1 Chapter Two: Literature Review

1.1 Theoretical Literature Review

1.1.1 Development of Agro-industries in Ethiopia, strategy and policy:

For long time African economy has been dominated by the export of Agriculture and mineral
primary products, which are activities with diminishing returns on scale. After gaining
independency during early second half of 20th century, almost all African countries adopted
input substitution industrialization, which required strong government interventionist that would
protect and support infant industries through different protectionist policy against competing
importers. Indeed, these ISI policies had showed significant increase in African GDP for a
decade. However, its implementations were cut off when structural adjustment program were
introduce in Africa (Ogujiuba et al., 2011; Oqubay, 2018).

In Ethiopia, the agricultural sector has dominated the economy for centuries in terms of
employment and foreign exchange earnings through supply of raw materials, meanwhile, the
productivity of agriculture in Ethiopian economy to be reminded lowest. However, as literature
suggests, agricultural sector is incapable of independently brining the nation out of poverty
(Rient, 2007); that is why we need to develop our agro-industries so we can shift our economic
structure to manufacturing sector. Ethiopia has a long history of Agro-industries that began in
1940’s. Agro-industries are the building block of industrial expansion through developing local
manufacturing industries; it uses the agricultural products as its primary input resources
(Clarence, 1969). The policies and strategies for improving the sector have been dependent on
the political ideologies of the Ethiopian government over the last decades.

During the imperial regime, the government of Ethiopia initiated a ten-year program of industrial
development (1945 - 1955) by the help of USA after the mutual Aid agreement of August 1943
between two countries. After that, the government has designed three consecutive five-year plans
that emphasize local manufacturing factories, in particular, agro-industry sectors. The first five
year plan (1958 – 1962) gave more emphasis on producing import-substitute goods with the
development of light and consumer goods-producing industries, mainly food & textile industries,
targeting the domestic market. In the next two consecutive 5-year development plans (1963 -
1967, & 1969 - 1974); the more attention was given to the sector development and the heavy
industry program to attract more foreign investors. Throughout the Plan period, the government
took different protection policy measures to encourage investments in manufacturing industries
including; high tariff, banning of imports. However, the overall industrial base of the country
had remained weak due to the problem of capacity, enabling environment and, financial issues,
among other factors. After the imperial regime has been collapsed in 1974, the Dergue
government came to the power with Social Economic ideology. Under the Dergue regime, the
development strategic aim was similar with the previous regime i.e. targeting to develop Import-
substitution and labor-intensive industries (such as agro-processing and textile) through taking
various policy instruments; however, in Dergue regime economy was state-led rather than
private-led. Throughout the Dergue government the industrial sector was declined dramatically,
the government did try some policy measures to cure the problem but, none of it worked. Indeed,
the poor policy towards private sector along with intense political confrontation was among the
major causes for the decline. (Gebreeyesus, 2013; Getnet & Admit, 2005).

In 1991, the EPRDF came into power and launched a more market-oriented economy and takes
the private sector as an engine of economic growth. And, the government has made a series of
economic reforms under the structural adjustment program by changing the command economic
policy. As a result, various private investors were back to the manufacturing sectors and play a
big role in the process of economic development. This promising policy environment created by
the economic reforms tied with macroeconomic revitalized the manufacturing sector and the
economy as a whole.

Through its period the government has perused an agricultural development led industrialization
strategy, hence it has believed that developing agricultural sector would create the enough food
supply for domestic consumption and raw material for industrial sector. To fulfill this aim,
different development plan were introduced including (SDPRP, PASDEP, and GTP-I &II). This
development plans gave great emphasizes to small holder agriculture and the industrial sector
development ( Gebreeyesus, 2013, Oqubay, 2015).

In 2018, with the coming of Prime Mister Dr. Abiy Ahimed to the power EPRDF government
reformed itself into a new form and in September 2019 the government of Ethiopia launched the
Home-Grown Economic Reform (HGER) agenda. In order to sustain the economic growth of the
country, the reform agenda have given priority to structural adjustment to the economy and
Macro-economic stability (FDRE, 2020). In terms of Industrial policy, great attention is given to
increase the country’s potential in manufacturing sector through development of Integrated
Agro-industrial parks. Similar to the previous period, IAIP will be used to produce goods and
products for domestic consumption as well as for exporting purpose. (Woolfrey et al., 2021;
Alemu & Berhanu, 2018)

