Impact Assessment of World Trade Organization (WTO) Accession on Food Security in Ethiopia: An Appraisal Using Partial Equilibrium Model

Zenebe Bashaw Ph.D. Student Graduate School of International Development (GSID) Nagoya University, Japan May 2008

1.

Introduction

A crucial aspect of the World Trade Organization (WTO) trade negotiations occupies understanding the significance and impacts that trade liberalization, accompanied by changes in agricultural policies, entail to the level of food security of Member and would-be Member countries. Specifically to an agrarian developing country similar to Ethiopia, the move towards opening the agricultural sector to competitive market and undertaking tariff reduction/changes in export subsidies or domestic support calls for a lesser government involvement in the agricultural sector. This sector has for long been considered as the bastion of successive states socio-economic and political strategies of, inter alia, import substitutions, collectivization, state ownership of agricultural land, peasant mobilization and so on. What significant impacts will accession to the WTO have on the food security level of an agrarian and vulnerable society such as Ethiopia? How does a highly food insecure agrarian country increase its competitive capacity in the agricultural sector? The objective of this paper is to assess the expected impacts on food security in Ethiopia assuming that the country is admitted to the WTO. The Government of Ethiopia submitted application for membership to the WTO on 13 January 2003. Subsequently the General Council established a Working Party in February 2003 to look into the application. Currently the status of the application is at a stage where the Memorandum on the Foreign Trade Regime was circulated in January 2007, and there has not been a deliberation by the Group since then. Assuming that Ethiopia is admitted to the WTO, changes in domestic agricultural policies will have far reaching consequences for food security both in the short and long- terms. There have been studies conducted to assess the impacts of WTO accession by Ethiopia on poverty/inequality (Aredo et al., 2006), service (Dorel and Mengesha, 2005), general quantitative impacts (Philip and Ferede, 2005) and on the Millennium Development Goals (MDGs) (Lofgren and Diaz-Bonilla, 2005). Yet, this study is the first attempt to appreciate the extent that the countrys entry into the WTO will be significant to food security at the micro-level. The overarching assumption in the contribution of trade liberalization to economic development and to agricultural strategies and policies in particular is

premised on the improvement of per capita food consumption and productivity thereby increasing the income of producers through improved export market access and reduction in tariffs. However, obstacles that are expected to hinder achieving improvements in the level of food security in the country lie in some aspects. There is low level in meeting quality of agricultural products that constitute supply-side and non-tariff barriers such as sanitary and photo-sanitary standards (SPS). Agrarian communities are characterized by low levels of food productivity and diversification in which not all farmers are net sellers, and the majority of peasant households are subsistence farmers. And market access is limited to agricultural commodities due mainly to poor infrastructure and less information to support peasant households. The economic foundation of Ethiopia is predominantly dependent on agriculture which supports approximately close to 50 percent of the GDP. For over the past two decades from 1985 to 2005, for example, the GDP percentage of agriculture has on average been close to 50 percent. As high as 85 percent of the countrys 70 million populations live in rural areas who earn their livelihood from traditional agricultural activities which again constitute 90 percent of the export earnings and 81 percent of the total labor force. Attempts in transforming the development strategies and approaches in the country essentially need to give priority to the agrarian economic structure the country, for this is inherently linked to the causation and manifestation of poverty.

2.

Objective and Methodology

This paper intends to project the assessment of Ethiopias entry into the WTO on food security based mainly on the principal indicator of peasant households food productivity/availability, access and utilization. It should be noted here that the household by itself poses difficulty of measurements. Unlike the neoclassical model of economics that takes the household as maximizing a joint utility function (a unitary model of the household), the household is composed of individual units that have different vulnerability, consumption habits, coping strategies, food need and most importantly resource distribution (Maxwell and Frankenberger, 1992: 4). This is true especially in patriarchal agrarian societies such as Ethiopia where men claim substantial economic decision-making power. The study employs the partial equilibrium model that emphasizes a particular subsection/sector of the economy of a single country and specific

commodities with the underlying assumption that external shocks such as changes in tariffs will have limited impacts on the rest of a countrys economy. The advantage of this model is the ability to examine a specific sector or commodity in a single country with greater detail and depth than general equilibrium models. However, the model is limited in terms of capturing a range of equilibrating variables that cut across a multitude of sectors (inter-sectoral linkages) in the economy. I measure food security based on the two indicators used in the Millennium Development Goals (MDGs). These indicators constitute the prevalence of underweight children under five years of age and the proportion of population below minimum level of dietary energy consumption. The indicators, however, are not sufficient enough to cover the presence of peoples inability to produce, and have physically and economically access to food. They are more of outcome indicators to utilize enough food necessary for a healthy and active life. Broadening them to include production and access will show the cumulative processes in the degree of vulnerability of households which can be defined as exposure coupled with inability to cope. As a strategic or policy recommendation, this paper suggests that in order to minimize the problems in extracting expected benefits as a result of joining the WTO, the large flows of aid given to the country should focus more on assisting food productivity, access and utilization of peasant households by strengthening their copying strategies. In particular increased emphasis should be given to infrastructure (roads and irrigation) and agricultural extension programs (seeds, fertilizers and farming tools). For years aid to Ethiopia has predominately been concentrated on emergency relief aid and lacked to substantially target core sectors such as infrastructure mainly road and irrigation, and agricultural extension services. These sectors are directly or otherwise related to addressing the problem of long-term chronic and acute food insecurity. It is more plausible if the large proportion of aid flows goes to sectors that are highly labor-intensive that can induce job growth and diversify the income generation opportunities of communities so as to be, in the long run, competitive on world market as well as build the coping strategies of vulnerable agrarian societies.

3.

Outline
The paper is structured as follows. The next section covers the rationale for

WTO accession by pointing out the overall merits and costs associated with joining the WTO by countries especially developing and low-income agrarian countries. This is followed by discussion on the Agreement on Agriculture (AoA) in the WTO, and the implications for food security. Trade liberalization and the series of difficult negotiations connote both direct and indirect ramifications for non-trade issues such as the level of food security of Member and would-be Member countries. In section three the paper assesses the possible impacts expected from Ethiopias joining the WTO. Aspects mainly food production/diversification, producer and consumer welfare, export and government revenue, and import costs are raised. In the last section, the paper highlights the role of aid in lessoning the costs/consequences and reinforcing underlying components of food security in Ethiopia.

