Implications of agricultural growth for poverty reduction in Ethiopia

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Ethiopian Economics Association (EEA), Seventh International Conference on the Ethiopian Economy, June 25, 2009

Ethiopian Economics Association (EEA), Seventh International Conference on the Ethiopian Economy, June 25, 2009

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  • 1. Implications of agricultural growth for poverty reduction in Ethiopia Paul Dorosh Ethiopian Strategy Support Program (ESSP-II) International Food Policy Research Institute, Addis-Ababa James Thurlow International Food Policy Research Institute, Washington D.C. Development Economics Research Group, University of Copenhagen Ethiopian Economics Association Conference Addis Ababa, 25 June 2009
  • 2. Research questions 1. How much will poverty decline under Ethiopia’s current growth path? 2. What is the growth and poverty impact of increasing yields and productivity for different crops and livestock sub-sectors? 3. Which crops and agricultural sub-sectors are best at generating national growth and/or poverty reduction? • These are some of the key strategic questions asked by NEPAD as Ethiopia’s prepares to join the Comprehensive African Agricultural Development Program (CAADP) 2
  • 3. Economywide model structure (1) • Dynamic CGE model (2005-15) • New 2005 EDRI SAM of Ethiopia • 24 agricultural sectors – Based on district crop and livestock data – Calibrated to observed yields/land areas – Regionalized (based on agro-zones) • 14 upstream processing sectors • 31 other nonagricultural sectors • Detailed poor/non-poor households – Based on 2005 income/expend. survey – Rural farm (by land size, asset holding) – Rural non-farm and urban • Micro-simulation poverty module 3
  • 4. Economywide model structure (2) Factor market closure rules • Regional land and livestock (mobile across agric. subsectors) • National labor (mobile across sectors and regions) – Five types: agricultural; unskilled; skilled technical; managers; professionals • National capital (fixed by sector) – Past investment creates new capital stocks (i.e., dynamic accumulation) – New capital is allocated based on sector profit differentials Macro closure rules • Flexible exchange rate; fixed foreign capital inflows • Fixed government spending plans; flexible fiscal deficit • Fixed private savings rates; flexible investment (savings-driven inv.) 4
  • 5. Baseline or ‘business-as-usual’ scenario Agriculture • Land cultivated for each crop follows medium-term trends: total land cultivated increases 2.6% per year, 2009-2015 • Land growth varies across regions (i.e., 1.2% in rainfall-sufficient areas, 3.2% in drought-prone areas, 3.7% in pastoralist areas) • Crop yield increases account for one-third of production growth • Overall agricultural GDP growth: 3.8% per year (pop growth = 3%) Non-agriculture • Based on historical medium-term trends (1998 onwards) • Manufacturing and services: 8.2% per year 5
  • 6. Accelerated agricultural growth scenario We increase productivity (TFP) growth rates to achieve 2015 regional yield targets identified by the Ethiopia-CAADP team Examples for selected crops 2.50 Accelerated yield growth target, 2015 Expected yields under baseline scenario, 2015 2.00 Current yields, 2005 Crop yield (mt/ha) 1.50 1.00 0.50 0.00 Maize Chat Wheat Tobacco Sorghum Flowers Teff Oilseeds Cotton Barley Coffee 6
  • 7. Model results: Economic growth Average growth rate (%) Share in Base- All Non- Growth and prices Total GDP 2005 100.00 line 5.95 agric. 6.88 agric. 8.50 • Achieving crop/livestock Agriculture 44.90 3.81 5.98 6.08 Cereals 13.49 5.18 7.53 7.79 yield targets raises agric. Pulses/ oils 3.83 3.34 3.77 3.73 growth from 3.8% to 6.0% Horticulture 2.45 3.84 4.26 4.32 • Particularly strong expansion Export crops Other crops 4.50 3.66 4.54 3.79 7.20 3.97 7.20 3.78 of cereals, export crops and Livestock 12.94 2.88 6.02 6.14 livestock (high growth Relative price movements potential) 1.075 1.050 Tobacco Price index (baseline scenario = 100) 1.025 • However, higher production 1.000 Sorghum Teff 0.975 reduces prices for fast- 0.950 Coffee Maize growing and/or market 0.925 Wheat 0.900 constrained products (e.g., 0.875 maize, wheat and livestock) 0.850 0.825 Poultry Cattle 0.800 2005 06 07 08 09 10 11 12 13 14 15 7