1.1.2 Food security and Development perspectives

The concept of food security has evolved considerably over time and it has given different
definitions by different researchers and scholars. There are over 200 definitions and 450
indicators of food definitions (Mohamed, 2017). According to FAO, food security is a situation
that achieved at the individual, household, national, regional and global levels when all people, at
all times, have physical and economic access to sufficient, safe and nutritious food that meets
their dietary needs and food preferences for an active healthy life (FAO, 2005). Based on this
definition four main dimensions of food security are developed; which are food availability, food
accessibility, food utilization and food stability. Food availability: refers to the presence of food
at global, national, household and individual level. Food accessibility: refers to resources that
household have to obtain foods, either through own production of through purchase. Food
utilization: refers to the nutritional benefits derived from food consumption which is related to
proper food processing, storage techniques and sanitation service exist. Whereas, Food stability:
refers to the stability of all other dimension of food security over time, even if your food intake is
adequate today, you are still considered to be food insecure if you have inadequate access to food
on a periodic basis, risking a deterioration of their nutritional status. Therefore, food security to
be insured at global, regional, national, household and individual level food stability should be
maintained (Mohamed, 2017). The definition of food security has been advance further during
the WFS 2009 where in beside the four pillars of food security: availability, accessibility,
utilization and stability; the nutritional dimension become an integral part of the food security
concept, while making it imperative for rigorous actions at all levels namely, individual,
household, national, regional, and global levels, and coordinated efforts and shared
responsibilities across institution societies, and economies food tackle food insecurity
effectively. (Habiba et al., 2015).

Food insecurity is a situation which occurs at individuals, households or nation level that has
neither physical nor economical access to the nourishment they need. Household is said to be
food insecure when its consumption falls to less than 80% of the daily minimum recommended
allowance of caloric intake for an individual to be active and healthy. In particular, food
insecurity includes low food intake, variable access to food, and vulnerability livelihood strategy
that generates adequate food in good times but is not resilient against shocks. These outcomes
correspond broadly to chronic, cyclical or seasonal, and transitory food insecurity, and all are
endemic in Ethiopia. Chronic food insecurity: is long-term or persistent in that it can be
considered to be an almost continuous state of affairs. Seasonal or cyclic food insecurity may be
evident when there is a recurring pattern of inadequate access to food such as proper to the
harvest period when household and national food supplies are scares to the prices higher than
during the initial post-harvest period. On the other hand, transitory food insecurity: is usually
sudden in onset, short-term or temporary and refers to short periods of extreme scarcity of food
availability and access (Mohamed, 2017).

In Africa, Improving food security; through ending poverty and ensuring access by all people to
food and ending all form of malnutrition is among the SDGs mentioned under the 2030 agenda
(UNECA et al, 2022). However, for the past many years, food imports into the continent have
been rising. In fact, food import for the continent grew at annual rate of 3.3% from 1999 to 2015,
faster than the rate of population growth (Olabisi et al., 2021). There are many considerable
reasons to increase domestic food production and reduce dependency on food imports in Africa;
which includes; decreasing negative impact of food price increase, reducing poverty, and
preventing food riots (Woodon & Zaman, 2010). As minot noted, poor household spend around
60% of their disposal income on food and, hence price spikes impact their purchasing power
(Minot, 2014). It is believed that enhancing agro-processing industries support aims to food
security and increase Africa’s ability to feed itself (Olabisi et al., 2021). In addition, SMEs play
an important role in food production, food processing and retail—and thus in the overall food
value chain. It’s also responsible for more than two thirds of all jobs worldwide, and also account
for the majority of new job creation (ILO, 2019; Demmler, 2020). Besides, the food and
agriculture sector is crucial in the effort to ensure food and nutritional security; there are a
number of global trends that are influencing food security, poverty and the overall sustainability
of food and agricultural systems (FAO, 2017).

In sub Saharan African countries; improving food security; through reducing food imports and
promoting domestic production food have been the main goals for policy makers and other
stakeholders. As literatures showed; these countries have adopted protections measures and
block action that are needed to improve the competitiveness and efficiency of domestic food
productions including edible oil (Mgeni et al., 2018, 2019a; Olabisi, 2020). Because of its ability
to produce oilseeds; Ethiopia has comparative advantage in the domestic production of edible oil
for its consumption. However, it entirely depends up on the imports of edible oil to domestic
consumption. Import requires allocation of foreign currency from the meager export earnings of
the country; which forces cash strapped countries to divert the scare foreign currency reserve
away from developmental agendas (FAO, 2011). Furthermore, dependences on trade expose a
country to supply risk as well as price risk (Bailey et al., 2013).

