The study results did not support government’s claim that Ethiopia’s inflation is a non-monetary phenomenon. On the contrary, monetary developments remain important and significant factors in explaining high food inflation in Ethiopia. Large and persistent budget deficits, rapid expansion of domestic credit, the growth of treasury bills, the shift from food aid to cash transfers and other things contribute to the rapid growth in money supply and put pressure on prices. Hence, a forceful policy tightening might be required to reduce the current soaring food prices in the country. The money supply is the ‘Black-box’ that this study has discovered as a major source of the current soaring food prices in the country. It is an important factor expected by donors and economists, even though the government claims the hoarding of goods by traders and the unbalanced growth of different sectors as the main causes. Moreover, there are also other important factors that explain Ethiopia’s soaring food inflation, including the general price level, world grain price index, lagged world DAP price index, domestic benzene price index, non-food price index and shocks in the goods and money markets. The continuous depreciation of Birr against dollar and the degree of inflation inertia are also important factors causing food inflation in the country. Moreover, results show that the soaring food inflation is almost uniformly distributed among regions.
Though rises in agricultural prices may have stimulating effects on the agricultural sector, and hence a positive income effect on the rural households who are net sellers, it has a substantial negative welfare effect on net-food buyer rural households such as pastoralists, food-insecure and resource poor households. Moreover, since the rise in the prices of some inputs outweighs the rise in agricultural prices its effect on the net seller rural households is also minimal. Therefore, stabilization policies in order to dampen inflation expectations on prices, a prudent fiscal policy as a tool for a sustained economic growth and as a means of avoiding sources of macroeconomic imbalance are quite apparent possible means to reduce the rapidly rising agricultural prices.
Results of market imperfection analyses show that markets in most Ethiopian regions are weak and at their infancy stages. Particularly, markets in the pastoralist areas are poorly developed and in most cases inaccessible to the pastoralists. As evidenced by many studies, markets in Ethiopia are inefficient. They are not responsive to economic incentives such as price, wage rate, interest rate, etc; they are weakly integrated both spatially and temporally; marketing margins are large; market actors are few and have much power to influence prices; there are information asymmetry; etc. The outcome is higher prices for final consumers, very low prices for producers, and abnormally high profits for market intermediaries. Hence, production and consumption will be less than optimal. In the absence of the necessary market infrastructure, producer organizations and collective marketing groups provide alternative
institutional innovations to enhance the uptake of market-oriented and productivity-enhancing technologies, to link farmers to markets, and foster market participation and commercialization of smallholder production.
Results of the enforcement contracts show that the encouragement of private institutions’ involvement in relational contract enforcement is found to be less costly and efficient. Because of interlinked incentives, brokers’ involvement in the enforcement of relational marketing contacts was found to be the most important one. The analysis of factors affecting the enforcement of agricultural products marketing contracts using Logit model identified duration of the relationship, age and frequency of transaction as the significant factors affecting the enforcement of relational contracts between producers and traders positively, while the deteriorating traditional values and transaction costs have a significant negative impact. An effective enforcement of agricultural products marketing contracts may be achieved through governmental and/or private institutions interventions that target market information access, development of cooperatives and traditional institutions and associated support programmes.
The analysis of the terms of trade between livestock and cereals for pastoral households shows that the price of livestock and their products has risen faster than that of cereals recently, diminishing the purchasing power of cereal producing households, and thereby eroding their terms of trade. Given that more than two thirds of the pastoralists are destitute, the effect that the favourable terms of trade have on pastoral households’ livelihood might not be significant. In a situation where most households do not have more livestock to sell to buy more amount of food, the effect goes to the few households who are net sellers. Appropriate intervention measures by policy makers and development partners that target improvement of production and productivity of livestock, livelihood diversification, provision of market information and infrastructure that improves the decision-making of the households might improve the effect of ‘favourable’ terms of trade for pastoral households. If pastoralists are able to produce more livestock they get better returns, the cash generated meets expenditures for goods and services that they cannot produce at home, including non-animal source foods, along with the opportunity to improve the unstable terms of trade. This not only helps them to improve their livelihood and health of their households, but also creates demand for other goods and services in the local and national market arenas, thus promoting trade and economic growth.