  • 8. Household income poverty Model results: 40 Income poverty 40.0 National poverty headcount (%) 35 • Baseline reduces poverty rate 30 from 40% to 22.7%, but abs. 25 poor increases Baseline scenario 22.7 20 All agriculture scenario 18.4 • Faster agricultural growth 15 With non-agriculture scenario further reduces the national 12.5 poverty rate to 18.4% (or 10 2005 06 07 08 09 10 11 12 13 14 15 3.7mil. fewer poor in 2015) Regional poverty Final poverty rate, 2015 • Poverty reduction is broad- Initial, Base- All Non- based (i.e., falls in all regions 2005 line agric. agric. and urban areas) National 40.02 22.67 18.36 12.46 Rural regions 41.33 25.49 20.77 13.72 • Complementary RS highlands (1a) 38.19 20.71 17.35 12.12 nonagricultural growth reduces RS enset sys. (1b) 44.98 30.15 24.41 15.05 Drought-prone (2) 47.97 33.13 27.08 17.77 national poverty by as much as Pastoralist (3) 27.70 16.10 10.19 6.12 agricultural growth Small urban centers 33.95 8.57 6.41 5.18 Large urban centers 32.95 9.30 6.77 6.16 8
  • 9. Model results: Identifying priority sectors %Poverty • Poverty-growth elasticities show how PGE  effective growth led by different %GDP agricultural subsectors is at reducing national poverty • Cereals are most effective at reducing poverty, especially in poorer regions Poverty growth elasticities for growth led by different sectors • Livestock is especially effective Cereals Export- Live- at reducing poverty in the crops stock National -1.17 -1.08 -0.36 pastoralist region (although Rural regions -1.27 -1.13 -0.35 RS highlands (1a) cereals is even more effective) -1.16 -1.03 -0.12 RS enset sys. (1b) -1.06 -1.44 -0.46 • Export crops are more effective Drought-prone (2) -1.48 -1.06 -0.42 Pastoralist (3) -1.94 -0.93 -1.50 at reducing Zone 1 poverty Small urban centers -0.62 -0.65 -0.42 Large urban centers -0.50 -0.92 9 -0.50
  • 10. Conclusions • Agricultural growth has significant poverty-reducing effects, especially for the poorest households/regions • Thus an Agriculture Development-Led Industrialization (ADLI) strategy are sound approaches • Complementary nonagricultural growth also significantly reduces poverty by raising incomes and stimulating agricultural demand • However faster agric. growth will cause national average real prices of some products to fall (esp. wheat, maize and milk) • If local marketing constraints are not resolved, localized market gluts could occur, seriously reducing incentives for production • Nonetheless, reduced prices of major staples helps reduce poverty of net food purchasers 10
  • 11. Next steps • Investment costs of accelerating growth: Out study examined the impact of alternative growth options, but we have not yet compared the investment options/costs required to achieve this growth (i.e., investment trade-offs) • Improve estimates of model parameters: We need to strengthen the econometric estimates for some of the remaining behavioral parameters (e.g., income elasticities and production technologies) • Climate change: EDRI and the University of Sussex will estimate the economic costs of climate change and adaptation investments (e.g., hydroelectric power etc) 11
  • 12. Linking growth to poverty reduction Economic growth Incomes and poverty Wages, rents, profits Agriculture Factor markets Rural Industry Production Commodity markets Consumption Taxes Urban Services Foreign trade Foreign markets and countries Spending Public sector or Taxes government Public investment Productivity/technology Foreign Private investment investment Human/physical capital 12