.
source: Afrik News
September 5th, 2010
This comments are taken from chrisblattman.com. The comments are based on an article titled “Why you should pay attention to the Ethiopian devaluation” from the 2nd of September 2010. We are only presenting here the comment from two of the readers. Please click on the above link to read the full article.
The article begins…
“Yesterday Ethiopians received a September surprise when the central bank devalued the currency by 20 percent.”
The comment by Almaz goes:
Currency devaluation on the basis of a certain economic policy is something every nation does occasionally, more so amongst the developed nations than developing ones with the exception of China. Some 20 years ago Canada did it to stimulate the economy to pull it out of the early 1990s severe recession. Canada devalued the currency by 45% at some point. Then again, Canada is economically integrated with the US, over 80% is exported to the United States, and for that reason the devaluation was understandable. The timing also did have something to do with, a new trade regime was on its way being implemented (NAFTA) US did not mind for the border town States benefited from the exchange rate advantage of importing Canadian goods and products to present it for the voracious appetite of US consumers.
Although the depreciation would take only a year and half but raising it back to the level it was prior to the recession, it would take over seven years. Because it would be very risky for the confidence of the Canadian economy to maintain that low exchange rate after the economy got its wing to fly, foreign investors cannot get a good return for their investment if that low exchange rate was maintained, so instead of attracting few more investors the currency devaluing nation can lose many more investors. So, one has to show confidence on their economy by maintaining strength on their currency to reflect a good management and command.
Given the above example its not a bad idea for Ethiopia to devalue BIRR, however the trade deficit Ethiopia has is far greater to compensate by the export increase it will have no matter how large the export is, because Ethiopia is an 80 million nation with trade deficit is into billions. So devaluing the currency may encourage one time (short term) investors to come and take advantage but they will leave once that advantage runs its course. Those who buy real estate would benefit from the exchange rate advantage it will give them, but all others things will rise immediately after. As illustrated above, Ethiopia is an import economy nation. In the long term the country could lose its ability to maintain that same juice stimulant for an extended period of time knowing the way I know Ethiopia.
China on the other hand can manipulate its currency as much as it wants for however long it desires for it has a huge reserve, essentially driving the world currency exchange rate. Alluding to the fact, if one controls the US currency, one has the world in their pocket. Ethiopia does not have excessive reserve like China does, as a matter of fact Ethiopia is running a yearly deficit economy, which means it cannot do what China does and come out unscathed. It may help it for a one time currency collection by giving the labor of the citizens to the foreign investor accumulating the extra 20% and using that extra juice the one time foreign investor can increase the margin of profit by a 20%. However, that’s where it stops. The nation would have to devalue its currency further down in order to get another stimulant juice, the question then becomes where does the devaluing stop.
People who are running a responsible big financial company like Access Capitals may have been shaken over this sudden move, and based on the website it looks like that is exactly what happened. The author of that report tried politely to calm people down that this is a one time move and will not move another dime till June 2011. Well, I am most certain that such a rapid transition would mean the government does not have a clear command over the economy, hence the possibility for further BIRR decline is inevitable, it may not come soon but at some point the move will be repeated. The authorities may be testing the waters, see how far they can go without arousing a mass protest.
The comment from M.D.M. goes:
I am not an economist, I am just a businessman (an importer), so my analysis could be wrong. But I don’t blame the government, what better means is there to narrow the trade deficit? But Can anybody tell me how they came up with the 20% figure? It is a nice round figure and it looks like somebody just guessed it. My second question is how can Ethiopia compare itself with China and think of import substitution? China virtually manufactures everything while Ethiopia produces almost nothing. So don’t you think the damage outweighs the benefits and the substitution has to come before such big devaluation? Although I think the government has good intentions and is doing everything it can, such violent up and downs in the economy shows the future doesn’t look good for us here.
June 30th, 2010
Ethiopian Farms Lure Investor Funds as Workers Live in Poverty
By Jason McLure
Until last year, people in the Ethiopian settlement of Elliah earned a living by farming their land and fishing. Now, they are employees.
Dozens of women and children pack dirt into bags for palm seedlings along the banks of the Baro River, seedlings whose oil will be exported to India and China. They work for Bangalore- based Karuturi Global Ltd., which is leasing 300,000 hectares (741,000 acres) of local land, an area larger than Luxembourg.
The jobs pay less than the World Bank’s $1.25-per-day poverty threshold, even as the project has the potential to enrich international investors with annual earnings that the company expects to exceed $100 million by 2013.
“My business is the third wave of outsourcing,” Sai Ramakrishna Karuturi, the 44-year-old managing director of Karuturi Global, said at the company’s dusty office in the western town of Gambella. “Everyone is investing in China for manufacturing; everyone is investing in India for services. Everybody needs to invest in Africa for food.”
Companies and governments are buying or leasing African land after cereals prices almost tripled in the three years ended April 2008. Ghana, Madagascar, Mali and Ethiopia alone have approved 1.4 million hectares of land allocations to foreign investors since 2004, according to the International Institute for Environment and Development in London.
Emergent Asset Management Ltd.’s African Agricultural Land Fund opened last year. On Nov. 23, Moscow-based Pharos Financial Advisors Ltd. and Dubai-based Miro Asset Management Ltd. announced the creation of a $350 million private equity fund to invest in agriculture in developing countries.
“African agricultural land is cheap relative to similar land elsewhere; it is probably the last frontier,” said Paul Christie, marketing director at Emergent Asset Management in London. The hedge fund manager has farm holdings in South Africa, Mozambique and Zimbabwe.
“I am amazed it has taken this long for people to realize the opportunities of investing in African agriculture,” Christie said.
Monsoon Capital of Bethesda, Maryland, and Boston-based Sandstone Capital are among the shareholders of Karuturi Global, Karuturi said. The company is also the world’s largest producer of roses, with flower farms in India, Kenya and Ethiopia.
One advantage to starting a plantation 50 kilometers (31 miles) from the border with war-torn Southern Sudan and a four- day drive to the nearest port: The land is free. Under the agreement with Ethiopia’s government, Karuturi pays no rent for the land for the first six years. After that, it will pay 15 birr (U.S. $1.18) per hectare per year for the next 84 years.
Land of similar quality in Malaysia and Indonesia would cost about $350 per hectare per year, and tracts of that size aren’t available in Karuturi Global’s native India, Karuturi said.
Labor costs of less than $50 a month per worker and duty- free treaties with China and India also attracted Karuturi Global, he said. The $100 million projected annual profit will come from the export of food crops, including corn, rice and palm oil, he said. The company also is plowing land on a 10,900- hectare spread near the central Ethiopian town of Bako.
The project will give the government revenue from corporate income taxes and from future leases, as well as from job creation, said Omod Obang Olom, president of Ethiopia’s Gambella region and an ally of Prime Minister Meles Zenawi’s ruling party.
