Analysis: Eritrea's 'public distribution system' tested by adversity

Ravinder RenaSpecial to the Middle East TimesApril 20, 2006MAI-NEFHI, Eritrea -- The Eritrea government pledged last year to reduce the inflation rate. Inflation, which had remained manageable following the country's independence in 1993, has been consistently high since 1998 mainly as a result of the war and drought, monetary expansion for deficit financing, and the depreciation of the Nakfa. Prices of many essential commodities have jumped by several hundred percent owing to the 1998-2000 border war with Ethiopia. Unsurprisingly, the poor have been hit hardest. Agricultural growth has fluctuated significantly year-by-year, largely due to weather conditions, while Eritrea's food security has not improved. But greater rainfall last year helped the agricultural sector and bettered food security in the country. In line with its taking the challenge in May 2005 to lower inflation, the Eritrean government established the Hidri Distribution Company along with Dukan Rithawi Waga, or "Fair Price Shops", to distribute sugar, sorghum, wheat, the cereal taff, coffee, tea powder, lentils and other essential items, at below-market prices. The government directed state-owned Hidri Distribution to sell these foods at cut prices - some commodities as low as 50 percent under market prices. In this way the government has been able to hold prices down. A public distribution system (PDS) was set up and based on purchasing goods from farmers at low prices, thereby both providing farmers with guaranteed sales and households with food grain at minimum prices, while creating buffer stocks. This method has already worked successfully in densely populated countries like India, China and many other developing countries. The PDS is unable to provide all the answers, however, to Eritrea's food, fiscal, welfare and development policy needs. Despite it achieving a fairly good level of production in cereals, food insecurity in Eritrea continues to trouble some 1.5 million people. Drought results in malnutrition and acute distress every lean season. This has been acutely so for the last six years. And food insecurity is worsening every season in Eritrea. This widespread problem demands long-term measures, structural-institutional changes and a rewriting of priorities, policies and systems of socio-economic management. Several leading policies and programs, such as the Food Security Strategy and the Poverty Alleviation Strategy, are also helping by accelerating food production. But even though dampening market prices has increased the volume of procured and unsold grain, it has become clear that the production increase will not be sufficient to eradicate hunger. The cost to the state to guarantee minimum support prices to growers can be considered as a consumer subsidy only if the food is actually purchased by the target households. There has been an involuntary addition to food stocks beyond the buffer requirements, brought about by ignoring the price-income frontier or the affordability and preference pattern of the target users. Products supplied by PDS have been diverted to the wealthier sections of the population. Can any public expenditure that does not reach and benefit the target persons, be treated as a 'subsidy' for them? Of course not. A deficit becomes a subsidy only if that service is consumed by the intended citizens. Anyone may shop at Fair Price Shops, including the wealthy and foreign residents. But it would be better to target the poor - and exclude the successful businessmen, highly paid employees, farmers with marketable output - by means of special entitlement cards, distributed directly by officials through a door-to-door survey in each village and slum. This approach will reduce the government burden and stop the diversion of goods away from the underprivileged. Furthermore, other essential items may be added to the existing list of commodities, which can further control the prices. This analysis of PDS mechanics and its interface with households as consuming entities is especially relevant in light of recent developments with the Fair Price Shops in Eritrea. Ravinder Rena is an assistant professor of economics at the Eritrea Institute of Technology and Teacher Education in Mai-Nefhi, Eritrea