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Food Price Policy in an Era of Market InstabilityA Political Economy Analysis$

Per Pinstrup-Andersen

Print publication date: 2014

Print ISBN-13: 9780198718574

Published to Oxford Scholarship Online: January 2015

DOI: 10.1093/acprof:oso/9780198718574.001.0001

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The Political Economy of Food Price Policy in Ethiopia

The Political Economy of Food Price Policy in Ethiopia

(p.133) 6 The Political Economy of Food Price Policy in Ethiopia
Food Price Policy in an Era of Market Instability

Assefa Admassie

Oxford University Press

Abstract and Keywords

Food prices increased significantly in 2007–8 in Ethiopia due to several supply- and demand-side factors. The Ethiopian government released emergency food grain reserves, imported and distributed wheat at subsidized price, banned the export of staple cereals, and removed value added and turnover taxes on food items. It also increased the reserve requirement of commercial banks and reduced domestic borrowing by public enterprises. These measures were mostly initiated by the government and the role of interest groups as well as local and international actors has been limited. These measures were taken to prevent potential social unrest and maintain macro-economic stability. A combination of factors including export bans, structural and cyclical factors, and developments in international markets have been cited as the main causes of the price increase.

Keywords:   Ethiopia, food price, price subsidies, interest groups, international markets, macro-economic stability agriculture

6.1 Introduction

The world market prices of major staples such as wheat, maize, and rice doubled or tripled between 2007 and 2008 (UNCTAD 2008; FAO 2009). A combination of factors including export bans, structural and cyclical factors, and developments in international markets have been cited as the main causes of the price increase (Dewbre et al. 2008; Headey and Fan 2008).

There had also been a steady increase in the price of food staples in Ethiopia starting around 2004. For instance, the price of maize in 2008 was 130 per cent higher than the 2004–8 average (FEWS NET 2009). Several policy measures have been initiated by the Ethiopian government starting around 2006 in response to rising food prices. The policy measures include production subsidies, social safety nets for food insecure households, price controls, fiscal measures such as adjustments in tariffs, the release of grains from the strategic reserve, media campaign, and export bans on food products.

The purpose of this chapter is to assess the rational for adopting different policy measures and the role of different social groups as well as the likely impact of the policy measures. The chapter primarily relies on a synthesis of the available policy documents, research reports, newspapers, etc. Some consultations with experts were also organized to understand the policy processes and the role played by the various stakeholders during the design of the policy measures. Quantitative information on prices, production import and export, etc. was collected from the Central Statistical Agency (CSA), Ministry of Finance and Economic Development (MoFED), the National Bank of Ethiopia, and other internet-based sources.

(p.134) 6.2 Recent Staple Food Price Trends and Policy Responses

In Ethiopia, food production trends greatly affect staple food prices, which tend to rise during drought years and during the lean seasons (June–October) when most households run out of their own produced food stocks. What happed during the droughts in 1974/5 and 1984/5 are illustrations. The recent developments in food prices are briefly discussed next.

6.2.1 Food Price Developments between 1998 and 2004

Traditionally, Ethiopia has generally been a country with low inflation rates, and food inflation has not been a major challenge. For instance, the average month-to-month annualized cereal inflation before 1998 was hovering around 1 per cent. Several factors, such as prudent monetary and fiscal policies, general price controls, as well as the implementation of economic reform and stabilization programmes, have contributed to this.

In terms of food price developments, the last decade can be broadly categorized into five major episodes. Episode I represents the period from July 1998 to July 2000 that was characatrized by the Ethio-Eritrean war and localized drought in some parts of Ethiopia (see Figure 6.1). Episode II covers the period from July 2000 to July 2002, where the Ethio-Ertrian war was over. Deflationary situations were observed during this period partly due to the bumper harvest and partly due to the slow demand recovery from (p.135) urban centres due to slow business activities in the aftermath of the Ethio-Eritrean war.

The Political Economy of Food Price Policy in Ethiopia

Figure 6.1 Inflation and time line of incidences

Source: computed using data from the Central Statistical Agency, general CPI (2000–11).

Episode III captures price developments between August 2002 and July 2004 when drought forced about 14 million people to depend on food aid and led to a 3.3 per cent decline in GDP in 2003 (EEA 2004). Weak and poorly functioning marketing and distribution systems and poor policy coordination were additional challenges. The Ethiopian government established a Disaster Prevention and Preparedness Commission and formulated a National Policy for Disaster Prevention and Preparedness, as well as a Food Security Strategy. In addition, the Emergency Food Security Reserve and the New Coalition for Food Security Programme were established towards the end of 2003 in collaboration with the donors.

