EXECUTIVE SUMMARY Over the past 15 years, the controlled food marketing systems of most African countries have been reformed as part of economy-wide structural adjustment programs. The effects of these reform programs on food security and farm productivity growth have been hotly debated, partly because of major differences across countries in the way these programs have been implemented. The food market reform experiments in Africa have often been only partially implemented, subjected to policy reversals, and often the state continues to engage directly in grain marketing activities. For these reasons, the empirical record of food market reform is varied, clouded and subject to major differences in interpretation. This report analyzes the effects of grain market reform in Ethiopia on grain prices and price spreads between major wholesale markets. The experience of Ethiopia during the 1990s represents a case in which a relatively consistent and internally-driven program of grain market liberalization has been pursued with the general approval of international lenders and donors. The state marketing board, while not abolished, has been substantially downsized and has become a marginal actor in the current grain marketing system. Hence, the case of Ethiopia between 1990 and 1997 may constitute a particularly important test of the hypothesis expressed by reform advocates that the removal of regulatory constraints on private trade and the transition to a market-oriented system would reduce grain marketing costs and pass along benefits to both farmers and consumers. Results and conclusions are based on descriptive indicators and a reduced-form econometric model that examines the effects of reform on maize and teff prices and price spreads after controlling for exogenous factors such as rainfall, food aid distributed onto local markets, and seasonality. Maize and teff are the two most important traded grain commodities in Ethiopia. The model is estimated simultaneously across six markets using seemingly unrelated regression estimator (SURE). Tests for unit roots in the data indicated that maize and teff prices were stationary in almost all cases, as were food aid and rainfall. The results generally indicated that grain market reform was associated with higher prices in major grain-producing areas and lower prices in major grain-deficit areas. Grain price spreads (the difference in wholesale prices between surplus and deficit markets) declined in 7 of 8 cases for maize and 10 of 11 cases for teff. Since marketing costs account for 40% to 60% of the price that consumers pay for staple cereal commodities in Ethiopia and throughout Africa, the reduction of these costs represents a major opportunity to improve both farm production incentives and household food security. Despite these positive developments, the grain marketing systems in Ethiopia and more generally in Africa continue to operate under numerous constraints that hamper the achievement of further gains in market efficiency that could pass along further benefits to farmers and consumers. Moreover, the reforms in Ethiopia have not appreciably reduced grain price volatility. These findings are indicative of the growing empirical evidence that, while policy reforms have often been critical in reducing costs and risks to farmers, marketing actors, and consumers, they must be viewed as part of a broader program of market development that involves the development of key market institutions, infrastructure, contract law and enforcement, and the general nurturing of civil society.
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Paper provided by Michigan State University, Department of Agricultural, Food, and Resource Economics in its series Food Security III Papers with number
11388.
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