Sidama: Coffee Economics, Politics and Poverty

Side Goodo
September, 2007

1. Poverty, Hunger and Underdevelopment in Africa
Over the last two centuries many countries of the world have developed at a breakneck speed. However, after half a century of decolonization, Africa still remains the darkest continent and the majority of its people still live under abject poverty.

Half of the 800 million people on the African continent live on less than US$1 per day while the mortality rate of children under five years of age is 140 per 1000. Only 58 percent of the population had access to safe water. The rate of illiteracy for people over 15 is 41 percent and there are only 18 mainline telephones per 1000 people compared with 146 for the world and 567 for developed countries (NEPAD, 2001). Thus, in Africa, at present, poverty defined in terms of both lack of ownership of economic resources and lack of access to social and economic services which refer to the broader livelihoods is rampant. Poverty is also about lack of power. The poor is the most vulnerable and the most powerless group of society.

Among the 49 least developed countries of the world as of 2007, 33 are in Africa. These are: Angola, Benin, Burkina Faso, Burundi, Central African Republic, Chad, Congo Democratic Republic, Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Guinea Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Sao Tome & Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Tanzania, Togo, Uganda and Zambia.

The LDCs or the fourth world countries are characterized by low income, GNI per capita of less than US$750, low level of human resources development, and economic vulnerability. A country must achieve GNI per capital of over US$ 900 to leave the forth world. About five of these African LDCs are characterised by a very low level of economic progress measured by a very low level of Gross National Income (GNI) per capita of less than US$ 200. These are: Ethiopia, Somalia, Seira Leon, Burundi, and Guinea Bissau.

Only two countries in Africa have shown remarkable economic performances during the past 20 years and were able to graduate from the LDC category. These were Botswana which moved up the ladder in 1994 and Cape Verde Island which graduated from LDCs just in 2007.

The poverty and backwardness of Africa stands in stark contrast to the prosperity of the developed world. The continued marginalization of Africa from the globalization process and the social exclusion of the vast majority of its peoples constitute a serious threat to global stability (NEPAD, 2001). The continued influx of Africans seeking better living conditions in Europe has already caused a great alarm among the EU member states but no concrete actions have been taken by this block of wealthy nations to bring sustainable development in the African continent.

The UN Millennium Development Goals (MDGs) adopted in 2000 are not likely to be achieved in many of the African countries because of such dismal economic performances in most of these countries. The 2015 targets for most indicators are already accepted as unachievable. Thus many of African countries are trapped in a vicious circle of underdevelopment, poverty, hunger and famine. The world has the resources and the technology to eradicate poverty in Africa and globally, but it does not have the will.

2. Poverty and Underdevelopment in Ethiopia
Ethiopia’s dismal economic performance with GNI per capita of about US$152 in 2005 puts the country at the bottom of the least developed countries of the world (the fourth world). As a result, poverty in Ethiopia is rampant. According to BBC World Service (Feb 2007), 81% of Ethiopia’s population is living below the poverty line of US $2 a day. Given Ethiopia’s current population of about 78 million, this means that over 63 million Ethiopians live below poverty line.

At the beginning of the 21st century, we witness an increase in global poverty and hunger along side unprecedented affluence among nations and individuals implying an ever increasing disparity between nations and with in various regions of a nation. The fact that the Microsoft tycoon Bill Gate’s net worth is 5 times as big as Ethiopia’s 2005 annual Gross National Income (GNI) of $11.1 billion US dollars at current prices (World Bank, 2005) is a vivid depiction of not only how the country has failed in terms of economic achievement during the past century but also the alarming disparity between individuals and countries in the developed world and individuals and countries in the LDCs.

The rest of the African countries blame colonialism for their underdevelopment. However, Ethiopia has been praised as the only African country that resisted western colonialism. Then why is Ethiopia at the bottom of the fourth world? Ethiopia has no one to blame for its unprecedented development disaster except for successive archaic feudal and totalitarian political leaderships. Archaic monarchical rule and rapacious feudalism that lasted for over half a century kept the country under perpetual darkness while the rest of the world was moving forward with lightening speed. Neither the 1974 revolution nor the 1991 TPLF take over of the political power in the country brought any fundamental changes on political organizations and economic management in the country. The socialist regime wasted 17 years of opportunity for economic revival of the country. Like its predecessors, the current regime managed to cling to political power for over 16 years with out any improvement in economic lives of the majority of the peoples in the country. In fact poverty, hunger and famine are now embodied into the very structure of the Ethiopian economy.

