Production Limitations Fuel Inflation

In 2011, the late Prime Minister, Meles Zenawi, announced that the market had effectively failed. He then said that the government would bypass retailers and sell goods directly to consumers, until the business community accepts lowering the price of goods.

“We plan to flood the market to overcome artificial shortages that have been created through inefficiencies in the market system. This includes artificial shortages in edible oil and sugar. We intend to import lots of edible oil and sugar and flood the market to ensure it is stabilised,” Meles said.

But after three years, agro-industrial consumer goods, such as sugar, cooking oil and cereals like Teff and wheat, and livestock products such as eggs and meat, see not only a price rise, but are scarce.

Why did the government’s macroeconomic stabilisation measures fail to permanently reduce the inflation rate on consumer goods? And why did our farmers remain unable to feed the people and fulfill the raw material needs of agro-industries?

The main cause of price inflation on agricultural (including direct and agro-processed agricultural products) consumer goods is lagging agricultural output. The existing land policy is the root cause of year on year reductions in agricultural production and the reason of the failure of those government measures to stabilise the market.

I believe the existing land policy impacts on agricultural production through decreases in land size, insecure ownership and discouragement of the mobility of the rural population.

Currently, the average landholding size is estimated to be one hectare. According to data from the Central Statistical Agency (CSA), in the 1996/97 fiscal year, the majority of households accounting for 63pc held less than one hectare.

Those holding in the range of 1.01 to two hectares represented 24pc, while 13pc of households were reported to own more than two hectares. Comparison with similar data from the early 1980s reveals that the average land holding size is decreasing. So households with relatively larger plots are decreasing, while those with smaller plots are increasing in number. This is primarily the result of inter-household allocation of land, or land redistribution.

Small land size is a major impediment for the application of production technology. The quantity of input used in Ethiopia is directly proportional to holding size.

In addition, small land size is the reason that many farmers cannot benefit from the high input package offered by the Ministry of Agriculture (MoA) and Sasakawa Global 2000. The package requires a peasant to own more than 0.25ha. Furthermore, high intensity of crop production in most parts of the country has become a strategy to cope with the small farm sizes.

Tenure insecurity has made peasants reluctant to apply sound land management practices and to make long term land investments. One source of insecurity is land redistribution. This has made many peasants cultivate high value, but less nitrogen-fixing crops, in order to avoid the risk of losing plots in redistribution before earning the maximum possible.

Poor land management practices coupled with deforestation, which is attributed to population pressure in rural areas, has severely exposed cultivated land to degradation. Estimates show that, cultivated land is experiencing a two to three percent reduction in fertility due to soil and water loss, biological degradation and nutrient loss. Soil loss is estimated at 1.5 million tons a year. This alone is estimated to have resulted in a two percent decline in total output.

Mobility of the rural population has arrested the migration of people to urban areas and has created population pressure in rural areas, by denying access to land to those who are sustainably absent from rural areas. The greater mobility of peasants out of agriculture will stimulate the greater mobility of land. Land will be able to move “freely” from those who cannot use it efficiently to those who can.

Population pressure in rural areas is blamed for the expansion of cultivation to areas, which were marginal and to areas previously covered by forests and woodlands. Forests, which covered 40pc of the land area at the turn of the century, are presently reduced to less than four percent, according to the Food & Agricultural Organisation (FAO).

Average cultivated land as a percentage of agricultural area has risen from 21pc in the period from 1961 to 1975 to 32pc in 1992. Permanent pasture, which accounted for 79pc of the total agricultural area between the years 1961-1975, is now reduced to 68pc.

On the contrary, land classified as not suitable for farming has risen. It increased from 57pc of the total land area between the years 1961-1975, to its present level of 69 percent. This means that land, which used to serve as permanent pasture, is increasingly being put under cultivation, and at the same time a significant amount of cultivated land is being withdrawn from agriculture.

To tackle the inflationary price of agricultural products the government must reassess the land policy and make some compromises. This is important to make agricultural (farm) land a source of increases in agriculture production.

According to recent estimates, chemical fertilizer is used by less than 39pc of farmers and less than 11pc of the country’s cultivated area is covered with improved seeds, while only 4.4pc of the potentially irrigable 4.7 million hectares of land is currently put under irrigation. In terms of the number of tractors in use, too, the performance of the sector has been disappointing.

Calculations made by FAO’s statistical database show that the average number of tractors in use was 1874 in the years 1961 to 1975. The number increased to 3865 in the years 1975 to 1991 and fell to 3121 in the years 1992 to 1998. These production limitations are not only causes of inflation on agricultural products, but also fuel the inflation rate that continues to rise sharply.

The question is how to increase agricultural production to tackle inflation on agricultural product?

Our agriculture is still dominated by small-scale farmers who have low input and low output, rain-fed mixed farming with traditional technologies. Intensification of land use by increased use of chemical fertilizer is limited. Thus, a change in land size constitutes the primary source of production increase.

As anyone who has taken Economics 101 understands, the cost of printing a 100 dollar bill is less than 0.25 dollars (with an apparent profit of at least 99.75 dollars going to those who print the money!). The same analogy applies to the Ethiopian case. It is clear from this that there is a strong temptation to print more and finance a government’s budget deficit through the creation of money. Economic history also indicates that weak and corrupt governments tend to finance their expenditures by borrowing and monetizing the debt.

As far as Ethiopia is concerned, the International Monetary Fund (IMF) has reported that the broad money supply in Ethiopia has been growing relatively fast in the last three years. The excess reserves that the entire banking system is faced with also indicate that the system is flooded with cash, among other things.

In any case, the increase in the money supply leads to ‘too many Birr chasing too few goods,’ resulting in high inflation rates. Thus, the latest drop in inflation is caused not by an increase in supply, but by a relative reduction in the rate of increase in money supply.

Nonetheless, it is the structural issues that limit agricultural production that ought to be redressed, if the curse of inflation is to be curbed in a sustainable way.


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