Food aid, food prices and producer disincentives in Ethiopia

Although the short-term aims of food aid are well conceived, strong concerns have been voiced regarding the long-term impacts of such aid on incentives for agricultural producers in recipient countries. This paper examines the statistical link between food aid shipments and food prices in Ethiopia over the period 1996-2006. Monthly data from three markets and three commodities are used to estimate a system of seemingly unrelated regression models for food prices. Results indicate that previous year food aid shipments reduce prices in all producer and consumer markets. These effects, however, appear to be limited to the set of internationally traded commodities that are domestically marketed. A recursive regression procedure is used to identify the food aid threshold at which a negative aid effect emerges. Food aid shipments that constitute less than 10% of domestic production appear to be benign, but shipments above this level show signs of being disruptive to local markets. We use a simple policy simulation to argue that production-sensitive targeting, e.g. conditioning food aid on local food production, would help to circumvent disincentive effects.