Global Trade and Poor Nations: The Poverty Impacts and Policy Implications of Liberalization

Chapter 3: Ethiopia

This chapter analyzes how the changes in international prices consequent on the implementation of the Doha Development Agenda would affect household expenditures and incomes in Ethiopia. To explore the variance in the distribution of the effects and to identify potential winners and losers, the effect of multilateral trade liberalization is estimated by broad household groups and by geographic region. Two scenarios are considered: limited multilateral trade liberalization, termed the business-as-usual scenario, and more extensive multilateral trade liberalization, termed the ambitious scenario.1 The chapter also explores complementary policies that Ethiopia might adopt to help its households take advantage of the opportunities offered by a Doha deal. The empirical methodology used is based on the trade and poverty framework of Winters and consists of tracking the movement in the prices (and quantities) of goods and factors associated with trade policy reforms and measuring their effect on household welfare.2 The price and quantity effects of the two Doha scenarios are those estimated by Kee, Nicita, and Olarreaga in chapter 2 of this volume. The present chapter translates price and quantity effects at the border into changes at the regional level, maps them onto household welfare, and ultimately estimates the overall effect on poverty. Ethiopia alessandro nicita 3 53 1. See chapter 2 for a detailed description of the two scenarios. 2. Winters (2002). The chapter is organized as follows. It begins by describing the extent and distribution of poverty in Ethiopia and then analyzes Ethiopia’s exposure to international trade shocks, tracing the implications for the likely effects of trade reforms on Ethiopian households. This is followed by a section describing the empirical framework used for the simulations and a section explaining the different policy scenarios that are analyzed; these look at the probable effects of multilateral trade liberalization, on its own and when complemented by potential changes in Ethiopia’s own policies. A section then presents the results, and a final section concludes. The analysis suggests that multilateral trade liberalization would have only a small effect on poverty in Ethiopia. Even under the most optimistic scenario, when ambitious multilateral liberalization is paired with improved domestic policies, the effects are estimated to be less than a 1 percent increase in real income for most households. The size of the gain differs across household groups: poor households and households in rural areas are expected to gain substantially less than the average. The reasons for the limited impact are to be found in the rudimentary state of Ethiopia’s domestic markets. In particular, poor price transmission, the pervasive subsistence economy, weak infrastructure , and the overall weak supply response from producers severely thwart the country’s ability to benefit from implementation of the Doha agenda. Poverty in Ethiopia Poverty is a major concern and a chronic problem in Ethiopia. Regional political instability, recurring droughts, and inappropriate policies have exacerbated the problem, making Ethiopia one of the poorest countries in the world. Ethiopia’s GDP per capita is estimated at about $110, compared to about $450 for sub-Saharan Africa on average. Other indicators also place Ethiopia at the bottom of the list: life expectancy is forty-two years, and literacy rates are around 40 percent. Recent estimates put the number of poor—defined as people who cannot afford the minimum expenditure needed to guarantee an intake of 2,200 calories per day—at about 25 million, or about 44 percent of the total population.3 More realistically, using a $2 a day poverty line, the percentage of poor is about 80 percent, or about 45 million people. Poverty has remained fairly stable, declining by about 1 percent between 1995 and 2000. At least half the poor (23 million) are in rural areas,4 but Ethiopia is a very diverse country, and poverty varies greatly across regions (table 3-1). Tigray, Afar, Benshangul, SNNPR, and Gambella are the poorest, with more than half 54 alessandro nicita 3. World Bank, World Development Indicators database. 4. This is because rural areas are poorer than urban areas and because the overwhelming majority of the population lives in rural areas (85 percent). of their people in poverty. Regions that fare better are Addis Ababa, Harari, and Dire Dawa, all of which are urban enclaves. Ethiopia’s Exposure to International Price Shocks The extent to which multilateral trade liberalization will reduce poverty in Ethiopia depends on the exposure to trade shocks of the Ethiopian economy in...