ECLAC – Project Documents collection
Caribbean Development Report, Volume 2
The escalation in world food prices and its
implications for the Caribbean
Armando Mendoza and Roberto Machado
Abstract
The phenomenon of rising food prices, affecting markets worldwide during the last few years, has
been a worrisome development for developing countries, due to its implications with regard to key
socioeconomic issues such as food security and poverty incidence. The Caribbean, as a net food
importer, has been one of the most affected regions.
This paper undertakes an assessment of the impact of the mounting food crisis in the
Caribbean, in the light of food security theory, using available data on domestic inflation rates,
household expenditure and consumption patterns.
Introduction
The escalation in international food prices that started during the middle of 2006 and lasted until
approximately the middle of 2008 has, undoubtedly, been one of the most important developments for
the global economy over the last few years. It has had profound and far-reaching implications for most
countries around the world, the most significant of which are escalating inflation, falling real
consumption – especially amongst the poorest segments of the population – and growing inequality.
The analysis undertaken at that time by ECLAC (2008) regarding the consequences for the
Caribbean arising from this global food crisis, found significant evidence that this food crisis was
having a direct and substantive economic and social impact on Caribbean countries.59 At the economic
level, most countries faced both wider trade deficits as a result of higher food- import bills, and
increasing inflationary pressures. At the social level, available data supported the view that both real
59
See “The escalation in world food prices and its implications in the Caribbean,” released by the
Subregional Headquarters of ECLAC (2008).
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income and the consumption capacity of households and individuals were going to be affected. This
could eventually translate into a regression in subregional achievements in poverty reduction and
inequality, particularly with regard to the achievement of Millennium Development Goals.
Following the release of the original report, several major developments occurring in the
wake of the original international food crisis have influenced and modified its impact. The global
financial crisis, and the ensuing global economic recession from mid- 2008 onwards, have shifted
policy concerns in most countries away from rising food prices and towards falling levels of activity
and growing rates of unemployment. Furthermore, as a consequence of the global economic
slowdown, demand and speculative pressures on international food markets have receded. As a result,
international food prices have fallen from the record highs posted during the first months of 2008, and
the worldwide upward trend has decelerated drastically in most countries, or even come to an end.
In this changing scenario, an updated assessment of the impact of rising food prices in the
Caribbean is a necessary exercise, in order to better appreciate not only the issues and damage
generated by this last episode of high food inflation, but also to understand how these kinds of
episodes could recur in the future. Accordingly, this report intends to present new information
regarding developments in the field of food security in the Caribbean, updating relevant parts of the
analysis made in the previous report by ECLAC (2008).
Thus, the second section of this report briefly reviews the process of escalation in world food
prices over the last few years, including the most recent period of price deceleration subsequent to the
unleashing of the global economic slowdown. The third section examines the structural and temporary
factors underlying the increases in food prices. The fourth section updates some selected sections of
the analysis made on the impact in the Caribbean of the hike in food prices, including the implications
for price stability, poverty reduction and inequality. Finally, the fifth section of this report presents
some updated conclusions.
THE DYNAMICS OF WORLD FOOD PRICES IN RECENT YEARS
According to the Food Price Index recorded by the United Nations Food and Agriculture Organization
(FAO),60 the process of rising prices in international food markets can be dated to mid-2006, when
practically all sub-indices started increasing at significantly more rapid paces than in previous periods,
including categories of essential foods such as cereals and oils. This process of accelerated price
inflation reached its zenith by the end of the first semester of 2008, when the FAO general index
recorded a staggering 77.7% nominal inflation accumulated from June 2006 to June 2008.
Furthermore, analysis by food categories indicated that during this two-year period, the oils and fats
price index grew 161.4%, followed by cereals (136.7%) and dairy products (93.2 %), while meat
prices rose at a much lower rate.
60
This index is composed of the weighted average of six commodity group price indices (meat, dairy,
cereals, oils and fats, and sugar), with weights given by the share of each group in total exports in 19982000.
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FIGURE 1
FAO FOOD PRICE INDEX, 2000-2009
(Base year 2000 = 100)
400
General Index
300
Meat
Dairy
Cereals
200
Oil and Fats
100
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009*
Source: Food and Agriculture Organization.
* Data up to August 2009.
However, in the second half of 2008, international food prices began a deflationary process,
which translated into a drastic fall in speculative and demand pressures in international markets.
Between July 2008 and June 2009, price indices in most food categories fell dramatically, with the
FAO general price index recording a negative (-29.2%) contraction during that period. Similarly, dairy
products (-49%), oils and fats (-43.6%), cereals (-32.3 %) and meats (-12.0 %), experienced
significant reductions in their price indices, reflecting a widespread deflationary process in
international food markets.
Several factors explain this deflation in food prices during the second half of 2008. The
2008/2009 global recession has been the main factor reducing demand. Additionally, a substantive
fall in oil prices (also during the second half of 2008) diminished demand for corn, soybeans and other
crops used to produce biofuels, while a record world cereal harvest helped to push international prices
down. Furthermore, with international food prices easing up, countries worldwide started lifting
restrictions on food exports, contributing to the stabilization of international food markets.
The evolution of global food markets for specific food products, particularly essential ones,
during the last years has reflected even wider oscillations in price levels. This rollercoaster process is
depicted in figure 2, which shows the average prices of several key food products.
