GRAIN-SUPPLY RESPONSE IN ETHIOPIA: AN ERROR-CORRECTION APPROACH

This paper quantifies the responsiveness of producers of teff, wheat, maize and sorghum to incentives using an error-correction model (ECM). It is found that planned supply of these crops is positively affected by own price, negatively by prices of substitute crops and variously by structural breaks related to policy changes and the occurrence of natural calamities. It has found significant long-run price elasticities for all crop types and insignificant short-run price elasticities for all crops but maize. Higher and significant long-run price elasticities as compared to lower and insignificant short-run price elasticities are attributable to various factors, namely structural constraints, the theory of supply and the conviction that farmers respond when they are certain that price changes are permanent. The paper concludes that farmers do respond to incentive changes. Thus attempts, which directly or indirectly tax agriculture with the belief that the sector is non-responsive to incentives, harm its growth and its contribution to growth in other sectors of the economy. Agriculture is the largest sector in the Ethiopian economy in terms of contribution to GDP (over 50%), foreign exchange earnings (over 90%) and employment creation (over 80%). The sector had been neglected until 1994 because growth was thought to be synonymous with industrialization. This view was justified by the belief that industry is the dynamic sector, while agriculture is static and unresponsive to incentives. This belief led to the taxing of agriculture by turning domestic terms of trade against agriculture. The consideration that agriculture is unresponsive implied that resources generated in agriculture could be transferred to other sectors of the economy without significantly affecting agricultural growth.