4. Rationale for World Trade Organization (WTO) Accession: An Overview

Notwithstanding the fiercely debated theoretical discourse and disagreements in mainstream economics and development studies about the role of trade and the overall institutionalization of market economy, a number of countries take the decision to apply for membership in the WTO going through complex and rigorous screening and negotiations. When a country submits an application, the General Council looks into the application and sets up a Working Party. The Working Party, consisting of WTO delegates, then asks the applicant country to present a Memorandum that details its trade regime. Members and the applicant will start negotiations on a range of issues including services, goods and intellectual property rights. The details of most of these negotiations are not documented publicly and little is known about the series of discussions held between and among Members, who are in a position to make demands, and acceding countries that make mainly concessions. If agreements are reached, the details will be compiled as Draft Protocol Accession outlining the applicants schedules of commitments. The Protocol of Accession will enter into force with the deliberation and approval by the WTO General Council or Ministerial Conference. The applicant ratifies the Protocol and it becomes a member one-month later (for critical and detailed assessment see Grynberg et. al , 2002; Kennett et. al, 2005). The decision to join the WTO by countries reflects issues that transcend specific reasons and encompass aspects of not only extracting benefits in terms of

socio-economic development (by boosting export-oriented production and attracting investment), but also addressing the demands and impacts of rapid globalization and trade liberalization. Since its operation started on January 1, 1995 as a successor of the General Agreement on Tariffs and Trade (GATT), policy makers and leaders have been taking the decision to apply for membership in the WTO for broader political, economic and legal reasons. For some, joining the WTO is seen as a credibility issue. Accession is equated with the recognition that the institutions and policies of the country in question are deemed to be of high standards capable of complying with the commitments of the organization. This, in turn, is linked to benefits in reducing costs of access to finance, attract foreign investment and lay the ground for long-term trade relationships (see Hoekman and Roy, 2000). For others, besides the widely discussed economic benefits of growth, poverty reduction and increased competitiveness, the requirements in membership are viewed to serve as mechanisms and policy inducements in strengthening local capacity and formulating legal/institutional foundations for dispute settlements. Cognizant of the spatial and temporal differences both in the benefits and costs of joining the WTO, the official line contends that the WTO trading system entails what are termed as the ten benefits (WTO, 2007). These range from the promotion of peace to building dispute resolution mechanism, cost-cutting, broadening product choice and quality, income generation and economic growth stimulation, carving out good governance and creating efficiency by shielding governments from lobbying. Contrasting positions by others indicate that the playing field has been uneven and actual accession has not been translated into expected benefits due mainly to limited market access, continuity in imposition of quotas on products such as textiles and protection in agricultural commodities and hence fewer gains, and obstacles in non-tariff barriers such as anti-dumping measures. Particularly for countries interested in acceding to the WTO, the costs of negotiations are high and the process has been complex without well-defined benchmarks, and that commitments needed to be fulfilled are ambiguous and too many usually not included in the WTO multilateral trade negotiations (Bosworth and Duncan, 2002). The benefits and costs speak volumes, for over two-thirds of the 148 WTO members (with more than 30 countries under negotiation) are developing or low income countries. These are countries in which agriculture/food production and consumption constitutes a strategic sector supporting their economic foundations and the large bulk of income for rural communities. From broader theoretical and empirical perspectives, a cursory look at the

literature shows that there is no agreement among economists and development experts on the direct link between trade liberalization/openness, on the one hand, and economic growth, poverty reduction and increased competitiveness, on the other. The studies looking into the link are based on the assumption that accession to the WTO is the major requirement, among others, for trade liberalization/openness and tariff reduction. Positive and normative economic theories of trade liberalization for long sought to understand what variables determined the patterns of trade liberalization and the terms under which such trade liberalization was undertaken. The theoretical foundation further examined to what extent countries or stakeholders extracted benefits and incurred costs by liberalizing/opening their trade. The Ricardian neo-classical theory argues that the benefits of trade and openness are associated with comparative advantage/factor endowment which was further tested by the Heckscher-Ohlin (HO) model. Keynesian models pointed out that the positive impacts appear through demand-pull features of exports (see Thirlwall, 1991; McCombie and Thirlwall, 1999). The new endogenous growth theories suggest that trade liberalization/openness is linked to long-term growth through its impact on technological change. Contemporary studies try to empirically support that countries that liberalize and open their trade achieve better economic growth than isolation or import-substitution. This is possible through improved productivity gains and increased competition, efficiency, innovation and acquisition of new technology, and most importantly, tackling poverty as a result of its multiplier effects. The positive impacts are premised to be extended to the international level by maximizing economic welfare where no country can be made better off without another being made worse off (Krueger 1978; Levine and Renelt, 1992; Dollar, 1992; Ben-David, 1993; Sachs and Warner, 1995; Edwards, 1998; Frankel and Romer, 1999; Bhagwati and Srinivassan, 1999; Hertel and Winters, 2006; Polaski 2006). Sachs and Andrew (1995) summarized how trade liberalization/openness spurs growth by stating that it takes roughly less than two decades for open economies to double in size while closed economies may take a century. In most of the studies, openness was measured based policy variables (non-tariff barrier frequency and average tariff) and outcome variables (for example, structure adjusted trade intensity, price distortion, black market premium) (Pritchett, 1996; Rodriguez and Rodrik, 1999). Contrary views assert that trade liberalization and openness exposes countries to economic instability by creating balance-of payment constraints,

leading to negative consequences mainly in cases where there are infant industries, and making the poor worse off mainly in the short-term as a result of loss of welfare (Taylor, 1993; Harrison and Hanson, 1999; Rajan, 2002; Winters, McCulloch and McKay, 2004; Stiglitz and Charlton 2004). Some of the critical works point out the methodological drawbacks and the limitation in isolating the effects of trade liberalization as a factor for promoting economic growth (Rodriguez and Rodrik, 1999). The intense debates and controversies are indication that there is much to finding ways to bridge the gap in the economic growth level of developed and developing countries. Further they are evidence that trade liberalization/openness and tariff reduction as avenues to the WTO entry should be accompanied by pertinent attention to the development goals and country-context needs of various countries in particular low income agrarian countries. It is plausible to argue that trade liberalization/openness has the potential to serve as an impetus to trigger productivity, efficient allocation of resources, sound investment environment, diffusion of technological innovation and R&D, and build transparent trade regimes/institutions thereby enhancing the chances for economic growth in the long-term (see Coe, Helpman and Hoffmaister, 1997).