6.2.2 Food Price Developments between 2004 and 2008

The period from August 2004 to July 2009 is captured by Episode IV, which was characterized by the 2007–8 global food price crises and the world financial and economic crisis. As pointed out earlier, Ethiopia was one of the countries with modest inflation rates except during drought and war periods. But, the story started to change around 2004 when Ethiopia started to experience high rates of inflation. Towards the end of 2004 and well before the rise in international food prices, nominal prices of grains started to rise in the Ethiopian markets as a result of strong demand- and supply-side factors.

Increased private consumption and increased investment in poverty- oriented sectors and improved purchasing power of farmers due to the injections of cash into the local economy through the Productive Safety Net Programme (PSNP) and microcredit services may explain the growth in aggregate demand. Supported by improved market information systems, road infrastructures, and storage facilities, farmers have gradually changed their trade practices, being able to hold some stocks in anticipation of better market opportunities. Increased remittances could be another important factor on the demand-side. On the supply-side, despite the good harvests obtained in the last several years, the amount of food marketed has not increased as expected. Household surveys complemented with market and cross-border trade surveys as well as analysis of large amounts of time series data have shown that the production estimates of cereals was roughly 30 per cent lower than the official estimates (Minot 2008).

Expansionary monetary policy, driven by a significant growth in money supply needed to meet the surge in credit demand for investment financing and the rising cost of imported intermediate inputs contributed to the increase in food prices. A World Bank (2007) study argued that during 2004–6, the money supply increased by 108 per cent, and real GDP increased by 48 per cent. In (p.136) addition, the unit price of imports of petroleum soared by 145 per cent while the unit price of fertilizer increased by 254 per cent. The prices of imported food items including grains increased by 55 per cent.

Ethiopia had a national election in 2005 which was followed by serious controversies. Reduced budget supports by donors to the government due to disagreements on the handling of the post-election events and some social unrest following the election have contributed to the market instability. The government increased money supply to fill the gap created by the withdrawal of the donor support and to make credit available for investment in particular credit to the public enterprises.

The general inflation rate reached 12 per cent in 2006 resulting from a strong upward pressure on food (14 per cent), and non-food prices (7 per cent) (CSA 2010). The average month-to-month annual inflation for food and cereals during 2007 and 2008 was 41 per cent and 58 per cent, respectively. The overall annual inflation rate accelerated reaching an average rate of 46.1 per cent (based on 12-month moving average), while the national food inflation reached a record rate of 61.1 per cent in mid-2008. The food inflation rate in November 2008 stood at a record 58.7 per cent, with an increase of 37.4 per cent if compared to the same month in 2007.

The nominal prices of grains show a dramatic increase between June 2007 and June 2008. Similarly, between April and August 2008, nominal retail prices of wheat, teff and sorghum, and maize increased by 60 per cent, 80 per cent, and 90 per cent, respectively. The real maize price rose by about 80 per cent, real teff prices by about 40 per cent, and real wheat prices by about 20 per cent.

6.2.3 Food Price Developments after 2008

The last period representing the period starting around July 2009 and extending to the present is represented by Episode V in Figure 6.1. Several food price stabilization measures and strict monetary and fiscal measures were put in place to lower the rampant inflation. The National Bank imposed a credit ceiling on private bank lending in early 2009 with the intention of curbing food and general inflation. In May 2009 food inflation stood at 52.6 per cent, a decline of 8.5 percentage points since climbing to the record rate in 2008. Cereal prices started to decrease marginally also due to the arrival of the harvested crop on markets. In December 2009, the food inflation rate declined to about 6.1 per cent. However, while the food component of consumer price index (CPI) inflation has been declining fast, the non-food component of CPI inflation declined from 21.9 per cent by the end of December 2008 to only 18.2 per cent by the end of December 2009 (CSA 2010).

(p.137) The declining trend in inflation was again reversed due to other policy interventions like the 20 per cent devaluation of the Birr against the US$ in September 2010 (see Figure 6.2). The government established price caps on essential food items which significantly destabilized the market and prices started again to rise. Accordingly, the month-to-month annualized general food and non-food inflation for May 2011 stood at 34.7 per cent, 40.7 per cent, and 26.2 per cent, respectively (EEA 2011). The government borrowing from the central bank as well as the significant increase in foreign exchange earnings contributed to the rise.

