Food aid or cash aid? Comparing effects on the Ethiopian economy

Policymakers, donors and non-governmental organisations have in recent years debated whether it is more effective to provide aid to poor households in the form of food or cash. Most studies have focused on specific aspects of the effects of aid, neglecting the impact on and feedback from different sectors of the economy.

A paper from The Macaulay Institute, UK, sets out to compare the overall effects of food aid and cash aid on the Ethiopian economy. Food aid has saved millions of lives in Ethiopia over the last few decades, but whether or not this is as effective as cash aid is open to debate.

Providing food as aid has significant logistical costs, as the food is usually purchased by donors from developed countries, imported into the recipient country and then transported to where it is needed. Some argue that if there are food markets in the recipient country, then it will cost far less to distribute money to those in need so they can buy appropriate food and other products. Others claim that food aid, even cash aid, discourages economic activity (the disincentive hypothesis).

Academics acknowledge the economy-wide effects of aid, but most studies have used models that consider effects on individual sectors. This study applies an economy-wide modelling framework to Ethiopia to consider the effects of both food and cash aid on different sectors and importantly, how these sectors then affect each other.

The model uses three scenarios.

• Scenario I simulates the effect of abolishing food aid without a cash replacement.
• Scenarios II replaces food aid with cash aid but with transport savings deducted from the value of the food aid being replaced.
• Scenario III replaces food aid with cash aid equal to the value of food being replaced.

Based on these models the research finds:

• The average price of food crops increases by 1.16, 1.18, and 1.20 percent respectively in Scenarios I, II and III, but prices of other commodities decline in Scenarios II and III.
• Production levels of most commodities increases in all cases: this implies that the removal of food aid will have expansionary effects on most agricultural and non-agricultural sectors, quite significantly when cash replaces food aid. This contradicts the disincentive hypothesis.
• The positive effect on the agricultural sector does not necessarily cause an increase in the price of labour (for example, wages).
• Household welfare improves for farmers in all scenarios; wage-earners benefit in Scenarios II and III, while entrepreneurs benefit only in Scenario III.

The model is limited in explaining how different scenarios affect households beyond the broad categories of farmers, wage-earners and entrepreneurs. But richer, entrepreneurial households may be benefiting the most from the existence of food aid. However, if cash transfers cause food prices to rise, untargeted poor households may suffer.

The economy-wide modelling framework has the following advantages:

• It combines the debates on cash versus food aid and the disincentive hypothesis.
• It shows the importance of distinguishing between the impacts of food aid and cash aid by considering three separate scenarios.

Source(s):
‘Cash or Food Aid? A General Equilibrium Analysis for Ethiopia’, Development Policy Review, Vol.24, No.5, pages 601-624, by Ayele Gelan, 2006
Free online access to this article for HINARI subscribers Full document.

id21 Research Highlight: 15 March 2007

Further Information:
Ayele Gelan
The Macaulay Institute
Craigiebuckler
Aberdeen AB15 8QH, UK

Tel: +44 (0)1224 498200
Fax: +44 (0)1224 311556
Contact the contributor: a.gelan@macaulay.ac.uk

The Macaulay Institute

Other related links:
'Moving from food aid to cash transfers in Ethiopia'

Cash Transfers and Social Protection, Paper presented at a workshop by Institute of Development Studies (PDF)