5. Agreement on Agriculture (AOA) in the WTO: Implications for Food Security

The impacts of change in trade policy in agriculture both in terms-of-trade and efficiency effects on the general economy are more germane to developing countries that rely on agriculture as the mainstay of their economies. This is because agriculture serves proportionally more as the mechanism for poverty reduction than any other sector (World Bank, 2007). More than two-third of the world poor live in the rural areas of developing countries and the agriculture sector shoulders four times GDP growth and income generation compared to other sectors. In Sub-Saharan Africa alone the share of agriculture in GDP and employment in 2007 was an average of 34 and 64 percent, respectively (WDR, 2007: 27). For developed and industrializing countries too trade in agriculture and the AoA remains the most sensitive and highly protected sector for different reasons. World food production is concentrated in the major developed countries of the United States (US), the European Union (EU), Australia, New Zealand and Canada although the contribution of agriculture to GDP is minimal. Industrializing countries such as

Argentina, Brazil, Thailand, India, Vietnam and China also occupy higher shares, and agriculture still remains the source of livelihood for millions of rural communities and households. However, it is estimated that currently more than 850 million people worldwide are in chronic food insecurity. This figure suggests that one in seven people are undernourished and go hungry (FAO, 2006). It is also estimated that global demand for food is expected to double in the coming five decades and agriculture will remain the core of livelihood security for the more than 70 percent of the worlds poor who live in rural areas (WDR, 2007). The implications of the AoA for the food security level of net-food importer developing and low income agrarian countries tend to be substantial. It should be emphasized that the impacts are neither uniform nor one-dimensional; they differ from country to country and constitute several aspects of agricultural policies, income, and net trade status in food and agriculture (see Valds and McCalla, 1999). This paper views food security in an agrarian society as physical and economic access by the majority of people in a society for enough and safe food that enhances their utilization skills for an active and healthy life capable of developing coping strategies with an outbreak of a disaster (cf. FAO, 1996).

6.

Food Security Concept and Measurement

The concept and practice of food security has traversed through periods where in the 1970s it was merely perceived as a net increase in food production and availability. A shift has emerged that emphasized long-term chronic poverty and market problem/purchasing power, asset depletion and food entitlement (Sen, 1981; Dreze and Sen, 1989). It no longer constitutes only the problem of food shortage. Rather it underscores intricate economic, behavioral, environmental and political components at different levels of transitory, chronic or acute food insecurity. The concept of food security exhibits a number of indicators employed by various countries, donors, non-governmental organizations (NGOs) and multilateral organizations. Riely and Moock (1995), for example, documented 73 indicators, and with a more accurate enumeration the list probably swells. Such a proliferation of indicators is further complicated by the problem of levels of measurement adopted in assessing the scope and nature of food security. Various studies adopt different levels of measuring food security ranging from regional to

national, household and individual. Two broad categories of measurements of the prevalence of food insecurity can be identified. The first is based on food production and access. It estimates the production, purchase and storage/depletion of food at the household level. This refers to what Maxwell and Frankenberger (1992) described as process indicator. The second approach employs food consumption. It measures the extent of food energy deficiency by estimating the number of people who are below physiologically determined threshold in their daily energy supply. It also relies on estimating the nutritional status of individuals through clinical examinations (goiter for iodine deficiency, eye examinations for vitamin A deficiency), laboratory tests (nutrients in body tissues or fluids, checking level of enzyme) or anthropometry (such as height and weight, including age in the case of children under the age of 2). These components of consumption constitute outcome indicator (Maxwell and Frankenberger, 1992; Morris, 1999). Yet, when these two components are adopted separately to measure the food (in)security level of countries or regions, discrepancies emerge. If food energy deficiency is used, Sub-Sahara Africa tends to have the highest food insecurity level, while using anthropometric measurements indicates that South and Southeast Asia have the highest food insecure population.

7.

Trade Negotiations and the AoA

Since the establishment of the GATT in 1948, there have been a total of seven rounds of trade negotiations. All of these past negotiations and agreements were centrally focused on tariffs, non-tariff and anti-dumping measures. The Uruguay Round (1986-1994) for the first time took up agriculture as one of the salient issues for negotiations leading to the establishment of the WTO in 1995. This was followed by subsequent negotiations and agreements in the Doha Round (2001~) which have for the most part been dogged by failures to reach agreements between developed and developing countries. A central question in the Uruguay and Doha Rounds is to what extent trade in agriculture and corresponding policy measures enhance or hinder the food security level of Member and would-be Member countries. The long-term objective of the AoA is to establish a fair and market-oriented agricultural trading system.through substantial progressive reductions in agricultural support and protection sustained over an agreed period of time, resulting in correcting and preventing restrictions and distortions in world

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agricultural markets (AoA Preamble, 1994). With the risk of oversimplification, the negotiations have attempted to place agricultural policies from the national to the supra that, in turn, will have far reaching consequences for not only in formulating development strategies, but also in searching the means to complement ongoing reforms, tackle poverty and inequality, and assess ways to integrate into the world economy. The WTO AoA has three essential pillars that aim to reduce agricultural protection: domestic support, market access, and export competition. Provisions and requirements of the AoA differ based on four underlying scenarios/formulas in the negotiations: the Uruguay Approach, the Swiss formula, Cancun/Blended formula and the Harbinson formula.

7.1 Domestic Support

Domestic support refers to establishing commitments for countries to reduce domestic government-provided support to the agricultural sector in the form of direct payments, policy intervention, or public provision of services targeting agricultural production. The focal point is on identifying distinctive domestic policies. The WTO employs the traffic lights analogy in the classification, termed as boxes. Red boxes constitute highly trade-distorting measures and should be stopped. Issues in the amber box include subsidies that are considered as trade-distorting, such as price support for producers, and the AoA calls for their substantial reduction (as in governments buying-in at a guaranteed price or market price support). Blue box refers to policies that include direct payments made under production-limiting programs. Such domestic supports are seen less trade-distorting than the amber ones (financial support based on fixed area and yields, livestock payments based on fixed number of head). Green box indicates domestic support programs that do not have or have minimal effect on trade, and are not subject to elimination or reduction (for example, governments support to agriculture research or training, environmental protection programs and infrastructure). The disciplining measures at trade-distorting policies are calculated on the basis of aggregate measurement of support (AMS). The AMS constitutes four measures of support as product-specific AMS (total support for each agricultural produce); non-product-specific AMS (support for the whole agricultural sector minus product-specific support); equivalent measure of support (product specific

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support that cannot be calculated using the AMS); and total AMS (this is the total value of the three AMS support categories). The AMS is calculated based on the level or degree of support for agricultural goods as well as non-product support. However, it should be emphasized that the calculation excludes a number of policies, and there is no consensus if such policies do have direct impacts on agricultural production. In addition the AoA allows government support for a particular commodity or non-specific support to be excluded from the AMS calculation. The de minimis exemption is allowed when the value of the total domestic support for a particular commodity does not exceed the total value of producing the commodity. It is also not included in the AMS when non-product specific supports value is less than the value of the total agricultural production.

7.2 Market Access

As a policy change, the AoA requires all non-tariff barriers (NTB) or import quota/quantitative restrictions on imports to be replaced by tariffs while at the same time stipulating current and minimum access commitments. Tariffication, the conversion of all NTBs to tariffs equivalents, is applicable to all countries with developing countries having the choice of using tariff bindings instead. Exemption is given to few sensitive products specified under the Special Treatment Provision (STP). With regard to determining the base-period tariff for increasing the market access, the provision makes distinction based on the development stage of countries. Least-developed countries are exempted from market access commitments. In the absence of significant imports in the past, the commitment for market access requires countries to provide access at minimal tariffs called tariff-rate quota (TRQ) which will be allocated to all countries based on the most-favored nation (MFN) criterion. The provision also allows countries to invoke the Special Safeguard Provisions (SSG) during cases where a product enters the customs territory of a Member exceeding a trigger level of the market access opportunities or in the event of sudden fall of the world price of a commodity.

