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

Ethiopia has experienced high food prices since early 2004. 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 in four waves encompassing both low and high price periods. The results have shown high food prices in recent years (between 2004 and 2009) increased welfare gain of rural households by about 10.5 percent on aggregate, as compared to less than 1 percent for the reference period (between 1994 and 2004). The welfare gains further improved to 18 percent (high price periods) with substitution effects, compared to 7.2 percent (low price periods). The welfare gains at aggregate level may not be equally distributed among rural households as about 37-46 percent of the sample households were net-cereal buyers (major staple crops) over the survey periods. However, the analysis has revealed high food price benefits not only net-cereal sellers but also autarkic and net-cereal buyers. The autarkic and net-cereal buyers could diversify income sources and benefits from high prices of other commodities such as such as pluses, fruits & vegetables, animal and animal products. They could also diversify to off-farm activities as average income from wage and transfer has indeed increased in 2009. Only poor families with limited farm and non-farm income need to be supported with safety net programs (both input and consumption support). It should be noted that, in the long-run, high prices could encourage net-sellers to invest and increase production which will eventually lead to lower food prices, which in turn benefit net-buyers. Meanwhile, many current net buyers could become net-sellers if grain prices are stable and favourable and if productive inputs are made available and affordable.