“This strategy will build up capitalism,” he said in an interview in Gambella. “The message I want to convey is there is room for any investor. We have very fertile land, there is good labor here, we can support them.” The government plans to allot 3 million hectares, or about 4 percent of its arable land, to foreign investors over the next three years.
Workers in Elliah say they weren’t consulted on the deal to lease land around the village, and that not much of the money is trickling down.
At a Karuturi site 20 kilometers from Elliah, more than a dozen tractors clear newly burned savannah for a corn crop to be planted in June. Omeud Obank, 50, guards the site 24 hours a day, six days a week. The job helps support his family of 10 on a salary of 600 birr per month, more than the 450 birr he earned monthly as a soldier in the Ethiopian army.
Obank said it isn’t enough to adequately feed and clothe his family.
“These Indians do not have any humanity,” he said, speaking of his employers. “Just because we are poor it doesn’t make us less human.”
Obang Moe, a 13-year-old who earns 10 birr per day working part-time in a nursery with 105,000 palm seedlings, calls her work “a tough job.” While the cash income supplements her family’s income from their corn plot, she said that many days they still only have enough food for one meal.
The fact that the project is based on a wage level below the World Bank’s poverty limit is “quite remarkable,” said Lorenzo Cotula, a researcher with the London-based IIED.
Large-scale export-oriented plantations may keep farmers from accessing productive resources in countries such as Ethiopia, where 13.7 million people depend on foreign food aid, according to a June report by Olivier De Schutter, the United Nations special rapporteur on the right to food. It called for ensuring that revenue from land contracts be “sufficient to procure food in volumes equivalent to those which are produced for exports.”
Karuturi said his company pays its workers at least Ethiopia’s minimum wage of 8 birr, and abides by Ethiopia’s labor and environmental laws.
“We have to be very, very cognizant of the fact that we are dealing with people who are easily exploitable,” he said, adding that the company will create up to 20,000 jobs and has plans to build a hospital, a cinema, a school and a day-care center in the settlement. “We’re going to have a very healthy township that we will build. We are creating jobs where there were none.”
The project may help cover part of the $44 billion a year that the UN Food and Agriculture Organization says must be invested in agriculture in poor nations to halve the number of the world’s hungry people by 2015.
“We keep saying the big problem is, you need investment in African agriculture; well here are a load of guys who for whatever reason want to invest,” David Hallam, deputy director of the FAO’s trade and markets division, said in an interview in Rome. “So the question is, is it possible to sort of steer it toward forms of investment that are going to be beneficial?”
Buntin Buli, a 21-year-old supervisor at the nursery who earns 600 birr a month, said he hopes Karuturi will use some of its earnings to improve working conditions and provide housing and food.
“Otherwise we would have been better off working on our own lands,” he said. “This is a society that has been very primitive. We want development.”
To contact the reporter on this story: Jason McLure in Addis Ababa via the Johannesburg bureau at firstname.lastname@example.org
December 7th, 2009
Ethiopia. Now is harvest time
by Julie Zaugg
Fertile land. Indians and Saudis are preparing for their first harvest on Ethiopian soil. Ethiopia intends to make over 2.7 million hectares to foreigners.
The smell of curry pervades the house where his wife, dressed in a sari, is busy cooking the meal. “I never eat African”, declares Hanumantha Rao, swallowing a mouthful of dahl, the traditional Indian lentil-based dish. Despite this, the Madras-born manager today lives in Africa, at the heart of one of the most fertile regions in Ethiopia, a verdant plateau stretching west of Addis-Ababa towards Sudan.
Ethiopia. In June 2009, the Indian company Karuturi took up intensive farming here. The harvest will be exported to Asia and Europe.
Eleven months ago, Hanumantha Rao moved 4,800 km away from his home to supervise the growing of maize, rice and vegetables for the Indian company Karuturi. Karuturi, the world’s largest producer of cut roses, had decided to diversify its activities into agribusiness. The rise in global food prices, which peaked around mid-2008, makes it a very promising sector for investment. This is especially true for Ethiopia since it has privileged access to Europeans consumers: Ethiopian goods which fall under the Everything But Arms deal are exempt from taxes and quotas. Furthermore, the country has plenty of land and it is cheap. “The government leases it to us for 127 birr [11 francs] per hectare per year.” Moreover, for the first five years, the company does not pay anything. “In India, we could never have obtained such a large area. Trying to buy 10 hectares is difficult.”
The Bako farm, 250 km west of the Ethiopian capital, is the first piece of the jigsaw. Spanning 10,918 hectares, it is found at the end of a red-earthed, waterlogged path, stretching as far as the eye can see.
Men in fatigues, armed with AK-47s, are guarding the entrance. Right now, the “farm” amounts to a wooden awning over a few plastic chairs and three state-of-the-art tractors. The company has imported 30 tractors from the United States and brought in 10 water-pumps and 30 generators from India. This technological deployment is in stark contrast with the archaic tangle of small plots around the farm where Ethiopian farmers still use ploughs and scythes. On the right of the awning, maize covers a neat square of 1,000 hectares. The first harvest is due in October. Part of it is intended for export.
White gold. Karuturi, whose headquarters is in Bangalore, is actually mainly interested in rice. “We are conducting tests on 10 hectares, to check whether the soil is suited to this kind of crop, which practically does not exist in Ethiopia.” Eventually, the company is planning to produce five million tons of rice a year here. The rice will be exported to Asia — mainly India — and to a few African countries (Sudan, Tanzania, Kenya). Peppers ocupy an additional four hectares. Courgettes, beans and onions will also be grown here for the European and American markets.
“The locals do benefit from the fact that we are here,” Hanumantha Rao maintains. “We are bringing them both our agricultural know-how — with our machines, fertilisers and pesticides — and jobs: 98% of Bako’s employees are locals. Only the management, a dozen Indians, are not [local].” What’s more, he promises, “We are going to build a school and a clinic to get closer to the local community.”
This does not stop him from barking at his workers, in English, while his assistant throws small change to the children running after the tractors. In their rubber boots and their beige anoraks, the two Asians stand out next to the Ethiopian workers who are barefoot in the black mud. Three-quarters of them are day labourers and receive 20 to 25 birr per day [around 1.70 francs]. Some have complained to a local paper that they were only paid 7 to 8 birr [ 60 centimes].
What was growing here before, on the land now cultivated by Karuturi? “Not much,” according to the manager. In fact, the locals used to grow tef, the major cereal in the Ethiopian diet. They also used the land as pasture. This is not allowed any more. The company has installed a fence and dug a trench around the farm, in order to stop the cattle from trespassing. Seven months ago, the situation got very tricky: armed with machetes and sticks, the villagers attempted to attack the Karuturi employees. The police were called in.
Despite these setbacks, the Indian firm has no intention of stopping now. It has its eye on 300,000 hectares further west, in the region of Gambella. “The Ethiopian government have already provided 40,000. We should get the rest in four or five months. We will grow sugar, rice and palm oil for export,” explains Hanumantha Rao. He is due to go there the following day, together with a delegation from Cargill which came in specially from New York.
