Food prices and poverty: confusion or obfuscation?

I can't seem to get off this topic.  This time my excuse is Maggie McMillan of Tufts, who rebukes me for having missed an opportunity to point out an important contradiction in the empirical literature surrounding the question of what a rise in food prices does to the world's poor. 

Maggie, who has written insightfully herself on this question (did I mention that she was my student at Columbia?), was surprised that I referred in an earlier post to a World Bank study by Ivanic and Martin which argued that the poor would be hurt from a rise in world prices in a clear majority of developing nations that these authors looked at.   What about this other World Bank paper (this one by Tom Hertel and company), she asks, which suggests the opposite?

Indeed, the second paper, which focuses on the effects of removal of rich country protection and subsidies in agriculture, finds that poverty rates would fall in virtually all of the developing countries included in the sample, and do so, as the Hertel et al. put it, as "a simple consequence of the higher world prices for farm products." 

So an increase in world food prices is bad for global poverty, unless it is the result of the Doha Round, in which case it is good....?

Upon closer look, perhaps what is going on is simple sample selection. The two studies have only three countries in common: Peru, Vietnam, and Zambia.  Now, interestingly the first two countries were the only two exceptions in the Ivanic and Martin study (the only to countries where the poor benefited from high food prices).  And Zambia is one of the few where the results ran counter to the general finding in the Hertel et al. paper (in Zambia poverty rises as a result of an increase in food prices).  So the country-level findings, in any case, seem not to be inconsistent. 

But the discrepancy is worrying no matter what its source. Ivanic and Martin have extrapolated from their results to suggest the current rise in food prices will increase the global poverty headcount by more than 100 million (equivalent to a loss of almost seven years of poverty reduction).  These estimates have been cited by World Bank president Zoellick and many others to shape the global policy agenda.  But can we really trust them?

Tom Hertel and Will Martin are frequent co-authors, and I hope they will reconcile their findings for the rest of us. 

 

Hertel and Martin respond:

Dear Dani:

Thanks for the opportunity to clarify the perceived contradictions between our studies of agricultural trade and poverty. To answer, we first review the different questions posed in the two studies, then reiterate the main findings and identify apparent contradictions, briefly contrast the methodologies employed, then take a very fruitful closer look at the results. We conclude that the two studies are quite consistent in their findings.

Purposes of the Studies and Main Findings:

The goal of the Hertel-Keeney- Ivanic-Winters paper (henceforth HKIW), published in Economic Policy, was to assess the impact of rich countries reforming all of their agricultural policies on poor households in developing countries and on farm households in rich countries. The paper concluded that such reforms would tend to hurt wealthy farmers in the rich countries – particularly the US, where detailed household data were available, while they would generally be poverty-reducing amongst farm households in poor countries. The impact on national poverty of rich country agricultural reforms was mixed, with the balance depending on the share of national poverty in agriculture-specialized households, as well as the impact of such reforms on unskilled wages and the landless poor. In the sample of 15 countries, the national poverty headcount fell in 9 cases.

The Ivanic-Martin (I-M) study asks a different question, namely: What is the impact of higher prices for a subset of agricultural products—staple foods— in a sample of nine low-income countries? They conclude that, with a few exceptions, increases in prices of staple foods raise poverty in poor countries. In light of the fact that rich country agricultural reforms affect developing countries mainly through changes in world prices, this finding generates an apparent contradiction.

Methodology:

Of course there are differences in methodology. However, in this case, we have the good fortune of having a common co-author, Maros Ivanic, who handled a key part of both studies, namely the household survey analysis. For this reason, a comparison is easier than it might otherwise be. The Ivanic-Martin study is much richer in its use of the household survey – using the entire survey, not just the households in the neighborhood of the poverty line, and detailed household data on production, consumption and net sales of staple foods. HKIW, on the other hand, have a more elaborate treatment of the national economies – including tariff revenue replacement and all factor markets. Despite these differences, however, we do not believe that differences in methodology are driving differences in the qualitative findings.

A Closer Look at the Results:

Rich country agricultural reforms under the WTO comprise three main components: export subsidy elimination, reductions in domestic support, and reductions in agricultural tariffs (market access). In their work, HKIW find that the export subsidy and domestic support components are, on average, poverty-increasing in their sample of 15 developing countries, as these rich country reforms raise world prices for staple foods including wheat, maize, dairy and rice. This is fully consistent with the I-M findings that higher world prices of staples raise poverty. However, these two adverse developments under the proposed Doha Development Agenda are dominated by the third pillar of reform – namely agricultural tariff reductions in the rich countries.

Developing countries remain subject to many tariffs on heavily-protected agricultural commodities. Furthermore, these tariffs are often specified on a $/ton basis (i.e. specific tariffs), so that countries exporting low unit value products are more heavily penalized. Removal of such tariffs disproportionately benefits low income exporters. Finally, rich countries impose many high tariffs on processed agricultural products. Removing tariffs on these products—which are considered in HKIW but not in I-M—permits developing countries to shift into higher value exports. In summary, it is hardly surprising that tariff cuts on all agricultural products in rich countries would have a different impact on poverty than world-wide price rises for staple foods.

