Toward Poverty Alleviation and a Social Action Program in Ethiopia

Over the last decade, average per capita incomes have declined considerably. In the absence of recent data on actual incomes and their distribution, however, some improvisation was necessary to provide a measure of the extent of poverty. On the basis of information from various sources, it was estimated that of the approximately 6.9 million people living in urban areas, about 4 million (58 percent) live below the poverty line; half of these people are desperately poor. An assessment of rural poverty was based on analyses relying on estimates of farmers' assets (farm area, the number of oxen per farm), their location, and their vulnerability to poverty. On this basis, it was estimated that 30 percent of farm households are chronically poor. Assuming a household size of five, this amounts to about 12.6 million rural people. If those who are vulnerable to poverty (17 percent) are added, then there are an additional 7.4 million, giving a total of about 20 million rural poor. In summary, if the landless, refugees, the displaced due to war, and demobilized soldiers in poverty are included, there are a total of about 27 million people out of a population of about 52 million (52 percent) living in chronic and transitory poverty in urban and rural areas in Ethiopia.

The social impact of poverty in Ethiopia is reflected in the following indicators. Nearly one quarter of children born do not reach the age of five. In rural areas, only about 12 percent of people have access to safe water, while under 50 percent of the population is within 10 km of a health facility of any kind. The number of people per physician in Ethiopia is about 79,000 compared with 25,000 in low-income economies in Sub-Saharan Africa.

Incentive and Regulatory Framework

The economic reform program introduced in October 1992 devalued the exchange rate, with a full pass-through to producer prices to ensure that the benefits of the devaluation provided the proper incentives. The price of labor relative to capital was realigned by introducing a higher nominal interest rate structure with the objective of reaching positive interest rates in real terms when combined with the devaluation of the exchange rate, which should encourage more labor-intensive production.Other important measures were also introduced, including increasing the income tax exemption threshold, reducing the marginal income tax from 89 to 50 percent, and eliminating all export taxes except for coffee.

Changes in the regulatory policies that affect the efficiency of markets should help the poor to participate in growth by leading to more competitive production, more affordable goods, and, through growth, more jobs. Similar regulatory reforms in the agricultural sector, including freeing up agricultural marketing and the hiring of farm labor, should result in increased growth and employment. The relaxation of restrictions on the movement of labor should over time mean that significant numbers of workers move from areas where there is high unemployment to those where more jobs are available. This will have the effect of increasing production in these areas and of increasing the incomes of those in less favorable agricultural areas. The opening-up of almost all economic activities to the private sector, legally supported by a new investment code and new labor and public enterprise laws, is also expected to increase competition and, therefore, efficiency in labor and goods markets.

Public Expenditures

Although a complete public expenditure review was started in 1992, no comprehensive analysis of public expenditures was available at the time the poverty assessment was carried out. Nevertheless, a review of health, domestic water supply, and sanitation was possible.

Budgeted government expenditures for health from fiscal years 1978/88 to 1991/92 averaged 1.5 percent of GDP, representing 3.3 percent of the total government budget. These figures are low in comparison to other countries in the region. In nominal terms, spending on health and related services in 1989/90 was about $1.50 per person. In real terms, actual expenditures undoubtedly fell over this period. The government's spending during these years for health, broken down by level of delivery, illustrates a health care system biased towards urban areas and hospital care. A striking feature of the recurrent budget was the fact that over 60 percent was used to meet the payroll of a growing number of civil servants in the health sector, although salary levels had not increased significantly in real terms.

Actual expenditures from the budget for water and sanitation increased very little in recent years and were substantially below the budget. Hence, in real terms, there was a significant decrease in recurrent expenditure by the government. External grants and loans made a significant contribution to capital expenditures, varying considerably from an actual outcome of about 50 percent in 1987/88 to a budgeted figure of about 60 percent in 1990/91.

Safety Nets

Many of the government's social programs in the past were massive general food subsidies and other commodity-based assistance programs, many of which were financed outside the budget and included large implicit subsidies. The real economic costs of these programs were never known or assessed. The report estimated that the annual value of the foodgrain programs alone accounted for about 6.5 percent of government expenditures, more than twice the public expenditure on health. The poorest sections of the community usually did not benefit from these commodity programs because generally they could not afford to buy even the subsidized foods. Thus, the programs tended to subsidize the middle- and higher-income groups. It is also clear that the benefits of the programs were heavily biased in favor of urban consumers; for example, urban consumers, who account for about 13 percent of the population, received about 60 percent of the foodgrain subsidies. Broadly, the economic impact of the programs was that producers were taxed and consumers (particularly in urban areas) were subsidized.

Poverty Strategy

Macroeconomic stability and a decrease in population growth to reduce pressures on resources are required for the Ethiopian economy to grow and for poverty to be reduced. To stimulate growth in agriculture, farmers need to be given access to land, labor, and capital, infrastructure and support services need to be improved, and sustained incentives need to be introduced to encourage the production of a marketable surplus. Growth will increase employment opportunities, but it will be important to ensure that the economy makes maximum use of labor-intensive technology. Improving all social services is an urgent priority if the welfare of the poor is to be improved. It will be necessary to strengthen the mother and child health system at the district and community level and to introduce targeted nutrition programs. Providing households with a low technology, low-cost water supply is a priority.

The poverty assessment is inconclusive about the benefits of targeting in the Ethiopian context. On the one hand, the presumptive cost of targeting is high because the number of poor is high, but on the other hand, broader assistance programs have also been expensive and have proven not to be cost-effective in the past. The poverty assessment recommended that, in urban areas, vouchers should be introduced that provide the poor with an entitlement to specific foods and kerosine. A food price adjustment for those on the public payroll should be implemented to ensure that wages maintain their real value following the introduction of the reform program. There should also be compensation for retrenched state enterprise workers who have lost their jobs as a result of the adjustments taking place in the economy, as well as an urban public works program to provide additional employment. In rural areas, the report recommended introducing a public employment program based on the improvement, rehabilitation, upgrading, and extension of rural infrastructure and natural resources. It also suggested implementing a voucher system to provide poor farmers with inputs such as fertilizer and simple equipment, supplemented by direct assistance to the aged, infirm, and female-headed poor households.

Statistical System

The analysis of poverty in Ethiopia is severely constrained by the lack of data. The poverty assessment, therefore, recommended that data on household incomes, expenditures, living standards, and access to services in both urban and rural areas should be improved and updated. Institutions should also be strengthened so that the government can do survey and analytical work on a regular basis.