The document summarizes the results of a computable general equilibrium (CGE) model analysis of the implications of price and production shocks on food security in Ethiopia. The model simulates the impact of drought-induced crop failures and livestock losses. It finds that while local household incomes fall significantly, national impacts are small due to Ethiopia's diverse agriculture and integrated markets absorbing supply changes. Isolated local shocks primarily impact the local area.

1. Implications of Price and Production Shocks
on Food Security in Ethiopia:
A General Equilibrium Analysis
Sherman Robinson
Dirk Willenbockel
Institute of Development Studies, University of Sussex
Hashim Ahmed
Ethiopian Development Research Institute (EDRI)
Paul Dorosh
International Food Policy Research Institute (IFPRI)
(Ethiopia Strategy Support Program, ESSP-2)
EDRI – World Food Programme – ESSP-2 Workshop
Addis Ababa, Ethiopia
18 November, 2009

2. Introduction:
Food Production and Price Shocks
• Ethiopian farmers often suffer the adverse effects of
insufficient or poorly timed rain.
• A major drought occurred in 2002/03 and localized droughts
affect some farmers almost every year
• Drought-induced reductions in cereal supply and in some
instances international price shocks threaten food security
of net food consumers.
• This paper uses a Computable General Equilibrium (CGE)
model to assess the effects of these shocks on prices,
incomes and food consumption, particularly for poor
households.

3. Methodology
• Computable General Equilibrium (CGE) model
• Regionalized (based on agro-ecological zones)
• Production
• Household income and consumption
• Disaggregated households
– Rural farm (by region)
– Small urban (rural non-farm) and large urban
centers

4. The Data Base
EDRI 2004/05 Social Accounting Matrix (SAM)
– Constructed as part of a project with the University of
Sussex (w/support of IFPRI-ESSP2)
– 65 production sectors (24 agricultural, 10 agricultural
processing, 20 other industry, 11 services)
– Regional SAM based on the “3 Ethiopias”
• Rainfall sufficient, drought prone, pastoralist
• Rainfall sufficient AEZ disaggregated to humid lowlands,
enset-based systems, and other (highland) rainfall sufficient
areas
– Poor household groups defined as poorest 40% of
rural and urban households according to HICES
2004/05 per capita expenditure data

5. Agro-ecological Zones (AEZ’s):
“3 Ethiopias” split into 5 AEZs
Source: 2005/06 EDRI Social Accounting Matrix.

6. The CGE Model
• Production
– Value added modeled using constant elasticity of
substitution (CES) production functions of factor
inputs (land, livestock capital, various types of labor
and non-agricultural capital)
– Intermediate inputs into production are determined
as fixed shares of the quantity of output.
• Trade
– Imported goods are assumed to be imperfect
substitutes for domestically produced goods;
– Likewise, exported goods are imperfect substitutes for
domestically produced and consumed goods.

7. The CGE Model (2)
• Incomes and Consumption
– Payments from each factor of production is
allocated to households and other institutions
using fixed shares derived from the base SAM.
– Household consumption is modeled using a Linear
Expenditure System (LES) specification.

8. Rules for Supply-Demand Balances
(Model Closure)
• Commodity markets
• Prices adjust to equate supply and demand
• Capital (including livestock capital) is fixed by sector
and region
• Land is fixed by region, but is mobile across crops
• Labor markets
• Total supply of labor of each skill type is fixed (and fully
employed)
• Real wages adjust so that demand for labor is equal to
supply

9. CGE Model: Macro Specification
• Trade balance
• Fixed foreign savings (foreign capital inflow), so trade
balance (current account) is also fixed.
• Real exchange rate adjusts to achieve export supply and
import demand that yield the fixed trade balance.
• “Balanced” macro closure
• Aggregate investment, government demand, and
consumption are fixed shares of total absorption.
• Any macro adjustment burden is shared equally across macro
aggregates
• Govt deficit is endogenous. Savings rates adjust to achieved
savings-investment balance.
• Numeraire: Consumer price index is fixed
• The model determines prices relative to this fixed CPI.

10. Scenarios
• Production shocks in drought-prone and
pastoralist areas
• 20 percent crop productivity decline
• 20 percent loss of livestock
• Production shocks in enset cultivating areas
• 20 percent enset yield decline
• 20 percent maize productivity decline

11. Agricultural Value Added
by Agro-Ecological Zone
bn birr (2005/06) Shares
Zone 2 Zone 3 Zone 4 Zone 2 Zone 3 Zone 4
Teff 2.75 0.29 1.41 10.8% 3.7% 9.3%
Wheat 2.31 0.26 0.88 9.1% 3.2% 5.8%
Maize 2.71 0.75 1.09 10.7% 9.4% 7.2%
Bar/Sor 2.47 0.20 1.61 9.7% 2.6% 10.6%
Enset 0.25 0.66 0.44 1.0% 8.2% 2.9%
Exp Crops 3.78 2.01 3.08 14.9% 25.1% 20.3%
Oth Agric 3.64 2.09 2.35 14.3% 26.2% 15.5%
Livestock 7.47 1.72 4.34 29.4% 21.6% 28.6%
Total 25.38 7.97 15.19 100.0% 100.0% 100.0%
Zone 2: Rainfall sufficient highlands (cereal – based)
Zone 3: Rainfall sufficient highlands (enset – based) – most of SNNPR
Zone 4: Drought prone
Source: 2005/06 EDRI Social Accounting Matrix.