A decade and a half is not a short time to harness the resources of the country towards the path of sustainable growth and development. On the contrary, the current leadership is preoccupied with maintaining its political power at the cost of economic nightmare. Time and resources are wasted on repressions of democratic freedom and human rights. Dictatorial and predatory regimes, lack of democratic freedom and human rights, lack of recognition of the rights of various ethnic groups in the country, inappropriate value systems of the societies’ of the ruling elites, absence of the rule of law, absence of property rights and institutions that support free enterprise under the current and previous Ethiopian regimes are solely responsible for continued underdevelopment and abject poverty of the majority of the citizens of this country.
The Sidama province located in the southern part of the country is endowed with abundant natural resources. However, under the current Ethiopian political organization, the Sidama region has deteriorated from self sustained traditional economic system into an economic disaster where hunger and famine have become the order of the day.

3. Poverty in Sidama Region
The Sidama region with estimated total population of 5 million which makes Sidama the 5th largest ethnic group in Ethiopia after Oromo, Amhara, Ogaden and Tigray, is one of the least developed regions in the country already at the bottom of the fourth world.

Only about 8% of the inhabitants of Sidama have access to electricity. The average rural household has only 0.3 hectare of land (compared to the national average of 1.01 hectare of land) and the equivalent of 0.5 heads of livestock. Most cattle in Sidama particularly in the low lands died due to tsetse fly infestations in the early 1980s. Only 15.4% of the population is in non-farm related jobs, compared to the national average of 25% and a southern average of 32%. Primary school enrollment has improved since recently to reach about 68% of all eligible children while enrollment in secondary school is one of the lowest (18%). These figures are inflated because of highly deflated population figure for Sidama of 3 million. Continued changes in climatic conditions due to global warming increased land areas in Sidama exposed to malaria to about 72% (World Bank, Country Memorandum, 2004).

All indictors reflect the glaring poverty in Sidama region. Sidama is predominantly rural society. 91 % of the total pupation in Sidama lives in rural areas. Thus it is primarily the peasant farmers who languish in poverty in the Sidama region. Fragmented land holdings, less than 0.3 hectares per household, coupled with very high population density of over 430 persons per sq km, implies a huge reservoirs of redundant labour force that needs to be employed out side of the subsistence farming. And yet the proportion of the total population engaged in non-farm related jobs in the Sidama region is only about 15%.

Sidama is endowed with various natural resources. Rivers such as Ganale that form Wabeshebelle river in Somalia originates in Sidama high lands of Harbagona. Lakes Awassa in the north west and Abaya in the south west offer great tourism potentials for the region. On top of all these, Sidama is endowed with the resources that make the Sidama name a global household name- that is, its black gold- coffee. Sidama produces abundant high quality organic (speciality) Sidama (Sidamo is a bastardised name given by the Amhara rulers) coffee that fetches the highest international retail prices for food chain multinationals such as Starbucks.

4. Sidama: Coffee and Poverty
Coffee, believed to have been discovered a 1000 years ago by a Kaffa goatherd, in the Kaffa region of the country, is one of the most important cash crops in the Sidama region. In the year 2005, Sidama and Gedeo alone produced over 63,562 tons of coffee (Central Statistical Agency, 2005). This is 1/3 of the total coffee output for the country during the year.

Sidama is very well known for its production of garden coffee. Speciality Coffee is grown in many villages. Sidama has ideal soil type and climatic conditions-including altitude, rainfall and temperature for the production of Arabica coffee. Coffee is predominantly produced in villages organized in 39 primary coffee cooperatives in Shabadino, Dalle, Aleta Wondo, Darra and Bansa districts. However, almost every household in rural Sidama outside of extremely hot lowlands of Awassa, Shabadino and Dalle and very cold highlands of Hula and Harbagona produces coffee. Over half of the total population in Sidama directly or indirectly depend on coffee for livelihoods.

Over 60% coffee produced in Sidama region is washed coffee and ready for export while half of the country’s coffee output of about 200,000 tones is consumed domestically. There are over 89 coffee washing stations in Sidama alone. Thus, over 40% of washed coffee destined to the export market comes directly from the Sidama region.