7.3 Export Subsidies

The essential elements of the agreement on export subsidies entail those that are measured both in terms of the volume (in tons) of the subsidized

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commodities for exports and the budgetary expenditures (in USD). The subsidies to be reduced are based on a list of 22 agricultural products.
Domestic Support (%) Scenario Uruguay (Conservative) Swiss (Ambitious) Cancun/Blended (Derbez) Harbinson (Compromising) Scenarios in AoA Developed 20 95 60 60 Developing 13 95 20 20 Market Access/Bound Tariffs (%) Developed 36 25 25 Only Bound Tariffs Developing 24 50 50 Only Bound Tariffs Export Subsidy (%) Developed 21 100 80 80 Developing 14 100 70 70

The AoA provisions, based on the above instruments, sought to correct excessive production/supply and trade-distorting measures, especially in developed countries, that were prevalent during the pre-Uruguay Round. The situation in low income and developing countries such as Ethiopia has been the reverse where they have been unable to meet their food demand while facing stiff competition from cheap agricultural commodities from developed countries. The concern is that AoA will lead to maintaining the same structural problem or status quo of agricultural productivity, and as a consequence food access and utilization problem. Possible impacts of the AoA appear through channels such as transforming the prices of tradable goods in either increasing or decreasing them; affecting the relative prices of factors such as capital and labor; influencing the availability of revenues for governments from trade taxes; connecting local economic activities to regional and international levels so that opening the ways for shocks/changes; and expanding access to new products. One scenario can be the removal of price support that may lead to lower production thereby increasing prices of agricultural commodities at the global level. Importers bear the brunt of the price increase (with the possibility of creating import dependence as calculated as the share of food import costs to total import costs) while exporters extract benefits. It can also lead to the continuation of some form of domestic support of countries capable of allocating funds. Increased production will lower the price thereby creating unfavorable competition for
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countries producing with higher costs of inputs. It is worth recalling that for the majority of developing countries, the issues at stake are characterized by complex causal relationships. Agricultural productivity is to the most part at the mercy of rain-fed agricultural practice; low price and the inability to compete with subsidized products substantially limit the level of income; coping strategies are nearly ineffective with the inability to connect to the next harvest season; and other sectors of the economy are not in a position to absorb the large labor force from the agricultural sector. In times of good harvest, production is dominated by one or two primary commodities which are highly susceptible to price volatility. As a case in point, 39 African countries are dependent on two primary commodities for over 50 percent of export earnings (UNCTAD, 1999). The AoA in principle accords low income and developing countries special and differential treatments with relatively longer periods of implementing some of the provisions. It has raised the de minimis commitment to 10 percent. Further the Marrakech Meeting highlighted the negative consequences that will arise in terms of the food security level of net-food importing developing and low income agrarian countries. It promises lessening the financial burden from food import bills and balance of payments as well as increasing the agricultural productivity of these vulnerable countries. Compared to the inefficient, inappropriate macro-economic policies and costly import substitution strategies widely practiced by developing countries during the 1970s and 1980s, timely and planned liberalization offers plausible alternatives for tackling poverty. Yet, the provisions attempt to address the same problems that have been at the center of food insecurity and vulnerability of rural households. These problems will have broader and deeper features mainly as a result of the threat in creating increasing inequality in competitiveness and agricultural productivity by possibly shifting the comparative advantage thesis to the competitive challenge (see Kaplinsky, 2000). Without correcting measures, the AoA tends to erode the coping strategies of rural households in developing countries by leading to rising subsidies in developed countries and rising food imports in developing countries (Shapouri and Trueblood, 2003). This further has the potential to cause a contraction of the already fragile resource base of states in developing countries. Rural development in general and food security strategies in particular have relied on the capacity of state institutions to serve as the last cushion for vulnerable agrarian households. To be sure, the AoA falls short of offering practical ways of alleviating the consequences of trade liberalization and tariff elimination on food security. This

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absence leaves the relatively longer years given to developing and low income countries to adjust to the disciplines of the Agreement too short to be feasible, thereby making the costs of adjustment higher and expensive.

8.

Food Security and Impact Assessment in Ethiopia

Ethiopia is probably better known for the images of starving children and series of appeals for help from the international community than other issues. This study will not set the goal of dispelling such pervasive and deep-ingrained perceptions. In the eyes of John Markakis, the Ethiopian homeland suffers from an age-old process of physical degradation, the work of natural forces abetted by human and animal action. Continuous cultivation and grazing stripped the earth of its natural cover, leaving it unprotected against the torrential rains that beat on the inclined surfaces of the highlands (1987: 89). It is estimated in the country that the percentage of people seriously affected by famine and are in need of assistance has shown a consistent weighted average of 10 percent (close to 5 million population) since 1980s to 2004 (FDRE, 2003; CIDA, 2004). A mix of factors that range from population pressure to unfavorable land tenure system, over-cultivation and over-grazing of farm lands, mismanagement of land resource, deforestation, soil erosion and inappropriate land use systems have been identified as responsible for the ever deterioration of the productivity of land in Ethiopia. Major crops such as teff (indigenous grass), wheat, maize, barley and sorghum have hardly been produced to the extent of sustaining the population for over a year. The magnitude of the problem of food insecurity in Ethiopia lies in the vulnerability and fragile coping strategies of the predominantly agrarian society which basically requires capital and expertise to improve the dire situation. In the history of the country the incidence of famine has been every 3-5 years in northern Ethiopia and every 8-10 years for the whole country (Haile, 1988: 90). This has been continuing between the fifteenth and nineteenth centuries where the incidence of famine was one on average every decade (Pankhurst, 1985: 26). There have been forty major famines and food shortages in total, among which fourteen occurred in northern Ethiopia, particularly in Tigray and Wello. For years, the country has not produced sufficient food to feed its people. A recent official paper of the Government of Ethiopia puts it as [i]n fact, hunger constitutes the major development challenges of Ethiopia, since it is a manifestation of chronic poverty.

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.the fact that the country has been repeatedly experiencing severe famines, fighting famine and hunger is a top priority (Ministry of Finance and Economic Development, 2004: 2).

