The Response of Ethiopian Grain Markets to Liberalization

effects of market liberalization, food aid, and other factors on cereal prices and price spreads.
Finally, Section 6 discusses the policy implications and main conclusions of the study.

2. EVOLUTION OF CEREAL MARKETING POLICY: 1974 - 1996

For 16 years until 1990, Government policy in Ethiopia has suppressed private grain marketing.
A revolution in 1974 introduced a socialist-oriented government that directly engaged in
wholesale and retail trade. The Agricultural Marketing Corporation (AMC) was created in 1976,
initially with World Bank support, to buy grain from farmers and sell to urban consumers and
state organizations. AMC’s mandate was ostensibly to stabilize prices of basic commodities and
protect the interests of the majority of the population. Interregional private trade was restricted
but not eliminated. Traders were forced to sell a portion of their supplies to the AMC at specified
prices. Farmers also had to deliver between 10 to 50 percent of their grain harvest as a quota to
the AMC (Lirenso 1995). The fixed AMC prices were consistently below market prices in most
areas. Prices were uniform irrespective of region from 1980/81 onward (Dercon 1994). Despite
stated policy objectives, the policy of forcing smallholders to grow and sell particular grains at
below-market prices was not designed to raise food production, but rather to capture a certain
share of it for distribution to politically influential groups at subsidized prices, mainly urban
consumers, the military, and public service agencies.² This approach took the view that it was
possible to tax agriculture and force sales to the state without depressing agricultural production
over the long run.

It is generally concluded that the quota policy at low fixed prices, combined with restrictions on
private grain trade, had three main effects: (1) depressing rural incomes; (2) transferring
resources from rural households to a relatively small group of urban households through
artificially cheap food prices; and (3) depressing cereals production in Ethiopia (Lirenso 1995;
Dercon 1994; Franzel et al. 1989). Low farm gate prices were a deterrent to the use of improved
inputs and consequently, population growth rapidly outstripped cereal production, contributing
to the country's chronic food crisis during the 1980s.

In March 1990, grain marketing policy was changed radically. Quotas and fixed grain prices were
abolished. Subsidies on wheat for urban consumers were abolished in 1992. The ensuing
Transitional Government of Ethiopia reaffirmed that all controls on interregional grain movement
were lifted and the private sector was permitted to operate in a free market environment.
However, grain checkpoints, or “kellas,” have remained in place as a mechanism for the regional
administrations to collect tax revenue on grain passing along roads (Howard et al 1995).

In 1992, the AMC was downsized substantially and renamed the Ethiopian Grain Trading
Enterprise (EGTE). The role of the EGTE was revised to stabilize producer and consumer prices
and maintain buffer stocks.³ Yet in actuality, the EGTE has played only a minor role in the grain

²The Government Food Corporation received 51% of AMC’s cereal sales, while the Ministry of Defense
and other state agencies received 24%. Government ration shops received 17%.

³Regulation No. 104/1992. EGTE's current objectives as stated in their 1994/95 Agenda are: (1) to
stabilize markets and prices to farmers to encourage them to increase their output; (2) to stabilize grain

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