1.1.3 Overview of production and demand for edible oil

[Link] Production of oilseeds in Ethiopia

Ethiopia consists of various climatic zones and a range of altitude from below sea level up more
than 4,500 meter above sea level. This enables it grow different types oil seeds, in which it has a
long tradition (Wijnands et al., 2009). According to Survey of Central Statistical Agency,
Ethiopia’s Total production of oilseeds is over 750,000 MT annually for the past consecutive
years. For instance in 2013 E.C the total production of oilseeds is 777,444 MT showed 7.7
declines over the year before. Out of the total production Sesame takes the largest amount with
33.4 percent share followed by Niger seed and Groundnuts with 27.6% and 26.3% shares
respectively (CSA, 2021; NBE 2021). Despite, Ethiopia being endowed with vast arable land
and favorable agro-climatic zone for cultivation of oilseed production, Ethiopia is producing way
behind its actual potential because of the low productivity exists in a sector due to poor
production technology (including use of unimproved seed), rain-fed cultivation and the sector is
pre dominated by smallholder farmers (CSA, 2021; FAO, 2017). In addition, in most recent
years production of oilseeds has been showing slight decline because, farmers are choosing to
use their land for better rewarding crops in terms of return they gain (Ahmad, 2020).

Most recently, big efforts have been started by the government of Ethiopia and other partners to
improve agricultural productivity and supply side chains. Unfortunately, the oilseed products are
categorized under the cash crop, where most its quantity are exported to the rest of the world. In
2021, Oilseed crops are the 4th largest foreign exchange earner next to coffee, cut flowers, and
chat; with its values of 355.5 million of USD and it contributes about 14% of Agricultural export
in Ethiopia (NBE, 2021). Yet, the deficit of edible oil is common problem in the countries at the
same year.

[Link] Production of edible oil in Ethiopia

Despite being one of the foremost countries in production of oilseeds in the world, Ethiopia is
among the edible oil deficit countries in Africa. The total annual production of edible oil in a
country is estimated around 30,000 tons with its contribution to domestic consumption is only
negligible (below 20%), the rest (above 80%) of edible oil for consumption is imported from
different countries, of which about 90% are palm oil by volume (FBPIDIE & GAIN, 2018;
Ahmad, 2020).

According to FBPIDIE and GAIN (2018), there are over 800 different oil processors factories in
Ethiopia; among which over 90 per cent of the factories are medium and small scale enterprises.
After assessing 270 oil processing factories, the have found that nine types oil are processed,
where the Niger seed oil is most processed. Nevertheless, Ethiopian oilseed processing sector is
inefficient and suffer from low capacity utilization. In fact, the average capacity utilization of
factories is about 40 per cent (FBPIDIE & GAIN, 2018).

Among many other factories, two government policy directions have negatively affected the
ability of edible oil processors to achieve the economies of scale and improve capacity o
utilization. First, the export promotion strategy, under this strategy oilseed is categorized as cash
crops. This creates a huge market challenges for local edible oil processors, since they have had
strong competitions from exporters as well as retailers through supply chain. This government
tendency to favor exporters over local processors has worsened oilseeds shortage. Evidences
have showed that, over the past years, local Prices for oilseeds at EXC where considerably above
the international markets prices. Second, the government’s intervention in edible oil market
through importing and distributing palm oil for local consumers at low-prices. This measure to
stabilize domestic price for edible oil has created another negative impact on the local processors
as consumers would shift their demands towards imported oil in terms of both price and quality
advantages (Ahmad, 2020).

[Link] Demand for edible oil in Ethiopia

Ethiopia is the second populous country in Africa over 100 million Population with 2.1% growth
rate annually (NBE, 2021). Its annual edible oil demand is estimated around 240, 000 MT, that is
increasing at a rate >10% annually. Traditionally, in Ethiopia majority of people, especially in
rural areas have used unrefined oils and animal fats such as butter; for consumptions as well as
oilseeds have been used to flavor foods consumed at home (CSA, 2021). In 2022, MOTI’s
forecasted demand for edible oil in Ethiopia is around 906.5 million liters. Of which 90% are
imported. According to data from MOTI, the share of local edible has been increased as large
edible oil factories (Phibela & W.A.) has started operating in 2020.