8.1 Model and Assessment Procedure

In order to assess the impacts of Ethiopias entry into the WTO (consequently abide by the AoA) on food security, this paper employs the Agricultural Trade Policy Simulation Model (ATPSM). The ATPSM is a deterministic, comparative-static, multi-commodity, multi-region, partial equilibrium global trade model developed jointly by UNCTAD and FAO covering 161 countries (160 individual countries plus and the EU-15, taken as one country) and 36 agricultural commodities. All prices are in US dollar. The model estimates the economic effects of liberalization/openness on changes in within-quota, applied and out-quota tariffs (MFN), import quotas, export subsidies and domestic support on production, consumption, prices, trade flows, trade revenues, quota rents, producer and consumer surplus and welfare. Changes in agricultural trade policies are computable for a wide range of countries by capturing different agents of producers, consumers and state institutions/governments. It is an important, relatively comprehensive tool in empirically appreciating the potential impacts and costs of different trade policy scenarios in the context of the AoA (UNECA, 2004a, Peters and Vanzetti, 2004). Its flexibility allows users to specify country or group of countries and commodities. It provides policy makers, trade negotiators, researchers and development agents the background to understand the scenarios and corresponding measures that should be taken to address challenges and shortcomings. It lacks, however, the ability to capture inter-sectoral implication compared to general equilibrium models. It is deterministic in that it takes all commodities as tradable. Besides the non-inclusion of aspects such as general non-quantifiable policy actions related to amortization on loans, interest rates, and technological changes and so on, the model fails to take into account the important role of power relations and political economic actions as factors in the evolution in and contestation of trade liberalization negotiations. Among the commodity groups in the model, all cereals, but rice, are major agricultural commodities in Ethiopia. Teff, an indigenous agricultural produce, is not covered in the model. Although this product is not exported because of its exclusive domestic consumption, the impacts of liberalization on

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farmers ability and income could have been measured if teff had been included. Meat products focus mainly on livestock, bovine and sheep meat, while beverage is dominated by coffee. Results are generated for the quantities (exports, imports, production and consumption); trade revenues (export, import and net trade balance); welfare effects (producer surplus, consumer surplus, government revenue and total welfare); and lastly prices (world market prices/consumer and farm prices). The prevailing domestic price for agricultural commodities is the factor for total production and demand, and market clearance is mediated through imports. Domestic prices are functions of world market price. The demand and supply functions are calculated as:

P (1 t ) D i ,r i ,i , r wi (1 t ci ,r ) i , j , r P wj c j ,r
j 1 j i J

(1)

P w (1 t p ) i , j ,r P w ( 1 t p ) S i ,r i ,i ,r i i ,r j j ,r
j 1 j i

(2)

Equations 1 and 2 denote price and trade policy changes are the source for new demand and supply. Trade policy changes may include subsidies, production support, tariffs and so on. In order to equalize domestic consumption and exports with production and imports, market clearance occurs through imports and this is expressed as:

X i ,r Si ,r

(3)

S S M i ,r Di ,r D i ,r i ,r i ,r X i ,r

(4)

The market equilibrium requires that at the international level the sum of changes in exports is the same as the total change in imports for each commodity and is expressed as:

(X
n 1

M n ) 0

(5)

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where: D, S, X, and M denote demand, supply, exports and imports, respectively: ^ denotes a relative change and absolute changes, Pw denotes world price, tc denotes the domestic consumption tariff and tp denotes the domestic production tariff, denotes supply elasticity, denotes demand elasticity, the ratio of exports to production, i, j are commodities indexes and r is a country index. Based on the price changes and the volume of responses in D, M, the trade revenue of the policy change can be computed by:
R (Pw Pw )(X X) (M M) Pw (X M)

S,

X, and

(6)

Moreover, a change in the quota rents, U, also generates more revenues. This is commensurate with the volume of imports times the world price times the difference between the in-quota and out-quota tariffs:
U QPw ( t m 2 t m 1 )

(7)

Equations 1 and 2 indicate that domestic prices are functions of world market price plus border protection measure or domestic support measures. Such protection measures are all expressed in tariff equivalents. It does not take into account transaction costs such as wholesale and retail margins. Export subsidies set the producer price when there are no imports, and tariffs and domestic support determine the producer price with no exports. The fact that there exists a two-way trade of one good complicates the relationship between world and domestic price. The model estimates composite tariffs of commodities by dividing them into imports, exports, and production supplied to the domestic market (Sd). The domestic market price wedge (td), consumer price wedge (tc) and producer price wedge (ts) are calculated: td = (X tx + M tm)/(M + X) tc = (M tm + Sd td) / D ts = (X tx + Sd td) / S + tp
(8) (9) (10)

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Welfare is composed of changes in producer surplus ( PS) and consumer surplus ( CS). The changes in producer and consumer surplus hinge upon three variables of domestic market price changes, the corresponding demand and supply responses to these changes, and change in quota rent as shown above.

PS P s S 0,5(S) cU ; CS P c D 0,5(D)

(11)

The change in net government revenue ( NGR) consists of change in tariff revenue, change in export subsidy expenditure and change in domestic support expenditure. NGR = TR ES DS (12)

Hence the sum is the total welfare effect will be:

W PS CS NGR

(13)

8.2

Impacts on Agricultural Export Earnings of Ethiopia

Ethiopias economy is dependent on agricultural for exports. More than 35 percent of the total exports or 70 percent of merchandise exports are derived from agricultural products (CSA, 2005). The graph below shows the expected change in agricultural export revenue based on the different scenarios/formulas for Ethiopia. As can be seen from the results, the Swiss formula will have the country the highest total agricultural export revenue (US $ 62 million). It is a non-linear formula, often described as ambitious, that aims to substantially and progressively cut as initial tariffs rise set by countries. It also requires both developed and developing countries to totally eliminate export subsidies and to some degree domestic support. Livestock, animal products and pulses constitute the largest income demonstrating that the

19

country has a comparative advantage in these products with the exception of pig meat which is negative in all the formulas. This is most probably due to religious reasons where the majority of do not raise pigs and eat pig meat. The country has 42 million cattle and 46 million sheep and goats, the largest population in Sub-Saharan Africa (FOA/FAOSTAT, 2007). While agricultural crops have less contribution, coffee shows the lowest figures.

Impact on Agricultural Export Revenue. Source: ATPSM

Total agricultural export revenue is the second largest in the Harbison Formula (US $ 36.5 million), which is a compromise between the Uruguay and Swiss formulas. This is followed by the Uruguay formula with total revenue of US $ 24 million. The lowest revenue generation is in the Cancun formula ($ 20.6 million). The largest source of the export revenue comes from livestock export. Livestock and animal products contribute near 20 percent of the total GDP of the country and its share in the agricultural GDP alone stands at a massive 40 percent (CSA, 2005). For the Uruguay formula simulation shows a contribution of US $ 2.2 million, the Swiss formula US $ 8.3 million, the Harbison formula US $ 3.2 million while the Cancun formula is expected to bring US $ 9.9 million. The highest contribution from livestock export, despite its large share, will not be easy for the country to exploit its comparative advantage. Part of the reason probably has to do with the imposition of blocks to livestock and animal products by developed countries as sensitive products (for example, BSE or Mad Cow Disease). The low share from the Uruguay formula probably lies in the reason that a number of developing and low income countries will not

20

substantially be affected by the requirements in disciplining their bound tariffs, export subsidies and domestic support measures (if any).
Wheat Uruguay Swiss Harbinson Cancun 67 141 110 41 Rice 153 428 Barley 1,150,694 2,933,876 1,980,430 204 Maize 8,361 75,918 1,931 230,279 Sorghum 476 3,621 1,129 3,870

36 288

Change in Export Revenues by Cereal Products (US $). Source: ATPSM

And it is only in the Uruguay and Cancun formulas that coffee export will have positive gains (Uruguay $ 707,278 with production change of 173 metric tons and Cancun US $ 1,672,099 with production change of 414 metric tons). The Swiss and Harbinson Scenarios had US $ -3,498,397 and US $ -861,906, respectively. In all the formulas, agricultural crops/cereals (with barley being relatively the highest) have quite low share of the export revenue. Cereals constitute the main components of food production, consumption and utilization in the country.

