Welfare Impacts of Rising Food Prices in Rural Ethiopia: a Quadratic Almost Ideal Demand System Approach

Ethiopia has experienced high food prices, especially since 2005. This paper examines the welfare impacts of rising food prices in rural Ethiopia using Quadratic Almost Ideal Demand System (QUAIDS) approach controlled for expenditure endogeniety and zero consumption expenditure. The elasticity coefficients from QUAIDS are used to estimate Compensated Variations (CV), which explicitly accounts for profit function and substitution effects. The study uses Ethiopia Rural Household Survey (ERHS) panel data, encompassing both low and high price periods. Prices of all food and agricultural products increased during the entire survey period of 1994 to 2009 but the increases were much higher in recent years, 2004 – 2009, compared to the earlier period of 1994 - 2004. The results have shown that the price hikes in recent years increased welfare gain of rural households by about 10.5% on aggregate, as compared to less than 1% for the reference period (1994 - 2004). The welfare gains further improved to 18% for the high price period and 7.2% for the low price period with substitution effects. It could be argued that the welfare gains at aggregate level is not equally distributed among rural households as 37 to 46% of the sample households were net-cereal buyers (major staple crops) during the survey period. However, the analysis revealed that high food and agricultural prices benefit not only net-cereal sellers but also autarkic and net-cereal buying families. Autarkic households and net-cereal buyers apparently seem to have benefited from high prices of commodities such as pluses, fruits & vegetables, live animals and animal products. They also appear to have gained from increased off-farm income as average income from wage and transfer has indeed increased in 2009. Only very poor families with limited farm and non-farm income need to be supported with safety net programs (both input and consumption support). In the long-run, high agricultural prices would encourage net-sellers to expand production, leading to lower food prices for net-buyers. More importantly, many current net buyers could become net-sellers if grain prices are stable and remunerative for producers.