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FIGURE 2
AVERAGE PRICES OF SELECTED PRODUCTS IN INTERNATIONAL MARKETS,
2006 TO JUNE 2009
(US$ per ton)
700
600
500
400
300
200
100
0
Maize (US)
Rice (Thai)
2006
Sorghum (US)
2007
2008
Soybean (US)
Wheat (US)
Jan-Jun 2009
Source: United Nations Food and Agriculture Organization (FAO).
As figure 2 shows, average international prices for all 5 products considered increased
dramatically between 2006 and 2008, in some cases more than doubling the levels recorded at the
beginning of the period, with increases ranging from 123.3% for rice to 62.6% for sorghum. Prices of
maize rose by 83.2%, whereas wheat prices surged by 72.6%. In all cases, these record price levels are
historic, in both nominal and real terms.
During the last period included in figure 2 (from January to June 2009), the prices of those
same products fell dramatically, reflecting the impact of the global economic slowdown and the
stagnation in international food markets. Consequently, between December 2008 and June 2009, the
price of wheat fell -26.7%, sorghum -26.4%, and maize -23.3%. Nonetheless, even with this latest
deflation, food prices are still standing at levels considerably higher than in 2006.
Over the same period, these food prices have been very volatile, spiralling and peaking
around mid- 2008 and stabilizing afterwards. Figure 3 presents the volatility by the coefficient of
variation of international prices for selected food products between July 2006 and June 2007, July
2007 and June 2008, and between July 2008 and June 2009, for selected products.
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FIGURE 3
COEFFICIENT OF VARIATION OF PRICES OF SELECTED PRODUCTS,
JULY 2006 TO JUNE 2007, JULY 2007 TO JUNE 2008, AND JULY 2008 TO JUNE 2009
(Percentage)
3.5
Wheat (US)
17.6
14.3
10.4
Soybean (US)
19.7
17.9
13
Sorghum (US)
17.9
18.5
2.6
Rice (Thai)
46.7
14.1
14.8
Maize (US)
22
19.4
0
Jul 2008-Jun 2009
Jul 2007-Jun 2008
Jul 2006-Jun 2007
Source: Calculations by ECLAC on the basis of FAO data.
In comparing the evolution of price volatility by period, the volatility of international food
prices was found to have escalated dramatically for the period July 2007 to June 2008 and, in the case
of some specific products, to have reached very high values indeed. The price volatility of rice soared
to 46.7% while, in the case of maize and soybean, this volatility reached 22.0% and 19.7%
respectively, reflecting the strong presence of speculative and uncertainty components within
international markets at this time. However, in the last period included in figure 3 (July 2008 to June
2009), volatility has decreased considerably, reflecting the global economic slowdown and the
collapse of speculative drives in international commodity markets during the second half of 2008.
CAUSES OF THE INCREASES IN FOOD PRICES
The increase in international food prices during 2006-2008 was evidently derived from a major
imbalance between global supply and demand, which can be explained by a combination of structural
and temporary factors. Although the exact structure and relationships between the different forces
fuelling this imbalance are complex and still not fully understood, it is widely recognized that there
are a number of elements to consider: on the demand side, the sustained, rapid growth and changing
consumption patterns of emerging economies (especially China and India), and speculative investment
in agriculture commodities futures markets; on the supply side, increased production costs must be
considered the main factor contributing to rising food prices; negative shocks on food supply
associated to natural phenomena are also part of the story. The surge in biofuels production can be
explained by both demand (direct) and supply side (indirect) effects. Finally, the depreciation of the
United States dollar, although it cannot be classified as either a supply or demand factor in world food
markets, is another element to be taken into account. Table 1 presents the various demand and supply
drivers of food inflation, differentiating between structural and temporary factors. Each of them is
then discussed below.
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TABLE 1
MAIN DRIVERS OF FOOD INFLATION
Supply side
Structural
Temporary
Increases in production costs
Poor harvest due to natural phenomena
Surge in biofuel production (indirect effect)
Demand side
Sustained rapid growth and changes in
consumption patterns in some emerging
countries
Speculative investment in agriculture
commodities future and options
markets
Surge in biofuel production (direct effect)
Other
Depreciation of the United States
dollar
Source: ECLAC
STRUCTURAL FACTORS
Increases in production costs
Oil prices exhibited a rising trend from early 2002 until the middle of 2008, when priced peaked and
then dropped as a direct consequence of the global financial and economic crisis. The price of crude
oil (West Texas Intermediate) practically quintupled between January 2000 and June 2008, going
from US$ 27.30 to US$ 133.90 per barrel, as shown in figure 4.
Global oil prices, although significantly lower since June 2008, are still above their historical
averages and have begun to recover during the second half of 2009. Over the next few years, oil prices
are expected to reach much higher levels than at the beginning of the current decade, a negative factor
affecting agricultural costs.
FIGURE 4
OIL PRICES, JANUARY 2000 TO JUNE 2009
(US$ per barrel)
150
West Texas
Interm ediate Spot Price
120
Europe Brent Spot Price
90
60
30
Jul-08
Jan-09
Jul-07
Jan-08
Jul-06
Jan-07
Jan-06
Jul-05
Jul-04
Jan-05
Jul-03
Jan-04
Jul-02
Jan-03
Jul-01
Jan-02
Jul-00
Jan-01
Jan-00
0
Source: Energy Information Administration.
By the same token, the accelerated rise in fertilizer prices, from mid- 2006 until mid- 2008,
has played a key role in escalating the production costs of agricultural activities. Figure 5 shows that,
between the third quarter of 2003 and the third quarter of 2008, phosphate rock prices multiplied by a
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factor greater than 10, and those of diammonium phosphate and triple superphosphate did so by a
factor of 6.4 and 7.3, respectively.
