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Implications of higher global food prices for poverty in low-income countries
April 2008
Maros Ivanic, Will Martin
World Bank

Acknowledgements: FANRPAN acknowledges the World Bank website as the source of this report: www.worldbank.org


Introduction

Since 2005, the world has experienced a dramatic surge in the price of many staple food commodities. The price of maize increased by 80 percent between 2005 and 2007, and has since risen further. Many other commodity prices also rose sharply over this period: milk powder by 90 percent, wheat by 70 percent and rice by about 25 percent. Annual average prices of key staple foods are shown in Figure 1. Clearly, such large increases in prices may have tremendous impacts on the real incomes of poor households in developing countries.

Despite widespread concern about the impacts of high food prices on poor people and on social stability (eg FAO 2007; World Bank 2008a), little hard information appears to be available on actual impacts on poor people. The overall impact on poverty rates in poor countries depends on whether the gains to poor net producers outweigh the adverse impacts on poor consumers. Whether higher food prices improve or worsen the situation of particular households depends importantly on the products involved; the patterns of household incomes and expenditures; and the policy responses of governments (World Bank 2008b).

Existing analyses tell us that the impacts of higher food prices on poverty are likely to be very diverse, depending upon the reasons for the price change and on the structure of the economy (Hertel and Winters 2006; Ravallion and Lokhsin 2005). A great deal depends on the distribution of net buyers and net sellers of food among low-income households (Aksoy and Isik-Dikmelik 2007). Only with careful examination of outcomes at the household level is it possible to tell whether changes in the prices of specific staple foods will help or hurt poor people.

A particular reason for concern about the impacts of high food prices on poor countries arises from the fact that the poorest people spend roughly three quarters of the incomes on staple foods (Cranfield, Preckel and Hertel 2007). On the other hand, the incomes of farm households—frequently one of the poorest groups in low-income countries—may be increased by higher commodity prices (Hertel, Ivanic, Preckel and Cranfield 2004). However, the benefits of higher food prices to poor farm households may be less than they might at first appear, since these benefits depends not on what they produce, but on their net sales of these goods.

In this study, we attempt to address the main implications of higher food prices on poverty following the methodologically simple yet data-intensive approach of calculating the short-run impacts on households’ income and costs of living following the changes in food prices. We do so using household surveys containing at least a thousand households in each of nine low-income countries, for which the data on consumption and production of the main food commodities are available. Besides calculating the change in household real income, we also estimate the impact of food prices on poverty rates and poverty gaps.

We consider two experiments in this paper. First we estimate the importance of small changes in the prices of individual commodities on poverty rates in each of our sample countries. We do so by conducting a stylized simulation in which we increase individual prices by 10 percent to assess the effect of a small change in the price of each commodity. Second, we estimate the impact of the actual food price changes between 2005 and 2007 on poverty in our sample of countries. In the initial analysis, we assume that changes in international prices are fully transmitted into domestic markets, and consider only the direct impacts of commodity price changes. We also consider scenarios under which commodity price changes lead to changes in the wage rate for unskilled labor—the other key source of income for most low-income households identified in Ravallion (1990).

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