To Subsidise or TO Transfer?A CGE ANALYSIS OF Alternative  policies  to tackle chronic food insecurity in ethiopia<br />Se...
Ethiopia is Chronically Food Insecure <br />Persistent availability problem<br />1960-2001: per capita food availability a...
Tackling Access and Availability: To Subsidise or to Transfer?<br />Increase ag productivity through input (Fertilizer) su...
3 Caveats<br />Is fertilizer subsidy the most efficient policy to boost ag productivity?<br />Optimal use, complementary p...
Why Interest in Transfers, Local Procurement and Subsidies?<br />Transfers effective in raising food consumption, but inco...
The Ethiopian Fertilizer Market<br />Before 1993: Govt Monopoly, 15% subsidy in 93<br />93-00: significant private sector ...
Structure of the presentation<br />Description of Simulations<br />Results & Sensitivity Analysis<br />Conclusions<br />
The Simulations<br />
Fertilizer Subsidy, Transfers from Local Procurement… and both<br />FERT: <br />50% decrease in fertilizer price through a...
Simulating a fertilizer subsidy<br />Introduce a negative tariff to reduce fertilizer price<br /><ul><li>Subsidy on fertil...
Assume ½ of difference in yield due to fertilizer & no productivity change for non-traded agriculture</li></li></ul><li>Si...
 Calibrate gamma in order to achieve a 0.25 MPC for an in-kind wheat transfer</li></li></ul><li>Simulating Local Procureme...
The implicit Tariff<br />
Partial Eq Cost of the subsidy and a transfer of the same cost<br />The Partial Eq cost of the subsidy to the government i...
Closure<br />Factors closures…<br />Labour is not fully employed and is mobile across sectors<br />Land is fixed and mobil...
Results and Sensitivity Analysis<br />
FERT: fert sub, no change in food aid imports<br />Productivity shock, lower cost of fert and higher application<br />High...
FERTL: fert sub, some aid imports replaced by local procurement<br />Similar to FERT: production, price and consumption ef...
LOCAL: additional wheat transfers from local procurement<br />Minor increase in prices of all cereals, due to income and c...
Availability of Food: Cereal Production & Supply<br />Subsidies (FERT + FERTL) cause production and supply gains for all c...
Purchasing Power: Income Effects<br />Fertilizer subsidy (FERT) raises income of all HHs<br />Local procurement (FERTL) in...
Access to Food: Cereal Consumption of the Rural Poor<br />Fert subsidies (FERT and FERTL) increase  consumption of all cer...
Cereal Consumption of the Rural Poor is sensitive to changes in assumptions<br />Change in aggregate food consumption depe...
Effects of wheat transfer on non-recipient HHs<br />Wheat consumption of all other household groups decreases with additio...
General Equilibrium Effects<br />Same partial eq cost for all simulations, but in general eq revenue and expenditure (ie g...
Conclusions<br />
Subsidy with Local Procurement has a strong Food Security Response<br />Fertilizer subsidy with local procurement (FERTL) ...
Agricultural Productivity effective in tackling Chronic Food Insecurity<br />Fertilizer subsidy works through agricultural...
Alternative Strategic Towards Food Security - A Comprative Analysis of Fertilizer Subsidy and a Locally Procured Food Tran...