FIGURE 5
FERTILIZER PRICES, 2003/III TO 2009/II
(US$ per ton; quarterly average)
1200
Diam m onium Phosphate
1000
Phosphate rock
Triple Superphosphate
800
Pottasium Chloride
Bulk Urea
600
400
2009 I
2009 II
2008 IV
2008 III
2008 I
2008 II
2007 IV
2007 III
2007 I
2007 II
2006 IV
2006 III
2006 I
2006 II
2005 IV
2005 III
2005 I
2005 II
2004 IV
2004 III
2004 I
2004 II
2003 IV
0
2003 III
200
Source: The World Bank
This evolution has had a significant impact on the production costs of food, inasmuch as
modern agriculture, particularly in developed countries, is intensive in natural and artificial fertilizers.
As in the case of oil, prices have gone down dramatically from the second half of 2008 onwards,
easing cost pressures on agricultural producers. However, just like oil prices, despite the price decline
during 2009, the prices of fertilizers remain much higher than in the first half of the decade.
Surge in biofuels production
The generation of fuels from biological sources, including agricultural products like corn,
sorghum and sugar cane, has been an ongoing industry for many decades. However, this activity has
only gained momentum in recent years as a consequence of rising international oil prices, which have
made biofuels production profitable.
The United States is the leading country in this field, mainly due to the application of specific
policies aimed at promoting biofuels generation and consumption.61 As a result, United States biofuels
production has risen dramatically, quintupling in output between 2000 and 2008. In 2008, the United
States was responsible for more than 50% of global ethanol production (see figure 6), with some 139
operating bio-refineries and an accumulated annual production capacity of 8 billion gallons.
61
In December 2007, the President of the United States signed into law the Energy Independence and
Security Act (EISA), expanding the Renewable Fuels Standard (RFS). The expanded RFS has established
the use of 36 billion gallons of renewable fuels annually by 2022 as a main goal.
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FIGURE 6
WORLD ETHANOL PRODUCTION, 2008
(Percentage)
China
3%
European Union
4%
Canada
1%
Other countries
2%
U.S.A.
53%
Brazil
37%
Source: United States Department of Agriculture, Renewable Fuel Association.
The boom in biofuels production has had one direct and one indirect effect on international
food prices. The biofuel that is produced and consumed in the United States is ethanol, which is
distilled from corn. In order to sustain the expansion in ethanol production recorded during the last
few years, the demand for corn has grown accordingly, meaning that a bigger chunk of United States
corn production is being absorbed by the biofuels industry instead of being devoted to human
consumption and cattle feeding.
FIGURE 7
CORN USED IN ETHANOL PRODUCTION IN THE UNITED STATES, 2002 TO 2008
(Percentage of total corn production)
40
30.1
30
24.7
18.3
20
13.2
10
9.3
14.6
10.9
0
2002
2003
2004
2005
2006
2007
2008
Percentage of total US corn production
Source: United States Department of Agriculture, National Corn Growers Association.
Indeed, as Figure 7 shows, the share of total corn production in the United States consumed
by the biofuels industry has grown from 9.3% in 2002 to 30.1% in 2008. This is a direct demand side
effect. However, there is also an indirect impact from this phenomenon, affecting other staples not
directly related to biofuels production. As corn prices go up, its production becomes more attractive,
so that more resources are gradually allocated to the production of this crop. This process constrains
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the availability of resources such as land and water for other agricultural products, reducing their
supply and, consequently, fuelling increases in their prices. Thus, the indirect effect of an increase in
biofuels production is a supply side one. As it is expected that biofuels production will continue to
expand, this phenomenon is of a structural nature.
Sustained rapid growth and changes in the consumption patterns of emerging
countries
The accelerated growth of emerging economies and changes in their consumption patterns
during the past few years – notably in China and India – is deemed to be one of the main structural
factors behind the inflationary world food spiral. The argument is that sustained and significant
economic expansion of these countries has translated into higher per capita income and consumption
and, consequently, into higher demand for conventional and new goods, of either a better quality or a
different nature. The rise in income has led more people to improve their consumption basket,
including items previously absent or marginally present – notably meat and dairy products – therefore
pushing up the demand for such goods at the global level, given the immense populations in these
rapidly-growing emerging countries.62
Meat is the clearest example of expanded demand coming from emerging countries fuelling
world food inflation over the past few years. As a source of calories and nutrients for humans, meat is
an expensive item compared to alternative sources such as vegetable products, because meat
production requires a considerable supply of essential resources and inputs like water, fuel, grains and
forage. It is estimated that the production of 1 kilogram of animal protein requires, on average, 6
kilograms of vegetable protein (grains and forage crops),63 while similar patterns are found in water
and energy consumption for livestock production. Under those parameters, increased meat
consumption – particularly in China – would drive up international prices, not just of types of meat
(beef, pork, poultry), but also of the inputs for meat production, including grains and forage crops to
feed livestock (such as corn and soyabean meat).
FIGURE 8
CHINA: PER CAPITA MEAT CONSUMPTION, 1981TO 2006
(Kilograms)
40
Urban Consumption
Rural Consum ption
Kilograms Per Capita
30
20
10
0
1981
1983
1985
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: United States Department of Agriculture
62
20% (1.3 billion) of the total world population of some 6.5 billion is from China and 17 % (1.1 billion) is
from India.
63
The ratio is 1 to 8 for beef, and 1 to 2 for poultry.
