Ebook Grain Markets and Large Social Transfers: An Analysis of Productive Safety Net Program in Ethiopia
It is almost universally agreed that providing access to food to the poor through social transfer programs is a valid policy intervention, irrespective of economic ideology, functioning of markets, or even the level of development of a given country. However, there is a long standing debate as to whether these transfers should be in-kind or in cash (Sen, 1990; Coate, 1989; Basu 1996). Four main arguments are made in favor of cash transfers are that they: avoid potential disincentive effects of food aid on domestic markets, can provide more choices to the beneficiaries and hence relatively improve their well-being, are more cost-effective than food transfers, as they entail food handling costs, and can boost consumer market demand, which in turn can contribute towards market development (World Bank 2005).
A critical underlying assumption behind all these arguments is that the markets are integrated and well-functioning so that food is available in local markets at moderate prices, an assumption which may not hold in many developing countries. This is one of the reasons why both emergency assistance and safety net programs continue to be food-based.
However, apart from situations of extreme civil conflict or war, it is unlikely that market locations in all parts of a country will be isolated from major central markets. This implies that in most cases, it should be possible to implement a mix of food and cash based safety net or emergency assistance programs. Cash transfer programs could be implemented in more developed geographic locations, where transactions costs are low and cash injection is likely to create demand for local products, yet not raise food prices excessively. Food transfer programs could be implemented in more remote places where markets are thin (not integrated with other markets), so as to avoid possible surges in food prices in local markets from cash transfers that would adversely affect not only the households receiving social transfers, but also poor non-beneficiaries (Basu 1996). Food transfers may also be easier to implement in more remote areas if these areas also lack implementation capacity (e.g., non-functioning or non-existence of financial institutions). Thus, from operational and cost effectiveness viewpoints, an optimum
policy option might be to combine both cash and food.
Ethiopia’s Productive Safety Net Program (PSNP), launched in January 2005, is one example of large scale social transfer program with a mix of cash and in-kind transfers. Introduction of the PSNP was a strategic move on the part of the Ethiopian government towards reducing food aid dependence, boosting domestic production, and fostering market development. The country’s food aid imports did in fact declined from 861 thousand tons in 2004-05 to 377 thousand tons in 2005-06 and 447 thousand tons in 2006-2007. Meanwhile, official estimates of production of the four major cereals (teff, wheat, maize and sorghum) showed a 40 percent increase from 8.3 million tons in 2004-05 to 11.7 million tons in 2006-07.
The PSNP spans up to 262 woredas that had been regular recipients of food aid between 2002 and 2004. It operates as a safety net, targeting transfers to poor households in two ways, through public works (PW) schemes and direct support (DS). Public works, the larger of the two programs, pays selected beneficiaries 6 Birr per day, raised to 8 Birr per day in December, as payments for their labor on labor-intensive projects designed to build community assets. Direct support is provided to labor-scarce households including those whose primary income earners are elderly or disabled. This component thus aims to maintain the safety net for the poorest households who cannot participate in public works.
The main objective of this paper is to analyze whether PSNP is linked with this unusual price trend. The analysis is based on a large data set collected by the Central Statistical Agency (CSA) of Ethiopia, which contains Peasant Association (smallest administrative unit) level data on prices, production, yields, and marketing of all major cereals. Two sets of analyses are conducted, with first set focusing on targeting characteristics and overall price trends and the other on the price relationships between PSNP and non-PSNP areas using co-integration methods.
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