Quarterly Journal of International Agriculture No. 3/07
Fall in technical efficiency of small farm households in the post reform period
Beyene Tadesse Ferenji
Addis Ababa University, Ethiopia, and
Franz Heidhues
University of Hohenheim, Stuttgart, Germany
Abstract
A market based economic system is expected to lead to a more efficient
production by providing producers with incentives to realize
input-output combinations close to the production frontier. However,
technical efficiencies could remain constant or even decline if only
the best farmers implement rapid technological change and a large
numbers of farmers are left behind. Changes in motivation and ability
of farmers to use the best techniques and innovations in the production
process were examined using a random coefficient framework. A
stochastic Cobb-Douglas production function that incorporates
time-varying inefficiency effects and technological changes was applied
to Ethiopian farm-households based on panel data collected at intervals
of years (1994, 1997, 1999 and 2001) in maize production.
Despite the fact that farmers in general increased the use of chemical
fertilizer and improved seeds, the study results show that they became
gradually more inefficient in the period under investigation. The
technical efficiency of farmers declined by a mean of 15%, which
resulted in a loss of about 24% of the potential output at the end of
the study period. This clearly demonstrates that market liberalization
alone does not always guarantee more efficient production. Major
limiting factors were identified by applying the Technical Inefficiency
Effects model. Decline in efficiency was generally attributed to the
fact that changes of institutions and farmers’ managerial skills were
not in parallel with improvements in maize production technology.
Whereas household education, access to credit and size of livestock
owned positively and significantly influenced the technical efficiency
of farmers, unreliability of the maize price, distance from the main
road (remoteness) and arising household’s dependency ratio negatively
affected it.
Keywords: institutional change, market liberalization, technological change, technical efficiency
JEL: Q160
Vol. 46 (2007), No. 3: 241-261