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

4

Why Interest in Transfers from Local Procurement and Subsidies?

Transfers effective in raising food consumption, but incomplete “additionality” (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

𝑄𝐼𝑁𝑇𝑐,𝑎 = 𝑖𝑐𝑎𝑐,𝑎 ∗𝑄𝐼𝑁𝑇𝐴𝑎

𝑄𝑉𝐴𝑎 = 𝛼𝑎𝑣𝑎 ∗ቌ 𝛿𝑓,𝑎𝑣𝑎 ∗𝑄𝐹𝑓,𝑎−𝜌𝑎𝑣𝑎𝑓𝜖𝐹 ቍ

1 𝜌𝑎𝑣𝑎ൗ�

𝑃𝑄𝑐 ∗𝑄𝐻𝑐,ℎ = 𝑃𝑄𝑐 ∗𝛾𝑐,ℎ𝑚 + 𝛽𝑐,ℎ𝑚 ∗ሺ𝐸𝐻ℎ − 𝑠𝑢𝑏𝑠𝑖𝑠𝑡𝑒𝑛𝑐𝑒 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒ሻ 𝑌𝐼𝑖 = 𝑌𝐼𝐹𝑖,𝑓𝑓𝜖𝐹 + 𝑇𝑅𝐼𝐼𝑖𝑖′𝑖′𝜖𝐼𝑁𝑆𝐷𝑁𝐺′ + 𝑡𝑟𝑛𝑠𝑓𝑟𝑖𝑔𝑜𝑣 ∗𝐶𝑃𝐼തതതതത+ 𝑡𝑟𝑛𝑠𝑓𝑟𝑖𝑟𝑜𝑤 ∗𝐸𝑋𝑅

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 gov’t

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

𝑝𝑤𝑚𝑓𝑒𝑟𝑡 ∗𝑡𝑚𝑓𝑒𝑟𝑡 ∗𝐸𝑋𝑅∗𝑄𝑀𝑓𝑒𝑟𝑡

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)… 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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Conclusion…

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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THANK YOU!