The Political Economy of Food Price Policy in Ethiopia

Figure 6.2 More recent trends in inflation

Source: computed based on data from the Central Statistical Agency, general CPI (2008–11).

6.2.4 Regional Price Trends for Major Food Staples

A steady increase in food prices has been observed in all regions of Ethiopia. Some of the regions experienced much higher food inflation rates than the national average. The region of Harari (71 per cent), Dire Dawa (60 per cent), Gambella and Tigray (58 per cent) experienced the highest food inflation rates in 2008. After declining fast in 2009 and 2010, food inflation again picked up significantly in all regions and actually reached the 2008 levels; Benishangul Gumuz region recording the highest inflation in 2011. Often the different regions exhibit different food price trends. Usually Addis Ababa, Amhara, and Oromia markets share similar food price trends suggesting greater integration of markets in Amhara and Oromia with Addis Ababa.

(p.138) The heterogeneity of regional food prices is partly explained by the limited regional market integration due to inadequate infrastructure and undeveloped food markets, restricting trade between food surplus and food deficit regions (World Bank 2007). In addition, weather conditions leading to differences in the performance of the agricultural sector across regions may explain some of the price heterogeneity across regions (Ulimwengu, Workneh, and Paulos 2009).

6.2.5 Price Transmission from International Market to the Domestic Markets

The price developments in the international market could have significant impact on local food prices if a country is highly integrated to the international market. However, according to Minot (2010) there could be a short-term transmission of only 8 to 9 per cent of the changes in international prices to local markets in sub-Saharan Africa. In the case of Ethiopia, the rising world food prices do not appear to have major implications for the domestic prices. Ethiopia is a relatively closed economy where imports are not more than 25 per cent of the GDP (Access Capital 2012). Moreover, about 75 per cent of food consumption in Ethiopia is comprised of local staples (such as sorghum and teff) that are not traded much internationally (World Bank 2007). Given the small share of imports in GDP and in the Ethiopian consumer basket, the inflation of imported items may have only marginal effects on domestic prices.

Commercial imports of food staples in Ethiopia are about 8 per cent of total consumption although this accounts for roughly 16 per cent of its foreign exchange earnings (World Bank 2007). Commercial import of maize was negligible. The commercial import of wheat was insignificant until 2008, but increased during the crisis. The largest amount of wheat import was in 2008, when the government imported 545,325 mt to stabilize the grain market. The impact of international food price increases can also filter through to domestic inflation if that domestically produced good is exported in large quantities since high prices in external markets become more attractive options for local producers and exporters pushing up domestic prices. And indeed, unit prices for some of Ethiopia’s export commodities such as coffee and oil seeds have been increasing during the period. However, given the small weights of these commodities in the CPI, the net impact of such external price effects would not be expected to be significant on the overall domestic price index. In addition, the rise in world food prices was accompanied by a similar increase in oil price that led to higher costs for fertilizer, sea freight, and overland transportation, which could raise the cost of both domestically-produced and imported food. In the case of Ethiopia, (p.139) unit price of imports for petroleum soared by 145 per cent and that of fertilizer increased by more than 254 per cent in 2008. Minot (2010) argues that landlocked countries face both higher costs, insurance, and freight prices of imported food and higher costs of overland transport. Thus, higher fuel costs may be an important contributing factor, but they are not enough to explain the full increase in staple food prices in Ethiopia.

Domestic prices in Ethiopia started increasing before the global food crisis and started increasing sharply long after world prices stabilized (see Figure 6.3). Ethiopian food prices also increased more rapidly than world food prices over the reference period. Moreover, local prices did not follow the downward trend in international prices after 2008, but continued to steadily rise.

The Political Economy of Food Price Policy in Ethiopia

Figure 6.3 Domestic and world price of wheat and maize

Source: computed based on data from the Ethiopian Grain Trade Enterprise (2005–9) and IMF Database (2012).

