Indian Statistical Institute

Ethiopian Food Policy Analysis: Demand

System Estimation

by
Rythem Jain
Sahil Bagdi
Shreya Bathla
Contents
1 Background 1

2 Policy Impact 1

3 Engel Curves 1

4 Demand System 2

5 Results 3

6 Discussion 4
6.1 Income Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.2 Uncompensated Price Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.3 Compensated Price Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.4 Policy Implication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1 Background
The project revolves around in-depth analysis of data from Ethiopia, an East African country. The data
is sourced from the Ethiopian Socioeconomic Survey 2018-19. Our focus has been on household-level con-
sumer expenditure on various commodities, of which we have chosen four: Teff, Milk, Sugar, and Wheat.
The number of observations, or simply put, the sample size, consists of approximately 4,700 households,
thus ruling out any bias related to inadequate sample size. As for the prices, marketplace data on prices
has been collected and matched with corresponding households according to the Unique Area Identifier Code.

Ethiopia, one of the world’s poorest nations, struggles with chronic food insecurity and relies heavily on teff,
a vital staple crop. Teff accounts for 28.5% of the country’s cereal cultivation land and contributes to nearly
30% of the per capita calorie intake for urban consumers. Despite its cultural and nutritional significance
and its role in alleviating food insecurity, the wholesale price of teff has surged from 15 Birrs per kilogram
(kg) in December 2015 to 28.6 Birrs per kg in December 2019. This sharp increase in teff prices has raised
concerns about its affordability for Ethiopian consumers and its potential impact on the prevalence of food
insecurity across the nation.

Policy Question: To address the issue of food security and affordability of cereals, the government imple-
mented a food policy that involved distributing subsidized wheat, which is another staple commodity widely
consumed in Ethiopia.
The aim of our project is to evaluate the effectiveness of this policy and determine whether subsidized wheat
can alleviate the food insecurity problem caused by the increasing prices of teff.

2 Policy Impact
The policy aims to distribute wheat at subsidized rates, resulting in a reduction in wheat prices. Wheat and
Teff are among the most commonly consumed cereals in Ethiopia and are close substitutes. Therefore, the
decrease in wheat prices is likely to negatively affect the demand for Teff as consumers switch to purchasing
wheat instead of Teff. Assuming a constant supply, a decrease in demand for Teff results in a reduction of
its price. This offsets, partially or fully, the initial increase in Teff prices.

3 Engel Curves
The engel curves below plots the budget share of each commodity in relation to log of total expenditure on
commodities of our demand system (this acts as a proxy for total income of the households). This is based
on the assumption of multi stage budgeting. In particular, Household are assumed to allocate their total
expenditure in two stages. In first stage, Household allocate their expenditure across food groups and in
second stage they allocate expenditure across food item within each group.

Teff: The Engel curve for teff initially remains flat for lower expenditures, but then rises steeply and takes
on an inverted parabolic shape for higher incomes. This implies that for lower incomes, the budget share
allocated to teff does not change significantly, but for higher incomes, it increases sharply before decreasing.
Additionally, the 95% confidence interval is narrow, except at the beginning and end.
Wheat: The Engel curve for wheat has an upward slope, indicating that the budget share allocated to
wheat increases with income. Additionally, the confidence interval is quite narrow.
Milk: The Engel curve for milk is flat at lower income levels and then fluctuates as income increases.
Additionally, the confidence interval is large towards the end.
Sugar: The Engel curve for sugar indicates that lower-income households allocate a higher budget share
to sugar compared to higher-income households. This suggests that sugar is a necessary commodity, as its
quantity demanded does not increase significantly with income. These findings align with intuition.

1
 Teff Wheat

1.5
1
.5

1
0

.5
-.5

0
-1

0 2 4 6 8 0 2 4 6 8
lpoly smoothing grid lpoly smoothing grid

Milk Sugar

1.5
.4

1
.2

.5
0
-.4 -.2

0
-.5

0 2 4 6 8 0 2 4 6 8
lpoly smoothing grid lpoly smoothing grid

95% CI lpoly smooth: s_teff

4 Demand System
The Quadratic Almost Ideal Demand System (QUAIDS) is an appropriate method for estimating this de-
mand system due to the non-linear nature of engel curves.

QUAIDS is used because it includes a quadratic term in the expenditure function, allowing for greater
flexibility in modeling the relationship between income and expenditure. This enables it to more accurately
capture how changes in income affect demand for different goods, especially for a wide range of income levels.
This non-linearity can be crucial for understanding the demand dynamics of luxury and necessity goods.

