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UNIVERSITY of ANTWERP Faculty of Applied Economics Stadscampus Prinsstraat 13, B.213 BE-2000 Antwerpen Tel DEPARTMENT OF ECONOMICS The interface between policy reforms, household livelihoods and farm-nonfarm linkages: insights from a village economy in rural Ethiopia Tadele Ferede UNIVERSITY OF ANTWERP Faculty of Applied Economics Stadscampus Prinsstraat 13, B.213 BE-2000 Antwerpen Tel. +32 (0)3 265 40 32 Fax +32 (0)3 265 47 99 http://www.ua.ac.be/tew FACULTY OF APPLIED ECONOMICS DEPARTMENT OF ECONOMICS The interface between policy reforms, household livelihoods and farm-nonfarm linkages: insights from a village economy in rural Ethiopia Tadele Ferede RESEARCH PAPER 2010-018 AUGUST 2010 University of Antwerp, City Campus, Prinsstraat 13, B-2000 Antwerp, Belgium Research Administration – room B.213 phone: (32) 3 265 40 32 fax: (32) 3 265 47 99 e-mail: [email protected] The papers can be also found at our website: www.ua.ac.be/tew (research > working papers) & www.repec.org/ (Research papers in economics - REPEC) D/2010/1169/018 The interface between policy reforms, household livelihoods and farm-nonfarm linkages: insights from a village economy in rural Ethiopia 1 Tadele Ferede Department of Economics University of Antwerp E-mail: [email protected] August 2010 1 I would like to thank Professor Guido Erreygers for constructive comments and suggestions at the various stages of the paper. I also wish to thank Professor Walter Nonneman, Professor Aviel Verbruggen, Professor Stefan Dercon, Professor Tom De Herdt and Professor Johan Eyckmans for useful comments. This paper is based on one of the chapters of my PhD dissertation. The financial support from the University of Antwerp is duly acknowledged. Abstract After two decades of agricultural-led development strategies since the early 1990s, economic growth has been erratic, land degradation has worsened, and the country has failed to enjoy significant drop in the number of food insecure population. By using a complementary qualitative and quantitative analysis, this study shades some insights regarding the effects of policy reforms on household livelihoods in rural Ethiopia. The qualitative results indicate that agricultural productivity declined and households experienced a downward livelihood trajectories. Farm households have stuck in a stagnant and low productivity agriculture as output growth is largely driven by employment expansion with limited or no productivity gain. Simulation results based on the village computable general equilibrium (CGE) model indicate that growth in agricultural productivity does not promote the development of the nonfarm sector in the form of labour-intensive small businesses. In settings characterized by low productivity, complementary reforms are required to trigger growth and to improve household livelihoods. The growth and employment linkages are strengthened when agricultural growth is driven by a set of mutually reinforcing policy reforms. Key words : Ethiopia, farm, nonfarm, linkages, CGE, village economy, household livelihoods 2 1 Introduction Poverty remains pervasive in the developing world: about one billion people live in less than $1 dollar a day, 500 million on less than 75 and 162 million on less than 50 cents a day (Ahmed et al , 2007). Three-fourth of those living on less than 50 cents a day, the ultra poor, are located in Sub-Saharan Africa (SSA) and live in rural areas. In a predominantly agrarian settings such as SSA, improving agricultural productivity is seen as an important instrument for reducing poverty, improving food security, preserving the environment, and for promoting economic diversification due to its growth and employment linkages (Byerlee et al. , 2009; Delgado et al ., 1998; Hayami and Ruttan,1971; Johnson, 2000; Kuiper et al ., 2008; Mellor, 1998; Ravallion and Chen, 2004; Schultz, 1964; Timmer, 2005). Studies (e.g. Anriquez and Stamoulis, 2007; Delgado et al ., 1998; Haggblade et al .,1989; Taylor and Yunez-Naude, 2002;Woldehana, 2002) also indicate that improved agricultural productivity leads to expansion of rural nonfarm activity. Since farm income is both limited and inherently unstable, nonfarm employment can support the farm sector by easing the capital and credit constraint, and by providing additional income for covering farm input expenses (Alasia et al. , 2009). However, the farm and nonfarm sectors compete for resources, such as labour. For instance, the use of family labour for farming activities tends to reduce the availability of labour for the labour-intensive nonfarm activities, which can lead to a decline in the output of the latter (Foster and Rosenzweig, 2004; Maertens et al ., 2008; Ruben and van den Berg, 2001). This suggests that the growth of the agricultural sector does not necessarily lead to the expansion of the nonfarm