A study by Ulimwengi, Workneh, and Paulos (2009) found that although all regions in Ethiopia have experienced drastic rise in food inflation since 2004, none of the Ethiopian regional maize markets had a long-term connection to the world market. The study found that the Ethiopian local maize markets do not share a common long-run trend in their respective price with the world maize market. The short-term impacts of a change in the world maize price on regional maize prices in Ethiopia are also limited and insignificant in most of the regions. Only border regions experienced higher and significant influence from the world maize price on local markets. Minot (2010) found that although the international price has a statistically significant effect on the domestic price of wheat, the coefficients suggest that the relationship is fairly weak.

In view of the above, it can be concluded that domestic rather than foreign factors were the most important determinants of Ethiopia’s food price inflation during the crisis. As noted by Minot (2010), the domestic policy and production shocks such as the government’s restrictions on imports and the purchase of foreign exchange must have been important contributing (p.140) factors. As indicated by the World Bank (2007) study and also emphasized by the study by Loening, Durevall, and Birru (2008) a supply shock may have contributed to higher real staple food prices in Ethiopia. In addition, although the rising inflation ought to be accompanied by a depreciation of the currency, the government imposed restrictions on imports and on the purchase of foreign exchange. While domestic prices rose about 70 per cent between June 2007 and June 2008, the exchange rate remained essentially unchanged. In early 2008, the national bank started rationing foreign exchange. So, as noted by Minot (2010) because of the fuel subsidies and restrictions on the foreign exchange market a shortage of foreign currency was created, preventing private traders from importing grain.

6.2.6 Impact of the Food Crisis

The price increases led to a reduction in the consumption of preferred foods and switching to cheaper foods. Reducing food and non-food consumption is a significant coping strategy by the most vulnerable households in Ethiopia (Bene, Devereux, and Sabates-Wheeler 2012). Teff is the most common staple grain consumed by most people, particularly in urban areas in Ethiopia. However, during the crisis many people resorted to relatively cheaper foods such as maize and sorghum. Anecdotal observation showed that people switched to eating twice a day instead of the usual three meals. According to the World Bank (2007), most poor people are net consumers implying that higher food prices could lead to increased poverty. Moreover, small farmers in Ethiopia both sell and buy food (it is estimated that more than 80 per cent of cereal producers purchase some cereals).

The result from a study on fifteen Ethiopian rural villages shows that the poverty level fell substantially (from 48 to 35 per cent) between 1994 and 2004 but increased to 52 per cent in 2009 and consumption per capita declined significantly (Dercon et al. 2011). Another study by Action against Hunger (2009) indicated that high prices were closely followed by an increase in malnutrition and under-five mortality rates. Ulimwengi et al. (2009) argues that a 50 per cent increase in grain prices would reduce urban caloric intake by 16 per cent and rural caloric intake by 24 per cent. Recently, Kumar and Quisumbing (2011) suggested that female-headed households in Ethiopia have experienced a higher food price shock in 2007/8. These studies suggest that the food price crisis indeed had significantly affected particularly the socially disadvantaged and poor people.

In addition to the significant effect on household welfare, the food crisis created serious balance of payment problems in Ethiopia. The worsening current account balance was accompanied by rising fiscal deficits. According to (p.141) IMF (2008), the impact of the 2008 food and fuel price increases has consumed more than 50 per cent of the international reserve for Ethiopia.

6.3 Policy Responses to the 2007–8 Food Crisis

The Ethiopian policy makers strongly felt that staple foods cannot be left to market forces alone and took several measures to stabilize food prices and to improve the purchasing power of the most affected segments of the population, mostly the urban poor. Like in many other countries, Ethiopia also took measures ranging from fiscal, trade, and monetary policy to social protection and safety net measures. Since the price transmission from the international market was limited, the policy responses were instigated by domestic price increases caused primarily by domestic factors.

6.3.1 Export Bans on Cereals

One of the first measures taken by the Ethiopian government was to restrict grain trade. The government banned the export of major food grains through several government circulars and directives based on the assumption that prices have increased because of the exports of tradable grains. Accordingly, the export of teff, wheat, maize, and sorghum was totally banned through a directive issued by the Ministry of Trade and Industry in December 2006. In June 2008 the ban was extended to all cereals.