8.3

Impacts on Agricultural Import Cost of Ethiopia

In terms of the impacts on import cost of the policy change, the country allows the highest inflows of imports under the Swiss formula (US $ 7.7 million) followed by the Cancun (6.7 million) and the Harbinson formulas (US $ 5.6 million). It is the Uruguay formula that experiences the lowest import flows into the country after a change of policy (US $ 2.4 million).

21

Impact on Import Cost, Source: ATPSM

The high figures in the Swiss formula are indication of the scenario that will require the country to open its market through major cuts in applied tariffs and subsidies. Import flows by product are concentrated around cereals (mainly wheat, maize and sorghum), refined sugar, tobacco leaves and oil seeds. Such a scenario will directly affect the food security in terms of access to basic agricultural commodities that are the sources of daily consumption. This may also be an indication that with the fall in production and soaring food prices, the country will be forced to import food mainly cereals. With the inability to burden rising import bills, the probability that continuing dependence on food aid is higher for some time.

Applied Out of Quota Tariff Rates for Ethiopia

Livestock Bovine meat Sheep meat Pig meat Poultry Milk conc. Butter Cheese Wheat Rice 10 20 20 20 20 20 30 30 5 5 Citrus fruits Bananas Other trop. fruits Sugar raw Sugar refined Coffee green Coffee proc. Cocoa beans Cocoa proc. Tea 20 20 20 0 5 40 0 30 40 40

22

Barley Maize Sorghum Pulses Tomatoes Roots & Tubers Apples Vegetable oils Source: ATPSM

5 5 5 20 20 20 20 30

Tobacco Leaves Tobacco proc. Hides & Skins Oilseeds temp. Oilseeds trop. Rubber Cotton

20 0 10 5 5 0 10

8.4

Impacts on Welfare

Possible impact assessment on welfare appreciates the four underlying aspects of consumer surplus, government revenue, producer surplus and the change in total welfare. These constitute not only the central livelihood of both rural and urban households, but also the financial capability of the government to extract highly needed revenues from a sector that serves as the backbone of the economy. The simulation results on welfare are indicative of major loss in consumer surplus, government revenue and total welfare change. The negative terms of trade effects will exacerbate the welfare loss. The only gain is by producers in all the formulas, and the positive expectation is more significant under the Swiss formula. While producers have the problem of preference erosion, consumers are expected to bear the brunt of high world prices (see Anderson and Martin, 2005; Pangariya, 2005).

23

Impact on Producer Welfare, Consumer Welfare, Government Revenue and Total Welfare, Source: ATPSM

8.4.1 Change in Consumer Surplus As the simulation result illustrates, the gains in consumer welfare after policy change are expected to be negative across the four scenarios. The largest share that consumers lose is in the Swiss formula (US $ - 129 million) followed by the Harbinson (US $ - 79 million), Cancun (US $ - 54 million) and Uruguay (US $ - 53 million). The Swiss formula prescribes major cuts in export and domestic subsidies. Consumers of agricultural commodities mainly crops like wheat will experience the largest welfare decrease (US $ -32.1 million), followed by maize (USD $ - 12.9 million), barley (US $ - 10.6 million), sorghum (US $ - 8.7 million). Other commodities of hides and skins (US $ - 17 million), pulses (US $ - 19 million) and refined sugar (US $ - 5 million) will also have negative changes in consumer surplus. The Consumer Price Index (CPI) of Ethiopia in 2007/8 indicates an increase of 29.6 percent due especially to increase in food by a total of 39.4 percent. Among the price hikes, cereals accounted for 46.3 percent, pulses 20.1 percent, bread and other prepared food 36.5 percent, and meat 22.5 percent (CSA, March 2008). With the entry of the country to the WTO and the change in agricultural policy, the impacts on consumer welfare and the central issue of food access and consumption of food security is expected to be a challenge to the county. In addition, with the recent rising global food price, from 9 percent in 2006 to 40 percent in 2007, it is expected to exacerbate the already chronic food insecurity status of vulnerable households in Ethiopia (Braun, 2008). Almost half of the population is undernourished, with children under five are 47 percent
24

underweight and 52 percent stunted. These figures are the highest in Sub-Saharan Africa (UNDP 2003; FOASTAT, 2006). 8.4.2 Change in Producer Welfare The most crucial and positive gains from the simulation will be change in producer welfare. For the majority of subsistence farmers this holds an important and promising contribution to increase their income and strengthen their coping strategies of recurrent drought. The largest gain will be under the Swiss formula (US $ 115) which is nearly twice the combined gains from Harbinson (US $ 69 million) and Cancun (US $ 50 million). The lowest gain will be under the Uruguay formula (US $ 47 million). The results suggest that the higher the removal of export subsidies and domestic support measures, the higher the welfare gains for producers in the country. This is in line with the contentions from proponents of trade-growth theories/approaches. A caution to such positive gains is the models emphasis given to trade policy aspects and its failure in incorporating domestic marketing margins and transaction costs. The model also does not take into account the incidence of drought and the degree of vulnerability of the countrys producers who are by far rural peasant households. Agriculture is basically rain-fed and subsistence that relies on the long summer and short (belg) rains. The subsistence nature of agriculture makes the majority of peasants not net sellers, but also consumers, leaving their welfare under the category of other consumers who are wage earner households.

