Maros Ivanic & Will Martin
World Bank
9 July 2014

Food price impacts on poverty

World & domestic food price changes

Poverty impacts of insulation
Food Price Impacts on Poverty

Begin with the Deaton method to measure
impacts on household real incomes
◦ ΔW = (ep – Πp).Δp = zp.Δp
 Where ep is the demand for food & Πp is the household’s
own production

Allow for 2nd order effects on the demand side

ΔW = zp. Δp +1/2. Δp.epp Δp

Where epp based on compensated elasticities of
demand for the GTAP CDE demand system


Introduce supply response & wage rate impacts
Medium-run household responses (3-5 years) from
a specific-factor model for that economy
◦ Labor mobile across commodities but capital & land fixed
◦ Household firm responses modeled as in GTAP
◦ Δ unskilled wage rates from GTAP-type national model

Long run impacts assume mobile capital &
imperfectly mobile land

Capture impacts of output price changes on wages
◦ Stolper-Samuelson effects

Calculated for each country based on the structure
of its economy
◦ GTAP-style prodn structure with GTAP parameters & data

Channels considered
◦ Short run: no wage impacts
◦ Medium run: labor the only mobile factor
◦ Long run: labor & capital mobile, land sluggish

Rice
Wheat
Maize
Sugar
Dairy
Oils
Total
Medium run
Long run
.11
.01
.02
.04
.08
.01
0.27
.12
.01
.03
.05
.12
.01
0.34
Bangladesh
China
Cote d'Ivoire
India
Indonesia
Nigeria
Pakistan
Tanzania
Vietnam
Global
Short run
Medium run
Long run
0.2
-0.6
0.8
2
0.7
0.8
2.1
1.1
-0.4
0.7
-1.2
-0.9
-0
-0.1
0.1
0.7
-1.3
0.4
-1.3
-0.4
-1.7
-1
-0.9
0.5
-0
0.6
-0.3
-0.7
-1.3
-0.3

Consider first key agricultural commodities whose
domestic & and international prices can be
measured fairly precisely
◦ And whose impacts on both expenditures and revenues of
poor households can also be assessed
 Rice, wheat, maize, sugar, oilseeds, dairy

We also consider much broader measures
◦ Food CPIs from FAO
 That allow us to consider much broader impacts

Focus on the period to 2012
◦ When WB Food Price index peaked
2.3
2.1
Price index (January 2006=1)
1.9
1.7
1.5
1.3
Domestic prices (consumption weighted)
1.1
International prices (consumption weighted)
Domestic prices (poor consumption weighted)
0.9
International prices (poor consumption weighted)
0.7
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
2.1
Price index (January 2006=1)
1.9
1.7
1.5
1.3
1.1
World Bank Food Price Index
0.9
Population-weighted Food CPI, developed countries
Population-weighted Food CPI, developing countries
0.7
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12

A large fraction of the 2008 increase in world
prices came from countries’ attempts to insulate
against this increase
◦ Martin & Anderson estimate 45% for rice

This insulation was mostly gone by 2012 & yet
world prices were very high
◦ Shows the substantial—and increasing—pressures on
world food markets
3.5
Price index (January 2006=1)
3
2.5
2
1.5
1
0.5
Domestic price
World price
0
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
3
Price index (January 2006=1)
2.5
2
1.5
1
0.5
Domestic price
World price
0
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12

Strong insulation in the short run

Inter-temporal dynamics of ECM type

Much stronger long-run transmission

Most countries’ own interventions tend to lower
domestic prices relative to world prices
◦ Export restrictions/reductions in import duties
◦ Very consistent response in many countries/commodities


But the combined effect of these measures is to
increase the world price
If all countries do it, the policy is completely
ineffective
◦ … even though it looks effective to each individual country

But countries reacted in many different ways
◦ What was the effect of these interventions on prices &
poverty?
ES
Pw
Pw
ES
Pw
P0
ED
ED
0
Q
700
60
Intern. Price in USD
600
50
NRA all countries
40
30
20
400
10
0
300
-10
200
-20
-30
100
-40
0
-50
Source: Kym Anderson
(www.worldbank.org/agdistortions)
NRA (%)
Global price
500


Poor households spend 60% of income on food
Most households near the poverty line not selfsufficient in food
◦ Higher food prices unlikely to benefit many in short run
◦ Although for some countries & products many poor
people are net sellers

Large spikes in food prices are a serious threat to
many poor households
◦ Little opportunity to adjust supply, or for wages to rise

Calculate the changes in trade distortions
between 2006 & 2008 for each country
◦ Distortions in Agricultural Incentives Database

Calculate impacts of these changes on world &
domestic prices
◦ A simple model of the global market

Estimate implications for poverty
◦ Calculate changes in real incomes of each household
◦ Assess the poverty impacts

Calculate counterfactual poverty implications
◦ Poverty impacts of each country’s own policies alone
◦ Poverty impacts of all actions

Change in global price p* as a function of change
in the power of protection Ti
∗
𝑝 =


𝑖 𝐻𝑖 𝑣𝑖
+ 𝑖 𝐻𝑖 𝛾𝑖 − 𝐺𝑖 𝜂𝑖 𝑇𝑖
𝑖 𝐺𝑖 𝜂𝑖 − 𝐻𝑖 𝛾𝑖
where: vi is an exogenous shock to i’s supply, Hi & Gi are
national shares of global production & consumption at global
prices, and ηi are demand elasticities (hat=proportional
change)
Implications of observed protection change for
global prices
◦ Rice 52%; edible oils 31%; wheat & maize 18%

Developed countries generally insulated less
◦ Minor exceptions: apparent EU insulation in the maize
market, US insulation in the edible oils market
◦ Developing countries essentially “exported” a part of the
food price spike to developed countries

Some developing countries insulated more than
others
◦ “exported” food price spike to other developing countries
◦ Surprisingly, large importing countries often insulated
more than other developing countries
 Although this is more costly for them than for smaller ctries

Use simple household models
◦ First-order net impacts of price changes
◦ No wage adjustments included (short run)

Need detailed information on households’
expenditure patterns and income sources
◦ Find these for 30 developing countries, incl China & India

Calculate change in households’ net real incomes
◦ Count # of households crossing poverty line ($1.25/day)

Weight country changes to calculate global
estimates
China
Côte d'Ivoire
Indonesia
India
Malawi
Niger
Nigeria
Tanzania
Viet Nam
Zambia
World (million)
Everyone’s action
Own action
0.4
0.5
0
0.1
2.4
1.0
-0.9
0.1
-2.6
-1.9
8
-0.6
-1.8
-1.4
-4.2
0.7
-0.5
-1.9
-0.3
0.3
-1.5
-84

Policies such as social safety nets are individually
and collectively effective
◦ There is an income effect that adds to price increases–
but this is tiny relative to insulation


Need to take into account desire to insulate
Can we devise trade rules that reduce the
collective action problem?

Price increases raise poverty in short run
◦ Longer term impacts may be reversed by wage impacts
and second-order terms

Policy makers seem to insulate from world price
changes in the short run
◦ But to transmit price changes within a few years

Insulation reduces poverty impacts individually
◦ But is collectively ineffective
◦ Need to develop policies that work