6.3.2 Fiscal and Monetary Measures

Ethiopia removed value added tax and turnover taxes on food grains and flour through a directive issued in March 2008. The elimination was intended to help to control food prices particularly in urban markets. The government attempted to restrict the supply of monetary aggregates in the economy since increased money supply was suspected to have contributed to the crisis. The National Bank of Ethiopia raised the minimum reserve requirement from 10 to 15 per cent of net deposits in 2007 (National Bank 2007). In addition, the Bank issued another directive on 7 April 2008 in which it raised the minimum liquidity requirement to 25 per cent of the bank’s total current liabilities (National Bank 2008). These directives are believed to have significantly reduced the lending capacity of commercial banks and thereby reduced the money supply in the economy. However, public spending has not been as such affected by the various national bank directives. The minimum interest rate on time and saving deposits was also raised.

(p.142) 6.3.3 Administrative and Price Control Measures

In addition to the above measures, the Ethiopian government suspended local procurement by the World Food Programme (WFP) and others and took several administrative measures on the domestic market. The most direct intervention was the price control, where the government prescribed the maximum prices to be charged for selling grains and placed directives on private traders to use price tags on their goods and to post the list of their goods for sale with the corresponding prices. Traders were warned not to hoard any grain. A task force was established with the mandate to take immediate action including the closing of illegal shops and stores without prior warning. Accordingly many traders were arrested for not respecting the directive (Ethiopian Herald 2008). The strategy seems not to have been effective.

6.3.4 Releasing Reserve Grain Stocks and Grain Procurement Measures

Ethiopia had maintained a strategic grain reserve for a long time although substantial market liberalization was implemented. The Emergency Food Security Reserve Administration was restructured and re-established in 2000 as a government organization to manage emergency food reserve as part of the preparedness strategy in the country’s disaster management efforts. The government released food grain reserve stocks starting in late 2007. About 190,000 tons of wheat was released from the grain reserve stock. More than 5,000 tons of wheat was also distributed to flour mills (FAO 2011). In addition, the WFP and other non-governmental organizations (NGOs) on their part channelled about 200,000 tons of food aid during the crisis (FAO 2011).

The Ethiopian government also started to procure wheat from the international market and distribute to poor consumers at subsidized prices through consumers’ associations and cooperatives. Thus, in 2008 Ethiopian Grain Trade Enterprise (EGTE) and WFP imported 520,000 and 515,000 tons of wheat and maize, respectively. The EGTE imports were distributed through the urban food rationing programme and through sales to flour mills at subsidized prices. This measure indeed helped to reduce the price of wheat in the domestic market. In order to finance the importation and sale of wheat at subsidized prices the government imposed a 10 per cent surtax on selected imported goods such as ready-made clothes, packed foods, electronics, beverages, perfumes, etc., which according to the government were luxury products in April 2007 (Ethiopian Herald 2008). The NGOs were also engaged in importing food.

(p.143) 6.3.5 Productive Safety Net Programme

Ethiopia, which had a long history of emergency food assistance in the form of relief aid, intensified its social protection interventions. It shifted its strategy of distributing food aid to a productive and development-oriented programme starting in 2005 by introducing the PSNP. The overarching principle of the PSNP was to facilitate ‘a gradual shift away from a system dominated by emergency humanitarian aid to productive safety net system resources. The focus of this programme was to provide more reliable and timely support to chronically food insecure households by helping them to earn income (in kind or cash) through cash or food for work labour-intensive public programmes (MoFED 2007). Those households who have no labour or no other means of support, and who are chronically food insecure receive direct support. About 20 per cent of the beneficiary households in PSNP receive direct support (Kie-Song 2011).

The programme targeted about five million people when it started in 2005. However, the number of food insecure people increased to about eight million in 2008 and the government requested donors to increase their contribution in order for it to assist people in non-PNSP rural areas affected by the 2007/8 food price crisis. The number of people from non-PSNP areas that depended on the food assistance of various NGOs increased from 4.6 to 6.4 million people in 2008. Although WFP had planned in 2008 to provide food assistance to about one million people, it delivered assistance to more than eleven million people during the year. In addition, the government increased the daily wage rate (cash transfer for public works in the framework of the programme) from 6 ETB to 10 ETB per day. In many instances, households preferred to receive food assistance as opposed to cash during the food price crisis.

6.3.6 Increased Investment in Agriculture

Ethiopia took several measures to support domestic food production. Long-term investment in agriculture has been adopted as one of the viable options by the Ethiopian government starting in 2008 by offering attractive incentives for investors particularly from China and India. The Ministry of Agriculture transferred more than 3.5 million hectares (ha) of land to these investors and is in the process of transferring a similar amount in the next five years. However, there is much debate regarding these land investments and their food security implications (Desalegn 2011). It is argued that the acquisition of land that may be claimed by indigenous societies may lead to food shortage. Some also argue that foreign investors are acquiring land to feed their growing population and are leaving the local rural population (p.144) without land or jobs. Nevertheless, the number of foreign investments that have started operation is still limited.

