This document discusses alternative policies to address chronic food insecurity in Ethiopia: fertilizer subsidies, food transfers from local procurement, and a combination. It uses a computable general equilibrium (CGE) analysis to simulate the impacts of: a 50% fertilizer price reduction (FERT); this combined with replacing some food aid imports with local procurement (FERTL); and increasing wheat transfers through local procurement only (LOCAL). FERTL delivers the best availability and access outcomes by boosting production and household consumption across cereals. LOCAL mainly improves wheat access but harms consumption of other groups and induces little supply response. Agricultural productivity growth through fertilizer subsidies effectively tackles chronic food insecurity when coupled with local procurement.

1. To Subsidise or TO Transfer?A CGE ANALYSIS OF Alternative policies to tackle chronic food insecurity in ethiopia Seneshaw Tamru, Gerawork Bizuneh, A. Stefano Caria

2. Ethiopia is Chronically Food Insecure Persistent availability problem 1960-2001: per capita food availability always significantly below per capita requirement (Demeke et al, 2004) Increasing 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. Tackling Access and Availability: To Subsidise or to Transfer? Increase ag productivity through input (Fertilizer) subsidy Lower cost of inputs benefits farmers Higher production: availability Lower prices for consumers: access Food transfers based on local procurement Higher prices benefit farmers Stimulate more production: availability Transfers used to address access

4. 3 Caveats Is fertilizer subsidy the most efficient policy to boost ag productivity? Optimal use, complementary policies, environmental concerns If better ag policies exist, then our results are a low-bound estimate of the effects of ag productivity growth Focus on chronic food insecurity Fert subsidy not adequate to respond to fast-onset disasters Focus on access and availability, not utilization

5. Why Interest in Transfers, Local Procurement and Subsidies? Transfers effective in raising food consumption, but incomplete “additionality” (Dorosh & Del Ninno, 2002) Local procurement is solution to price disincentive effects of food aid imports (Barrett C. B., 2006) 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

6. The Ethiopian Fertilizer Market Before 1993: Govt Monopoly, 15% subsidy in 93 93-00: significant private sector participation 1995: 30% subsidy 1996: 20% subsidy February 1997: Subsidy Removed Marked fall in fertilizer application rates 2000-present Regional Holdings first and later Cooperative Unions dominate the market

7. Structure of the presentation Description of Simulations Results & Sensitivity Analysis Conclusions

8. The Simulations

9. Fertilizer Subsidy, Transfers from Local Procurement… and both FERT: 50% decrease in fertilizer price through a subsidy on imported fertilizer No change in food aid wheat imports FERTL: 50% decrease in fertilizer price as in FERT Some food aid wheat imports replaced by local procurement LOCAL: No subsidy on fertilizer No change in food aid wheat imports Increase in wheat transfers to rural poor through local procurement same level of local procurement as in FERTL

13. The implicit Tariff

14. Partial Eq Cost of the subsidy and a transfer of the same cost The Partial Eq cost of the subsidy to the government is: The subsidy will cost 1.171 billion birr. 1.061 billion birr of wheat can be transferred for the same cost:

15. Closure Factors closures… Labour is not fully employed and is mobile across sectors Land is fixed and mobile Capital is fixed 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)

16. Results and Sensitivity Analysis

17. FERT: fert sub, no change in food aid imports Productivity shock, lower cost of fert and higher application Higher domestic production and lower prices for 3 cereals Higher HHs consumption, also for rural poor FERT increases overall import demand: ex rate depreciates, exports increase

18. FERTL: fert sub, some aid imports replaced by local procurement Similar to FERT: production, price and consumption effects Local procurement induces larger domestic production response for wheat and lower price reduction HH consumption on all goods rises compared to FERT Total import demand slightly reduced: small appreciation of real ex rate

19. LOCAL: additional wheat transfers from local procurement Minor increase in prices of all cereals, due to income and consumption effects of transfer Increase in domestic production of wheat, large increase in rural poor consumption of wheat due to transfer Small macro effects on real exchange rate

20. Availability of Food: Cereal Production & Supply Subsidies (FERT + FERTL) cause production and supply gains for all cereals Local procurement (FERTL) increases domestic production of wheat further … but slightly lowers overall supply given cap on imports Food transfers (LOCAL) affect production and supply of wheat only

21. Purchasing Power: Income Effects Fertilizer subsidy (FERT) raises income of all HHs Local procurement (FERTL) increases income gains of the rural poor, through higher returns to land and labor Wheat transfer (LOCAL) delivers highest income gains for rural poor Small-no gains for other HH

22. Access to Food: Cereal Consumption of the Rural Poor Fert subsidies (FERT and FERTL) increase consumption of all cereals Price and income effects contribute to access Food transfers (LOCAL) increase wheat consumption only Transfers and small income effect increase access Higher cereal prices tend to lower access

23. Cereal Consumption of the Rural Poor is sensitive to changes in assumptions Change in aggregate food consumption depends on: Productivity gains from fertilizer use MPC out of in-kind transfer Under conservative assumptions, LOCAL achieves a higher aggregate consumption than FERTL Realistic estimates are 2/3p & 0.25<MPC<0.5 No clear ranking

24. Effects of wheat transfer on non-recipient HHs Wheat consumption of all other household groups decreases with additional food transfers (LOCAL) Effect of higher prices dominates income effects Mis-targeted rural poor will not receive the transfer but pay higher cereal prices Effects are negligible

25. General Equilibrium Effects 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, hence PE Costs > D.net revenue In LOCAL PE Costs < D.net revenue, WHY? reduction in investment resulting from reduction in net revenue Subsidy with local procurement most cost-effective at delivering GDP growth

26. Conclusions

27. 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 consumption is unaffected

28. Agricultural Productivity effective in tackling Chronic Food Insecurity Fertilizer subsidy works through agriculturalproductivity reponse Virtuous cycle of increased production, increased incomes, lower prices, higher food consumption Best when coupled with local procurement Calibration: what are actual productivity gains from additional fertilizer use? What is a realistic MPC for in-kind transfers? If low productivity & high MPC transfers to be preferred for improving access of rural poor