Coffee is the single most important export commodity for Ethiopia providing about 65% of the country’s foreign exchange earnings. Ethiopian coffee exports currently account for about $400 million in export income. More than 20 million people in the country (about 25% of the population) derive their livelihoods from the coffee sector. Coffee contributes over 10% of Ethiopia’s GDP.

Coffee is the most important agricultural commodity in the world, and is worth up to $14 billion annually. In fact coffee is the second most widely traded commodity in the world next to petroleum. More than 80 countries, including Ethiopia, cultivate coffee, which is exported as the raw, roasted or soluble product to more than 165 countries worldwide. More than 121 countries export and /or re-export coffee. More than 50 developing countries, 25 of them in Africa, depend on coffee as an export, with 17 countries earning 25 per cent of their foreign exchange from coffee.

Coffee classification and grading systems in Ethiopia were developed and licensed for the first time in 1952 and then modified in 1955. Ethiopian coffee certification began after the establishment of the National Coffee Board of Ethiopia in 1957. Licensed and graded coffee export from Ethiopia has the history of over half a century. However, half a century of progressive coffee export did not at all translate to poverty reduction and increased access to livelihoods in Sidama. Instead, as specialty coffee production, processing and exports increased from Sidama, poverty, hunger and famine also increased. This is a symptom of fundamental economic and political problems in the country.

Why did massive high quality coffee production fail to reduce poverty in the Sidama region and in other coffee producing regions in Ethiopia? There are various factors that explain why coffee failed to contribute to poverty alleviation in these regions and in Sidama in particular. Among others these include (a) inimical macroeconomic policies, (b) systematic exploitation of producers by parastatals (c) unfair allocation of retail returns, and (d) international price volatility. I will deal with each of these in the following sections.

a) Inimical macroeconomic policies
Successive dictatorial regimes in the country followed inimical macroeconomic policies. One of such policies is the exchange rate policy. Ethiopia followed fixed exchange regime during both the feudal and socialist regimes. The national currency, birr, was exchanged for highly overvalued rate of about 2 birr for 1 US dollar for over two decades. Both economic theory and practice shows that currency overvaluation has serious negative effects on the export performance and export earnings. Since coffee is the country’s major export, currency over valuation has the most undesired effects on the coffee export performance and earnings in the country.

Thus, prolonged currency overvaluation in the country during both the feudal and socialist regimes meant that coffee producers were denied of most of their coffee incomes. Since the government was the primary exporter during these periods, it was able to artificially set the farm gate prices at a very low level so that it retains most of the returns generated from the coffee export. Thus the peasant farmers continued to earn negligent income from their coffee produces. This perpetuated rural poverty and under development in major coffee producing regions such as Sidama.

However, the macroeconomics alone does not explain why coffee failed to alleviate poverty in Sidama. Systematic exploitation of coffee farmers through parastatals was another reason why the benefit of coffee could not trickle down to the legitimate producers. I will review this in the next section.

b) Systematic exploitation of coffee producers by the parastatals
In addition to inappropriate macroeconomic policies, there is also another indirect mechanism by which coffee income from the area is stifled to the center. These is carried out systematically through the parastatal called the development bank of Ethiopia. The coffee producing cooperatives are required to deposit their earnings only in the development bank accounts. However, when they deposit their monies there, they are forced to put it in the non-interest bearing current account. This enables the bank to lend and benefit by charging interest to other borrowers the money deposited by these cooperatives. Thus while cooperatives get no interest for the money they deposit in these banks, the banks charge these co-ops exorbitant rates of interest whenever they want to borrow from these banks. Thus there is double exploitation of the coffee revenues of these cooperatives. Their money does not bear interest but they pay high interest for what they borrow from these banks.

Cooperatives are private businesses and there is no reason why they should not earn interest from their assets. This is another mechanism of inappropriate resource misappropriation that perpetuates the misery of the coffee producing farmers in Sidama.

(c) Unfair distribution of retail returns
The Sidama coffee along with Harar and Yirgacheffe is considered to be among the world’s best coffee. However, the producers of this coffee, the Sidama peasant farmers, are among the world’s poorest people. One of the reasons for this is the insignificant retail return these farmers obtain for their coffee produce. The specialty coffee fetch higher prices for food chain multinationals compared to the prices of commodity coffee. That is each of the high quality coffees sells at a premium over commodity coffees in world markets and draws high retail prices.