Here comes the sheikh. Ethiopia attracts a lot of investors. In 2008, Saudi Arabia was hit full force by the rise in world grain prices and got scared. What if it couldn’t feed its 25 million inhabitants, many of whom are poor immigrants? In order to ensure its food security, King Abdullah has decided to outsource Saudi food production and created a public fund of US$5.3 billion to provide loans at preferential rates to Saudi companies which wanted to invest in countries with strong agricultural potential.
In January 2009, the King received with great fanfare the first sacs of grain produced abroad: Ethiopian rice courtesy of Jenat, a joint venture between three Saudi companies (Tadco, Almarai and Al-Jouf). The project had been put in motion by a man as discreet as he is powerful: Sheikh Mohammed Al Amoudi.
Born to an Ethiopian mother and a Yemeni father, the sheikh got Saudi citizenship and made a fortune in construction and real estate. With US$9 billlion in personal assets, he ranks 43rd on Forbes’ list of the world’s richest people. In Ethiopia, he employs 40,000 people through Midroc, a consortium that runs factories, hotels, hospitals, malls, a gold mine and …Elfora. Elfora produces meat, poultry and agricultural goods for export to Saudi Arabia, Dubai, Yemen, Djibouti, Egypt, Ivory Coast and what used to be Congo Brazzaville. The company runs three farms in Ethiopia.
A land of vines and zebus. One of these farms is in Meki, a dusty town located 134 km from the capital, in the heart of the Rift Valley. Goats and zebus graze on yellowing pastures that stretch to the horizon. Not many crops around. Here and there, herdsmen with their plastic containers swarm around a community well bearing the logo of the NGO that built it. Water is a precious resource in Ethiopia, but this has not stopped Elfora from installing a sophisticated irrigation system on the hundreds of hectares under its control. “Water and fertiliser are automatically applied to each plant through a computerised dripfeed,” Getachew* explains. He is the person in charge of this operation set in the midst of vines gently sloping down toward the Arsi mountains. “We are experimenting with grapes on 15 hectares, but we also grow white haricot beans and maize, and we’re about to plant tomatoes and peppers.” Everything will go to the Middle East, Israel and the rest of Africa.
Further south, a barbed wire fence stands at the edge of the road on the outskirts of Awassa. A white sign marks the entrance to Elfora’s Melge/Shallo Farm. Five years ago, Al Amoudi was given 3,000 hectares by the Ethiopian government but he is only just starting to farm it. A sea of white tarpaulins stretch to the horizon. Those are the greenhouses. Suspended several metres off the ground, people are busy erecting the heavy metal frames. The Dutch horticulturist Jan Prins has been allocated 1,000 hectares on the farm to grow vegetables for the sheikh.
According to Gelata Bijiga, the manager of the farm, “The first vegetables will be ready in five months. They are intended primarily for Saudi Arabia, but also for Dubai, Bahrain and Europe.” In the Spanish-made greenhouses, seedlings are already sprouting in the little plastic containers sitting directly on the ground. The wooden tags tell you what they are: celery, broccoli, Brussel sprouts, radish, beetroot, fennel. All the employees are Ethiopian. “We have 300 workers right now. There will be 1,000 in due course,” the manager says. The Saudis don’t pay much better than the Indians. “But working conditions are good,” a worker says while watering the seedlings. “Farming in Ethiopia is hard work. Here, at least I learn about modern agriculture.”
Others are not so lucky. The local villagers who used to let their herds graze on this state property don’t have access any more. At first, this generated tensions. “They tried to force their way in,” Gelata Bijiga remembers. “So we threatened them with legal action and things calmed down.” A 2002 UN report indicates that on another farm at the edge of the desert area in the northeast, Elfora managed to get rid of the Afar nomads who used the area as pasture in the dry season, by making it mandatory to buy plots in “pasture zones”.
2.7 million hectares. In fact, the government is very pleased with the influx of foreign capital. “Ethiopia is a rural country: 80 per cent of our jobs and around 45 per cent of our GDP come from agriculture,” says Abeba Deressa, the Minister for Agriculture, sipping a cup of the strong local coffee at his desk in Addis Ababa. “However, out of the 74 million hectares of arable land, only 14 to 18 million hectares are exploited to date — predominantly (95 per cent) by small farmers growing subsistence crops. Foreign investment is therefore crucial.” The idea is to increase productivity, improve infrastructures, create jobs and get technology transfer.
The state owns all the land in the country, a remnant from the socialist Derg regime of 1974-1991, and has done a quick survey to establish an inventory. It will provide foreign investors with 2.7 million hectares — 1.6 million of them before October — at very favourable conditions.
“We are offering leases between 50 and 99 years at minimal rent (US$10 to 12 to the hectare), five to seven years of land tax exemptions, and zero tax on imported machinery,” the Minister boasts. The government is trying very hard to help foreign firms set up shop. If an investor brings in 30 per cent of the capital, the Development Bank of Ethiopia will provide the remaining 70 per cent.
“Demand is so strong that we can hardly respond to it,” Abera Deressa beams. The country has already registered 1,311 projects, the largest being the 300,000 hectares leased to Karuturi. Among other beneficiaries, Djibouti has received 7,000 hectares to grow wheat, while the German Flora Eco Power (with 13,000 hectares), the Italian Fri-El Green Power (30,000 hectares), the American Ardent Energy Group (15,000 hectares) and the British Sun Biofuels will produce biofuels.
Mohammed Al Amoudi has several projects up and running. He wants to “plant sugar” with Syngenta on 30,000 hectares in the Northwest. He is trying to get another 100,000 hectares in the province of Benishangul Gumuz to produce biofuels together with the Malaysian firm Agri Nexus. He also grows coffee, tea and cereals on 19,200 hectares under the aegis of his certified label Ethio Agri-CEFT, which supplies Starbucks. Abeba Deressa reckons that within three to five years, there won’t be any more land to lease in Ethiopia.
River diversion. However, the situation is not exactly rosy. From the investors’ point of view, Ethiopian government offices are often quite uncoordinated. They sometimes allocate the same land to two different buyers. They may also promise land which turns out not to exist. Flora Eco Power almost abandoned its Ethiopian project when the local management of its biofuel factory simply disappeared, leaving behind a US$10 million debt and 150 unpaid workers .
For the farmers who are deprived of their land, there’s nothing to celebrate either. They get no compensation for the land itself. If they are lucky, they get some minimal recompense: the equivalent of ten years of harvest and a little something for the improvements they made on the land. As to the herders, who previously used the land for grazing, they get nothing. As the Minister puts it, “They can just go somewhere else.”
The environment itself is degrading, through the destruction of forests and the intensive farming which requires so much water and pesticides. In order to irrigate its 30,000 hectares, Fri-El Green Power is going to divert part of the Omo river, on which an entire region depends.
Questions are put to the Minister. Does it make sense to let foreigners have all this land, while five million Ethiopians depend on emergency food aid for their survival? Aberra Deressa evades the point with a smile: “Good question, but we cannot afford to close our doors to the global economy.”
