Higher food prices are good for the poor ... in the long run

Guest post by Derek Headey

A few years ago Dani very kindly let me guestblog on some of my work on the global food crisis (see here and also Dani’s much earlier comments here). In that earlier work I used Gallup World Poll data on subjective food security to conclude that the 2007-08 global food “crisis” seemingly had no adverse impact on the world’s poor. As The Economist noted (here), my results were subsequently corroborated by World Bank estimates, which suggested that global poverty continued to fall through the 2007-08 food crisis.

In my most recent paper, however, I find an even stronger result: higher domestic food prices predict reductions in poverty (see here). The methods in this paper are fairly simple. I take World Bank national poverty estimates for a broad swathe of countries and regress changes in poverty against changes in domestic food prices (the ratio of the food CPI to the non-food CPI). The main finding is that the elasticity between $1.25 poverty and food prices varies between -0.32 and -0.46 (see Figure below). The result is also a robust one in that it holds for different models, different regressors, different assumptions about the endogeneity of food prices, and different poverty indicators.

There are two important caveats to this result, however. The first is that we don’t know exactly why this relationship exists, though the most compelling hypothesis is that higher food prices trigger large wage adjustments, at least in the long run. A recent World Bank working paper by Hanan Jacoby persuasively demonstrates this in a simple general equilibrium model for rural India (see here). Thus, even if many poor people are net food consumers, the fact that they are large net sellers of labor means that they can ultimately benefit wage increases induced by higher food prices.

The second caveat is that this is a “long run” relationship, in the economic sense of the term, meaning “after all adjustments have taken place”. How long is this adjustment in practice? We don’t really know. There’s a great scarcity of research on wages and food prices, and almost all of it comes from Bangladesh and is now rather dated (e.g. Ravallion 1990). In my sample of poverty episodes, however, I show that the negative poverty-food prices elasticities reported above even hold for episodes as short as 2 years. This suggests that the long run may not be very long. At the same time, one cannot rule out negative welfare impacts of higher food prices in the short run, which would still imply an important role for social protection, and perhaps also for price stabilization measures. Over the longer term, however, higher food prices typically seem to be a boon for poverty reduction.

Comments

[Naomi Hossain]

It's vital these issues are still being discussed - your work has been critical for helping us figure out what is going on. In our IDS/Oxfam qualitative research on how wellbeing is being impacted by food price rises we find that wages have been increasing for people on low incomes -not everyone but most. But three caveats: 1. people often face a major and sometimes violent struggle bidding their wages up - there is nothing automatic about wage increases in response to price rises - witness the Bangladeshi garments workers' ongoing fight; 2. people are typically shifting to more precarious livelihoods - mining, migrant labour, sex work etc; 3. quality of life is definitely lower - more women are in (low) paid work so the unpaid care work at home is neglected (we call this women's economic empowerment!); communities become more individualised, and people feel pressure to earn more cash just to put a basic meal on the table. So poverty numbers might well be down - but what does that actually mean? What if people are actually worse off? We think it is a possibility. See http://policy-practice.oxfam.org.uk/our-work/food-livelihoods/food-price-volatility-research

[Peter]

No offense to your study, but all this proves is that the world bank measure of poverty is not based on any objective living standard. I would go so far to say as food prices don't matter to you if you are living at around 2 dollars a day. You rely on aid to live, you can't be a market consumer. Secondly, the argument that higher food prices will lead to relative wage inflation could benefit the poor, but it is relatively hard to say if it will.. Capital always ends up with the lion's share, especially in nations with little to no labor protection (most of them). Therefore, for those reasons and many more I don't care to list, aggregate global poverty and aggregate global food prices are relatively unrelated. I only post against this because I believe your assumptions are dangerous.

[Uwe Kerkow]

Is it possible that part of the answer lies in the fact that many of the poor are rural poor and still produce food? Rising prices would help help them earn more - if they are able to sell.

[Larryshultz]

Is the $1.25 real or nominal value?

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