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The concomitant of the sustained economic growth recorded by China during the past few
decades is better standards of living and higher consumption levels. Indeed, per capita meat
consumption has been increasing steadily in urban and rural areas alike, as shown in figure 8. Between
1981 and 2006, annual per capita meat consumption (including beef, mutton, pork and poultry) in
urban areas rose from 20.5 kilograms to 32.1 kilograms, a 57% increase. This process was more
pronounced in rural areas, where per capita meat consumption went from 9.4 kilograms to 20.5
kilograms, a 118% increase during the same period.
Consequently, China’s meat production and imports have been growing steadily in order to
meet expanding domestic demand. According to FAO estimates, China’s share of worldwide meat
imports expanded significantly between 2004 and 2008, from 7.8% to 14.4%. However, the impact of
China’s meat demand has been concentrated in poultry rather than in other meats such as beef and
pork. Indeed, poultry has not only been the main type of meat imported by China, with an estimated
volume of almost 2 million tonnes in 2008 (figure 9), it has also exhibited extremely dynamic growth,
almost doubling in volume imported between 2005 and 2008.
FIGURE 9
CHINA: MEAT IMPORTS, 2005TO 2008e
(Thousand of tonnes)
1,984
1,952
2000
1,888
1500
1,237
1,011
1,000
1000
823
500
383 400
448
256 262
200 216 227
90 90 77
99 100
0
Bovine
Ovine
2005
Pig*
2006
2007
2008
Poultry*
2009f
Source: Food and Agriculture Organization.
* Includes data from Hong Kong
e = estimate.
However, as a consequence of the economic slowdown, the volume of China’s meat
imports, particularly pork and poultry, the two main meat imports, has stalled or fallen during
2008. However, the long term forecast is that demand from China will gradually recover and will
resume its growth path within the next few years.
Despite these changes in consumption patterns in China and their impact on international
food prices, China’s economic boom and increase in consumption (including meat) was a gradual
process, dating back to the 1980s and 1990s. For many years, China posted high growth rates and
rising consumption without unleashing a general and massive rise in international food prices
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such as the one observed from mid-2006 onwards. In fact, China was a net exporter of key staples
such as wheat and rice at the time when their international prices had increased sharply.
Therefore, the figures clearly do not support the hypothesis that Chinese consumption
dynamics is at the heart of the current hike in food prices. On the one hand, China has been either
a marginal importer or exporter of key grains like wheat during the last few seasons when
international food prices took off. On the other hand – and perhaps more importantly – the rise in
meat imports by China is concentrated in poultry and pork, whose production is less intense in
grains than that of other meat products such as beef. Indeed, China’s share in global poultry
imports went from 12.3% to 19.2% between 2004 and 2008, its share in world pork imports rose
from 8.1% to 17.2 %, while its share in world beef imports barely increased from 3.1% to 3.9 %.
TEMPORARY FACTORS
Poor harvests due to natural phenomena
The world has witnessed a number of adverse events affecting some major agricultural producers
during the last few seasons that have had a direct impact on international food prices through the
reduction in international supplies and stocks, especially of wheat. According to the United States
Department of Agriculture, between the 2004/2005 and the 2007/2008 seasons, wheat production
decreased in several key countries and regions, as shown in figure 10.
FIGURE 10
WHEAT PRODUCTION INDEX
(2004/2005 season = 100)
140
100
European Union
China
India
Russia
Canada
Australia
USA
World Total
60
20
2004/ 05
2005/ 06
2006/ 07
2007/ 08
2008/ 09
Source: United States Department of Agriculture.
The decline in wheat production was especially intense during the 2006/2007 season, due to a
severe drought that affected Australia, whose wheat output dipped by 57% in relation to the previous
season, from 25.2 million metric tonnes to 10.8 million metric tonnes (see figure 11). As this country
is an important wheat exporter, this event affected international supply and stocks, and put upward
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pressure on world wheat prices.64 It is also worth noting that a poor harvest in one particular season
affects not only world prices in that year but also in subsequent years through its impact on world
stocks. However, following a mild recovery during 2007/2008, the volume of Australian wheat
production in the 2008/2009 season has returned to quasi- normal levels, thus reducing price volatility
and inflationary pressures on world wheat markets during 2009.
FIGURE 11
AUSTRALIAN WHEAT PRODUCTION FROM 2004/2005 TO 2008/2009
(Million of metric tons)
30
25.2
21.9
21.5
20
13.8
10.8
10
0
2004/05
2005/06
2006/07
2007/08
2008/09
Source: United States Department of Agriculture.
Although the upward pressure on worldwide wheat prices between 2006 and 2008 is partly
explained by reduced production due to natural phenomena in some big countries such as Australia,
another set of other events has affected or is still affecting food prices at both the international and
domestic levels. Desertification and land degradation, heavy rains and floods, and water pollution are
some examples of those phenomena affecting regional or country agricultural output. Hurricane Dean,
which hit the Caribbean subregion in August 2007, and Hurricane Gustav, in August 2008, affected
food production in several Caribbean countries, reducing the output of agricultural goods both for
export and domestic consumption.65
Speculative investment in agricultural commodity futures and options
markets
Another temporary factor behind the hike in food prices during the period between 2006 and 2008 was
the emergence – and increasing participation – of investment banks and other institutional investors in
world commodity markets. In the wake of the collapse of real estate markets, and low interest rates –
particularly in the United States – these institutions started targeting food products and other
commodities as investment vehicles. As a result, international investment in financial instruments
linked to food stocks have soared in the last few years.66
64
During the 2005/2006 season, Australian wheat exports accounted for 13.7% of the world total, declining
to 10% in 2006/2007 and declining further to a 6.8% share in 2007/2008. During 2008/2009, it is expected
that their share will return to the levels recorded in 2005/2006.