In the offices of the United Nations Food and Agriculture Organisation, filled with leaflets describing the humanitarian work carried out in Ethiopia, people cautiously observe the game being played out on the continent. Mafa Chipeta, the Coordinator for the East Africa region, refuses to put any blame on Ethiopia. “For years,” he says, “we have been shouting in the dark trying to get investors interested in the Ethiopian farm sector. Now that they are coming in, we can’t very well start dissuading them.”
This is particularly the case if Ethiopia wants to eventually break out from the yoke of humanitarian aid. “Small farmers will never be capable of feeding the whole population of Ethiopia. Only intensive farming and technologies imported from abroad can make this happen.”
The process must indeed be supervised, but one should not be too zealous, the international civil servant warns. One should avoid repeating the mistakes of the World Commission on Dams. They established such stringent rules to protect local communities and the environment that foreign investment completely dried up. “Countries that could afford to do so, like China and India, have carried on building dams. But others, the poorer countries, had to give up. When this happened, the international community lost all influence overnight.”
Mafa Chipeta, pensive, looks through the window of his office overlooking the Bole district where skyscrapers and Chinese factories are sprouting like mushrooms. “How can a country develop if it never takes any risks? Let us give Ethiopia a chance to try the adventure.”
November 27th, 2009
Hungry for Land. Global Trends
by Maywa Montenegro
Growing food in foreign lands has a long history. But the 21st century version of outsourced agriculture presages something fundamentally new.
In response to the global food crisis, wealthy countries — mostly in the Middle East and North Africa, but also China, India, and South Korea, among others — are buying or attempting to buy farmland in the developing world. In the eastern and financial presses, these sorts of stories have been coming at a steady drip for more than a year. But somehow, with the exception of a few brief reports — most casting it as a “win-win” scenario — the phenomenon has fallen beneath the radar of mainstream western press. That is now likely to change as the trend gathers momentum and the international community begins to respond. On April 6, at a specially convened Manhattan forum, UN food security expert Olivier de Schutter called for a “code of conduct” to regulate the purchase of international farmland. “States, all too often, are led to make such deals because they are attracted to immediate rewards, but they should also look at the long-term consequences,” he said. On Wednesday of this week, Joachim von Braun, Director General of the International Food Policy Research Institute, will deliver a press conference in Washington, DC, on the controversial issues surrounding this development.
It all started just 20 months ago, when some of the world’s largest grain exporters — notably Russia, Argentina, and Vietnam — dramatically curbed exports in an effort to bring down domestic food prices. The resultant supply crunch sent prices soaring and set off the alarm bells in nations whose major food pipelines had suddenly been stanched. Some initially sought out long-term bilateral trade agreements: The Philippines, for instance, negotiated a three-year deal with Vietnam for 1.5 million tons of rice per year. Such agreements, however, are often tenuous and difficult to broker for more than a handful of years. Sensing their vulnerability, government leaders from Libya to Japan began deciding that importing food and crops would no longer suffice; it is safer, cheaper, better to own the land. And so, throughout 2008, with the world’s attention fixed on elections and Olympics and economic implosion, high-level officials quietly crossed the globe in a diplomatic hunt for arable country.
Many negotiated successfully: Prime ministers from both Kuwait and Qatar established relations with Cambodia that have now developed into robust land-for-oil negotiations. Libya secured 250,000 hectares of Ukrainian farmland, and Laos signed away 15 percent of its arable countryside. The United Arab Emirates opened talks on a $3 billion, 800,000-hectare-deal with Pakistan, and surveyed arable tracts in Sudan, Egypt, and Yemen. Saudi representatives looked at land in Kazakhstan, Turkey, South Africa, and the Philippines and began discussions that this March resulted in a $4.3 billion, 2 million-hectare-lease of Indonesian rice paddies. Embattled Sudanese President Omar al-Bashir spent much of the year stumping to attract investors for almost 900,000 hectares of land, and Meles Zenawi, prime minister of Ethiopia said his government was “very eager” to provide hundreds of thousands of hectares of land for investment. China, rumored to have projects slated on nearly every continent, officially announced a $5 billion earmark for food production in Africa.
By August of last year, the size, number, and speed of these exchanges had grown so great that Jacques Diouf, the director general of the UN Food and Agriculture Association, warned that the situation risked creating a “neo-colonial” system — a reference to the grim sort of imperialism that began with the Dutch East India Company in 1602 and continued until the demise of the so-called Banana Republics in the late 20th century, when the benefits of the global market turned colonialists into capitalists, toward reliance on imports and exports of grains and produce rather than on ownership of the property itself.
The current land run, however, presages something fundamentally new. In part, it’s the number and diversity of parties involved. At least 12 nations are now seeking land for food in more than 30 different countries, often in alliance with private agribusiness to manage the farm once the governments have negotiated a deal. But in addition to this group, which is motivated by food security, another category of actors is jumping in for purely economic reasons (see Private Investment sidebar below). Investment houses, private equity funds, hedge funds, and commodity traders see that food prices are hovering well above their pre-spike 2006 levels — and are predicted to go only higher with the expansion of the Chinese and Indian middle class. Meanwhile land, at least in the developing world, is relatively cheap, so there is ample profit to be made by getting control of good soils as quickly as possible. According to agronomist Henk Hobbelink, whose Barcelona-based organization Grain compiles media reports of these deals, the twin tracks of food crisis and economic crisis have together spawned a global “land grab” that, in terms of speed and scope, is “unprecedented in history.”
But there is a deeper, more unsettling phenomenon that distinguishes the 21st century version of farming abroad. Globally, farmland — and just as critically, water on that land — is disappearing at an alarming rate. Approximately 50 million acres vanish each year to urbanization, population growth, and economic and industrial development. The aquifer watering Saudi agriculture is nearly dry. In Iraq, the Mesopotamian breadbasket is expected to shrink by 30 percent due to upriver damming in Turkey, and in China, farmland has dwindled by over a million hectares per year in the past decade.
The recent scramble for land brings to the fore broader issues of the role of natural resources in a changing world. As economist Mahfuzur Rahman wrote in a recent editorial for the Dhaka Daily Sun, “Not long ago, economic development was dominated by the role of physical capital. This was followed by increased emphasis on labor skill and technology. The thinking appears to have come full circle — the role of ‘land,’ in the broadest sense of natural resources and the environment, is again the focus of an increasingly resource-scarce, environmentally conscious world.”
It may at first seem absurd that African and Asian governments — several still reeling from the food crisis — have been so willing to let go of arable land. After all, just last year at the FAO-hosted emergency global summit in Rome, a number of African leaders, including former UN Secretary General Kofi Annan, made renewed calls for a “green revolution” in Africa and stressed the importance of local, small-scale farming. But the funding so far allotted for this homegrown green revolution pales in comparison to the money attached to these new land contracts. And since several include funding for much-needed infrastructure and agricultural R&D, for many leaders of cash-strapped nations, the decision to let land has been an easy one.