1.2 Empirical literature review

There are a number of empirical works of literature conducted to better understand the relations
among consumption, production and trades of commodities (Hossain, 1997; Chowdhury and
Herndon, 2000; Hassaouneh et al., 2012; Nazlioglu and Soytas, 2011; Chen et al., 2012; Chen
and Han. 2015; Andrei et al., 2016; Umanath et al., 2018; Olabisi et al., 2020). Most of these
studies have used unidirectional single-equation model for estimating supply and demand for
commodities.

Angus et al. (2009) examined the demand for and supply of agricultural commodities, and the
characteristics of farming and food industries and pointed out that future land use was likely to
be shaped by market for agricultural and food products. Frone et al. (2010) analyzed the level
and intensity of the cause-effect dependences between consumption of food and prices. Dinu et
al. (2012) analyzed the evolution of trade flows, imports and exports with food products of
Romania, and tested their degree of correlation with domestic production. Hassaouneh et al.
(2012) investigate the dynamics relationships between biodiesel, sunflower oil and crude oil
price in Spain by using both Vector Error Correlation Model and Multiple linear regression
models. Their results indicate that sunflower and crude oil prices drive biodiesel process both in
short and long-run. Radman-Funaric (2013) estimated the relations between the amount of
production, imports, exports, and the availability of electricity to its final consumption in
croatioa, by applying the regression model. Econometric analysis of trade, exports. Imports, and
consumption were studied by Al-Mulali and Sheau-Ting (2014). Olper et al. (2014) discussed the
import competition and productivity growth in the food industry in European Union countries
and found out that the European Union food imports were closer substitutes for domestic
production than non-EU imports.

Also, different studies have made in different countries, to investigate the inter-relation between
production, consumption and trade markets in edible oil sector. Kaya et al. (2015) studied the
sunflower market in Eastern European countries, emphasized the great potential of these
countries in producing sunflower seed and oil. Rahoveanu et al. (2018) studied overview of
sunflower seed and oil market, pointing out the factorial relationship between sunflower oil
production, import and consumption by using linear regression model. They found that Romania
could fulfill its demand consumption of edible oil by domestic production. Olabisi et al. (2020)
investigated the price-response of households, and how they substitute between palm and
sunflower oils by using QUAIDS model on Tanzania household level data. They pointed out that
demand for edible oils is relatively inelastic with own-price elasticities. Megeni and Mpenda
(2021) analyzed the market demand for edible oil and its determinants in Tanzania by using
Nerlove’s Partial adjustment model. Findings from their study showed that demand for edible oil
is inelastic for increase in imported palm oil price, but elastic for domestically produced
sunflower edible oil. This implies that the price for imported palm oil is lower than domestically
produce sunflower oil.

On the other hand, most studies have used Simulation equation models to solve the inter-relation
between production, demand, supply, price, and trade of food commodities (Lamm and Westcott,
1981; Dority and Tenkorang, 2016; Bayramoğlu et al. 2016; Wahib, M. A., et al,. 2017; Sativa et
al., 2017; AKhmad, 2020; Umanath et al., 2020; Rachmaniah et al., 2022).

Bayramoğlu et al. (2016) used simultaneous equations system, including equation for supply and
demand of corn, bioethanol, and corn price. Sativa et al. (2017) by using two-stage least square
(2SLS) estimation approach, assessed the effectiveness of reference price policy in prompting
red chili through import management and determine the factors that affect the red chilli deals in
the effort to stabilize the price. The result showed that reference price policy was not effective to
cease the price for red chilli fluctuating. So, they recommended, the policy measures that
encourages red chilli farmers importance that would increase the amount of production for
continuity the supply side. Malaiarasan et al. (2020) have investigated inter-relationship between
sugar supply and demand in Indian sugar sector by applying three-stage least square (3SLS)
estimation method. They concluded that price of sugar affected sugar supply positively and sugar
demand negatively, which is consistent with the theory of demand and supply that says demand
for commodity is negatively affected by its price whereas supply has positive relation with price
of commodity. Rachmaniah et al. (2022) examined supply and demand model of by using two-
stage least squares (2SLS) estimation method; aimed to support innovative chili enterprise
system.

