This paper presents a bio-economic model of a less-favored area in the highlands of Ethiopia. Land degradation, population growth, stagnant technology, and drought threaten food security in the area. Rainfall risk appears to have increased in recent years. The bio-economic model is used to analyze the combined effects of land degradation, population growth, market imperfections and increased risk of drought on household production, welfare, and food security. Furthermore, it is used to assess the impact of increased access to credit for fertilizer, off-farm income, Food-for-Work interventions, and planting of eucalyptus as alternative strategies for development of the area.

The analysis shows that household welfare and land quality are deteriorating rapidly in the area and that interventions are urgently needed to avoid human disaster. Provision and adoption of credit for fertilizer, although risky, are predicted to lead to increased grain production and improved household welfare and food security. Better access to credit may have a negative effect on conservation incentives, but this may be mitigated by linking a conservation requirement to provision of credit for fertilizer. Better access to off-farm income may improve income and reduce vulnerability to drought. However, it may also reduce incentives for own food production and land conservation. Provision of Food-for-Work (FFW) may also undermine own food production and incentives to conserve land unless FFW is linked to land conservation. FFW may then be used to enhance food security and land conservation provided that the programs are compatible with local priorities. Planting of eucalyptus on land unsuitable for crop production may substantially increase household incomes if market outlets for trees can be identified and off-farm employment opportunities are limited. Tree planting will not have severe negative effects on food production or land conservation. A policy combining promotion of tree planting and conservation of cropland may achieve win-win benefits in terms of increased household incomes as well as more sustainable land use.