The Response of Ethiopian Grain Markets to Liberalization



The benefits to consumers during the post-liberalization period have been most evident in Mekele.
Real prices for white teff, white wheat, and maize in Mekele declined by 49, 42, and 27 birr per
quintal (in 1995 birr) in the post-liberalization period after controlling for other factors. However,
some of these gains to consumers are likely to be due also to the ending of the civil war, which
disrupted commerce especially in the northern part of the country (Dercon 1994).

The benefits to surplus cereal producers during the post-liberalization period have been evident
in almost all markets examined and for each of the three cereals. For example, wholesale wheat
prices in Hosaenna, a major wheat growing area, have risen by 10 birr per quintal in the post-
liberalization period, other factors constant. Wholesale teff prices in Bahir Dar, a major teff
growing area, have risen by 17 birr per quintal in the post-liberalization period, other factors
constant. For the major maize producing areas of Bako and Shashemene, real prices have risen
by 4 and 11 birr per quintal, respectively, other factors constant. Data is not available to clearly
assess the extent to which increases in wholesale prices have been passed along to farmers in the
form of higher producer prices. Yet to the extent that higher prices at wholesale level have been
transmitted to producers, liberalization has positively affected cereal production growth and
incentives to use fertilizer and other productivity-enhancing inputs.

One of the reasons for the differential effects of market liberalization could be the difference in
the development of marketing infrastructure linking these surplus markets to the deficit regional
markets. A considerable part of the food price instability problem in Ethiopia is related to the
high cost of transportation, which creates a major wedge between import and export parity prices.
For example, when areas of Southern Ethiopia are in grain surplus, prices are depressed by high
transport costs that limit grain export opportunities. When these areas are in grain deficit, prices
are driven upward by the high cost of transporting grain to these areas from other regions.
Government and donor support for improved road infrastructure and lower transport costs —
both within Ethiopia and between Ethiopia and its regional neighbors -- would contribute to both
the productivity and stability of the food system and further increase the benefits of market
liberalization.

Cereal price spreads between wholesale prices in different markets decreased after the initiation
of grain market liberalization in 23 of 24 cases examined. This implies that the margins charged
by traders for moving grain from one region to another has declined, which has conferred
important benefits to both surplus-producing farmers and grain-purchasing households in deficit
regions. Changes in cereal price spreads between regional surplus and deficit markets are
generally explained by changes in the costs and/or margins for transportation, storage, crop
finance, and related transactions costs involved in trading.

Despite these gains, however, the grain marketing system in Ethiopia still suffers from a number
of constraints that inflate costs in the food system. Tariffs on grain movement add an additional
20% to 33% onto observed price spreads between surplus and deficit regions, and thus inflate the
wedge between producer and consumer prices. While tariffs on cereal transport may raise
revenue for the regional governments, these taxes work against government efforts to support
producer prices in surplus-producing regions and keep consumer prices low in deficit regions.
To the extent that the poor spend a greater portion of their income on basic staples, taxes that
raise the price of these goods are borne disproportionately by the poor. Grain checkpoint tariffs,
by increasing the risks and uncertainties of regional grain movement, also decrease the regional

-16-



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