However, the distribution retail returns from the speciality coffee is monopolised by the importers and distributors. The peasant farmers in Sidama, Gedeo and Harar who produce such speciality coffee in Ethiopia obtain only around 6%-10% of the total retail returns. This barely covers even the production costs.

This is far less than the percentage the high quality coffee producers in other developing countries obtain for their produce. For instance, producers of Jamaican Blue Mountain Coffee capture 45% of their product's retail price which is 35 percentage points higher than what the Sidama producers obtain for their produce. The fact the Jamaican retail return share is acceptable by both the importers and distributors indicates that, other things remaining constant, there is a possibility for the Sidama farmers to increase their coffee income by three folds. However, the realisation of this dream is very difficult if not impossible in Ethiopia.

(d) International price volatility
The recent plunge in the international coffee prices contributed to further deterioration of the incomes of the Sidama coffee producers usually supported by the IMF and World Bank poverty alleviation, structural adjustment and stabilization programmes. The global oversupply of the commodity coffee resulting from increased production by farmers led to a sharp decline in coffee prices beginning in 2001. At the beginning of 2003, the world coffee prices have fallen by 50% and were at their lowest in 30 years where the global supply was about 8% above the global demand.

Accordingly, the world market price for coffee has become less than US$0.50 per pound, of which farmers only receive half. This was five times less than what the farmers used to get before the slum began in 2001. However, still in Western countries, coffee was sold for around US$10 per pound. As a result of this massive slump in coffee price, the Sidama and other coffee farmers in Ethiopia faced a sharp increase in poverty and hunger.

The main reason for such devastating price slump was the global over supply of commodity coffee. However, the effect is compounded in Ethiopia because of the country’s insignificant share in the world coffee market. For instance, while Brazil produces over 2 million tones, Ethiopia’s out put is only about 200,000 tons 1/3 of which comes from Sidama and Gedeo alone. Ethiopia produces only 10% of Brazils coffee output and les than 2% of the world coffee output. Nothing has been done by the successive Ethiopian regimes to increase the country’s share in global coffee market. Vietnam which was insignificant coffee producers before 1980s has now become the world’s second largest producer of coffee following Brazil. The successive Ethiopian rulers continued to plunder revenues collected from wild coffee trees and those produced by poor Sidama, Gedea, Wollaga and Harar peasant framers but did nothing to improve the efficacy and the scale of production except boasting that coffee originated in Ethiopia 1000 years ago. This represents another 1000 years of lost opportunity in Ethiopia.

Thus Ethiopia does not have any role in international coffee price determination. The country is the best example of a coffee price taker firm with perfectly elastic price line and demand curve. The Sidama coffee enriches the importers and distributors to the detriment of the peasant farmers who produce it. The recent battle between Starbucks and the Ethiopian government over the issue of trademarks over specialty coffees, i.e. Sidama, Yirgachefe and Harar was a typical example of how globalisation tends to perpetuate poverty in the periphery and continues to enrich the centre. Finally, Starbucks accepted the country’s right to trade mark the Sidama (Sidamo is the bastardised name given by the Amhara rulers and is a misnomer) other specialty coffees. Accordingly, with the support from DFID in 2005 and 2006, the Light Year Intellectual Property (LYIP) assisted the country to obtain trade marks in over 30 countries.

This together with the involvement of coffee cooperatives in Fair Trade is meant to increase incomes of peasant coffee producers. It is argued that Fair Trade guarantees a minimum of $1.26/pound (a living wage) and access to credit at fair prices to poor farmers organized in cooperatives. Fair Trade is also believed to promote socially and environmentally sustainable techniques and long term relationships between producers, traders and consumers. How many of the Sidama coffee cooperatives are able to benefit from this agreement is not clear at present.
Although the Sidama coffee producers have been organized in cooperatives since early 1980s they have never benefited from the organization. The recent attempt to reorganize the Sidama coffee producers union that will be able to directly export coffee has been a disaster. It was reported that while coffee price has recovered recently and other coffee unions are making recovery, the Sidama coffee cooperative union became bankrupt for some reason. Thus, whether Starbucks accepts the country’s bid to trade mark the Sidama and other specialty coffees or not, the benefits of a massive coffee production from these areas will not likely trickle down to the poor farmers in the near future.

The Ethiopian political economy needs a fundamental change. It is only when such changes take place peacefully and sustainably and as immediately as possible that the current subhuman living conditions of the people in Sidama and the rest of the country will improve.