2
5 Results

Table 1: Budget/Expenditure Elasticities of Demand with Standard Errors

Teff Wheat Milk Sugar
Expenditure 1.5209 1.3207 1.2142 0.4143
(0.0127) (0.0259) (0.0314) (0.0089)

Table 2: Uncompensated Price Elasticities with Standard Errors

Food Type Teff Wheat Milk Sugar
Teff -1.5689 0.4572 0.1598 -0.5690
(0.1017) (0.0689) (0.0468) (0.0470)
Wheat 1.3555 -2.8480 -0.0281 0.1998
(0.1930) (0.1793) (0.0960) (0.0924)
Milk 0.7106 -0.0184 -1.3828 -0.5236
(0.1700) (0.1241) (0.1393) (0.1022)
Sugar -0.0958 0.1769 -0.0367 -0.4587
(0.0404) (0.0282) (0.0241) (0.0351)

Note: The entry in row i, column j represents the percentage change in the quantity demanded of good i
for a 1% change in the price of good j.

Table 3: Compensated Price Elasticities of Demand with Standard Errors

Teff Wheat Milk Sugar
Teff -1.0301 0.6502 0.3092 0.0707
(0.1013) (0.0689) (0.0468) (0.0475)
Wheat 1.8234 -2.6803 0.1016 0.7553
(0.1925) (0.1792) (0.0960) (0.0934)
Milk 1.1408 0.1357 -1.2635 -0.0130
(0.1691) (0.1240) (0.1393) (0.1033)
Sugar 0.0510 0.2294 0.0040 -0.2844
(0.0400) (0.0281) (0.0241) (0.0355)

Note: The entry in row i, column j represents the percentage change in the quantity demanded of good i
for a 1% change in the price of good j, while keeping real income constant i.e only considering the
substitution effect.

3
6 Discussion
6.1 Income Elasticities
Table 1 shows that the income elasticities for teff, wheat, and milk are greater than 1, indicating that they
are luxury goods. On the other hand, the income elasticity for sugar is between 0 and 1, suggesting that it
is a necessary good.
Although teff and wheat are commonly considered necessities, income elasticities greater than 1 suggest that
they are actually luxury goods. This finding is counterintuitive.

6.2 Uncompensated Price Elasticities

Uncompensated Price Elasticities provides demand elasticities that consider both income and substitution
effects. As shown in Table 2, all diagonal terms are negative, indicating that all own-price elasticities
are negative, as expected. While the corresponding off-diagonal terms differ in magnitude, they share the
same signs. Wheat has the highest uncompensated own-price elasticity, followed by teff, milk, and sugar,
respectively. The cross-price elasticity between wheat and teff is high, indicating that they are close gross
substitutes.
For instance, a 1% increase in the price of teff leads to a 1.35% increase in the demand for wheat. Others
coefficients can be interpreted similarly. Additionally, the elasticity between milk and sugar is negative,
indicating that they are complementary goods, which aligns with our intuition.

6.3 Compensated Price Elasticities

Compensated Price Elasticities provide demand elasticities that only consider the substitution effect. Table
3 shows that all diagonal terms are negative, indicating negative own-price substitution effects, which is
consistent with the law of demand. Additionally, the off-diagonal elements have the same sign, except for
milk and sugar. Wheat has the highest own-price compensated elasticity, followed by milk, teff, and sugar.
Wheat and teff are close net substitutes, as indicated by their high positive cross-price compensated elasticity.

6.4 Policy Implication

Given the background, if the price of teff increases by 1%, its demand will decrease by about 1.5%, while the
demand for wheat will increase by about 1.35%. If a subsidy is imposed on wheat resulting in a 1% decrease
in its price, the demand for wheat will increase by approximately 2.84%, while the demand for teff will only
decrease by 0.45%. Therefore, the total demand for teff will decrease by 1.95% (1.5% + 0.45%), while the
demand for wheat will increase by 4.19% (2.84% + 1.35%), which is significantly more than the decrease in
demand for teff. So Subsidizing wheat can increase aggregate consumption and improve consumer welfare
(assuming aggregate consumption as the welfare measure). This is because wheat has a high own price
elasticity and cross-price elasticity with teff. We have done this calculation using uncompensated elasticities
but result will be same even with compensated elasticities. Therefore, by subsidizing wheat, the negative
effect of an increase in teff price on consumers can be offset.