65
For assessments on the damage and losses caused by Hurricane Dean in Saint Lucia, Dominica, and
Belize, see ECLAC and UNDP (2007a), (2007b) and (2007c), respectively. In the case of Jamaica, see
Planning Institute of Jamaica (2007).
66
According to the Latin American and Caribbean Economic System (SELA) and the Bank for
International Settlements (BIS), financial investment in commodities like food and oil multiplied by a
factor of 8 between 2004 and 2007, totalling some US$ 8,400 billion at the end of 2007.
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Figure 12 shows the surge in demand since 2003 for commodity futures in the most important
grains for human consumption. In March 2008, the stockpile of corn futures was some 2,381 million
bushels, an amount equivalent to the full annual corn supply to the ethanol industry. Moreover,
between January 2003 and March 2008, the stockpile of corn futures multiplied by a factor close to
ten. Futures market stockpiles of soybean and wheat also increased dramatically, by factors of twelve
and seven, respectively.
FIGURE 12
STOCKPILES OF FUTURES MARKETS, JANUARY 2003 AND MARCH 2008
(Millions of bushels)
2,381
2,500
2,000
1,500
1,134
972
1,000
500
243
167
81
0
Corn
Soybean
Future Market Stockpile January 2003
Wheat
Future Market Stockpile March 2003
Source: Masters Capital Management LLC
The considerable expansion of investment in food futures - especially in essential products
like corn and wheat – has fostered inflationary pressures on international food markets. Futures prices
act as a benchmark for current prices of commodities, therefore, increments in futures prices have
resulted in higher spot prices reflecting the expectations of economic agents. Thus, speculative
investment should be considered one of the main temporary factors contributing to inflation in
international food markets. Consequently, in the aftermath of the global financial crisis of 2008-2009,
pressures on commodity markets have receded significantly, contributing to the fall in international
food prices.
Depreciation of the United States dollar
Between 2006 and 2008, another temporary factor deemed to be partially responsible for the surge in
world food prices was the tendency of the United States dollar to depreciate. As international
commodity prices are designated in this currency, loss in value of the currency has pushed these prices
up in order to recover their level in terms of other currencies, particularly in the case of the Euro.
The root of the depreciating dollar lies in the substantive twin deficits recorded from the
beginning of the present decade as a result of the combination of tax cuts and public spending
expansion – associated with the September 11 terrorist attacks in 2001 and the subsequent invasions of
Afghanistan and Iraq – together with a private credit- and consumption boom that fuelled, and was fed
by, the real estate bubble.67 The excess of public and private spending over income needed to be
financed by the rest of the world. Thus, the United States Government issued large amounts of
Treasury Bills to finance the fiscal deficit, therefore expanding the supply of dollar-denominated
assets. The excess of private expenditure was financed by foreign capital inflows to domestic financial
institutions and stock markets.
67
Fiscal balance went from a surplus of 2.6% of GDP in 2000 to a deficit of 2.1% of GDP in 2002.
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The role of some Central Banks in accumulating massive amounts of Treasury Bills as
international reserves was particularly important. However, as these reserves were increasingly
denominated in United States currency, the Central Banks started to lose their appetite for assets
denominated in dollars, therefore reducing their demand for such financial instruments, and putting
downward pressures on the value of the dollar. The financial crisis unleashed in the United States and
Europe during mid- 2008 brought this precarious equilibrium to an end.
Figure 13 shows the evolution of the nominal exchange rate of the United States dollar vis-àvis the Euro and the Japanese and Chinese currencies in the period between January 2005 and June
2009, expressed as an index number.68 After reaching its highest value in late 2005 (when the nominal
rate was 0.85 Euros per dollar), the United States currency embarked on a depreciating trend that
reached its minimum by June 2008, when the nominal exchange rate reached 0.63 Euros per dollar.
Thus, since January 2006, the United States dollar has lost one-third of its value with respect to the
Euro.
The process was similar but less intense in the case of the Yuan. After moving from the peg
of Yuan $ 8.78 per United States dollar to a peg based on a basket of currencies in July 2005, the
Chinese currency appreciated considerably vis-à-vis the dollar. Thus the June 2008 exchange rate of
Yuan $ 6.9 per US dollar represented a 16.7 % nominal depreciation of the dollar.
FIGURE 13
SELECTED NOMINAL EXCHANGE RATES FROM JANUARY 2005 TO JUNE 2008
(January 2005 = 100)
120.0
100.0
Yuan/US$
80.0
US$/Euro
Yen/US$
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
60.0
Source: International Monetary Fund, International Financial Statistics, electronic version.
In the case of the Yen, the exchange rate was subjected to higher volatility, reaching its peak
during June 2007 at 123.3 Yen per United States dollar, falling quickly to 100.1 Yen per dollar in
68
The base for the period is January 2005 = 100 for each of the currencies. The index expresses the
evolution of the exchange rates of the Euro per dollar, the (Chinese) Yuan per dollar and the (Japanese)
Yen per dollar.
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March 2008 followed by a brief recovery before falling to a minimum of 89.6 Yen per US dollar in
January 2009.
Thus, the nominal depreciation of the United States dollar against other recognized currencies
during the last few years has helped fuel inflationary pressures on international commodity markets,
including international food markets.