At this point, it is useful to reference a follow-on paper to the HKIW piece. This follow-on paper focuses on a set of trade reforms that allow more direct comparison with the results in the I-M paper. In their follow-on paper, HKIW argue that, as proposed, the Doha Development Agenda is less poverty friendly than the trade reforms not undertaken in the DDA. They argue that this is due to the excessive reliance of the DDA on reductions in export subsidies and domestic support (both poverty increasing in poor countries), and its relative neglect of agricultural tariff cuts in developing countries. The latter, they find, are poverty reducing in all but one of their 15 countries. Furthermore, the mechanism for poverty reduction is closely related to the one identified by I-M, namely lower domestic prices for food.

Summary:

In summary, the HKIW work (taking into account both of their recent papers) and the I-M paper are remarkably consistent. Both find that higher prices for staple foods in developing countries will tend to raise poverty. Of course, the specifics depend on the source of these higher prices. Ivanic and Martin are silent on this point, while HKIW consider a variety of sources for price changes, including: elimination of rich country agricultural export subsidies, reductions in rich country farm support, and agricultural tariff cuts in rich and poor countries.

The current commodity crisis is precipitated by other factors, including record-low stocks, adverse weather events and biofuel mandates. Our work does indeed suggest that this “perfect storm” in commodity markets bodes ill for the world’s poorest households.

Sincerely,

Thomas Hertel, Purdue University: hertel@purdue.edu

Will Martin, The World Bank: wmartin1@worldbank.org

Comments

[Melvin]

Dani,

this passage needs to be revised:

"...a World Bank study by Ivanic and Martin which argued that the poor would benefit from a rise in world prices in a clear majority of developing nations that these authors looked at."

[Dani Rodrik]

Melvin --

Thanks for the close reading. Correction done.

[Richard]

Might the differing results in the two studies arise from differences in the commodities examined? Most importantly, the Hertel et al piece includes price increases in cotton in its analysis, while the Ivanic and Martin does not.

There are also differences in methodology. Ivanic and Martin is a partial equilibrium analysis, but also considers unskilled wage effects. Hertel et al use a modified CGE framework.

[Gallagher]

A close look at the Hertel study shows that the "high prices are bad for the poor except under Doha" is still a hollow argument.

Hertel is right to model a "Doha scenario" and a "full liberalization" scenario in this paper and many other based on the same GTAPish model runs. The "Doha Scenario" looks fairly close to the deal on the table (which is far from fully liberalizing all tariffs and subsidies).

The "Doha Scenario" here would only bring 2.5 of the 622 million people living under $1 dollar per day over the poverty line (0.4 percent). You could argue that there are better, cheaper, less costly (the tariff revenue losses for developing countries under the deal on the table are $63 billion) ways to bring these folks above the poverty line.

Also, let us remember that the model runs can simply reveal bringing an individual from $1 per day to $1.01 dollars per day then shazam they are "out" of extreme poverty....

[Antonio]

I would like to ask Prof. Rodrik if farm protectionism will help African countries to face the current world food crisis in the light of the following article:
http://www.foreignpolicy.com/story/cms.php?story_id=4306
Thank you!

[madmax]

I don't know what professor Rodrik thinks but I think this is really interesting! Ghana seems to be pursuing a similar strategy. And Mali has been very successful at promoting rice production. One problem in Ghana though is that people have become accustomed to the taste of imported rice and they complain that the domestic rice is of inferior quality. This seems like a problem that could be overcome. And promoting domestic rice production in Ghana would have a large impact on poverty reduction since most of the poorest people in Ghana live in the north where rice is grown.

[befuddled]

Hertel and Martin your response leaves me more confused. If the estimates in the most recent paper are correct then the current rise in food prices will increase the global poverty headcount by more than 100 million. This is a huge effect, isn't it? How can it be that this effect is small enough so as to be more or less ignored (certainly not emphasized) in your previous work? Is it also because the magnitudes of the price changes are different? What is really going on here? And, BTW, what does the World Bank plan to do about it?

[Richard H. Serlin]

It's important to be very careful here with your measures here. For example, if you just use per capita GDP you may find that higher food prices mean higher per capita GDP because a small minority makes a lot more money even if there are far more people who plunge into dire poverty.

I know statistics are kept on the number of calories per day. If you could find whether when food prices go up, the percentage of the countries population on less than 1,200 calories per day goes up, that would be very valuable and non-misleading information. This is the kind of thing studies should look at so that they aren't misleading.

Richard Serlin
Blog:http://richardhserlin.blogspot.com

[Jonathan]

I forget the source (perhaps it was Rodrik himself), but a good rule of thumb seems to be that countries which are 'price takers' will be hurt by global price increases whilst those which are 'price makers' will tend to benefit, depending on the commodity.

The longer term political questions seem to be how governments will securitise food policy: Will they throw up export barriers and build stockpiles, beggaring thy neighbor? Will they strive for 'self-sufficiency' or autarky through import barriers, opening the door to politically-risky shortages? Will the current crisis help or hinder agricultural liberalisation in the Doha round?

Since food policy impinges much more directly on welfare than, arguably, energy policy, it's probably only a matter of time before the constraints of climate change, population growth and middle-class expectations make food policy more about competition than cooperation.

A recent spate of recent articles about China and the Middle East buying up producing land abroad will probably catalyse the issue...

[Derek Headey]

Dear Dani, I think one source of confusion in this issue is the difference between the size of the price change and the speed. A price rise spread out over 10 years is very different to one that occurs in the space of 2 0r 3 years in a market where supply responses are slow. The current rise constitues a crisis because the ability of governments and populations to reallocate resources to agriculture in the short run is very limited. I am not sure how this affects the Doha-round estimates, but Ivanic and Martin's methodology seems more appropriate for the current situation.