Grounds for growth? Institutional mechanisms of value chain upgrading in Ethiopia's coffee sector

Motivation Agricultural commodity exports are important to many low‐income countries. In recent years, domestic processing of commodities, the so‐called “functional upgrading” of global value chains (GVCs), has been put forward as a favoured path to enhance economic development. Little attention has been paid, however, to national policies and institutions that may conflict with the development of specific and competitive domestic value chains. Approach and methods Adopting a case‐study approach that draws on expert interviews and other data sources, we analyse how national institutional conditions affect the development of different Ethiopian coffee value chains from a mechanism perspective. Focusing on mechanisms supports causal reconstruction, and thereby the generalization of results. Findings Our detailed findings confirm and illustrate two main points: value chain development requires functioning markets. And functioning markets require institutions, the optimal design of which depends on the wider institutional, social, and political environment. The upgrading of the value chain requires coordination between multiple stakeholders and is easily undermined by inconsistent policy interventions and institutional structures. In Ethiopia, the goal of earning foreign exchange might be better served by support for value chain upgrading than by a ban on domestic trade in exporting quality coffee beans, which tends to undermine upgrading efforts. Policy implications For policy‐makers, it is important to develop a coherent strategy for industrial and economic development and to design the institutional landscape accordingly. Taking into account trade‐offs between different objectives can mean avoiding overly rigid interventions, such as the ban on export‐quality coffee from the domestic market for the sake of achieving one objective. Generally, domestic upgrading of the value chains of abundant commodities is not necessarily the best path to economic development. Specifically, with pronounced economies of scale, the foreign currency generated by commodity exports may better be used to develop other sectors.