Additional factors
An extensive number of additional temporary factors could be mentioned in relation to the rise in
international food prices. For the goals of the present study, a brief mention must be made of one of
those additional factors, which is derivative in nature: the establishment of restrictions on food exports
in countries worldwide, including several major producers and exporters.
Some governments, in response to the price spike in international and domestic food prices
during 2006-2008, have introduced bans or restraints on food exports, particularly of two essential
foodstuffs, rice and wheat, intended to prevent domestic shortages and to keep internal prices under
control. Paradoxically, the adoption of those measures, by aggravating the supply problems in the
international markets, became self-fulfilling in nature, contributing to extending and amplifying the
food crisis and price increases. Table 2 presents a brief summary of the restrictions on food exports
adopted by some relevant agricultural producers.
TABLE 2
RESTRICTIONS ON FOOD EXPORTS ADOPTED BY SELECTED AGRICULTURAL
PRODUCERS
(Data from June 2008)
Measure adopted
Date of adoption
Bangladesh
Introduction of a 6-month ban on rice exports
April 2008
Brazil
Temporary ban on rice exports
April 2008
Cambodia
Establishment of a two-month ban on rice exports
March 2008
China
Introduction of a tax on rice exports
December 2007
Restriction of exports of wheat, corn and rice by issuing of trade permits
January 2008
Establishment of a voluntary ban on rice exports
January 2008
Replacement of the voluntary ban by an official ban on rice exports until September 2008
March 2008
Egypt
India
Establishment of a ban on wheat flour exports
October 2007
Introduction of a minimum export price for non-basmati rice
September 2007
Ban on exports of non-basmati rice
March 2008
Increase of the minimum price on exports of basmati rice
March 2008
Indonesia
Establishment of a ban on rice exports
April 2008
Guyana
Introduction of a ban on rice exports
January 2008
Kazakhstan
Establishment of a 4-month ban on wheat exports
April 2008
Introduction of a 1–year ban on rice and milk exports
December 2008
Pakistan
Introduction of a ban on wheat exports
May 2007
Russia
Establishment of a two- month ban on wheat exports
April 2008
Partial ban on new rice exports
September 2007
Three-month curtailment of rice exports, targeting company-based contracts
March 2008
Vietnam
Source: FAO, USDA.
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Guyana is a significant agricultural producer at the subregional level, and, consequently, the
establishment of restrictions on food exports must have had a negative effect on food markets across
the Caribbean. In January 2008, the Government of Guyana announced the establishment of a ban on
rice exports in order to ensure the adequate supply to domestic markets, which had been affected by a
poor harvest in the autumn and the increased demand from Europe and the Caribbean.
As a consequence of the fall in international food prices from the second half of 2008
onwards, most of the countries mentioned in table 2 have lifted their restrictions on food exports,
totally or partially, therefore adding to deflationary pressures. However, should the global food
situation deteriorate again, a future reestablishment of those restrictions cannot be discarded.
EXPLORING THE VALIDITY OF EXPLANATIONS FOR THE
ACCELERATION OF FOOD INFLATION
In this subsection, various explanations for the increase in food prices discussed above are tested
econometrically. The model formulated postulates that food inflation (π) depends on its own past
value (π-1) to capture inflationary inertia, input cost increases, excess demand and expectations, such
that:
I
J
K
R
12
i =1
j =1
k =1
r =1
m=2
π = α + βπ −1 + ∑ γ i X i + ∑ δ jY j + ∑θ k Z k + ∑ ρ r Dr + ∑ λm S m + φUS $ + ε
(1)
where
π is food inflation, the Xs are a set of variables that reflect the increases in food production costs, such
as the growth rate of oil and fertilizer prices
the Ys are a set of variables that captures excess demand, using import growth rates in China and India
and biofuel production in the United States as proxy
the Zs are expectations variables using purchases of food commodities in future and options markets
as proxies
the Ds are dummy variables that capture natural phenomena that affected food supply
the Ss are monthly seasonal dummies
US$ is the nominal depreciation of the United States dollar vis-à-vis the Euro.
The model is estimated using monthly data between February 2000 and June 2008, the period during
which international food prices rose and peaked. The results for the best specification of the model are
shown in table 3. These exploratory results are intended to provide a preliminary evaluation of the
causes of the acceleration of world food inflation, to assess whether this process is mainly driven by
temporary factors or is of a more structural nature. Annex I provides definitions of variables and
sources.
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TABLE 3
DRIVERS OF WORLD FOOD INFLATION
(ESTIMATION METHOD: ORDINARY LEAST SQUARES; SAMPLE: FEBRUARY 2000 TO
JUNE 2008)
Coefficient
t-statistic
p-value
Constant
-0.011
-1.20
0.24
π-1
0.360
3.41
0.00
CHINAMV-1
0.048
1.67
0.10
USETH
0.130
1.92
0.06
FUTOPT
0.042
2.88
0.00
US$
0.190
1.89
0.06
Explanatory variable
R2 = 0.47
F (16,60) = 3.34 (p-value = 0.00)
Number of observations = 77
Number of parameters = 17
AR 1-2 test:
F(2,58) = 0.11 (p-value = 0.90)
Heteroskedasticity test: Chi2 = 0.37 (p-value = 0.99)
Normality test:
Chi2 = 0.86 (p-value = 0.65)
RESET test:
F(1,59) = 1.50 (p-value = 0.23)
Source: ECLAC
Note: Estimation including seasonal dummies; CHINAMV-1 = imports volumes of China, lagged one month;
USETH = ethanol production in the United States; FUTOPT = increase in contracts of futures and options of food
products.
