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:
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.
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.
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.
Thomas Hertel, Purdue University: [email protected]
Will Martin, The World Bank: [email protected]