The Agricultural Transformation Agency was established to improve agricultural productivity and bring agricultural transformation by supporting existing structures of the government, the private sector and non-state actors. The agency is playing a coordinating role and aims to address the systematic bottlenecks in seeds, soil health, and fertility management, input and output markets, extensions and research, and cooperatives. The government is also committed to invest more in agricultural research, extension, irrigation and new technology development (Wodon and Zaman 2010). Improving farming practices, advising farmers to use water pumps, overcoming soil acidity, empowering farmers to get access to finance through microfinance institutions are examples. Investment in agriculture was also strengthened by improving infrastructure such as roads to make less densely populated areas more accessible to investors and investment.

Other measures to improve productivity through enhanced input delivery have been considered. For instance, donor assistance to cover around 50 per cent of the cost of fertilizer was requested in 2008 in response to the food price rises. The government has proposed to subsidize the cost of fertilizers by about 25 per cent. Schemes to improve and narrow the gap between the demand for improved seeds and actual supply and distribution through government-imported certified improved seeds have been designed. Increased resettlement programmes to reduce the pressure on overpopulated areas as well as increased family planning services with the view of reducing pressure on fragmented land holdings were additional measures taken. Introduction and support of agricultural insurance systems and microcredit services have been intensified. Measures were taken to support pastoralists by providing direct supply of feed and establishment of water points.

6.3.7 Establishing a Commodity Exchange

The Ethiopian government established the Ethiopian Commodity Exchange (ECX) in March 2008 to enhance market transparency and facilitate the use of long-term legally binding contracts between the agricultural commodities suppliers and traders and thereby reduce or manage risk. The intention is to create a new market place where all market actors (from farmers to traders to processors to exporters to consumers) can take advantage of more transparent market information and hedge against price risks through standardized contracts for immediate or future delivery. Although ECX trading started with four commodities, namely, maize, wheat, haricot beans, and sesame seeds, only some maize and wheat were traded initially through an agreement with WFP and government institutions, such as the military and (p.145) universities. Currently, coffee and sesame are the main crops that are traded on the exchange. So, its contribution in stabilizing the prices of food staples is quite limited.

6.3.8 Other Policy Measures

The Ethiopian government has also attempted to create economic opportunities for the most vulnerable groups especially in urban areas by providing finance and working space. Several urban work programmes have been launched to engage the youth. The school feeding programme which started earlier was also expanded and strengthened to retain students in school (WFP 2008). The government, as well as non-state operators, also increased the salary of public employees.

6.4 The Rationale for Policy Interventions and the Role of Stakeholders

6.4.1 The Rationale for Policy Interventions

The Need for Macroeconomic Stability

The government has always claimed that achieving sustained economic growth by maintaining macroeconomic stability is one of its central objectives. Accordingly, the effort to lower the growth of money supply towards the end of 2008 was basically derived from the intention to maintain a level of inflation that is not detrimental to growth. For instance, the increased reserve requirements for private banks as well as the credit cap on lending by private commercial banks were direct responses to limit the growth of money supply. But, this action has seriously undermined the lending ability of private banks and had constrained import trade in particular as most of the short-term loans from the private banks were used to finance imports.

The Need to Avoid Social Unrest

The 2007–8 food price crises occurred just two years after the national election in 2005. There have been some controversies about the result of the election and several protest actions were organized by the opposition political parties after the elections. The aftermath of the election created serious uncertainties and partly contributed to the upward pressure on prices. Some farmers were reluctant to sell their produce after the 2005 elections, due to these uncertainties. Members of the opposition political parties also often used the high food price inflation to show the weakness of the government. So, the Ethiopian government took various measures to control rising food (p.146) inflation since it did not want to take risks which might lead to further political and social instability.

Protecting the Poor (Welfare Concerns)

The Ethiopian government has been extremely concerned about the implications of the food price rise on the food security status of the most vulnerable urban households and producers (Ethiopian Herald 2008). The importation and distribution of food grains at subsidized prices to poor people was a direct response to such concerns. The introduction of the food rationing programme suggests that the economic, human, and political costs that may be caused by price instability are a predominant government consideration in food policy in Ethiopia (Rashid 2010).

