Implications of agricultural growth for poverty reduction in Ethiopia

Paul DoroshEthiopian Strategy Support Program (ESSP-II)

International Food Policy Research Institute, Addis-Ababa

James ThurlowInternational Food Policy Research Institute, Washington D.C.

Development Economics Research Group, University of Copenhagen

Ethiopian Economics Association ConferenceAddis Ababa, 25 June 2009

Research questions

1. How much will poverty decline under Ethiopia’s current growth path?

2. What is the growth and poverty impact of increasing yields and productivity for different crops and livestock sub-sectors?

3. Which crops and agricultural sub-sectors are best at generating national growth and/or poverty reduction?

• These are some of the key strategic questions asked by NEPAD as Ethiopia’s prepares to join the Comprehensive African Agricultural Development Program (CAADP)

2

Economywide model structure (1)

• Dynamic CGE model (2005-15)

• New 2005 EDRI SAM of Ethiopia

• 24 agricultural sectors – Based on district crop and livestock data

– Calibrated to observed yields/land areas

– Regionalized (based on agro-zones)

• 14 upstream processing sectors

• 31 other nonagricultural sectors

• Detailed poor/non-poor households – Based on 2005 income/expend. survey

– Rural farm (by land size, asset holding)

– Rural non-farm and urban

• Micro-simulation poverty module3

Economywide model structure (2)

Factor market closure rules

• Regional land and livestock (mobile across agric. subsectors)

• National labor (mobile across sectors and regions)– Five types: agricultural; unskilled; skilled technical; managers; professionals

• National capital (fixed by sector)– Past investment creates new capital stocks (i.e., dynamic accumulation)

– New capital is allocated based on sector profit differentials

Macro closure rules

• Flexible exchange rate; fixed foreign capital inflows

• Fixed government spending plans; flexible fiscal deficit

• Fixed private savings rates; flexible investment (savings-driven inv.)

4

Baseline or ‘business-as-usual’ scenario

Agriculture

• Land cultivated for each crop follows medium-term trends: total land cultivated increases 2.6% per year, 2009-2015

• Land growth varies across regions (i.e., 1.2% in rainfall-sufficient areas, 3.2% in drought-prone areas, 3.7% in pastoralist areas)

• Crop yield increases account for one-third of production growth

• Overall agricultural GDP growth: 3.8% per year (pop growth = 3%)

Non-agriculture

• Based on historical medium-term trends (1998 onwards)

• Manufacturing and services: 8.2% per year

5

Accelerated agricultural growth scenario

We increase productivity (TFP) growth rates to achieve 2015

regional yield targets identified by the Ethiopia-CAADP team

6

0.00

0.50

1.00

1.50

2.00

2.50

Teff

Bar

ley

Wh

eat

Mai

ze

Sorg

hu

m

Oils

eed

s

Co

tto

n

Ch

at

Tob

acco

Co

ffee

Flo

wer

s

Cro

p y

ield

(m

t/h

a)

Accelerated yield growth target, 2015

Expected yields under baseline scenario, 2015

Current yields, 2005

Examples for selected crops

0.800

0.825

0.850

0.875

0.900

0.925

0.950

0.975

1.000

1.025

1.050

1.075

2005 06 07 08 09 10 11 12 13 14 15

Pri

ce in

de

x (b

ase

line

sce

nar

io =

10

0)

Teff

Wheat

Maize

Sorghum

Tobacco

Coffee

CattlePoultry

Model results: Growth and prices• Achieving crop/livestock

yield targets raises agric. growth from 3.8% to 6.0%

• Particularly strong expansion of cereals, export crops and livestock (high growth potential)

• However, higher production reduces prices for fast-growing and/or market constrained products (e.g., maize, wheat and livestock)

77

Share in 2005

Base-line

All agric.

Non-agric.

