Food Aid for Market Development in Sub- Saharan Africa Awudu Abdulai Swiss Federal Institute of Technology, Zurich Christopher B. Barrett Cornell University, Ithaca Peter Hazell International Food Policy Research Institute, Washington,

Outline of Presentation u Introduction u Trends in Food Aid Shipments to Sub- Saharan Africa u Conceptual Issues Regarding the Potential Impact of Food Aid u Food Aid and Agricultural Development in Sub-Saharan Africa u Implications for Future Food Aid Policies u Summary

Main Objectives of Study n To review the literature on potential impacts of food aid flows sub-Saharan Africa. n To explore empirically the relationship between food aid and food production in the region over the past generation. n To examine the implications for future food aid policies regarding food market development.

Motivation Food aid remains contentious, in part because of product market disincentive effects. But what about factor market effects? What has been the relationship between food aid and food production? What does this suggest about the prospective impacts of food aid in market development applications?

Trends in Food Aid Shipments to Sub- Saharan Africa Food aid flows to SSA have tripled , to more than 30% of all flows. Cereals and wheat still dominate, but other products have been making steady inroads. Table 1: Composition of Food Aid Shipments to Africa by Commodity (annual average, metric tons) Wheat and wheat flour472,0521,633,5531,247,4361,257,443 Coarse grains 332,962883,4961,214,905759,089 Other cereals 126,286590,739515,178527,501 Cereals 931,3003,107,7882,977,5192,544,033 Noncereals 91,439222,842372,423353,548 Total Food Aid 1,022,7383,330,6293,349,9432,897,581

Food Aid Deliveries to Sub Saharan Africa by Type, Meanwhile, there has been a strong shift from program toward emergency food aid As a result, the WFP’s share has increased to 68 % in 2002, twice the global rate.

Monetization Rate of Title II PL480 Project food aid has increasingly become like program food aid due to skyrocketing monetization rates

Potential Adverse Impacts of Food Aid n Food Price Impacts: –Lowers local food prices to the detriment of farmers »Commercial food sales displacement: domestic or imports? –May shift preferences for imported foods n Factor Market Effects: –Concerns about labor market disincentives n Risk Management Effects: –Enables recipient governments and farmers to neglect agriculture –Moral hazard effects of free insurance

Potential Favorable Effects n Nutrition/Health: obvious, but depends on timing/targeting n Stimulus to demand for complementary foods n Income effects on demand when food aid well targeted Factor market effects: n FFW public goods and private inputs can help productivity n Obviate binding (temporary/seasonal) liquidity constraints n Reduced imports changes either FX availability or real XR n Storage/transport (e.g., backhaul capacity) n Reduced income smoothing and costly risk mitigation

Empirical Analysis to examine food aid and food production relationship VAR Specifications for food production and food aid with country-specific effects: Use a first-difference IV estimator: Food production equation: Food aid equation:

Data and Methodology Data: Annual food aid flows and food production per capita using FAO/WFP data.

Summary of the Main Results n Food aid appears to have exerted a modest positive lagged impact on food production in sub-Saharan Africa over the past thirty years. n Suggests that any possible disincentive effect due to depressed product prices induced by food aid shipments must be more than offset by positve risk management and factor price effects. n Food output negatively affects food aid levels with a lag. n Granger causality tests suggest bidirectional causality between food aid and food production.

Estimated Impulse Response Functions Years since food aid shock Volume (kg per capita) Food production per capita Food aid per capita Depicting the time-path of food production responses to a one-year increase in food aid shipments of one kilogram per capita

Parameter Estimates: Food Production Equation

Parameter Estimates: Food Aid Equation

Implications for Future Food Aid Policies n Food Aid for Market Development –Poorly developed and highly inefficient markets –Fixed costs and risk discourage very poor farmers from participating in markets –Directing food aid to cash-strapped smallholders can prove stimulative  Dairy sector potential (Operation Flood in India)  E.g., Nonfat dried milk could perhaps be put to good use to help develop remunerative domestic food production, processing and marketing channels to benefit poorer households. »Promising countries: Kenya, Ethiopia and Rwanda  Grain processing (As in West Africa and elsewhere)  Food aid to stimulate the development of grain processing and bakery industries

Implications for Future Food Aid Policies n Food Aid for Smallholder Productivity Enhancement »To stimulate uptake of improved natural resource management and production technologies.

Conditions for Success n Reasonably accurate targeting essential – to relieve binding constraints on productivity improvements and minimize adverse product market price disincentive effects n Significant increase in demand for the final product to ensure an increase in farm income. n Substantial supply response required. n Opportunity cost criterion must be satisfied

Summary n Need for improved and more creative use of food aid to promote sustainable rural development in a way that will also serve to wean countries from food aid n Empirical results indicate that food aid has on balance proved broadly stimulative to per capita food production in SSA n Notwithstanding familiar risks, food aid can be used for market development if effectively managed n From a nutritional and overall development perspective, it seems non-emergency food aid may be able to support the emergence of agro-processing industries in selected sub- Saharan African countries