NAIROBI, KENYA -- Ethiopia's Marxist government, dogged by famine in part because it has failed to pay fair prices to its peasant farmers, has agreed to significant changes in its agricultural policies that likely will free up millions of dollars in development aid from the West, according to several major western aid donors.

Since the famine of 1984-85, Ethiopia has been under increasing international pressure to liberalize a system that western critics have said gives farmers little incentive to grow more than their families can eat. The system has contributed to Ethiopia's chronic food shortages and left it unnecessarily vulnerable to famine.

The reforms would increase crop prices that the farmers receive from the state-controlled marketing board and allow them to sell more of their harvests to private traders, according to Ethiopia-based representatives of western donors.

A U.S. relief official in Addis Ababa, however, cautioned that while the government apparently agreed to the reforms in late December, the changes have yet to be seen in the marketplace. The official added that the most difficult problems associated with the reforms, such as the proposed changes in the quota that farmers must sell to the government, have yet to be worked out.

"It's a good signal of intent," said Rick Machmer, director of the U.S. Agency for International Development in Ethiopia, in a phone interview from Addis Ababa. "But . . . who will set the quota? And will it be set in Addis, or by local authorities? It has to be flexible. And who will have the power to change it?"

The changes are likely to release more than $100 million in development aid from the World Bank and the European Community, according to representatives from those organizations. The EC had refused to release $78 million in development money until Ethiopia agreed to inject free-market incentives into its faltering farm economy.

"It's a big step," said Benno Haffner, the European Community's delegate to Ethiopia. "We and the government agreed that a good incentive for the small farmers who represent 90 percent of the rural population would be higher prices."

The Ethiopian government decided to make the changes in late December after completing an exhaustive study of its farm pricing system, according to Haffner and Ingo R. Loerbroks, the representative in Ethiopia for the U.N. Food and Agriculture Organization. The aftershocks of the 1984-85 famine, during which an estimated 1 million Ethiopians died, coupled with an unexpected drought this past year, directly influenced the decision, Haffner said.

"Once the government had a short breathing period after '84-85, they began thinking, 'How can we stabilize production, how can we get away from the dependence on foreign assistance?' " Loerbroks said. "These changes came as part of a long dialogue between the government and donors."

The changes must meet with the formal approval of the World Bank and the EC before the development funds will begin to flow, officials said.

Donors said they hope the reforms, coupled with a major infusion of aid for irrigation, fertilizer and seed improvement, eventually will lead to food surpluses in Ethiopia to enable it to withstand its crippling cycles of drought and crop failure. Though plagued with inadequate rainfall, Ethiopia has many fertile areas. Given proper incentives and improved cultivation methods, experts believe that it has the capacity to feed itself.

But relief officials caution that the reforms will not solve Ethiopia's present food crisis.

"It's not going to turn the situation around for several years," said Machmer of AID.

As a result of last summer's drought in the north and central highlands, Ethiopia has requested more than 1 million tons of food. An estimated 7 million of its 45 million people are at risk, according to the latest estimate by the United Nations.

Unlike the famine of 1984-85, when the government first attempted to hide its food problem, this time Ethiopia asked for help as soon as the severity of the drought was understood. Donors, too, responded faster this time than in the previous emergency. But relief officials said it is still unclear whether large amounts of food can be transported into mountainous, war-affected regions of northern Ethiopia in time to avert widespread starvation.

Even when the rains are good, Ethiopia has a food deficit of 500,000 tons, according to an AID study conducted last year. Had the reforms been implemented 10 years ago, Machmer said, Ethiopia still would need hundreds of thousands of tons of food this year.

Complicating the country's so-called built-in food deficit are recurrent drought and soil erosion and decades of civil war in the north. Food production also is limited by cultivation methods that have not changed in centuries. Only 5 percent of farmers use fertilizer; only 2 percent use improved seed.

Ethiopia has resisted free-market farm reforms that have swept Africa in the past three years. In many of those countries, including socialist Tanzania, higher prices for peasant farmers have led to increased food production. Even the Soviet Union has urged Ethiopia to stop trying to collectivize agriculture and concentrate instead on increasing the productivity of small farmers.

The United States, which contributed $95 million in emergency assistance last year and will continue to supply one-third of Ethiopia's emergency food needs, is prohibited by law from providing development aid until Ethiopia repays or otherwise settles military debts incurred during the dictatorship of emperor Haile Selassie.

A senior U.S. State Department official on a recent swing through East Africa described Ethiopia as "utterly out of step with the rest of the African mainstream" and said the U.S. government remains "skeptical" that the Ethiopian government is serious about change. "What that government seeks to do is create the impression of dialogue . . . in order to impress various audiences," the official said. "But if they do make the changes in the actual tangible behavior, and not just the words, we will take note."