6.4.2 The Role of Stakeholders

The Configuration of the Decision-Making Organ

The Ethiopian system of governance recognizes three branches: the legislative, the executive, and the judicial branches and the system of political governance is based on a multi-party political configuration. Several political parties have been formed mostly organized along ethnic lines. However, most have been unable to win seats in the federal or regional parliaments during the successive elections in the country. In the entire history of the Ethiopian parliament only the 2005 election saw a sizable number of opposition political parties’ representation, although several members of the opposition political parties refused to take their seats in parliament. However, in the most recent election in 2010 only one member of the opposition and one independent candidate were able to win seats in the House of Peoples’ Representatives. The rest of the parliament belongs to the ruling party. So, the configuration of the political landscape is highly skewed towards the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) political party led by a powerful prime minister. The House of Peoples’ Representatives, which is the legislative organ, is dominated by members of the ruling party which has easily reinforced the legacy of a one-party policy-making process. The power of the government is huge. It has several state-owned corporations involved in many critical economic sectors.

The Role of the Legislative and the Executive Organs in the Food Price Policy Decisions

Several key actors are created within the Ethiopian political landscape under the auspices of the space guaranteed by the constitution. The legislative, the judicial, and the executive branches of the government, the public and private media, civil society organizations, and academia are the major ones. (p.147) In addition, bilateral and multi-lateral international organizations such as the World Bank and International Monetary Fund (IMF) have a stake in the social and economic developments in Ethiopia.

The 2007–8 food price crisis was discussed by the House of Peoples’ Representatives (lower chamber). The few members of the opposition political parties who took their seats after the 2005 elections were constantly requesting the government to provide explanations for the high food price increase, but consensus has not been reached on the causes of the rising food price and the policy responses. On the one hand, the government was arguing that the food price increase was the result of the growth process itself and, therefore, the solution is to intensify growth. According to the government, increasing supply will be the mechanism for meeting the imbalance between the demand for food and the supply as demand has grown faster than supply. On the other hand, the members of the opposition political parties were blaming the monetary and fiscal policies. It was only in 2009 that the government accepted the argument that its monetary policy is one of the sources of the problem and started to take measures to reduce the money supply in the economy. The imposition of credit ceilings on private commercial banks was an example of the measures.

While the persistent appeal by the opposition members of parliament at the time is believed to have marginally contributed to the adoption of various policy measures, the main initiator and driver of the policy measures with respect to the food price rise was the executive branch of the government. Most of the policy measures were drafted by the MoFED and the Ministry of Trade and Industry, discussed within the Council of Ministers, approved by the House of People’s Representatives, issued as directives by the respective ministry and made public through the mass media. As the House of People’s Representatives was dominated by the members of the ruling political party at the time, whatever was drafted by the executive branch often easily got endorsed by the House. The National Bank was mainly responsible for the monetary directives.

6.4.3 The Contribution of Other National Stakeholders

As discussed earlier the Ethiopian political landscape is dominated by a centralized and authoritarian executive branch which does not often respond to public pressure. Nevertheless, it is believed that some groups indeed had limited influence on the policy decisions. For instance, there have been several media reports regarding the high food prices; though it is not clear to what extent they have influenced the policy decisions. While the relatively strong public media invariably propagated only the government view and accused the private traders and developments in the international market for the food (p.148) price rise, the relatively weak and less effective private media which is stifled by a restrictive press law was very emotional. Some of their arguments were not supported with evidence and focused mostly on condemning the government. So the views of the media in particular on the price crisis were often divided.

The private sector including the chamber of commerce had little influence on the food price policy decisions. The government has actually accused private traders of hoarding grains and causing the price escalation during the food price crises. As a result the private sector has often been harassed and intimidated by the government as the various statements issued by the government clearly show. Similarly, the role of civil society organizations in the food price policy decisions has been limited. The Ethiopian government has often stated that the attempt to influence policy by civil society organizations is not welcomed. There are not many consumers’ and producers’ associations in the country that can put meaningful pressure on the policy makers. There were some cooperatives and unions engaged in trading activities, which, according to some people, were contributing to the inflationary situation in urban areas as they bought grains from farmers and sold them at high prices. Apart from individual discontents and complaints, there has not been any major organized public riot or protest by the civil society groups.