Source: ATPSM

25

Productivity is also mediated by other variables such as land tenure system, the availability and adoption of technologies, product quality maintenance, information and market access and so on. Translating the potential of trade liberalization and change in producer welfare necessitates enabling peasants to diversify their agriculture products and have access to information about the market. The recent initiative for the Ethiopia Commodity Exchange (ECEX) is out of recognition of the problem faced by millions of peasants in rural Ethiopia market access, risk management and quality planning (see Gabre-Madhin, 2007). The largest source of the income for producers across the four formulas is the combined gains (US $ 123 million) from crop production of wheat (US $ 46 million), barley (US $ 24.4 million), maize (US $ 31.1 million) and sorghum (US $ 21.3 million). Quality promotion is also needed because the single highest expected gain in producer welfare is from hides and skins (US $ 45 million). Although there is a possibility that SMS and technical (non-tariff) barriers to trade (TBT) may arbitrarily be used by countries to protect sensitive products, keeping higher qualities of goods is expected to enhance the competitiveness of the countrys comparative advantage. 8.4.3 Change in Government Revenue As Jean Bodin succinctly puts it, financial means are the nerves of the states (1975: 243). Resource constrained states are woefully inhibited in the provision of basic necessities to their people, much less efficient services. States bureaucracies are rudimentary, and social services (education, health care) and infrastructure (roads, school, water, irrigation) are deficient. Successive states in the country have depended on agriculture as the source of revenues. The central development strategy of the current government in Ethiopia has been the Agricultural Development Led Industrialization (ADLI) policy. Premised on the experience of other developing countries attempt to drive the agricultural sector towards a more sustainable development approach, the ADLIs central focus is to rehabilitate the agricultural sector and create a strong link to other sectors, mainly small and medium industries. This aims to incerase the financial sources of both the government and subsistence farmers. Agriculture accounts for 70 percent of raw materials for large and medium size industries (FAOSTAT, 2006; CSA, 2006).

26

The simulation results show that government revenue, which stands as 51.2 percent from agriculture, will negatively be affected in all the formulas. The export revenues accrued from cash crops mainly coffee (nearly 50 percent), pulses, oil seeds, and hides and skins are zero or below zero. The loss of government revenue, however, is not so substantial to put the state in large-scale financial crisis. The four scenarios point out a revenue loss of between half million US dollar and 1 million US dollar. 8.4.4 Change in Total Welfare Total welfare that Ethiopia would gain by joining the WTO in all the scenarios indicates negative welfare change. The largest loss will be under the Swiss formula (US $ 14 million) followed by the Harbinson formula (US $ 10 million). The Uruguay and Cancun formulas would bring loss of total welfare amounting to US $ 5 million and Us $ 4 million, respectively. The substantial cuts in tariffs, export subsidies and domestic support measures tend to have negative repercussions on the total welfare gains of the country. The survey of by Aredo et al (2007) also found consistent results similar to this simulation. Aredo et al draw the conclusion that poverty may rise after the reform although welfare of farm households could improve. Change in total welfare is the sum of consumer welfare, producer welfare and government revenue. If the country is able to transform the possible higher gains from producer welfare, it has the potential to lift over the total welfare gains of the country, and as a consequence tackle the most critical problem of food insecurity.

9. Foreign Aid and Food Security: Searching Ways to Strengthen Trade Gains in Ethiopia
This paper argues that foreign aid has the potential to serve as an important source of capital and expertise in order to enable Ethiopia to prepare the ground for better employment of the gains from trade. By doing so, the paper departs from the conventional position of allocating aid to the country. It also maintains that the contentions that recipient countries, donors and policy makers should make a choice between trade and aid does not help to facilitate the effort

27

in finding a plausible way of benefitting from the complementarities of aid and trade (see Easterly, Levine and Roodman, 2003; Sachs, 2004; Collier and Dollar, 2001; Dalgaard and Hansen, 2001; OECD, 2006; Page, 2007). More than any time in the theory and practice of aid, the question of how to bring about measurable changes and transformations in alleviating chronic and acute food insecurity in developing countries and therefore achieving a better level of economic growth is inseparable from how to address the arduous and deep-rooted problem of poverty and underdevelopment. The need is further reinforced by the fact that aid has remained the main source of capital for a number of poor countries, such as Ethiopia, which is ranked 170th of 177 countries on the Human Development Index (HDI). And the effective use of such aid has the potential to induce and support development through the gains of trade. The study by Sundberg, Lofgren, and Bourguignon (2005) showed that the country is a good candidate in scaling up aid in line with its need, limitations and capacity. The paper advances the idea that aid that is sufficient and pertinent to the priority need of the recipient maximizes the utility function of addressing the problem of chronic and acute food insecurity by strengthening the capacity and resource deficiency of the country that most producers, consumers and the central and regional states lack. This is because it will have the potential to serve as an important source of capital and expertise that complements local human, social, natural, and financial livelihood assets to be gained from trade. The kind of aid that should be allocated to Ethiopia requires emphasizing the priority needs of the different stakeholders in trade. For long this has been missing from the practice and discourse of aid allocated to Ethiopia. When aid allocation is incompatible or divergent from the priority need of the recipient country, its quality and utility function tends to decrease. The higher the divergence in the actual allocation of aid by a donor or group of donors, and the need of the recipient to receive, the lesser the relevance and effectiveness of aid flow to tackle the problem of chronic and acute food security (as measured at least by the two indicators of MDG in food security). In order to achieve aid investment in food security projects with relatively durable and meaningful impacts, among the possible targets of aid allocation from donors, a significant proportion of aid flow should reflect the priority need of the recipient. The Paris Declaration on Aid Effectiveness stated that aid scaling up for more effective aid requires increasing alignment of aid with partner countries priorities (OECD,

28

2005: 1). The quality of aid is measured partially but importantly by the extent to which there is proximity between actual aid allocation and the recipients need priority. The trajectories of aid flow to Ethiopia attest that it has mainly been focused on responding to transient food insecurity through emergency relief aid. For years aid to Ethiopia has predominately been concentrated on emergency relief aid and lacked to substantially target core sectors such as infrastructure mainly road and irrigation, and agricultural extension services through large-scale food-for-work programs. These sectors are directly or otherwise related to addressing the problem of long-term chronic and acute food insecurity. It makes sense if the large proportion of aid flows goes to sectors that are highly labor-intensive that can induce job growth and diversify the income generation skills of communities so as to be, in the long run, competitive on world market as well as build the coping strategies of vulnerable agrarian societies. Food aid has widely been recognized for its importance in saving the lives of millions of people stricken by famine and starvation. At the same time food aid is assumed to have drawbacks as labor supply disincentives and displacement of trade and production disincentives besides other technical issues of delay in delivery and targeting. Large flows of food aid have largely been disassociated, especially in Ethiopia, from addressing integrated food security program. With the risk of oversimplification, an integrated food security program constitutes creating livelihood assets that enable vulnerable agrarian societies to develop coping strategies. The MDG serves as one basic parameter for assessing needs for aid. The MDGs have widely received support and recognition both from donors and recipients and they are reflections of the underlying needs in low-income and poor developing countries. Indeed, these goals also have received intense and sharp criticism as being idealistic and misplaced schemes not far from an old wine in a new bottle. The worse the condition in a sector is, it is expected that the volume of aid given to that particular sector will be higher. For example, the higher the HIV/AIDS infection rate, the higher the need for supporting the health system. And the higher the number of underweight children under five years of age and the proportion of population below minimum level of dietary energy consumption, the higher should the need be for aid to the food security sector of a recipient. Flows of aid to Ethiopia have been considerably volatile and

29

unpredictable, which have largely consisted of emergency assistance mainly food aid. Between 1984 and 1998 food aid reached 10 million metric tons which was basically 10 percent of annual cereal production of the country (Barrett and Clay, 2002).