For others, however, the trend raises a number of red flags: What will become of displaced subsistence farmers? Will the host countries be able to grow enough food for their own needs? Does it really make sense for nations like Laos and Cambodia, which currently receive aid from the World Food Program, to be signing away leases to fertile land? Hobbelink’s group is particularly concerned about the potential for corruption — benefits accruing only to the leasing nations, and perhaps to the host nations’ governing elite, while the local people lose out. And then there are environmental concerns. “In many instances,” says Devlin Kuyek, a political economist at Grain, “a way of farming based on traditional knowledge and local biodiversity will be replaced by large irrigated monoculture schemes.”
Yet for nearly every critique of “outsourcing ag,” there is an equally compelling argument in favor. Experts point out that most land contracts will result in the employment of indigenous labor: Even as China flies in thousands of its own farmers and scientists to begin production on its African farms, those workers are training locals to grow rice “the Chinese way.” Many of the Arab states, upholding Islamic traditions of helping the poor, have promised a share of the food crop to local markets. And countries like Pakistan and Sudan currently lack the resources to make their own farms productive; by improving infrastructure, foreign investment could boost the overall economy of the host nation. Josh Ruxin — director of the Millennium Villages Program in Rwanda, co-founder of Rwanda Works, a new organization that invests in Rwandan agribusiness ventures, and an assistant professor of public health at Columbia University — acknowledges the potential for colonial-like exploitation, but believes that renewed international interest in African land could also be a powerful springboard for smart development. “Show us how you’re going to do it in a way that’s environmentally sustainable and that provides opportunities for local talent,” he says. Land-hungry nations could be leveraged for investments in African health and education, to ensure, he says, that “ultimately the cycle of poverty is broken.”
Recent events in Madagascar illustrate Ruxin’s point. Until earlier this year, the island was slated for the largest outsourcing project to date, with the South Korean firm Daewoo having signed a 99-year lease on a million hectares of land — roughly one-third of the country. In early March, largely due to public resentment over this deal, President Marc Ravalomanana was ousted in a military coup d’état, and his successor, even before being sworn into office, announced that Daewoo’s plan was “cancelled.” But even President Andre Rajoelina isn’t tossing out the idea altogether: As reported in Le Monde on March 21, the Indian company Varun plans to rent nearly 500 hectares of Madagscaran land. More importantly, the lease must first receive approval from peasant owners, and if they agree, they will receive 30 percent of the harvest. Because Indian technologies are expected to boost output from 3 to 12 tons of rice per hectare, local farmers will get the same if not a larger amount of food, with no effort at all.
Assessing the long-term implications of farming abroad isn’t easy: Arrangements vary from country to country and are highly complex — Libya’s recent 100,000-hectare deal in Niger, for instance, also includes a contract with China’s oil corporation SINOPEC for infrastructure development and with another unnamed Chinese corporation to supply the hybrid rice seeds. Perhaps the biggest problem, however, is the lack of transparency. “The countries involved don’t like to have the details published,” says Lester Brown, director of the Earth Policy Institute in Washington, D.C. “Exporting nations are nervous that their farmers will resent investors coming in and driving up land costs, while importing nations aren’t eager to advertise their dependence. There are extreme sensitivities on all sides.”
In Kenya, for example, reports have surfaced of a deal with Qatar, giving the Gulf state access to land in the Tana River Delta — a pristine ecosystem currently inhabited by native pastoral communities (see Troubles in the Delta) . Conservation groups are now urging the government to be more forthcoming about its plans in the delta, and one organization, Nature Kenya, recently enlisted economists to analyze the costs to human livelihoods of development in the region. They hope such assessments, especially if broadened to include environmental costs, could eventually hold sway at the national level.
More holistic appraisals of land development have in fact been incubating for over a decade. At places like Vermont’s Gund Institute, Stanford’s Natural Capital Project, and the Stockholm Resilience Center, researchers are developing and testing models that ask — from pollination, carbon capture, and water filtration services to value as both genetic reservoir and tourist trap — how much is a chunk of the Earth really worth? In all likelihood, what’s currently being paid for leased farmland is a paltry sum compared to its full systemic worth.
Of course, the value of a piece of land can’t be reduced to its natural resources, its biodiversity, or even its ecosystem services. Layered atop those are the emotional, incalculable, often ineffable attachments to place. Land is home, land is country, land is community. It is why, in the end, the idea of giving up a piece of one’s backyard is such a charged issue. More critically, any kind of farming abroad — even if skirting the world’s ecologically pristine sites — will offer only temporary relief from soil erosion, drought, salinization, and human encroachment. The long-term solutions to the future of food won’t lie in geopolitical land grabs. They will instead lie in the hands of scientists seeking to reinvent agriculture from the inside out, with biofuels that double as feedstock, plants engineered to yield vital nutrients, and ways to grow crops that reimagine “land” in the traditional sense. Mark Twain famously quipped, “Buy land, they’re not making it anymore.” True, but neither have we learned to make the most of it yet.
November 26th, 2009
The New Colonialism: Foreign Investors Snap Up African Farmland
By Horand Knaup and Juliane von Mittelstaedt
Governments and investment funds are buying up farmland in Africa and Asia to grow food — a profitable business, with a growing global population and rapidly rising prices. The high-stakes game of real-life Monopoly is leading to a modern colonialism to which many poor countries submit out of necessity.
Farmers working a field in Malawi.
Every crisis has its winners. A group of them is sitting in the Stuyvesant Room at the Marriott Hotel in New York. The conference room, where the shades are drawn and the lights are dimmed, is filled with men from Iowa, Sao Paulo and Sydney — corn farmers, big landowners and fund managers. Each of them has paid $1,995 (€1,395) to attend Global AgInvesting 2009, the first investors’ conference on the emerging worldwide market in farmland.
A man from the Organization for Economic Cooperation and Development (OECD) gives the first presentation. Colorful graphs travel up and down his PowerPoint charts. Some are headed downward as the year 2050 approaches. They represent the farmland that is disappearing as a result of climate change, soil desolation, urbanization and the shortage of water. The other lines, which point sharply upward, represent demand for meat and biofuel, food prices and population growth. There is a growing gap between these two sets of lines. It represents hunger.
According to most prognoses, there could be 9.1 billion people living on earth in 2050, about two billion more than today. In the coming 20 years alone, worldwide demand for food is expected to rise by 50 percent. “These are pessimistic prospects,” says the OECD man. He looks serious and even a little sad, as he describes the future of the world.
But for the audience in the Stuyvesant Room, mostly men and a handful of women, all of this is good news and the mood is buoyant. How could it be any different? After all, hunger is their business. The combination of more people and less land makes food a safe investment, with annual returns of 20 to 30 percent, rare in the current economic climate.
