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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
Introduction
2


    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
How to Tackle Access and
        Availability? Subsidies or
3
        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
Why Interest in Transfers from
4
        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
The Ethiopian Fertilizer Market
5

       Before 1993: Govt Monopoly
       93-00: significant private sector participation

       2000-present Regional Holdings first and later
        Cooperative Unions dominate the market
                                                140.00
                                                120.00
           1993: 15% subsidy                   100.00
           1995: 30% subsidy


                                           Kg /ha
                                                    80.00

           1996: 20% subsidy                       60.00
                                                    40.00
                                                    20.00
       February 1997: Subsidy Removed
                                     0.00
            Marked fall in fertilizer
                                                            1995/96
                                                            1996/97
                                                            1997/98
                                                            1998/99
                                                            1999/00
                                                            2000/01
                                                            2001/02
                                                            2003/04
                                                            2004/05
                                                            2005/06
                                                            2006/07
                                                            2007/08
                                                            2008/09
        
            application rates
                                                            Cereals   All crops
The Simulations
6

       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)
Fertilizer Subsidy, Transfers from
7
     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
                                                                                                                                                         1       ������������
                                                                                                                                                              ������ ������
                                                                                                                                            ������������
                                                                                                                                        −������ ������
                                           ������������������������            =            ������������
                                                                          ������������              ∗                   ������ ������������
                                                                                                                  ������ ,������   ∗ ������������ ,������
                                                                                                                                ������
   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
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
Partial Eq Cost of the subsidy and
    a transfer of the same cost to the
9
    gov’t
    The Partial Eq cost of the subsidy to the
    government is: ������������������������ ∗ ������������������������������������ ∗ ������������������ ∗ ������������������������������������
                 ������������������

     pwm - World price                                               0.729
     tm- Subsidy                                                     0.707
     EXR1- Exchange rate post-subsidy                                1.019
     QM1- Fertilizer demand post-subsidy                             2.230
     Total cost of subsidy                                           1.171

    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                                      1.171
    Total logistic costs                                              0.110
    Total amount transferred (value)                                  1.061
Comparison of Simulation Results
10
     and Sensitivity Analysis
Cereal Production & Supply:
11
      Availability of Food
            % Change in Domestic         Subsidies (FERT +
                Production                FERTL) cause
     40.0                                 higher production
     35.0                                 and supply gains for
     30.0
                                          all cereals
     25.0
     20.0                                    FERTL increases
     15.0                                     domestic production
     10.0                                     of wheat further
      5.0
      0.0
                                         Food transfers
            Teff    Wheat     Maize       (LOCAL) affect
            FERT   FERTL    LOCAL         production and
                                          supply of wheat only
Income Effects: Purchasing
12
       Power
            HH Income: % Change From      Fertilizer subsidy
                    Baseline               (FERT + FERTL)
     6.00
                                           raises income of
                                           all HHs
     5.00

     4.00

     3.00
                                          Wheat transfers
     2.00
                                           (LOCAL) deliver
                                           highest income
     1.00
                                           gains for rural
     0.00
                                           poor
             Rural Poor   Urban Poor
                                            But small-no
              FERT    FERTL   LOCAL
                                             gains for other
Cereal Consumption of the Rural
13
         Poor: Access
 25                                            Fert subsidies (FERT
             FERT      FERTL    LOCAL           and FERTL) increase
 20
                                                consumption of all
                                                cereals
                                                   Lower prices and higher
 15                                                 incomes contribute to
                                                    access
                                               Food transfers
 10
                                                (LOCAL) increase
                                                wheat consumption
     5                                          only
                                                   Transfers and small
                                                    income effect increase
     0                                              access
          Teff      Wheat   Maize   NT ag          Higher cereal prices
                                                    tend to lower access
[1]   This is calculated as the ratio of absolute change in GDP over absolute change in government savings.




               General Equilibrium Effects
  14

                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 % Change in gov savings DGDP/ GE costs
                                               GDP               (GE cost)
                   FERT                                                 1.9                                   -19.2   2.27
                   FERTL                                                2.6                                   -19.9   3.03
                   LOCAL                                                0.3                                   -22.6   0.30
Conclusions
15

    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
Productivity increament is effective
16
     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
Conclusion…
17

    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.
18




     THANK YOU!

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Food Security Without Food Transfers?

  • 1. 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 2 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
  • 3. How to Tackle Access and Availability? Subsidies or 3 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 4 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
  • 5. The Ethiopian Fertilizer Market 5  Before 1993: Govt Monopoly  93-00: significant private sector participation  2000-present Regional Holdings first and later Cooperative Unions dominate the market 140.00 120.00  1993: 15% subsidy 100.00  1995: 30% subsidy Kg /ha 80.00  1996: 20% subsidy 60.00 40.00 20.00  February 1997: Subsidy Removed 0.00 Marked fall in fertilizer 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09  application rates Cereals All crops
  • 6. The Simulations 6  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)
  • 7. Fertilizer Subsidy, Transfers from 7 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 1 ������������ ������ ������ ������������ −������ ������ ������������������������ = ������������ ������������ ∗ ������ ������������ ������ ,������ ∗ ������������ ,������ ������  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
  • 8. 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
  • 9. Partial Eq Cost of the subsidy and a transfer of the same cost to the 9 gov’t The Partial Eq cost of the subsidy to the government is: ������������������������ ∗ ������������������������������������ ∗ ������������������ ∗ ������������������������������������ ������������������ pwm - World price 0.729 tm- Subsidy 0.707 EXR1- Exchange rate post-subsidy 1.019 QM1- Fertilizer demand post-subsidy 2.230 Total cost of subsidy 1.171 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 1.171 Total logistic costs 0.110 Total amount transferred (value) 1.061
  • 10. Comparison of Simulation Results 10 and Sensitivity Analysis
  • 11. Cereal Production & Supply: 11 Availability of Food % Change in Domestic  Subsidies (FERT + Production FERTL) cause 40.0 higher production 35.0 and supply gains for 30.0 all cereals 25.0 20.0  FERTL increases 15.0 domestic production 10.0 of wheat further 5.0 0.0  Food transfers Teff Wheat Maize (LOCAL) affect FERT FERTL LOCAL production and supply of wheat only
  • 12. Income Effects: Purchasing 12 Power HH Income: % Change From  Fertilizer subsidy Baseline (FERT + FERTL) 6.00 raises income of all HHs 5.00 4.00 3.00  Wheat transfers 2.00 (LOCAL) deliver highest income 1.00 gains for rural 0.00 poor Rural Poor Urban Poor  But small-no FERT FERTL LOCAL gains for other
  • 13. Cereal Consumption of the Rural 13 Poor: Access 25  Fert subsidies (FERT FERT FERTL LOCAL and FERTL) increase 20 consumption of all cereals  Lower prices and higher 15 incomes contribute to access  Food transfers 10 (LOCAL) increase wheat consumption 5 only  Transfers and small income effect increase 0 access Teff Wheat Maize NT ag  Higher cereal prices tend to lower access
  • 14. [1] This is calculated as the ratio of absolute change in GDP over absolute change in government savings. General Equilibrium Effects 14  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 % Change in gov savings DGDP/ GE costs GDP (GE cost) FERT 1.9 -19.2 2.27 FERTL 2.6 -19.9 3.03 LOCAL 0.3 -22.6 0.30
  • 15. Conclusions 15  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
  • 16. Productivity increament is effective 16 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
  • 17. Conclusion… 17  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.
  • 18. 18 THANK YOU!