In the name of the poor: the Ethiopian welfare system is regressive and inefficient
In this blog post, I argue that the Ethiopian social welfare system is not only inefficient but also regressive. Contrary to the rhetoric, the system is not progressive; it mainly supports the better off than the least fortunate. Also, the welfare system fails to promote the efficient use of goods and services. This is because the support is mainly in the form of price subsidy rather than income support. As a result, the price system plays a limited role in terms of providing signals to producers and consumers so that they take note of the changes and make the requisite decision.
Food items that receive government subsidies include cooking oil, sugar, and wheat. The subsidy channeled, for example, to palm oil—the main cooking oil used in Ethiopia—cost the government in the order of 227.45 mil ETB (8.06 mil USD) in 2018 alone. Who benefits from this government subsidy? They are those who buy these commodities, particularly, those who buy large quantities. Poorer individuals, on the other hand, may not be able to afford these commodities to begin with or can afford only a very little amount, which means they will receive little to nothing from the subsidy.
There are also several other goods and services that receive the government’s generous support for similar intended purposes but ended up benefiting mainly the better off. The Ethiopian government launched an Integrated Housing Development Program in 2005 aimed at supporting low- and middle-income households toward housing ownership. Under this program, Land was made available free of lease and bank loan interest rate was set lower than the commercial rate. But who benefited from this program? Households who were able to save from 20 to 40% of the housing value. Which Ethiopians can afford to save this amount of money? Mostly the upper-middle class.
Now, let me turn into water and electricity which some of us might even be unaware that they are highly subsidized. Water and electricity are supplied at a price that is far below their production costs (there are recent attempts to increase electricity tariffs toward cost recovery). When debates arise regarding, for example, raising water tariffs, the usual case made against such argument is that ‘let’s not deprive the poor at least drinking water’.
As we all know, the water supply in Ethiopia is very unreliable, including in the capital where piped water is available for a few days per week. Who is hit the hardest from this? Not the better-off households because they live in housing fitted with giant tankers that store water when it is released and use it for the rest of the days when piped water is unavailable. Also, the water consumption by better-off households is much higher, making them the largest recipient of the water subsidy. Even worse, households in rural areas usually do not have access to piped water even for those few days per week and still have to travel long distances in order to fetch potable water. Thus, removing water subsidies could help government free resources, which would then be used to further develop water production and distribution systems aimed at improving water accessibility and reliability for ALL. This may also help to mitigate the pervasive water wastage.
Another commodity that receives a generous subsidy from the government is oil (fuel). The poor either walks or relies on public transport to undertake their economic and social activities. The well-to-do, on the other hand, tend to drive private cars using the highly subsidized fuel (the subsidy in Ethiopia made oil one of the cheapest in the region despite the fact that it produces no oil). Needless to say, this subsidy is both inefficient and regressive.
Can we change the system?
In the past, given Ethiopia’s poor record system, the government might have had little means to reach the poor directly, but to target commodities that are deemed to have utmost significance for the poor. But now thanks to the advent of digital technologies and their widespread adoption, there is a real chance to revamp the welfare system.
For example, a recent paper published in the Nature journal documents how the Togolese government with support from researchers ingeniously leveraged data from mobile phone networks in order to identify and provide cash relief to the most affected households due to measures taken to contain the spread of COVID-19.
Ethiopia could also harness similar technologies to generate quality data on households’ economic status at a cheaper cost. Such data, coupled with the recently launched National Digital Identification (ID), which is crucial for the clear identification of citizens and legal residents, could create an opportune moment to shift from price subsidy into an income support for poorer households. Not only could this shift make the welfare system efficient and progressive, but it could also generate additional benefits. Removing the subsidy on wheat, for example, could force individuals to switch to sorghum, which is considered more nutritionally rich (in some of the parameters) and climate-resilient than wheat.