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Alternative Strategic Towards Food Security - A Comprative Analysis of Fertilizer Subsidy and a Locally Procured Food Transfer

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Ethiopian Development Research Institue (EDRI) and International Food Policy Research Institute (IFPRI), Seventh International Conference on Ethiopian Economy, EEA Conference Hall, June 26, 2010

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Alternative Strategic Towards Food Security - A Comprative Analysis of Fertilizer Subsidy and a Locally Procured Food Transfer

  1. 1. To Subsidise or TO Transfer?A CGE ANALYSIS OF Alternative policies to tackle chronic food insecurity in ethiopia<br />Seneshaw Tamru, Gerawork Bizuneh, <br />A. Stefano Caria<br />
  2. 2. Ethiopia is Chronically Food Insecure <br />Persistent availability problem<br />1960-2001: per capita food availability always significantly below per capita requirement (Demeke et al, 2004)<br />Increasing number of people with insecure access<br />Number of estimated food transfer beneficiaries trending upwards (Demeke et al, 2004)<br />Numerous utilization issues<br />Acute watery diarrhoea (AWD), malnutrition, child wasting and stunting prevalent<br />
  3. 3. Tackling Access and Availability: To Subsidise or to Transfer?<br />Increase ag productivity through input (Fertilizer) subsidy<br />Lower cost of inputs benefits farmers<br />Higher production: availability<br />Lower prices for consumers: access <br />Food transfers based on local procurement<br />Higher prices benefit farmers <br />Stimulate more production: availability<br />Transfers used to address access<br />
  4. 4. 3 Caveats<br />Is fertilizer subsidy the most efficient policy to boost ag productivity?<br />Optimal use, complementary policies, environmental concerns<br />If better ag policies exist, then our results are a low-bound estimate of the effects of ag productivity growth<br />Focus on chronic food insecurity<br /> Fert subsidy not adequate to respond to fast-onset disasters <br />Focus on access and availability, not utilization<br />
  5. 5. Why Interest in Transfers, Local Procurement and Subsidies?<br />Transfers effective in raising food consumption, but incomplete “additionality” (Dorosh & Del Ninno, 2002)<br />Local procurement is solution to price disincentive effects of food aid imports (Barrett C. B., 2006)<br />Fertilizer subsidies have proved effective in the past:<br />Malawi experience: higher application rates and yields (Gilbert et al, 2009) <br />Role in Green Revolution in Asia (Demeke, 2004)<br />In Ethiopia, given declining soil fertility and land availability constraints, food production growth has to happen at the intensive margin (increasing land productivity)<br />But high cost of inputs<br />
  6. 6. The Ethiopian Fertilizer Market<br />Before 1993: Govt Monopoly, 15% subsidy in 93<br />93-00: significant private sector participation<br />1995: 30% subsidy<br />1996: 20% subsidy<br />February 1997: Subsidy Removed<br />Marked fall in fertilizer application rates<br />2000-present Regional Holdings first and later Cooperative Unions dominate the market<br />
  7. 7. Structure of the presentation<br />Description of Simulations<br />Results & Sensitivity Analysis<br />Conclusions<br />
  8. 8. The Simulations<br />
  9. 9. Fertilizer Subsidy, Transfers from Local Procurement… and both<br />FERT: <br />50% decrease in fertilizer price through a subsidy on imported fertilizer<br />No change in food aid wheat imports<br />FERTL: <br />50% decrease in fertilizer price as in FERT<br />Some food aid wheat imports replaced by local procurement <br />LOCAL:<br />No subsidy on fertilizer <br />No change in food aid wheat imports<br />Increase in wheat transfers to rural poor through local procurement <br />same level of local procurement as in FERTL<br />
  10. 10. Simulating a fertilizer subsidy<br />Introduce a negative tariff to reduce fertilizer price<br /><ul><li>Subsidy on fertilizer calibrated so as to get a 50% reduction in price </li></li></ul><li>…and the right demand and productivity response<br />Comparing 5 years averages before and after the 97 subsidy removal, we ..<br />Adjust input output coefficient to obtain a realistic demand response:<br /><ul><li>Adjust productivity parameter to obtain a realistic productivity response
  11. 11. Assume ½ of difference in yield due to fertilizer & no productivity change for non-traded agriculture</li></li></ul><li>Simulating a Wheat Transfer <br />Transfer money from government to households<br /><ul><li>Force households to consume out of cash transfer as if they had received wheat
  12. 12. Calibrate gamma in order to achieve a 0.25 MPC for an in-kind wheat transfer</li></li></ul><li>Simulating Local Procurement<br />We fix wheat imports (mainly food aid and price inelastic high quality wheat) & hence change model:<br />Add one exogenous variable<br />Make QMwheat and QDwheat highly substituable (sigma 8)<br /><ul><li>Add one endogenous variable: Implicit Tariff</li></ul>Imports of wheat in 2005 were 1.638<br />For LOCAL, imports at 1.638: all additional wheat purchases from local markets <br />For FERTL, imports go down: 1.061 of food aid previously imported is now sourced locally<br />