12. Agricultural Value Added
by Agro-Ecological Zone
30
Value Added (bn 2005-06 Birr)
25
Livestock
Oth Agric
20
Exp Crops
15 Enset
Bar/Sor
10
Maize
5 Wheat
Teff
0
Zone 2 Zone 3 Zone 4
Zone 2: Rainfall sufficient highlands (cereal – based)
Zone 3: Rainfall sufficient highlands (enset – based) – most of SNNPR
Zone 4: Drought prone
Source: 2005/06 EDRI Social Accounting Matrix.

13. Simulation 1a Drought
(20% Decline in Crop Productivity)
• Base regional agricultural production shares
• Drought prone zone produces about 1/3 of total teff and
barley/sorghum and about 1/4 of wheat, maize and livestock
• Pastoralist zone produces 22% of livestock output
• Drought-induced 20 percent decline in crop productivity
• Drought-prone zone cereal crop outputs decline 13% (maize) to
21% (teff)
• Barley/sorghum output falls by 16% and maize output falls by
24% in the pastoralist zone
• Price and income effects
• Prices of cereals rise because of reduced supply: teff (6.9%,
barley/sorghum 2.2%, wheat 2.1%)
• Rural poor household real incomes fall by 2.3 and 3.3% in the
drought-prone and pastoralist zones, respectively
• Overall, household welfare declines 2.1% (of the base year
consumption expenditure) nationally

14. Simulation 1b Drought
(20% Decline in Livestock)
• Production shocks in drought-prone and pastoralist
areas
• Output of livestock falls by 14% in drought areas
• At the original price, demand for livestock products would
be greater than supply, so the price of livestock rises (by
8.5%)
• In response to the higher prices, supply of livestock
products from non-drought affected farmers increases
• Livestock sector output rises by 3.1% in other AEZs
• Livestock exports fall by 20.1%
• The livestock shock has only small effects outside of
the drought areas.
• Real incomes of urban households fall by 1.0%
• Nationally, real welfare fall by 0.9%

15. Simulation 2a Enset Shock
(20% Decline in Enset)
• Base regional agricultural production shares
• The rainfall sufficient highland enset zone produces 48
percent of the national enset crop, but enset accounts for
only 8 percent of the agricultural value added of SNNPR
• 20 percent decline in enset area in rainfall sufficient
highland enset zone (most of SNNPR)
• Output of enset falls by 17% in SNNPR enset areas
• The enset price rises by 5.1%, inducing some substitution
of land to enset with minimal effect on other agricultural
prices
• Rural poor households in SNNPR suffer a small decline in
welfare on average
• The enset shock has almost no effect on the economy
outside of the enset zone, though enset growers outside of
the zone do benefit from the higher enset market price.

16. Simulation 2b
20% Decline in Maize Productivity in Enset Zone
• Base regional agricultural production shares
• The rainfall sufficient highland enset zone produces only
16 percent of the national maize crop, and maize accounts
for only 9.4 percent of the agricultural value added of
SNNPR
• 20 percent decline in maize productivity in the rainfall
sufficient highland enset zone (most of SNNPR)
• Output of maize falls by 15% in SNNPR enset areas
• The maize price rises by only 1.5%, since the maize market
is assumed to be integrated with the much larger national
market
• Rural poor households in SNNPR suffer a small decline in
welfare on average
• The maize shock has almost no effect on the economy
outside of the enset zone,

17. Simulation Results:
Production Shocks
Sim 1a Sim 1b Sim 2a Sim 2b
Production Shock Livestock Maize Enset Maize
20% 20% 20% 20%
Zones 4 and 5 4 and 5 3 3
Share of Natl Prod 46.7% 24.6% 48.3% 16.1%
Share of Zone VA 28.6% 7.2% 8.2% 9.4%
Price Effect 8.5% 1.1% 5.1% 1.5%
% Change RurPoor
Real Income -0.6% -2.3% -0.2% -0.1%
Welfare -0.8% -2.8% -0.3% -0.1%
Note: For Sims 1a and 1b, Share of Zone VA and % changes in real income and welfare
are for zone 4 only.
Source: 2005/06 EDRI Social Accounting Matrix.

18. Real Wholesale Prices of Cereals
Addis Ababa, 2004-09
600
500
Price (Birr (2006)/quintal)
400
300
200
100
0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-04
May-05
May-06
May-07
May-08
May-09
May-04
Month/Year
Maize Mixed Teff Wheat Sorghum
Source: EGTE data; Dorosh and Ahmed (2009). 18

19. Caveats
– Sensitivity analysis regarding key assumptions and
parameters is required
– In order to better model droughts, further analysis is
needed regarding the multi-period effects of losses
of livestock capital on livestock investment and
output
– Additional analysis of implications of foreign
exchange rationing (as is currently in place) is also
needed

20. Concluding Observations (1)
• The simulations illustrate the extent to which
production and price shocks spread
throughout the economy
• Drought reduces farmer crop incomes in the
affected regions
• Reduced supply affects national prices since
markets are generally integrated at the wholesale
level
• Farmers outside drought regions actually benefit,
but net consumers everywhere lose

21. Concluding Observations (2)
– Production shocks can have devastating effects on
households directly affected, but can leave the
national economy largely unaffected
– Effects on the national economy are limited even though
the simulations assume integrated commodity markets
(i.e. the domestic price of each commodity changes by the
same amount throughout the country)
– The effects of production shocks would be even more
limited nationwide if commodity price transmission were
less perfect, (but would be more severe in the area
experiencing the production shock)

22. Concluding Observations (3)
– Thus, isolated production shocks can pose severe threats
to household welfare at the local level, but be essentially
unnoticed at the national level because of
– the small size of the shocks relative to the entire economy and
– the diversity of food products (not all of which are directly
affected by the shock)
– Localized monitoring of production and market conditions
is essential
– Further work is needed to refine model paramters and
specifications and to better understand dynamic effects of
droughts and price shocks