economy, as the latter depends on incentives, such as the relative profitability of activities, input and output prices, assets, etc. Yet how the interactions of farm and non-farm activities affect the outcome of policy interventions, especially at household level is not well explored. The search for rural-centered broad-based growth with poverty reduction and modernization of the agricultural sector as top priorities requires the micro-level understanding of the synergies and trade-offs of policy reforms. This paper positions itself in this context, and we take one of the villages in rural Ethiopia as a case study to assess the effects of various agricultural policy reforms on growth, household livelihoods and farm-non-farm linkages. A variety of rural development reforms has been undertaken in the country since the mid 1970s, such as integrated rural development, structural adjustment programs (and liberalization), poverty reduction, etc, all central to the policy-making discourse. Despite a series of interventions, the rural areas are locked in a mutually enforcing cycle of problems (Hanjra et al ., 2009). The much praised market liberalization measures undertaken since the 1990s have not helped farm households either (Alemu et al. , 2006; Gabre-Madhin 2001). The agricultural sector entered the new millennium with significantly declining land quality and productivity (Daio et al , 2007; Demeke et al ., 2003;Demeke and Tadesse, 2008; Elias, 2002; World Bank, 2008). Limited 'capital-led' intensification results in low agricultural productivity growth of the farming sector (Clay et al .,1998). 2 The agricultural sector is thus stuck in subsistence production of food grains using oxen- pulled-ploughs, and the country failed to achieve food security and to promote growth. Poverty remained stubbornly high, especially in rural areas. Specifically, this study sheds some insights on a number of questions related to the design of a rural-centred development policies. First, what scope is there for boosting economic growth that will benefit rural households? Second, does increased productivity of the farm sector hinder the expansion of the nonfarm sector by competing for household inputs? Third, will a simple injection of additional resources without continued growth in the productivity of the existing resources spur growth that is capable of generating broad-based growth and of improving the livelihoods of households? Fourth, how do changes in market conditions (e.g. fluctuations in output prices) affect crop production and household incomes? Finally, how do the different policy interventions compare to each other regarding their effects on output and household income levels? These are relevant and topical policy questions that require a deeper analysis of their complementarities and trade-offs. In doing so, we employ complementary qualitative and quantitative methods of analysis to examine the impacts of policy changes on rural livelihoods and the linkages between farm and nonfarm activities at household level. No study has paid detailed attention to address this issue using a mix of qualitative and quantitative approaches. A description of the study setting is given in section 2. Sections 3 and 4 provide, respectively, selected livelihood indicators and an economy-wide analysis of policy reforms. Section 5 concludes. 2 A brief description of the study area and data sources This study focuses on the village of Yetmen in the Enemay woreda of the East Gojjam zone of the Amhara National Regional State (ANRS), Ethiopia (figure 1). It is located about 248 km northwest of Addis Abeba, and lies in between two nearby towns: Dejen (in the south) and Bichena (in the north). The former is 17 km south and the latter 15 3 km north of Yetmen . 2 The present feature of agricultural production in the country is to use more labour to crop densely, and this labour-led path to intensification has proven to be unsustainable and led to land degradation (Demeke and Hunde, 2004). In the 1990s, for instance, the seed-fertilizer package has been central to government’s extension strategy without focusing on efficiency and profitability of input use (Byerlee et al ., 2007). 3 A detailed description of the village can also be found in Tiumelissan et al ., (2006). 4 The village is one of the fifteen villages subject to repeated studies by the Department of Economics of Addis Abeba University in collaboration with different institutions including the Centre for the Study of African Economies of Oxford University, the International Food Policy Research Institute (IFPRI), the United States Agency for International Development (USAID), and Gothenburg University of Sweden since 1994. Since then six rural household surveys (ERHS) were conducted and each household has been repeatedly surveyed, to form
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