FOOD SECURITY WITHOUT FOOD TRANSFERS?
A CGE ANALYSIS OF ALTERNATIVE POLICIES TO TACKLE FOOD INSECURITY IN ETHIOPIA
A. Stefano Caria DRMFSS (MoARD), Seneshaw Tamru IFPRI/EDRI and Gerawork Bizuneh IFPRI/EDRI
2
Introduction
Food Security in Ethiopia
Persistent availability problem 1960-2001: per capita food availability always significantly
below requirement (Demeke et al, 2004)
High number of people with insecure access Number of estimated food transfer beneficiaries trending
upwards (Demeke et al, 2004)
Numerous utilization issues Acute watery diarrhoea (AWD), malnutrition, child wasting and
stunting prevalent
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How to Tackle Access and Availability? Subsidies or Transfers?
Productivity Increament through fertilizer subsidy Lower cost of inputs- benefits farmers Higher production: availability Lower prices -for consumers: access
Food transfers based on local procurement Transfers used to address access Higher prices benefit farmers Stimulate more production: availability
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Why Interest in Transfers from Local Procurement and Subsidies?
Transfers effective in raising food consumption, but incomplete βadditionalityβ (Dorosh & Del Ninno, 2002)
Fertilizer subsidies have proved effective in the past: Malawi experience: higher application rates and yields
(Gilbert et al, 2009) Role in Green Revolution in Asia (Demeke, 2004)
In Ethiopia, given declining soil fertility and land availability constraints, food production growth has to happen at the intensive margin (increasing land productivity) But high cost of inputs
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The Ethiopian Fertilizer Market
Before 1993: Govt Monopoly 93-00: significant private sector participation
2000-present Regional Holdings first and later Cooperative Unions dominate the market
1993: 15% subsidy 1995: 30% subsidy 1996: 20% subsidy
February 1997: Subsidy Removed Marked fall in fertilizer application rates
1995
/96
1997
/98
1999
/00
2001
/02
2004
/05
2006
/07
2008
/09
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
Cereals All crops
Kg /
ha
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The Simulations
IFPRI standard static CGE model EDRI 2005 SAM 17 sectors
Separate accounts for teff, wheat, maize, non traded agriculture & fertilizer
No regional disaggregation
Factors closures⦠Labour is not fully employed and is mobile across sectors Land is fully employed and mobile Capital is fully employed and activity specific
Marginal propensity to save is fixed; investment adjusts Tax rate fixed, government savings adjusts Foreign savings fixed, exchange rate is flexible
DPI is numeraire (CPI flexible)
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Fertilizer Subsidy, Transfers from Local Procurement⦠and both
FERT: 50% decrease in fertilizer price through a subsidy on imported fertilizer
A realistic fertilizer demand response to fertilizer subsidy
Used a micro simulation model based on empirically estimated yield functions to quantify the likely effects of additional fertilizer application on national yields
LOCAL: No subsidy on fertilizer and No change in food aid wheat imports Increase in wheat transfers to rural poor through local procurement We also assume wheat transfers have a 0.25 MPC
10kg transfer increases counterfactual HH consumption by 2.5 kg
FERTL: 50% decrease in fertilizer price as in FERT Some food aid wheat imports replaced by local procurement
same level of local procurement as in LOCAL
ππΌπππ,π = ππππ,π βππΌπππ΄π
πππ΄π = πΌππ£π βα πΏπ,ππ£π βππΉπ,πβπππ£ππππΉ α
1 πππ£πΰ΅οΏ½
πππ βππ»π,β = πππ βπΎπ,βπ + π½π,βπ βαΊπΈπ»β β π π’ππ ππ π‘ππππ ππ₯ππππππ‘π’ππα» ππΌπ = ππΌπΉπ,ππππΉ + ππ πΌπΌππβ²πβ²ππΌπππ·ππΊβ² + π‘πππ ππππππ£ βπΆππΌΰ΄€ΰ΄€ΰ΄€ΰ΄€ΰ΄€+ π‘πππ ππππππ€ βπΈππ
Micro simulation model- based on empirically estimated yield functions
To quantify the likely effects of additional fertilizer application on national yields Four steps:
First, we measure the increase in fertilizer application rate.
