Public investment in irrigation and training for an agriculture-led development: a CGE approach for Ethiopia

Agricultural activities have been and remain key for sustained growth and pro-poor development in Ethiopia. However, the sector under utilizes its irrigation capacities as well as its abundant human resources. This paper aims at measuring the impact of public investment in small-scale irrigation and training for farmers on growth and agriculture-led development, on food security, and on poverty in Ethiopia. It is line with the current five year development strategy of the government and will give insights on the effect of selected targeted indicators. We use a dynamic Computable General Equilibrium (CGE) model to capture the outcomes of public investment shocks. Public investment is modeled in such a way that it increases the supply of skilled agricultural labor and that of irrigated land by transforming unskilled labor and non irrigated land. Two types of technologies are utilized in agriculture to produce the same crop: a more productive technology that is intensive in skilled labor and irrigated land and a less productive technology that is intensive in unskilled labor and non-irrigated land. Households have the ability to increase their endowments in labor and land. Hence, the increase in skilled labor due to public investment in the form of short term training enables households to increase the share of skilled labor they detain while reducing the share of unskilled labor. The same applies for land. Finally, the model has a poverty module using a top-down approach where changes in the CGE model are imported in the household data. The CGE model is a PEP type model and is calibrated to a SAM of Ethiopia for the fiscal year 2005/06. The poverty module uses the 2005 Household Income and Expenditure Survey. This exercise showed that the Ethiopian government policy strategy regarding agriculture sector development has a great potential for reducing poverty and food insecurity. Simulation results show that investing in training and irrigation contributes to the effort towards achieving the MDGs. Exports expand and in particular export of cash crops that generate higher income at household and national levels. The results also show that an agriculture-led development is less likely to occur because of weak forward and backward production linkages between agriculture and manufacturing sectors where a great deal of manufacturing inputs are imported. The increment in public investment has a crowding-out effect that affects the expansion of manufacturing and services sectors which are highly intensive in private capital.