Results indicate that the structural factors that have influenced world food inflation in the
analysed period are: imports from China (lagged one period), and the production of ethanol in the
United States. Surprisingly, evidence of a significant effect from either oil or fertilizer price increases
could not be found. The main temporary factors seem to be (speculative) investment in futures and
options in food markets, and the depreciation of the United States dollar against the Euro.
These preliminary findings indicate that the surge in world food prices is driven by a
combination of structural and temporary factors. The structural factors are excess demand ones,
namely, growth in Chinese imports and biofuels production, whereas the temporary factors are
expectations, as measured by investment in food products in futures and options markets, and the
depreciation of the United States dollar. Statistical tests reveal no evidence of autocorrelation,
heteroskedasticity or non-normality in the residuals that could have rendered the estimates inefficient
and led to an overstatement of the statistical significance of the parameters. In addition, there seems to
be no functional form misspecification. Thus, the results, although exploratory, seem reliable. Overall,
the estimated model explains 47% of the variations in world food inflation, representing an acceptable
goodness of fit.
Certainly, the model proposed here is an approximation to the complex problem of price
determination in international food markets, providing merely a partial view of the underlying forces
behind the phenomenon of accelerated food inflation over the last few years. Several other factors
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could be considered to improve the model’s fitness. For example, a case could be made that trade
restrictions adopted by major agricultural producers have had a direct and significant impact on
international food markets, becoming one of the main forces fuelling uncertainty and speculation, and
driving prices up. Consequently, the inclusion of trade restrictions and restraints as an explanatory
variable should be further explored.
In a similar way, variables that originally lacked enough explanatory power in strict
econometric terms, regardless of their evident significance and strong links to international food
prices, could improve their standing with more precise definition. Thus, the apparent lack of
relationship between the prices of basic inputs like oil or fertilizers, and food prices, could eventually
be amended or strengthened through the inclusion of additional variables also related to agricultural
production, such as pesticides, or rural labour costs.
EFFECTS ON THE CARIBBEAN: AN UPDATED ASSESSMENT
The phenomenon of rising international food prices, which reached its zenith by the middle of 2008,
had a direct and evident impact on the Caribbean through several transmission channels. As was
already mentioned, such a relationship was explored in ECLAC (2008), and the present report
attempts to expand on that area. Evidently, the first and most direct effect of the increase in
international food prices has been on domestic inflation rates, given the importance of imported food
in the consumption basket used to measure the Consumer Price Index (CPI) in all Caribbean countries.
On the social front, the implications of the rise in food prices on poverty and indigence rates and on
income distribution are also presumably high. In the absence of access to detailed information from
household surveys at the microeconomic level, a discussion is presented below based on
macroeconomic and aggregate household surveys information.69
The effects evaluated below address the recorded increases in world food prices and the
domestic food crisis in the Caribbean during 2008 and the first semester of 2009. This analysis is
preceded by a brief discussion of the dependency of Caribbean countries on imported food, and some
considerations on nutrition, both key variables for understanding the vulnerability of the subregion to
the escalation of prices in international food markets.
DEPENDENCY ON IMPORTED FOOD AND NUTRITION
CONSIDERATIONS
The effect on Caribbean countries of world food inflation is basically determined by their dependency
on imported foodstuffs, since it is well known that the subregion is a net importer of food, with only
Guyana and Suriname being exporters of a product – rice – whose international price has risen
significantly during the last few years and that, in addition, is considered an essential food. Certainly,
other agricultural products are also important in the export baskets of some Caribbean countries, sugar
in the case of Barbados, Belize, Guyana and Jamaica, and bananas and plantains in the case of Belize,
Suriname, Dominica, Saint Lucia, and Saint Vincent and the Grenadines. Notwithstanding, none of
these products has witnessed a comparable hike in world market price.70
Figure 14 shows that the Caribbean is a net importer of most basic grains and pulses,
including those that have experienced significant price increases, such as maize, rice and, especially,
69
For the type of analysis that can be carried out with microeconomic survey data see Dessus and others
(2008) and IDB (2008).
70
In fact, world prices for Caribbean sugar fell from US$ 15.86 per pound in July 2006 to US$ 12.88 per
pound in March 2008, a 19% drop.
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wheat. Indeed, from April 2008 to April 2009, the consumption of corn, rice and coarse grains in the
Caribbean was 4.2, 2.0 and 3.7 times higher than domestic production, respectively. The difference, of
course, needed to be imported. This chronic unbalance between subregional demand for and supply of
most basic food products is particularly evident in the case of wheat, a crop that does not grow in the
Caribbean, but is extensively consumed by the population in the form of breads and crackers, pasta
and semolina, flour, and so on. Indeed, during the same period, regional wheat imports totalled 2,125
thousand metric tons. This high dependence on imports of wheat and other basic grains reveals that
the Caribbean subregion is highly vulnerable to international price escalation, thus raising the issue of
food security.
FIGURE 14
CARIBBEAN DOMESTIC PRODUCTION, CONSUMPTION AND IMPORTS OF GRAINS AND
PULSES APRIL 2008 TO APRIL 2009
(Thousand of metric tons)
3000
2,883
2,755
2,125
2,119
2,000
2000
2,000
1,737
868
1000
820
785
657
0
0
Corn
Rice
Dom estic production
Wheat
Dom estic consum ption
Coarse grains
Im ports
Source: United States Department of Agriculture.