Second, we allocate the additional fertilizer consumed to enumeration areas (EAs) - simple sharing rule.
Third, we use the yield function estimated in Asrat, Bizunesh, and Seyoum Taffesse (2010) to predict yields for every EA with the old and new fertilizer quantities.
Fourth, we compare average predicted yields across EAs with the old and new fertilizer quantities, calculating the percentage increase in land productivity, our proxy for increasing TFP.
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Partial Eq Cost of the subsidy and a transfer of the same cost to the govβt
pwm - World price 0.729tm- Subsidy 0.707EXR1- Exchange rate post-subsidy 1.019QM1- Fertilizer demand post-subsidy 2.230Total cost of subsidy 1.171
ππ€πππππ‘ βπ‘πππππ‘ βπΈππ βππππππ‘
The Partial Eq cost of the subsidy to the government is:
The subsidy will cost 1.171 billion birr. 1.061 billion birr of wheat can be transferred for the same cost:Total cost of wheat transfer 1.171Total logistic costs 0.110Total amount transferred (value) 1.061
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Comparison of Simulation Results and Sensitivity Analysis
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Cereal Production & Supply: Availability of Food
Subsidies (FERT + FERTL) cause higher production and supply gains for all cereals FERTL increases
domestic production of wheat further
Food transfers (LOCAL) affect production and supply of wheat onlyTeff Wheat Maize
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
% Change in Domestic Production
FERT FERTL LOCAL
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Income Effects: Purchasing Power
Fertilizer subsidy (FERT + FERTL) raises income of all HHs
Wheat transfers (LOCAL) deliver highest income gains for rural poor But small-no gains
for other HH
Rural Poor Urban Poor0.00
1.00
2.00
3.00
4.00
5.00
6.00
HH Income: % Change From Baseline
FERT FERTL LOCAL
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Cereal Consumption of the Rural Poor: Access
Fert subsidies (FERT and FERTL) increase consumption of all cereals Lower prices and higher
incomes contribute to access
Food transfers (LOCAL) increase wheat consumption only Transfers and small
income effect increase access
Higher cereal prices tend to lower access
Teff Wheat Maize NT ag0
5
10
15
20
25
FERT FERTL LOCAL
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General Equilibrium Effects
Same partial eq cost for all simulations, but in general eq revenue and expenditure (ie govt net revenue) change
Fertilizer subsidy (FERT + FERTL) income effect has positive effect on govt tax revenue
Subsidy with local procurement most cost-effective at delivering GDP growth
% Change in real GDP
% Change in gov savings (GE cost)
DGDP/ GE costs
FERT 1.9 -19.2 2.27FERTL 2.6 -19.9 3.03LOCAL 0.3 -22.6 0.30
[1] This is calculated as the ratio of absolute change in GDP over absolute change in government savings.
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Conclusions
Subsidy with Local Procurement has a strong Food Security Response
Fertilizer subsidy with local procurement (FERTL) delivers: The best domestic production and supply (availability) response
for all cereals Large household consumption (access) response for all cereals Smaller loss in government net revenue
Locally procured transfers (LOCAL)β¦ Generate little general supply response compared to fertilizer
subsidy Large consumption response (access), especially wheat Harm food consumption of other groups; mis-targeted food
consumption is unaffected
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Productivity increament is effective in tackling Chronic Food Insecurity
Ranking of policies in terms of cereal consumption of the rural poor (access) depends on our assumptions on productivity & MPC: If high productivity & low MPC, fertilizer subsidies
to be preferred for improving access to food of rural poor
Ranking in terms of cereal supply (availability) is more robust to different productivity and MPC assumptions
High agricultural productivity growth, coupled with local procurement, delivers an effective response to chronic food insecurity
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Conclusionβ¦
However, Policies focusing on one dimension of the yield function alone, such as fertilizer subsidy, are unlikely to deliver the necessary improvement in yields.
Food transfers may still be the most effective short-to mid-term answer to food access insecurity when high return agricultural productivity policies are not available.
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