Total GDP 100.00 5.95 6.88 8.50

Agriculture 44.90 3.81 5.98 6.08

Cereals 13.49 5.18 7.53 7.79

Pulses/ oils 3.83 3.34 3.77 3.73

Horticulture 2.45 3.84 4.26 4.32

Export crops 4.50 4.54 7.20 7.20

Other crops 3.66 3.79 3.97 3.78

Livestock 12.94 2.88 6.02 6.14

Average growth rate (%)Economic growth

Relative price movements

Model results: Income poverty• Baseline reduces poverty rate

from 40% to 22.7%, but abs. poor increases

• Faster agricultural growth further reduces the national poverty rate to 18.4% (or 3.7mil. fewer poor in 2015)

• Poverty reduction is broad-based (i.e., falls in all regions and urban areas)

• Complementary nonagricultural growth reduces national poverty by as much as agricultural growth

88

Initial, 2005

Base-line

All agric.

Non-agric.

National 40.02 22.67 18.36 12.46

Rural regions 41.33 25.49 20.77 13.72

RS highlands (1a) 38.19 20.71 17.35 12.12

RS enset sys. (1b) 44.98 30.15 24.41 15.05

Drought-prone (2) 47.97 33.13 27.08 17.77

Pastoralist (3) 27.70 16.10 10.19 6.12

Small urban centers 33.95 8.57 6.41 5.18

Large urban centers 32.95 9.30 6.77 6.16

Regional poverty

22.7

18.4

40.0

12.5

10

15

20

25

30

35

40

2005 06 07 08 09 10 11 12 13 14 15

Nat

ion

al p

ove

rty

he

adco

un

t (%

)

Baseline scenario

All agriculture scenario

With non-agriculture scenario

Household income poverty

Final poverty rate, 2015

Model results:Identifying priority sectors• Poverty-growth elasticities show how

effective growth led by different

agricultural subsectors is at reducing national poverty

• Cereals are most effective at reducing poverty,

especially in poorer regions

• Livestock is especially effective

at reducing poverty in the

pastoralist region (although

cereals is even more effective)

• Export crops are more effective

at reducing Zone 1 poverty9

Cereals Export-crops

Live-stock

National -1.17 -1.08 -0.36

Rural regions -1.27 -1.13 -0.35

RS highlands (1a) -1.16 -1.03 -0.12

RS enset sys. (1b) -1.06 -1.44 -0.46

Drought-prone (2) -1.48 -1.06 -0.42

Pastoralist (3) -1.94 -0.93 -1.50

Small urban centers -0.62 -0.65 -0.42

Large urban centers -0.50 -0.92 -0.50

GDP

PovertyPGE

%

%

Poverty growth elasticities for growth led by different sectors

Conclusions

• Agricultural growth has significant poverty-reducing effects, especially for the poorest households/regions

• Thus an Agriculture Development-Led Industrialization (ADLI) strategy are sound approaches

• Complementary nonagricultural growth also significantly reduces poverty by raising incomes and stimulating agricultural demand

• However faster agric. growth will cause national average real prices of some products to fall (esp. wheat, maize and milk)

• If local marketing constraints are not resolved, localized market gluts could occur, seriously reducing incentives for production

• Nonetheless, reduced prices of major staples helps reduce poverty of net food purchasers

10

Next steps

• Investment costs of accelerating growth: Out study examined the impact of alternative growth options, but we have not yet compared the investment options/costs required to achieve this growth (i.e., investment trade-offs)

• Improve estimates of model parameters: We need to strengthen the econometric estimates for some of the remaining behavioral parameters (e.g., income elasticities and production technologies)

• Climate change: EDRI and the University of Sussex will estimate the economic costs of climate change and adaptation investments (e.g., hydroelectric power etc)

11

Linking growth to poverty reduction

12

Factor markets

Commodity markets

Foreign markets and countries

Public sector or government

Human/physical capital

Productivity/technology

Rural

Urban

Agriculture

Industry

Services

Economic growth Incomes and poverty

Production Consumption

Wages, rents, profits

Foreign trade

Taxes

Spending

Foreign investment

Taxes

Public investment

Private investment