The Response of Ethiopian Grain Markets to Liberalization



THE RESPONSE OF ETHIOPIAN GRAIN MARKETS
TO LIBERALIZATION

1. INTRODUCTION

A major role of agricultural policy is to identify policy changes that may induce technological
innovation and productivity growth throughout the food system,1 in order to increase the living
standards of people who must relate to it in one way or another. Marketing costs account for
40% to 60% of the price that consumers pay for staple cereal commodities in Ethiopia (GMRP
1997). Therefore, the reduction of these costs is a critical means to improve farm production
incentives and household food security in Ethiopia.

Over the past 15 years, the controlled food marketing systems of many African countries have
been liberalized. In some cases, the reforms have been initiated locally (as in Ethiopia, for the
most part). In many other cases, liberalization occurred under pressure from international lenders
and donors as part of economywide structural adjustment programs (see Jayne and Jones 1996
for a survey). Advocates of food market reform have encouraged liberalization as a means to
reduce costs in the marketing system, thereby raising and stabilizing farm incomes, promoting
farmers’ incentives to use productivity-enhancing inputs, and reducing poor households’
dependence on food aid for their survival. While food market reform has been subject to
contentious and often emotional debate over the last decade in Africa, the debate has generally
been over assumptions about how food markets work in reality as opposed to theory, and how
markets actually respond to particular forms of policy change.

The objective of this study is to assess how Ethiopia's grain marketing system is evolving and
responding to the liberalization of food marketing in 1990. Particularly, the study examines how
grain market liberalization has affected (1) the level and volatility of cereal prices; (2) the level and
volatility of price spreads between major wholesale markets; and (3) the extent of correlation
between prices in selected regional markets over time. The paper also estimates the effects of
imported food aid wheat on cereal market prices , after controlling for other exogenous factors
such as rainfall and seasonality. Concerns have arisen both from Government and donors over
the potential adverse effects of food aid on market prices, but a dearth of strong empirical
information has limited informed discussion on the topic. Finally, the paper identifies issues and
problems needing attention in order to reduce cereal marketing costs and guide future food
security policy in Ethiopia.

The remaining sections of this paper are structured as follows: Section 2 briefly describes the
evolution of Ethiopia’s cereal marketing system since the early 1970s. Section 3 presents the
conceptual framework and methods on which the findings of this paper are based. A description
of the markets and commodities included in this analysis and the sources of data are presented in
Section 4. Section 5 presents the results of descriptive and econometric analysis measuring the

1 The food system refers to the various stages and modes of coordination required to produce food and
put it on consumers' tables, including input supply, farm production, distribution, processing, and retailing
(see Shaffer 1980).

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