Only few studies have attempted to study market behavior and price determination in edible oil
sector using Simultaneous equation model (Tetiy, et al., 2009; Ekram El-Rahman, and Rania,
El-Saied T., 2021). Tetiy et al. (2009) examined the factors influencing the palm oil price and
consumption by applying two-stage least squares (2SLS) method and found that palm oil
consumption is significantly affected by domestic palm oil price and population whereas, palm
oil price is affected by domestic palm oil production. Ekram El-Rahman, and Rania, El-Saied T.
(2021) studied production, consumption and food gap of oil crop in Arab World by using three-
stage least squares (3SLS) approach and analyzed the inter-trade structure of oil crops. Their
findings indicated that, an increase in cultivated area of oil crops results in an increase of
domestic production of edible oil while, the increase in import of edible oil will result in increase
of oil consumption.

Regarding policy perspective, a number of studies have conducted showing that the government
intervention polices (such as, tariff and non-tariff barriers) basically impact the change in
consumer and producer surplus and it will promote domestic production in developing countries
(Diao et al., 2008; Gillson and Amir, 2015; Oqubay, 2015; Adewale, 2017; Jahari and Kilama,
2018)

Diao et al. (2008) pointed out that African countries can fulfill its food self-sufficiency goal by
implementing significant policies both on production and marketing of agricultural products.
However, low productivity in agricultural products along with poor capacity of food processing
is among the factors contributing food deficiency and increasing amount of food imported.
Adewale (2017) argues that imposing tariff as an import substitution industrialization policy
stimulated industrialization in the BRICS countries. Since, the import tariff will make the import
price for similar commodity more expensive to domestic prices (Akhamad, 2020). On the other
hand, Oqubay (2015) showed the evidence from Ethiopian cement manufacturing sector arguing
that the government intervention policies have played a huge role in developing cement
manufacturing sector in in early 2000s both by direct and indirect supports. Whereas, other
studies have showed that tariff imposes, when implemented solely it would not produce the
intended results (Jahari and Kilama, 2018; Mgeni et al., 2018, 2019a; Olabisi et al., 2020; Mgeni
& Mpenda, 2021). Rather it would cause a reduction in the efficiency and competitiveness of the
sector (Mgeni et al., 2018) and also it would have limited effects on stimulating consumer
demand for domestic edible oil (Olabisi et al., 2020). In addition, (Mgeni et al., 2019a) pointed
out the imposition of tariff can be used as a short run measure allowing domestic industries to
grow and achieve the desired level of industrialization subsequently in long run trade
liberalization can came into play. Hence, that this policy intervention is inefficient in terms of
productivity & creates a supply deficit in the market, thus reducing consumer’s welfare.

Instead, studies have recommended that government should use Intervention policies like the use
of improved seed and other modern technologies that reduce costs of production and that targets
increasing productivity of oilseeds (Mgeni et al., 2019a, b; Mgeni & Mpenda, 2021). Gillson and
Amir (2015) note that it is often advised that input subsidies and seed policies can also improve
comparative advantage for domestic agriculturally produced commodities instead of increasing
tariff. In addition, Hartrich and Berhanu (2021) mentioned that government should improve the
productivity of oilseeds production through providing of improved seeds and irrigation methods,
this primarily incur farmers income as well increase the amount of market supplied for the
market. Additionally this increase in the amount of oilseed production resolves the basic problem
of domestic edible oil processors; i.e. lack of supply of oilseeds. As edible oil processing sector
predominately rely on locally produced oil crops.

On trade liberalization policy side we have India; that has liberated its edible oil import in 1994
under WTO rules. Dohlman et al. (2003) mentioned that in addition to high population and
steady economic growth, the trade policy reform has play key role in increasing demand for
consumption and import of edible oil in India. Under this policy India abolished import quotas
from imports of oils, have increased market access which negatively affected domestic edible oil
processor and Vanaspati industries (Shivakumar et al., 2007). Oilseed crops sectors have also
affected under this reform as domestic price support policy favored production of crops that
competes with oilseed which results in declining oil crop production and stagnant yields. Persaud
and Landes (2006) argued current policies are not achieving intended goals of benefiting small
farmers and reducing import dependence. However, they are imposing large costs on consumers
and creating an inefficient processing sector. In addition efficiency gain in oilseed processing
sector through increasing capacity utilization and modernization of processing sector are
important to reduce cost of production of edible oil (Reddy et al., 2009). In fact efficiency in
oilseed processing sector have also hampered by poor infrastructure and policy restriction these
scale processing plants (Dohlman et al., 2003).

1.3 Conceptual framework