Grain Marketing Reform in Ethiopia: A Study of the Impact of Deregulation on the Structure and Performance of Grain Markets

During 1980-89, domestic grain marketing in Ethiopia had been regulated due to a strong drive by the government to control wholesale trade as part of the socialist economic policy. The policy instruments used to enforce regulation included compulsory delivery of grain by farmers and traders to the parastatal at fixed prices, the banning of private traders and the restriction of inter-regional grain shipments. These measures suppressed private grain trading and had far-reaching effects on grain production, farm income and food security in deficit regions.

In March 1990, sustained donor pressure and internal political pressure, compounded by worsening economic conditions, forced the government to deregulate grain markets and prices. This study analyses the impact of deregulation on the grain marketing system and on the interests of major grain market participants. It is based on field surveys in Chilalo, Ada and Addis Ababa, involving interviews of selected farm households, grain traders, brokers and the public enterprises involved in grain assembly and distribution.

The results of the survey show that deregulation has had several effects, desirable and undesirable, on the structure and performance of grain markets. The major effects on market structure include a wholesale shrinkage of the public grain purchasing network and a substantial decline in parastatal grain procurement and sales on the one hand, and an increased proportion of the market handled by private traders on the other. The resulting changes have forced the parastatal to accept new marketing conditions and to make a series of institutional reforms, such as the closure of purchase centres in regions with less potential for grain production, the closure of zonal offices, the leasing out of excess storage and trucking capacity, and the laying off of surplus labour. In contrast, deregulation has promoted private grain trade - by restoring traditional grain markets, by putting the experienced people back in their jobs, by allowing new firms to enter grain trading, by creating employment opportunities for thousands of people, by enabling traders to earn greater profits, and by instilling business confidence with respect to credit advances and investment in future grain trading.

Like traders, grain producers have benefitted from a significant increase in grain prices, although the benefits were biased towards growers of high market price crops like tef and wheat; the better-off farmers with larger holdings; the farming households living closer to roads and central markets. Rural-urban terms of trade have remained favourable to farmers because grain prices have increased compared with prices of fertilizer and manufactured goods needed by farming households. Hence, deregulation has tended to accentuate the existing differences in income distribution between social groups, regions and economic sectors, by making some richer and others poorer.

Meanwhile, consumers have lost in terms of prices as a result of the reform, due to the removal of subsidy and a more than two-fold increase in food prices, although the food supply situation, in terms of availability in type, quality and quantity, has improved compared with the 1980s. Deregulation has failed to curb urban inflation or high retail prices of food grains in major towns due to overpricing of grain transportation and storage by established traders, who tend to dominate the market.

Analysis of the economic performance of deregulated markets reveals that the private sector marketing margin narrowed and tended to decline after deregulation. Private sector trade has been largely competitive and more efficient than the parastatal trade. However, some imperfections remain in the private grain trade. Established traders, especially wholesalers, with higher levels of capital and better access to market information were found to influence purchase prices in some localities and entry barriers are many, particularly at the higher level of marketing. Analysis of market integration also showed that, following deregulation, spatial market integration has increased significantly although some markets remained segmented vertically.

Several constraints (policy, administrative, resource, and political) inhibit the development of a more efficient and a more competitive marketing system. Various policy measures, such as further deregulation of other sectors of the economy and the development of a marketing infrastructure, would help in overcoming these barriers and improving the marketing system.