These are not Wall Street experts, nor are they people who shoot money across the continents like billiard balls. On the contrary, these are extremely conservative investors who buy or lease land to grow wheat or raise cattle. But land is scarce and expensive in Europe and the United States. Solving the problem means developing new land, which is only available in Africa, Asia and South America. This combination of factors has triggered a high-stakes game of real-life Monopoly, in which investment funds, banks and governments are engaged in a race for access to the world’s arable land.
October 20th, 2009
Why Europe Lost Africa
The Apparent End of Afro-European Relations
To understand China’s foray into Africa, it is instructive to read the weekly issues of The China Monitor, a publication of the South African-based think-tank Centre for Chinese Studies. It provides a deep insight into China’s economic relations with Africa as far as trade, aid, and infrastructural development are concerned. Such developments confirm Africa’s drift from Europe. Why did Europe lose Africa?
The Evils of Colonialism
In his book How Europe Underdeveloped Africa, Walter Rodney spells it out in black and white that “colonialism was a one armed bandit.” Frantz Fanon categorizes colonialism as “violence in its natural state.” The entire system of colonialism was based on how much, how best and how fast Europe could exploit Africa even at the cost of African “life and limb.” It sowed the seeds of violence and instability that have followed Africa till this day.
The legacies of colonialism are still quite visible everywhere in Africa. The most outstanding is the diametrical relationship that exists between Europe and Africa. This continent remains the least developed in the world and a showcase for hunger, disease misery and conflicts. “Africa entered colonialism with a hoe and left with a hoe,” says Rodney.
Neo-colonialism, Europe’s New Form of Exploitation
Neocolonialism continued the job left by colonialism. Its main instruments were hypocrisy, double standards and propaganda. The spiral of conflicts that greeted African independence were visible signs of neo-colonialism at work. It is not difficult to find Europe’s hand in all African conflicts from the Congo in 1960, through the Rwandan genocide of 1994 to the recent upheavals in the continent.
African conflicts provide a lucrative market for western (and now Chinese) arms merchants. Europe is notorious for hypocrisy and double standards in Africa. The West has left a reputation for condoning the butchery of Africans by Africans and then preaching human rights. Europe provided economic and military assistance to obnoxious apartheid regime of South Africa that butchered Africans in thousands.
In August 2008 for example, the government of Rwanda issued its report which documented France’s role in the Rwandan genocide. It is shocking to find the names of former French leaders like Francois Mitterand, Allan Juppe and Dominque de Villpin. France is among those western countries which claim to uphold human rights.
Neo-colonialism also practices a policy of selective criticism of African governments. Two cases in point are the recently flawed elections in Nigeria (2007) and Kenya (2008). For fear of disrupting oil supplies in Nigeria, the West did not go beyond verbal protests. As for Kenya, this country was simply transformed into an ethnic volcano. When Robert Mugabe rigged his own elections in June 2008, the West started calling for regime change.
Is China a Credible Alternative to Europe?
Angered by China’s foray into Africa, Europe has attempted to bring China to book over human rights abuses. “China’s ‘no conditions’ investments in African countries misgoverned by oppressive regimes contributes to perpetuating human rights abuses and further worsen governance,” said a draft report of the European Parliament on Development in May 2008. This report further insisted that any “coherent strategy to respond to the new challenges raised by emerging donors such as China … must not attempt to emulate China’s methods and aims….”
China has so far given a deaf ear to western rhetoric about human rights in Africa. Beijing has continued to embark on the path set out in “China’s Africa Policy,” which is inspired by what China calls a “win-win relationship.” Chinese constructed roads, railways, bridges, schools, hospitals, and airports are living signs of China’s transformative presence in Africa.
Africa’s Time to Choose
Zimbabwe’s President Robert Mugabe, enemy number one of the West was among the first African leaders to define Africa’s choice of partner. “We have turned east,” he said, “where the sun rises, and given our backs to the West where the sun sets.” Considered a pariah, Mugabe has never been taken seriously. All Europe looks forward to is his departure.
“When it comes to China and Africa, the European Union and the US want to [eat] their cake and [have] it,” said Senegalese President Abdoulaye Wade. “Today … economic relations are based more on mutual need and the economic reality that the EU and US cannot compete with China.” President Wade concluded his interview with Financial Times in strong terms. “Not just Africa but the West itself has much to learn from China. It is time for the West to practice what it preaches….”
October 12th, 2008
Ethiopia is growing fast, but inflation is biting
From the Economist Intelligence Unit ViewsWire
Double-digit growth has its downsides, in the form of inflation of 40%-plus and foreign currency reserves that cover no more than six weeks of imports.
Since 2004 the Ethiopian economy has enjoyed double-digit growth rates, but this success has come at the cost of rapid inflation and a steep fall in foreign currency reserves. Surging coffee prices have played a major role in spurring accelerated growth, while inflation is being largely driven by the steep rise in world food and oil prices.
One adverse consequence has been the 33% appreciation of the real exchange rate, which threatens the country’s export drive (although it does have the beneficial effect of slowing inflation). This real exchange rate appreciation has taken place despite a 30% fall in the nominal exchange rate, meaning that the Birr has not fallen anywhere near rapidly enough to accommodate the widening gap between inflation in Ethiopia and its main trading partners.
According to the IMF’s latest report on the economy, growth will slow over the next five years, reflecting the combination of high inflation (which will have to be tackled by tightening fiscal and monetary policy), the infrastructural deficit (which will constrain production) and declining competitiveness, caused by real exchange rate appreciation. The Fund says that “front-loaded” fiscal and monetary tightening could bring inflation back to single-digit levels within two years, but because inflationary expectations have taken hold, slowing inflation could take longer, forcing the government into even tougher contractionary policies that threaten to curb GDP expansion.
Because the public sector plays such a dominant role in the Ethiopian economy, bringing down inflation will involve reduced borrowing and investment by the state at just the time when the government has embarked upon an ambitious infrastructural investment programme. Five new hydropower plants and a wind-power facility are being built; between them these will expand the country’s installed generation capacity from the current 660 megawatts to some 3,600 mw by 2012. Ethiopian Airlines is planning the purchase of ten new Dreamliner aircraft to be delivered over the next four years, and these costly schemes will have to be funded by a combination of domestic and offshore borrowing. To reduce inflation to single digits, however, the government will have to cut its public-sector borrowing by some 2.5% of GDP, and increased infrastructural investment—funded from borrowing—is simply incompatible with a tighter fiscal and monetary stance. This means that there is a very good chance that inflation will remain high and consequently that the real exchange rate will continue to appreciate, thereby undermining exports and increasing import demand.
Inflation reached a historic high of 40% in May. Ethiopian inflation has in the past been driven by drought, but not on this occasion, since the country has enjoyed four successive years of bumper harvests. Rather, inflation is being driven by fuel prices, currency devaluation, the spillover from the construction boom and (during 2008 in particular), rapidly rising food prices.
Money supply is also playing a role: having accelerated since 2005, money-supply growth has pushed above 40% early this year. There is an additional, technical problem, in the form of rising velocity of circulation. In other words, people are withdrawing cash from the banks and from savings and spending it, partly because they expect prices to continue to escalate (inflationary expectations), but also because real interest rates are negative so that money in the bank loses its value.