Flows of Total ODA and Share of Relief Aid, Source: My Computation from different sources (UNDP, 2003a; FAO/WFP, 2006; MOFED, 2004)

Sub-sectoral Breakdown of Aid to Agriculture in 2004, Compiled from different sources (MOFED; FAO; WB; UNDP; DAG).

ODA to the country has substantially decreased its composition of food aid from 22 percent in 1965 to 11 percent in 1985 and ten years later to 4 percent in 1995, but bilateral ODA emergency aid to Ethiopia for 2003-2004 still continues to be over 40 percent (OECD, 2006). Multilateral and private aid flows constitute a large portion of food aid of different forms in their packages which are usually accompanied by the problems of delivery time, composition, targeting and
30

distribution. The average per capital ODA flow from 1997 to 2003 was less than US $13, an amount half given to other African countries. The main source of bilateral aid since 1991 has been the US, Japan and Scandinavian countries as well as multilateral donors such as the World Bank, the UN and the EU. The International Development Association (IDA) of the World Bank is the largest donor. From 1980 to 1997 Ethiopia was able to secure a total of US $17 billion in official development assistance (Abegaz, 2000: 170). There have been a growing interest and calls since 2000 for the doubling of aid for the purpose of achieving the MDGs (see Foster, et al., 2003; Geda, et al. 2004). Total ODA flows have shown a sharp increase from US $ 925 million in 2000 to US $ 1, 786 million in 2004. Nonetheless, as high as 31 percent to 33 percent went for emergency and humanitarian assistance, and the agriculture sector together with forestry and fisheries received only 7 percent to 6 percent of ODA allocation (FAO/WFP, 2006: 3; MOFED, 2004: II). Aid used to support FFW programs is neither sufficient nor long-term. This, in turn, limits the contribution of aid in addressing chronic and acute food insecurity besides problems of targeting and selection. Most projects are not directly supported by foreign aid, but rather emergency food aid has been channeled by the recipient country and local governments as payment for supporting FFW programs. Agrarian communities in Ethiopia and especially in the northern regions of the country are chronically and acutely food insecure largely to due to their vulnerability and fragile livelihood assets. Enhancing the multiplier effects trade for creating long-term public goods requires sufficient and pertinent aid flow. Food productivity, availability and consumption tend to be bolstered with the existence of an aid modality suitable for not only targeting infrastructure, but also extending the coverage to agricultural extension program (mainly seed distribution, fertilizer and farm implements).

10.

Conclusion

The decision to join the WTO by countries reflects issues that transcend specific reasons and encompass aspects of not only extracting benefits in terms of socio-economic development, but also addressing the demands and impacts of rapid globalization and trade liberalization.

31

The overarching assumption in the contribution of trade liberalization to economic development and to agricultural strategies and policies in particular is premised on the improvement of per capita food consumption and productivity thereby increasing the income of producers through improved export market access and reduction in tariffs. The impacts of change in trade policy in agriculture both in terms-of-trade and efficiency effects on the general economy are more germane to developing countries that rely on agriculture as the mainstay of their economies. This is because agriculture serves proportionally more as the mechanism for poverty reduction than any other sector. Possible impacts of the AoA appear through channels such as transforming the prices of tradable goods in either increasing or decreasing them; affecting the relative prices of factors such as capital and labor; influencing the availability of revenues for governments from trade taxes; connecting local economic activities to regional and international levels so that opening the ways for shocks/changes; and expanding access to new products. The implications of the AoA for the food security level of net-food importer developing and low income agrarian countries tend to be substantial. It should be emphasized that the impacts are neither uniform nor one-dimensional; they differ from country to country and constitute several aspects of agricultural policies, income, and net trade status in food and agriculture The magnitude of the problem of food insecurity in Ethiopia lies in the vulnerability and fragile coping strategies of the predominantly agrarian society which basically requires capital and expertise to improve the dire situation. The simulation results show that a possible entry to the WTO by Ethiopia will have both challenges as well as benefits. In terms of agricultural export revenue, the Swiss formula will give the country the highest gains and the other formulas also show relative positive outcomes. Livestock, animal products and pulses constitute the largest income demonstrating that the country has a comparative advantage in these products. In terms of the impacts on import cost of the policy change, the country allows the highest inflows of imports under the Swiss formula. The high figures in the Swiss formula are indication of the scenario that will require the country to open its market through major cuts in applied tariffs and subsidies. Import flows by product are concentrated around cereals (mainly wheat, maize and sorghum), refined sugar, tobacco leaves and oil seeds. Such a scenario will directly affect

32

food security level in the country in terms of access to basic agricultural commodities that are the sources of daily consumption. Possible impact assessment on welfare appreciates the four underlying aspects of consumer surplus, government revenue, producer surplus and the change in total welfare. With the exception of producer welfare, the country is expected to experience negative outcomes in consumer welfare, government revenue as well as total welfare change. Translating the potential of trade liberalization and change in producer welfare necessitates enabling peasants to diversify their agriculture products and have access to information on the market. Quality promotion is also needed because the single highest expected gain in producer welfare is from hides and skins. If the country is able to transform the possible higher gains from producer welfare, it has the potential to lift over the total welfare gains of the country, and as a consequence tackle the most critical problem of food insecurity. This paper argues that foreign aid has the potential to serve as an important source of capital and expertise in order to enable Ethiopia to prepare the ground for better employment of the gains from trade. This paper advances the idea that aid that is sufficient and pertinent to the priority need of the recipient maximizes the utility function of addressing the problem of chronic and acute food insecurity by strengthening the capacity and resource deficiency of the country that most producers, consumers and the central and regional states lack. The kind of aid that should be allocated to Ethiopia requires emphasizing the priority needs of the different stakeholders in trade. For long this has been missing from the practice and discourse of aid allocated to Ethiopia. When aid allocation is incompatible or divergent from the priority need of the recipient country, its quality and utility function tends to decrease. In order to achieve aid investment in food security projects with relatively durable and meaningful impacts, among the possible targets of aid allocation from donors, a significant proportion of aid flow should substantially target core sectors such as infrastructure mainly road and irrigation, and agricultural extension services through large-scale food-for-work programs. These sectors are directly or otherwise related to addressing the problem of long-term chronic and acute food insecurity. Further research is needed to show to what aid can serve as a potential supplement in strengthening the gains from trade. At the same time, research

33

needs to look into what modalities of aid and for what purpose aid should be allocated to Ethiopia in order for the country to fill the gap in resources, expand infrastructure, and create a relatively durable coping strategies of vulnerable rural communities. The main focus of my current research for my dissertation attends the relationship between the problem of and allocation and food insecurity.

34

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