There are a few national research institutions including the Ethiopian Economics Association, the Ethiopian Development Research Institute, and some university-based research units which were expected to provide evidence-based policy suggestions, but their contribution has been marginal as the culture of evidence-based policy decision is not strong within the Ethiopian system of governance. There are no references in the policy documents which show that the policy measures regarding the food price challenges were informed by the results of research undertaken by these institutions.

6.4.4 The Role of External Development Partners

It can be hypothesized that the multi-lateral institutions such as the World Bank, IMF, European Union (EU), Food and Agriculture Organization (FAO), WFP as well as the bilateral donors such as the UK’s Department for International Development (DFID) or United States Agency for Interntional Development (USAID) might have some influence on the policy framework since Ethiopia is heavily dependent on these donors. However, the Ethiopian policy makers have often claimed that they have not been influenced and dictated by external partners. Nevertheless, some discussion forums focusing on the food prices have been organized and the government has accepted some of the recommendations although it has not openly acknowledged it (p.149) in public. Some people say that the government was forced to cut back on some investment projects, or at least forced to delay them around 2008 as a result of the advice of the international bodies. In addition, some of the recommendations by international research organizations might have been considered by the policy makers, although there has not been any explicit reference to the studies.

6.5 Major Outcomes of the Policy Interventions

6.5.1 Socioeconomic Impacts

While studies have not yet established a clear link between changes in welfare and the policy measures in Ethiopia, it can be argued on the basis of limited anecdotal evidence that the measures have helped to reduce the potential negative impacts of the crisis on consumers. For instance, the FAO (2011) study showed that the number of undernourished people in Ethiopia in 2002 which was about 33 million remained the same in 2006–8. The same report actually stated that the proportion of undernourished people went down from 48 per cent in 2002 to 41 per cent in 2006–8. Another FAO (2009) study confirmed that malnutrition had continued to decline in 2008.

Similarly, official data from MoFED show that the food price rise does not seem to have reversed the decline in poverty. The proportion of the population below the poverty line which was estimated to be around 37 per cent in 2005/6 declined to 29.6 per cent in 2010 (MoFED 2012). It seems that the policy interventions have counter-balanced the potential negative effects of the food price rises and actually contributed to the poverty reduction. The release of emergency food stocks and the distribution of subsidized imported wheat to low-income urban families must have helped. The government sales of its wheat imports from July to October 2008 successfully reduced domestic market prices (Rashid 2010). Similarly the introduction of the productive safety net programme must have also helped to contain the impact. Although the PSNP was initially planned to benefit around 5.14 million people per year, MARD (2009) and Amdissa (2010), however, indicated that around seven million people have been able to meet consumption needs through food for work programmes and around one million as direct beneficiaries.

6.6 Conclusions

Inflation in general and food price inflation in particular was not a serious challenge in the past in Ethiopia except during drought years. However, the (p.150) food price inflation rates portrayed a general upward trend starting around 2004. Though developments in the international markets indeed have some minor impact, the high food inflation was caused mostly by domestic factors including the increased monetization of the economy, the inefficient and poorly integrated market structure, as well as the speculative behaviour of market participants. Developments in the international market had little impact.

Recognizing the challenges brought about by the rising food prices, the Ethiopian government took several policy measures including the banning of cereal exports, reduction of import tariffs, raising the reserve requirement of commercial banks, administrative measures and releasing of grain stocks and most of all, distributing grains at subsidized prices to the urban poor starting in 2006. Although there has been some limited pressure by some interest groups, both domestic and external, most of the policy measures were initiated and implemented by the executive branch of the government. The main factors that motivated the government to take these measures include the desire to avoid social unrest, protect the urban poor, and maintain a stable macroeconomy.

These measures have indeed helped to control and reduce the potential negative impact of the food price increase particularly on the poorest segment of the population. The interventions helped to bring some level of macroeconomic stability, maintain the trend in poverty reduction, and improve the balance of payment position from a situation of one month’s import to about 2.5 months import in 2009.

This chapter has clearly underscored the need for appropriate and well-targeted social protection programmes to reduce the impact during such crises. Buffer stocks and emergency reserves are also important instruments. In addition, the food price increases have also underscored the need for considering agricultural development as a priority for food security. Establishing monitoring mechanisms to reduce the negative consequence of food price volatility in the future could be useful.


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