Exports threatened by inflation
Competitiveness is a worry too, because while the exchange rate has devalued by some 22% since 2004, reflecting much higher inflation in Ethiopia than the global average, the real exchange rate is strengthening, rising by one-quarter in the past four years. One consequence is that Ethiopia’s current-account deficit is now very large, at around 20% of GDP.
Exports continue to boom, despite the loss of competitiveness. Since 2004 Ethiopia’s share of the global coffee market has increased by 50%, albeit from a low base (ie, from 0.6% to 0.9%). Export shares for its other main products—flowers and oilseeds—have also increased, with horticulture’s global market share rising by 0.5%.
Aside from exchange rates, three factors are critical to Ethiopian competitiveness: wage levels, the state of infrastructure and the ease of doing business. In terms of wages Ethiopia is reckoned to be the most cost-effective country on the continent, with a manual worker earning US$60 a month as against US$190 in China. Indian investors have moved into the flower sector because land costs are much lower than in their home market, wages are one-third of Indian levels, freight costs are lower and there are no import taxes. In 2007 Ethiopian flower exports increased by 133%, while exports of oilseeds, leather goods and live animals rose by 20-30%.
In terms of the World Bank’s Doing Business indicators, Ethiopia is near the top of the African league table, behind only Botswana, Kenya and South Africa. Despite this and despite the country’s impressive export performance, it seems clear that competitiveness is under threat from high inflation and an appreciating real exchange rate.
In part this reflects economic fundamentals—very rapid import growth caused by strong output expansion. As growth slows in the next few years import growth will decline, but this may well be insufficient to counter overvaluation of the exchange rate. It is therefore likely that the Birr will continue to depreciate over the next two to three years.
October 9th, 2008
Financial Market Turmoil and Africa
by Shanta Devarajan
Chief Economist of the Africa Region at the World Bank
My colleagues and I are trying to think through the implications for Africa of the recent turmoil in global financial markets. Here are four propositions.
1. African banking systems are unlikely to experience the turbulence of the U.S. banking system. African banks retain loans they originate on their balance sheets, the interbank market is small, and the market for securitized or derivative instruments is either small or nonexistent. Even though some African countries’ banking systems have significant foreign ownership, the parent banks are typically not in the U.S. Furthermore, the foreign ownership share in the largest economies, Nigeria and South Africa, is less than five percent (compared with a developing-country average of 40 percent).
2. A cutback in foreign capital inflows could seriously affect growth and poverty reduction in Africa. Over the past five years, Africa has seen a substantial surge in foreign capital inflows—foreign direct investment, portfolio investment, and loans. A slowdown or reversal of these flows could dampen securities prices in some countries; the stock markets in Nigeria, Kenya and South Africa fell last week. Most countries were using these inflows to finance much-needed infrastructure investment, which may have to be postponed. If the cutback spreads to official development assistance (such as the $40 billion over the next five years that has been promised by the U.S. for HIV/AIDS), the lives of hundreds of millions of Africans, including the two million on AIDS treatment, may be threatened.
3. If the financial market turmoil leads to a recession in the U.S. and elsewhere, commodity prices will likely fall. Food, oil and mineral prices have already begun to fall, although they are still higher than they were in 2006-7. This is good news for importers of these commodities. Even for oil exporters, many of whom have been using a reference price of about $70-80 a barrel in their budgets (and saving the rest), a drop in the price of oil will not be as damaging as it was in past episodes.
4. Of greater concern in Africa is the resurgence of inflation and macroeconomic imbalances in some countries. Ethiopia’s inflation rate is 61 percent, Kenya’s 28 percent, Ghana’s 18 percent and South Africa’s 13.6 percent. Ethiopia’s trade deficit is 30 percent of GDP, Ghana’s current account deficit is 13 percent of GDP, and South Africa’s 8.2 percent of GDP. Although unrelated to the financial market crisis in the U.S. (but closely related to the food and fuel price increases of earlier this year), these developments will require early and decisive actions to avoid the situation getting worse.
I look forward to your comments and suggestions on these propositions.
May 31st, 2008
“These days, those of us who are supporting family by sending money back home are aware of the uncanny economical development there. Life is too expensive to survive in Ethiopia and whatever amount of money sent there won’t help much. 100 kg Teff for over 1000 Birr? What is going wrong in Ethiopia? Who is responsible for this mess?” (Lissan)
Ethiopia: Soaring Inflation Deepens Economic Crisis
by: Side Goodo
Soaring inflation is deepening Ethiopia´s economic crisis. According to the foreign based Ethiopian sources, inflation in the country has reached an alarming 35% in January 2008 while the government sources indicate that it is about 20%. In either case, there is real evidence of sustained increase in the general price level in the country since 2005. The price of cereals has increased fourfold while the prices of raw materials have more than doubled during the past three years.
photo: kully ballagan (Flickr)
In the country where over 80% of the population lives below US$2 a day, i.e. below poverty line, inflationary pressure of this magnitude puts the basic survival of the majority of the population at stake. In urban areas, many households are said to be already dependent on the government cereal handouts. In rural areas, inflationary pressure is exacerbated by the recurrent drought which exterminated crops and live stocks in many regions. According to both the UN and local sources, an estimated 9 million Ethiopians need urgent food aid for 2008; the never ending problem of this country.
The Ethiopian government admits that the inflationary pressure has become very severe. However, it also claims that the economy has been growing at 10% for five consecutive years and it is healthy at present. This can not be trusted for two reasons. First, if the economy has been growing at such robust rate, the country should be able to feed itself. Why do we continue to beg food aid if our economy has been growing at this rate every year for many years? Second, double digit inflation is clearly the sign of unhealthy economy.
Because of such wrong diagnosis of the economic problems facing the country, the government recently declared a wrong strategy to control inflation. Instead of devising appropriate economic policies that help tackle the root causes of inflation, the Ethiopian government recently declared a war on what it termed as “greedy” and “criminal” business persons. The same route was followed by Mugabe in Zimbabwe, where inflation is now over a 1000%.
The rest of the article is organized as follows: section 2 presents an overview of the causes of inflation. Section 3 deals with the strategies to control inflation. Section 4 analyses the Ethiopian strategy for controlling inflation while section 5 concludes.
2. Causes of Inflation
In the mid-twentieth century, two camps of economists proposed two different causes of inflation. The monetarists argued that money supply was the most dominant determinant of inflation while for Keynesians the real demand was more important in determining inflation than changes in the money supply. Currently, many economists agree that inflation is caused by the combination of both real demand and changes in the money supply.
Based primarily on the Keynesian tradition, economists identify two types of inflation: cost-push and demand-pull inflation. Cost-push inflation is caused by the decrease in aggregate supply. Decrease in aggregate supply is in turn caused by increase in prices of production inputs, primarily, labour and raw materials. Ceteris paribus, the higher the cost of production, the lower is the amount of goods and services produced and hence the lower the aggregate supply of goods and services.
