Ethiopia’s Agricultural Policy Challenges

Ethiopia’s Agricultural Policy Challenges Case Study

Key Dialogue Questions (KDQ) • Should the lead sector for economic development be agriculture or industry, given that Ethiopia is a non oil-dependent developing country? • Should more priority be given to smallholder farms or private commercial farms, given the context of the agriculture sector of Ethiopia?

Role of agricultural sector in economic development of Ethiopia • Agrarian and non-oil dependent developing country • Agriculture is the backbone of its economy: • main livelihood for > 85% of the population; • accounts for about 45 % of GDP; • almost 90 % of exports/foreign exchange earnings originate from agriculture sector; • Main source of industrial raw materials for agro-industries. • Two major sectors of agriculture: Smallholder and the large - scale farming sector

Smallholder sector • Predominantly mixed crop and livestock semi-subsistence farming • accounting for 83% - 95% of all cultivated land and of agricultural production • low levels of modern inputs use and heavy dependence on rainfall • vulnerable to the vagaries of nature (unpredictable rainfall & recurrent drought) • Low productivity, very limited market share and insignificant saving and investment

Large -scale farming • Ethiopia did not inherit colonial commercial farm. • Growth of the sector started with the establishment of farms in the 1950s/60s (by elite, nobility, etc). • The Derg/Military regime nationalized the farms to; • Operate as state-owned enterprises after 1975: • A ministry to manage & develop new state farms through the allocation of a large budget, • Socialist policy (forbid land ownership > 10 ha) retarded growth of large scale private farm sector for 17 years • Post1991 market and price liberalization which resulted in; • the privatisation of many sate farms while the rest are still operating as parastatal/public enterprises • Stimulated private investment in large scale commercial farm development by domestic and foreign) and the steady growth of the sector over the past two decades

Post 1991 Agricultural Sector policy • Agricultural development -led industrialisation (ADLI); • Lead- role of agriculture in development policy. • Agriculture as the basis in the conceptualisation of growth, policy guidelines and poverty reduction. • The key challenge for reducing poverty and providing the foundation for long-term growth is to ensure rapid and sustained increases in land and labour productivity. • Agriculture is the main source to generate primary surplus that fuel the growth of other sectors notably, industry • ADLI is made the policy in strategic development plan; • Poverty reduction programme (SDPRP) and MDG • Plan for Accelerated and Sustainable Development to End Poverty (PASDEP), for 2005-2009/10 • Growth and Transformation Plan (GTP) strategic framework for the period 2010/11 -14/15.

Agricultural growth strategy • ADLI strategy further refined during PASDEP with Emphasis on commercialisation of agriculture, strong private sector growth and intensification of marketable farm products. • The fundamentals of the GTP strategy include: • A shift to produce high value crops, • a special focus on high-potential areas, • facilitating the commercialization of agriculture, • supporting the development of large-scale commercial agriculture (where it is feasible). • PASDEP implementation as the main instrument for delivering agricultural growth through strong push for intensification to increase yield and productivity in the smallholder sector.

Public Expenditure Pattern • A high share of expenditure for pro-poor and development oriented sectors

Public expenditure • While average pro-poor expenditure was approximately 54% of total public expenditure (2001/02 – 2007/8), expenditure on agriculture and food security was about 12.6% of the total. • Strong commitment to continued agricultural growth; about 13 to 17 % of expenditure (far more than the average for SSA). • Food security nonetheless remains a key challenge as a large share of the sector budget goes to the Productive Safety Net Program (PSNP) & HH Asst Building Prog (HABP) • GoE & DP realised that success in long-term food security will require complementary efforts to enhance agricultural growth, and thereby reduce food prices and diversify rural livelihoods. • Thus, PADETES program for the intensification of smallholder agriculture during 1996/97 – 2004/05 EFY was allocated a large share of the agricultural growth expenditure.

PADETES program and performance • To achieve strong push for intensification • Three major Program components which are; • Regular extension packages: for cereal crops which are mostly seed and fertilizer; • Minimum packages: emphasizing natural resources management with traditional crop management); and • Household packages: providing farm households a menu of technology (water harvesting, dairy, apiculture, and horticultural production).

PADETES Program • PADETES capacity to deliver extension services • Roughly 8,500 Farmer Training Centres (FTCs) have been created throughout Ethiopia, • Development Agents (Das) trained increased from 2500 in 1995 to 63,000 (45,000 placed already in woredas/districts), • Built DAs and woreda/district staff; trained with technical skills, and are as specialists, • The development agent (DA) to farmer ratio had risen from 1:5000 to 1:800

Efficiency of Spending (PADETES) • The program reached about 40% of the roughly 10 million farm households • Succeeded in boosting input use (improved seed and fertilizer use increased by about 50 and 30%, respectively, from 1995 to 2005. • Increased use of improved inputs/fertilizer rate (higher than the African average). • But no change in average per capita agric. GDP and per capita grain production (results achieved are not as expected).

Large – scale commercial farm • Government support for the sector; • Tax incentives/exemption from custom duties • Infrastructure development (access road, power, other utilities, etc) • Small land tax and grace period for payment • Growth Performance of the large – scale sector • FDI inflow into agric. fluctuated between US$545mn & US$265mn/year from 2004-2007, • From 2000 - 2005, floriculture/horticulture sector was the main focus of FDI • Ethiopia is the 2nd largest flower exporter in Africa, (next to Kenya) • Agricultural investment was about 15% in 2010.

Total capital of domestic and foreign investment projects approved, mill Birr (1992/03 - 2010/11)

Total agricultural investment capital of approved projects (2006/07 - 2010/11)

Impacts of large – scale farm growth • Environmental concern and ‘land grab’ • Critics on the motives of FDI inflow, lack of long term growth impact; • Primary aim to secure the food demand in the investors’ countries • Financial returns instead of the traditional motives of efficiency and market-seeking • Lack of technology transfer and spill-over effect on domestic/smallholder farmers (Out-growers?) • Least impact on domestic market growth • Evidence unavailable to justify government support (e. g., tax incentives) to sector growth

Conclusion: KDQ KDQ1: Is ADLI appropriate? • Key arguments to increase the support for agriculture; • Is the major contributor to GDP • Has strong impact on poverty as it is source of livelihood • Generates the major share of foreign exchange • Provides raw materials for industry • Comparative advantage (land and labour) to produce surplus production and generate capital to finance industrial growth • Studies often show that growth based on agriculture makes a stronger contribution than industrial growth b/z • agriculture has greater multiplier effects • benefits from agricultural growth shared more equally

…. Continued KDQ • Key elements of the argument to increase support for industrial development are; • the perception that support for agriculture has not been as effective as hoped. • not clear yet whether public support for industry would experience challenges of a similar scale or nature to those experienced in the agricultural sector. • the view that industrial development will create more employment (absorb the excess labour in agriculture and also reduce urban unemployment) • others (create markets and demand for surplus supply of agricultural produces

…. Continued KDQ KDQ 2: Should more priority be given to smallholder farms or private commercial farms, given the context of the agriculture sector of Ethiopia? • strong M&E systems to evaluate the performance of support for both smallholders and large farms. • Policy analysis to judge based on; • The costs of support, including both the cost of delivering services and the loss of revenue arising from any tax incentives offered to investors in commercial farms • The impact of the programmes on the production of crops and livestock, implications of changes in production and prices on the exchange rate and the effect of this on consumers. • The implications of this for changes in the margins enjoyed by farmers, input suppliers and those involved in marketing produce.

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Ethiopia’s Agricultural Policy Challenges