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Working Paper 182 - Rising Food Prices and Household Welfare in Ethiopia: Evidence from Micro Data
23/09/2013 09:56
Working Paper 182 - Rising Food Prices and Household Welfare in Ethiopia: Evidence from Micro Data
The Ethiopian economy has witnessed double-digit rate of inflation since 2003, surging to a peak of 53% in June 2008. The significant rise in the relative prices of grain and other foodstuff such as sugar, edible oil and other necessities were particularly worrisome. Large changes in both absolute and relative prices in such a short period of time can undermine the rebound in per capita incomes in the last decade and the poverty reduction effort of the government. Cognizant of the gravity of problem, policymakers have mounted efforts to cushion vulnerable households from experiencing the full brunt of price surges. The scope for such interventions will be once the welfare effects of rising prices are understood. Moreover, better measures of key parameters driving the demand for grain and other goods supplements an analysis into the causes of relative price changes in Ethiopia.   This paper seeks to bridge the knowledge gap surrounding the link between welfare and rising prices. First, the study examines the distributional consequence of the rise in absolute price over the recent periods in rural as well as urban areas. It provides quantitative estimates of the change in the measure of income inequality due to price changes. Such findings will indicate whether or not the poor have been affected disproportionately more than others during inflationary periods. Second, it provides evidence on the welfare implications of changes in relative prices of key consumption goods by constructing concentration curves using non-parametric methods. The pair-wise comparison of concentration curves is used to analyze whether subsidies on wheat or other grain products could raise welfare, particularly, if it is financed through surtax imposed on other commodities, or income. Third, it estimates the effect of changes in the relative prices of agricultural goods on consumption growth for rural as well as urban households to capture welfare effects of the price shocks. Finally, a range of income and cross-price elasticity of demand values are reported to understand better the role of demand shifts in driving relative price changes. The results show that the recent dramatic rise in the general price level may be responsible for a 2% annual rise in the average GINI coefficient in urban areas. Therefore, between 2000 and 2006, the GINI coefficient rose by about 6 percentage points due to inflation alone suggesting the anti-poor bias of the inflationary process in urban areas. Secondly, consumption pattern for cereals and other food items suggest that subsidies targeted at maize in rural areas, and teff in urban areas financed say through a proportional income tax (surtax) could be welfare enhancing, particularly for the poor population. The study shows that, while real consumption growth deteriorated significantly following the rise in the real price of food (cereals) in urban areas, its effect on rural households depended on the potential to be a net-seller or a net-buyer. As a result, land rich households tended to benefit significantly from real and nominal price movements of cereals while land poor households lose enormously. Thus, policy reforms designed to raise agricultural terms of trade in favour of the rural sector need to address the potential for general price hikes to aggravate poverty by impoverishing the land-poor and consequently raising income inequality as well as pushing the average farm household into poverty. The study estimates that the overall effect of the recent hike in relative prices has increased the true cost of living by 12% in urban areas, suggesting the severity of the welfare loss associated with inflation. In addition, if unchecked, inflation in urban Ethiopia could worsen income inequality significantly. It is estimated that between 2000 and 2006, the Gini coefficient might have increased by 6.1% due to changes in relative prices that were adverse to the urban poor. This result coupled with the recent trend of rising inequality in urban areas suggests that gains in average per-capita growth can be eroded easily leading to growing impoverishment of households in urban areas. The impact of a rise in the real prices of cereals on the welfare of rural households is more complex. To partially address this issue, the study specified a dynamic model of consumption growth, which is a function of changes in household endowments and price shocks. The model was estimated for three distinct groups which potentially could address the net-purchasing position of a household. These groups are: land-rich, land-poor and a typical farm household. The result show that real growth in consumption is positive for land-rich households, negative for a typical farm household, and deteriorates significantly for land-poor households. These outcomes imply negative consequence for the pace of poverty reduction in rural areas.Lire la suite
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