However, other things will not always remain constant and the supply of goods can be influenced by other factors than the increase in the prices of inputs. Therefore, not all inflation resulting from the fall in aggregate supply can be categorized as cost-push inflation.
In Ethiopia, the fall in aggregate supply can not be solely attributed to an increase in the input prices. The archaic production technique used in the agricultural sector which employs 85% of the population coupled with the recurrent drought in many parts of the country have caused persistent fall in the production of agricultural output. Therefore, the current inflationary pressure in the country is due to the combination of both cost-push and structural economic problems.
The cost-push inflation is aggravated by increased oil prices and prices of other raw materials. Due to the combination of politics and scarcity the international price of oil has increased tremendously during the past two years. The oil price reached the all time high of over US$100 a barrel in 2008. Although the Ethiopian government tried to subsidize oil consumption in the country, the price increase has been significant. In addition to this, the price of other raw materials such as cement has at least doubled in Ethiopia during the past three years due to the combination of increased demand and limited production facilities.
On the other hand, demand-pull inflation is caused by an increase in aggregate demand which in turn is the result of increase in either private or government consumption or both, increase in investment demand, increase in money supply and so on. The demand pull inflation is caused by increase in the demand for goods.
Therefore, any strategy to control the level of inflation should be based on the economic assessment of the causes of inflation.
3. Economic Strategies to Control Inflation
In many countries, the control of inflation has become one of the prime objectives of government economic policy. Effective policies to control inflation must focus on the root causes of inflation in the economy. If inflation is caused by increased inputs costs and consequently the fall in aggregate supply, the production costs must be reduced to curtail inflation. If the cause is excess demand, the government should reduce the aggregate demand.
In most advanced countries the main cause of inflation is excess demand. Accordingly, they focus on the control of the growth of demand through the use of monetary policy instruments, viz, interest rate and real money supply. Monetary policy can control the growth in demand through increase in interest rates and reduction in real money supply. The transmission mechanism of monetary policy is complex. In conventional macroeconomic models the interest rate channel is the primary mechanism of transmission. However, Bernanke and Gertler (1995) have pointed out that the macroeconomic response to policy induced interest rate changes is considerably larger than that implied by the conventional estimates of elasticities of consumption and investment. Therefore, other channels such as the Bernanke credit channel may also be at work.
In any case, increased interest rate reduces aggregate demand in a number of ways: (a) discouraging borrowing by both households and firms, (b) increasing the rate of saving, (c) increasing cost of funds and reducing business investment and (d) leading to the fall in monetary inflation, by reducing the demand for lending and the growth of broad money.
Demand-pull inflation can also be controlled using fiscal policy. A government can reduce aggregate demand by increasing direct taxes which leads to the fall in personal disposable income and consumption. A government can also reduce aggregate demand by reducing its spending and its borrowing levels.
Other economic policies used to control inflation include revaluation of exchange rates and incomes policies or the direct control of wages. Effective control of inflation can only be achieved if there is effective control of aggregate demand through a combination of both fiscal and monetary policy and improvements in the supply side of the economy. Introduction of inflation targets can also enhance the credibility of the inflation control policies.
4. Ethiopia´s Inflation Controlling Strategy
The Ethiopian government recently announced what Heinlein (March 2008) termed as “Tough Anti Inflation Measures”. The core of these measures include a crackdown on what the government calls “economic criminals” referring to business people whom it blames for the recent price increases that boosted inflation rates to 20%. Accordingly, the government established a task force to punish what it calls “greedy and illegal” business persons and asked the public to provide information about those involved in price gouging.
However, the crackdown on private businesses does not address the underlying causes of inflation in the country. This strategy is based either on the misconception of the country´s economic dynamics or the deliberate attempt to shift the burden of the failed economic policies to the private sector. According to McMahon (2006), many people mistakenly believe that prices rise because businesses are “greedy”. This is not the case in a free enterprise system. Because of competition, the businesses that succeed are those that provide the highest quality goods for the lowest price. So a business can’t just arbitrarily raise its prices anytime it wants to. If it does, before long all of its customers will be buying from someone else. Thus unless the Ethiopian business firms blamed for increased prices are monopolies, there is no way that they will be able to increase prices on all commodities as they wish.
Therefore, the Ethiopian government targeted the wrong causes of inflation and hence its measure is bound to be counter productive. Ethiopia´s inflation is primarily cost-push inflation and what can be termed as structural. It is caused by the fall in aggregate supply of goods. The increase in the cost of raw materials including the price of oil has contributed to the fall in aggregate supply. Speculative behaviours caused by the expectation of increasing prices can exacerbate inflationary pressure. However, since the Ethiopian inflation is primary driven by the sustained increase in food prices, speculative behaviour can not be considered as the driving force behind the current inflationary pressure. Moreover, oil price has increased globally. It can not be the main cause for soaring inflation in Ethiopia.
The archaic nature of the production system in the agriculture sector which employs 85% of the country´s population could not keep with the pace of the population growth in both rural and urban areas. This coupled with recurrent drought in many parts of the country has significantly reduced the supply of food grains in the country. The persistent supply shortages led to the persistent rise in the general price level.
Thus it is the combined effects of cost-push inflation and structural economic problems that are behind the sustained increased in the general price level in the country.
This trend is likely to continue unless the government devices an appropriate policy to improve the supply side problems of the economy. Cracking down on the business people is another grave mistake this government must avoid at all cost. Countries in crisis such as Zimbabwe have followed this route and have failed miserably.
The other inflation fighting measures announced by the government include an end to sales tax on food grains and restrictions on the growth of money supply. An end to sales tax on food grains is a good news. However, an imposition of VAT on other activities is likely to counter balance this effects. The reduction in real money supply presupposes that the cause of inflationary pressure is excess demand. In any case, increase in money supply while there is the shortage of aggregate supply of goods is likely to fuel inflationary pressure and hence it is appropriate to keep the pace of real money supply with that of the growth in the real sector.
These are appropriate economic policies to control inflation. However, they should be backed by efforts to improve the supply problem.
The underlying causes of the current inflationary pressure in the country are both structural and are linked to increased input costs. The government has to focus on these causes if it is to effectively control inflation in the economy. The policy of cracking down on the business people is likely to be counter productive because it fails to address these underlying causes of inflation.
The suggested changes in monetary policy and sales tax are useful. However, they must be backed by effective measures to improve the supply side problems. Improvement of the supply side problems requires further changes in macroeconomic policies. These include creating conducive environment for private investment; full privatization of government and party owned companies on food security and other related policies. The country must set its economic priority right. The country must be able to feed itself!! The main driving force behind the current soaring inflation is food prices. Radical policies must be devised to ensure food security as a matter of urgency.
If the government is serious about addressing the underlying causes of inflation in the economy, introduction of inflation targeting may improve the credibility of inflation controlling measures.