  13. 13. The implicit Tariff<br />
  14. 14. Partial Eq Cost of the subsidy and a transfer of the same cost<br />The Partial Eq cost of the subsidy to the government is:<br />The subsidy will cost 1.171 billion birr. 1.061 billion birr of wheat can be transferred for the same cost:<br />
  15. 15. Closure<br />Factors closures…<br />Labour is not fully employed and is mobile across sectors<br />Land is fixed and mobile <br />Capital is fixed and activity specific<br />Marginal propensity to save is fixed; investment adjusts<br />Tax rate fixed, government savings adjusts<br />Foreign savings fixed, exchange rate is flexible<br /> DPI is numeraire (CPI flexible)<br />
  16. 16. Results and Sensitivity Analysis<br />
  17. 17. FERT: fert sub, no change in food aid imports<br />Productivity shock, lower cost of fert and higher application<br />Higher domestic production and lower prices for 3 cereals<br />Higher HHs consumption, also for rural poor<br />FERT increases overall import demand: ex rate depreciates, exports increase<br />
  18. 18. FERTL: fert sub, some aid imports replaced by local procurement<br />Similar to FERT: production, price and consumption effects<br />Local procurement induces larger domestic production response for wheat and lower price reduction<br />HH consumption on all goods rises compared to FERT<br />Total import demand slightly reduced: small appreciation of real ex rate<br />
  19. 19. LOCAL: additional wheat transfers from local procurement<br />Minor increase in prices of all cereals, due to income and consumption effects of transfer<br />Increase in domestic production of wheat, large increase in rural poor consumption of wheat due to transfer<br />Small macro effects on real exchange rate <br />
  20. 20. Availability of Food: Cereal Production & Supply<br />Subsidies (FERT + FERTL) cause production and supply gains for all cereals<br />Local procurement (FERTL) increases domestic production of wheat further<br />… but slightly lowers overall supply given cap on imports<br />Food transfers (LOCAL) affect production and supply of wheat only<br />
  21. 21. Purchasing Power: Income Effects<br />Fertilizer subsidy (FERT) raises income of all HHs<br />Local procurement (FERTL) increases income gains of the rural poor, through higher returns to land and labor<br />Wheat transfer (LOCAL) delivers highest income gains for rural poor<br />Small-no gains for other HH<br />
  22. 22. Access to Food: Cereal Consumption of the Rural Poor<br />Fert subsidies (FERT and FERTL) increase consumption of all cereals<br />Price and income effects contribute to access<br />Food transfers (LOCAL) increase wheat consumption only<br />Transfers and small income effect increase access<br />Higher cereal prices tend to lower access<br />
  23. 23. Cereal Consumption of the Rural Poor is sensitive to changes in assumptions<br />Change in aggregate food consumption depends on:<br />Productivity gains from fertilizer use<br />MPC out of in-kind transfer<br />Under conservative assumptions, LOCAL achieves a higher aggregate consumption than FERTL<br />Realistic estimates are 2/3p & 0.25<MPC<0.5<br />No clear ranking<br />
  24. 24. Effects of wheat transfer on non-recipient HHs<br />Wheat consumption of all other household groups decreases with additional food transfers (LOCAL)<br />Effect of higher prices dominates income effects<br />Mis-targeted rural poor will not receive the transfer but pay higher cereal prices<br />Effects are negligible<br />
  25. 25. General Equilibrium Effects<br />Same partial eq cost for all simulations, but in general eq revenue and expenditure (ie govt net revenue) change<br />Fertilizer subsidy (FERT + FERTL) income effect has positive effect on govt tax revenue, hence PE Costs > D.net revenue<br />In LOCAL PE Costs < D.net revenue, WHY?<br /> reduction in investment resulting from reduction in net revenue<br />Subsidy with local procurement most cost-effective at delivering GDP growth<br />
  26. 26. Conclusions<br />
  27. 27. Subsidy with Local Procurement has a strong Food Security Response<br />Fertilizer subsidy with local procurement (FERTL) delivers:<br />The best domestic production and supply (availability) response for all cereals<br />Large household consumption (access) response for all cereals<br />Smaller loss in government net revenue<br />Locally procured transfers (LOCAL)…<br />Generate little general supply response compared to fertilizer subsidy<br />Large consumption response (access), especially wheat<br />Harm food consumption of other groups; mis-targeted food consumption is unaffected<br />
  28. 28. Agricultural Productivity effective in tackling Chronic Food Insecurity<br />Fertilizer subsidy works through agriculturalproductivity reponse <br />Virtuous cycle of increased production, increased incomes, lower prices, higher food consumption<br />Best when coupled with local procurement<br />Calibration: what are actual productivity gains from additional fertilizer use? What is a realistic MPC for in-kind transfers?<br />If low productivity & high MPC transfers to be preferred for improving access of rural poor<br />

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