Friday, November 19, 2010

Higher Food Prices and Poverty


Dani Rodrik asks if higher food prices mean higher poverty or does it mean higher income for the poor. He points to several articles and essays on this topic (refer notes below).


The issue is complicated. Just as we have expense basket we also have income basket. Agriculture appears in income basket of low-income HH. An increase in food prices, at least those forming part of income basket, should ideally help these low-income HH. However, the reality is different for most countries.

Often, most of price rise is effected at middleman levels (know for sure about India). The reason is typically inadequate market infrastructure for farm goods. Thus in countries where agri-product markets are well evolved, higher food prices tend to seep to the low income HH whereas in other areas they don't. (Some logical assumptions included).

Further, if a certain section of the low-income population is suffering drastically because of food price increases then it is difficult to justify the increase. Urban poor almost always suffer because of any food price increase. However, if urban poor can return to rural areas then it is possible to tweak their income basket to their advantage. This obviously depends on how volatile the price rise is.

The point is, whether the net impact of increasing food prices is beneficial depends on various factors. First, it depends on the profile of income basket and how much of income basket is increasing. Second, it also depends on how effective are agri product markets. Thirdly, it also depends on polarization of income baskets within lower income class.

Notes:

Dani Rodrick 2007 post - Food prices and poverty
Dani Rodrick 2008 post - Food prices and poverty confusion or obfuscation
Johan F.M. Swinnen - The right price of food
Maggie McMillan - Does OECD support for agriculture increase poverty in developing countries?
World Bank Implications of higher global food prices for poverty in low-income countries
World Bank Distributional effects of WTO agricultural reforms in rich and poor countries