Food aid and poverty.

One of the primary objectives of food aid is poverty alleviation. This is true independent of the type of food aid (see Barrett 2007 for an excellent overview of the various types of U.S. food aid). Advocates of food aid argue: it is an effective means of reducing hunger; when used for food for work programs, it stimulates development; and by reducing the need for food imports it has prevented large cumulative deficits in poor countries. Critics of food aid argue it has increased the dependence of developing countries on food imports. The dumping of surplus production for free or nearly no cost to poorer nations means that the farmers from such countries either cannot produce at competitive prices, or lose the incentive to produce entirely (leading, over time, to the deterioration of the infrastructure of production). They also claim that food aid is inefficient--it often fails to reach the most needy and has high administrative costs.

However, credible empirical evidence on the role of food aid in combating poverty is limited. Levinsohn and McMillan (2006) use nationally representative household survey data from Ethiopia to identify the relationship between household income and household wheat sales and purchases (the cereal most commonly distributed by food aid programs). They find

* Net buyers of wheat are poorer than net sellers.

* At all income levels there are more buyers of wheat than sellers. Only 12% of Ethiopian households sell wheat.

* The net benefit ratios are higher for poorer households, indicating that poorer households benefit proportionately more from a drop in the price of wheat.

Levinsohn and McMillan also undertake a welfare analysis of food aid in Ethiopia. They treat the Ethiopian wheat market as a partial equilibrium in a closed country, which received extra wheat via food aid. They observe the actual price (with the wheat aid), and then calculate a counterfactual wheat price that they believe would have held, given some posited elasticity of demand, absent food aid. Finally, they calculate the distributional effects under the counterfactual price and conclude the poor were typically better off with the low (with food aid) price. Based on these findings, they conclude that Ethiopian households at all levels of income potentially benefit from food aid, and the benefits of food aid go disproportionately to the poor.

A serious limitation of this analysis is its failure to address the long-term impact of food aid on production and consumption patterns. Ideally, we would extend Levinsohn and McMillan by examining net benefit ratios along the Ethiopian income distribution pre-and post-food aid. This would tell us whether the provision of food aid was associated with households changing from net producers of wheat to net consumers of wheat. Longitudinal data of this sort are not available for Ethiopia pre-food aid. Instead, we use indirect evidence based on trends in production, consumption, and prices to examine the long-term consequences of food aid for Ethiopia. (1)

We then extend their analysis to the entire group of developing countries using a series of non-parametric regressions to identify trends in the production and consumption patterns of food aid recipients. We begin by exploring the relative importance of food aid by income level. We then explore the claim that food aid has turned countries that were once net food exporters into net importers. We study these trends separately for Sub-Saharan Africa (SSA) where poverty has increased over the past thirty years and where some of the largest recipients of food aid are. We conclude with a discussion of strategies for isolating the causal impact of food aid on outcome measures including poverty, food production (consumption) patterns, and net exports.

Food Production and Consumption Patterns in Ethiopia

Ethiopia receives more food aid than almost any other country in the world. Food aid reached 15% of annual cereals production in 2003, and typically represents between 5% and 15% of total annual cereals production (Jayne et al. 2002). At the same time, it is widely recognized that raising the productivity and profitability of smallholder agriculture is essential for poverty reduction in Ethiopia. Extensive government programs aimed at raising agricultural productivity have been disappointing. Many observers have attributed the poor performance of agriculture to uncoordinated food aid shipments (see for example, Harrison 2002 and GebreMichael 2004).

Figure 1 shows the evolution of wheat food aid to Ethiopia and domestic wheat production between 1970 and 2003. Notice that food aid did not play an important role in the Ethiopian economy until the famine of 1984. Most food aid programs began in the late 1950s, but according to the most comprehensive international trade data available (Feenstra et al. 2005), Ethiopia did not begin importing wheat until the early 1970s. Between 1984 and 2003, however, wheat food aid was on average equal to 68.4% of domestic wheat production, and in some years, wheat food aid exceeded domestic wheat production. Thus, the potential for wheat food aid to impact producer prices and domestic output is significant.

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In figure 2, we evaluate the claim that wheat food aid to Ethiopia is partly responsible for the decline in wheat producer prices. Wheat producer prices peaked during the famine of 1984 at a little over $400 per metric ton. In 2003, the producer price of wheat was only $100 per metric ton. The dramatic decline in producer prices occurred immediately following the famine of 1984, and since that time, there has been a slow but steady decline in producer prices. However, there is no apparent relationship between food aid and producer prices; food aid has been volatile while producer prices have been steadily falling. While it is impossible to rule out the possibility that food aid is responsible for the decline in producer prices, the aggregate data in figure 2 do not provide much support for this hypothesis.

Figure 3 confirms the poor performance of the wheat sector in Ethiopia: domestic production per capita was lower in 2003 than in 1970. The remarkable fact that stands out in figure 3 is the absence of correlation between wheat food aid and wheat production in Ethiopia.

Wheat production has remained relatively flat while wheat food aid fluctuates widely ranging from a low of near-zero in 1970 to twenty kilograms per capita in 1992. The result is that food aid has had a significant destabilizing affect on the availability of wheat in Ethiopia. This uncertainty about food aid deliveries may depress investment in domestic wheat production. We find no evidence, however, that wheat production as a share of total cereals production is on the decline in Ethiopia; it has remained relatively constant over the past twenty years ranging between 14% and 16%.

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Figure 4 confirms that food aid deliveries to Ethiopia are primarily driven by fluctuations in the U.S. price of wheat. Between 1984 and 2003, the simple correlation between wheat food aid and the U.S. price of wheat is -0.761. The starkness of this picture reveals that food aid is primarily driven by domestic political considerations in donor countries and not by a concern for poverty alleviation in Ethiopia.

The evidence presented in this section suggests the significant potential for wheat food aid to affect producer prices and incentives to invest in wheat. The volatility of food aid to Ethiopia, driven by variation in U.S. wheat prices, created uncertainty about supply conditions that might have deterred investment in the wheat sector. Although wheat food aid to Ethiopia is unlikely to have been a significant driver of the downward trend in Ethiopian producer prices, Ethiopia is as dependent on food aid today as it was in 1984. Hence, we cannot claim that food aid has had a significant beneficial long-term impact on the Ethiopian economy.

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Food Production and Consumption Patterns in Developing Countries

We begin with an investigation of the relationship between income per capita (measured in constant 1985 dollars at purchasing power parity (PPP) exchange rates and collected from the Penn World Tables version 6.1) and the average percent of cereals consumption from food aid. This exercise will help us to determine the relative importance of food aid for the poorest countries in our sample. We follow this with an investigation into the relationship between income per capita and the value of net food and net cereal exports as a share of gross domestic product (GDP), measured at current prices. This can be thought of as the fraction of current income earned from the sale of these products or spent to purchase these products. This exercise will help us to evaluate the claim that food aid creates dependency and is responsible for turning countries that were once net exporters of food into net importers of food. We are particularly interested in comparing how cereals imports have evolved over time since the bulk of food aid comes in the form of cereals.