Department of Agricultural, Food, and Resource Economics Food Security Group

IDWP 68. T.S. Jayne, Asfaw Negassa, and Robert J. Myers. 1998. 21 pp. The Effect of Liberalization on Grain Prices and Marketing Margins in Ethiopia 

EXECUTIVE SUMMARY:
Over the past 15 years, the controlled food marketing systems of most African countries have
been reformed as part of economy-wide structural adjustment programs. The effects of these
reform programs on food security and farm productivity growth have been hotly debated, partly
because of major differences across countries in the way these programs have been implemented.
The food market reform experiments in Africa have often been only partially implemented,
subjected to policy reversals, and often the state continues to engage directly in grain marketing
activities. For these reasons, the empirical record of food market reform is varied, clouded and
subject to major differences in interpretation.

This report analyzes the effects of grain market reform in Ethiopia on grain prices and price
spreads between major wholesale markets. The experience of Ethiopia during the 1990s
represents a case in which a relatively consistent and internally-driven program of grain market
liberalization has been pursued with the general approval of international lenders and donors. The
state marketing board, while not abolished, has been substantially downsized and has become a
marginal actor in the current grain marketing system. Hence, the case of Ethiopia between 1990
and 1997 may constitute a particularly important test of the hypothesis expressed by reform
advocates that the removal of regulatory constraints on private trade and the transition to a
market-oriented system would reduce grain marketing costs and pass along benefits to both
farmers and consumers.

Results and conclusions are based on descriptive indicators and a reduced-form econometric
model that examines the effects of reform on maize and teff prices and price spreads after
controlling for exogenous factors such as rainfall, food aid distributed onto local markets, and
seasonality. Maize and teff are the two most important traded grain commodities in Ethiopia.
The model is estimated simultaneously across six markets using seemingly unrelated regression
estimator (SURE). Tests for unit roots in the data indicated that maize and teff prices were
stationary in almost all cases, as were food aid and rainfall.

The results generally indicated that grain market reform was associated with higher prices in
major grain-producing areas and lower prices in major grain-deficit areas. Grain price spreads
(the difference in wholesale prices between surplus and deficit markets) declined in 7 of 8 cases
for maize and 10 of 11 cases for teff. Since marketing costs account for 40% to 60% of the price
that consumers pay for staple cereal commodities in Ethiopia and throughout Africa, the reduction
of these costs represents a major opportunity to improve both farm production incentives and
household food security. Despite these positive developments, the grain marketing systems in
Ethiopia and more generally in Africa continue to operate under numerous constraints that
hamper the achievement of further gains in market efficiency that could pass along further benefits
to farmers and consumers. Moreover, the reforms in Ethiopia have not appreciably reduced grain
price volatility. These findings are indicative of the growing empirical evidence that, while policy
reforms have often been critical in reducing costs and risks to farmers, marketing actors, and
consumers, they must be viewed as part of a broader program of market development that
involves the development of key market institutions, infrastructure, contract law and enforcement,
and the general nurturing of civil society.