In relation to this high dependence on imported food, there is an apparent inelasticity of
demand for some major items such as wheat, regardless of the impact of rising international prices. In
fact, according to available data, the import volumes of wheat, corn and other major food imports into
the Caribbean have been on a steady rise during the last few years, and have not been visibly affected
by the phenomenon of rising international prices between 2006 and 2008. Thus, for the period
between April 2008 and April 2009, the volume of imports of most grains and pulses has broken all
historical records.
However, during the last few decades, the Caribbean has made significant improvements in
food availability and consumption, which have had a favourable impact on nutrition indicators. For
instance, according to the Caribbean Food and Nutrition Institute (CFNI, 2007), malnutrition rates
(weight for age) in children below 5 years of age have more than halved between 1994 and 1996 and
between 2000 and 2003 in Guyana (from 19% to 9.4%) and Belize (from 15% to 7.3%). FAO (2006),
using three-year averages for the period between 1979 to 1981 and 2001 to 2003, estimates that the
daily average calorie intake per person increased in all the more developed countries (MDCs) except
Trinidad and Tobago.71 In the 2001 to 2003 period, this figure ranged from 2,660 calories per person
per day in Suriname (2,400 calories per person per day in the period 1979 to1981) to 3,110 calories
per person per day in Barbados (3,040 calories per person per day in the period 1979 to 1981).
71
This source does not provide information for the Eastern Caribbean Currency Union (ECCU) countries.
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In all cases, daily average per capita intake of calories in the period 2001 to 2003 was above
the 2,400-calorie level estimated by the CFNI as the minimum requirement for an adult to meet its
nutritional needs. This basic nutritional requirement is extensively used in Household Surveys and
Poverty Assessments throughout the subregion as the benchmark to determine indigence lines.
Despite these positive trends, ECLAC (2006) raises a particularly worrisome issue: changes
in consumption patterns in the Caribbean have increased their dependency on imported food as a
result of the substitution of the traditional diet, based on domestic produce, for a diet more intensive in
cereals like wheat and other staples, mostly produced outside the subregion. This reinforces the
vulnerability of the Caribbean to the escalation in world food prices.
B. DOMESTIC INFLATION
Undoubtedly, the phenomenon of rising international food prices has had a direct link to the evolution
of domestic prices in the Caribbean. In order to examine the significance and duration of the impact of
food price increases on headline inflation, figure 15A presents cumulative inflation rates recorded by
the MDCs between July 2006 – when world food prices started to escalate – and June 2009.72 It is
clear that, in all the cases recorded, food inflation surpassed headline inflation – that is, Consumer
Price Index (CPI) inflation – by a significant margin, implying that food inflation played a key role in
the overall acceleration of inflation during this period.
In absolute terms, Jamaica (64.7%) recorded the highest food inflation of the period.
However, by far the most significant difference between food and headline inflation was observed in
Trinidad and Tobago, where food inflation reached 64.5%, surpassing headline inflation (29.5%) by
no less than 35 percentage points, and non-food inflation (16.2%) by no less than 48.3 percentage
points, reflecting the very large role that rising food prices have played in fuelling overall inflation in
Trinidad and Tobago during the three-year period.
FIGURE 15A
HEADLINE, FOOD AND NON-FOOD CUMULATIVE INFLATION, JULY 2006 TO JUNE 2009
(Percentage)
70
64.7
64.5
60
50
45.5
40
30
20
10
30.8
27.8
22.8
17.1
9.1
21.4
16.8
7.8
33.4
29.5
22.7
14.9
7.8
33.3
15.6
16.2
7.6
-0.3
0
Bah
Bar
Bel
Guy*
Jam
Sur
T&T
-10
Headline inflation
Food inflation
Non-food inflation
Source: ECLAC, based on official information.
* Data up to March 2009.
72
The Bahamas, Barbados, Belize, Guyana, Jamaica, and Trinidad and Tobago. Suriname is not included.
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Similarly, in all the other MDC countries, food inflation was significantly higher than
headline inflation and non-food inflation. In Guyana, Suriname and Belize, the difference between
food and headline inflation was between 15 and 19 percentage points, while in the other MDCs, the
difference was lower, particularly in the Bahamas, where it was 8.0 percentage points. In Belize,
accumulated non-food inflation during the period was negative, reflecting an overall price deflation.
However, food inflation in Belize reached 22.8% and thus was the key contributor (7.6 percentage
points) to headline inflation.
Figure 15B shows a similar phenomenon in the ECCU countries, of food inflation recording
higher values than headline and non-food inflation. The difference between food and headline
inflation for the period was more significant in Anguilla (14.4 percentage points) and Dominica (13.5
percentage points).73 In both these countries, food inflation exceeded non-food inflation by factors of
3.2 and 10.5, respectively. The difference was also significant in Antigua and Barbuda and in
Montserrat, where food inflation posted rates 10.5 and 10.8 times that of non-food inflation,
respectively, and in Saint Vincent and the Grenadines, where this factor was 3.3. In contrast, Saint.
Lucia exhibited the most constant inflation rates, with a difference lower than 7% between food
(14.4%) and non-food (7.4%) inflation. The other countries were in intermediate positions.
FIGURE 15B
HEADLINE, FOOD AND NON-FOOD CUMULATIVE INFLATION, JULY 2006 TO JUNE 2009
(Percentage)
40
29.9
30
25.9
22.6
20
10
21.6
21.6
18.4
17.7
17.5
15.5
14.4
11.2
9.4
5.2
11.5
11.1
9.1
9.2 10.1
7.4
7.8
5.0
1.8
2.2
2.0
0
Ang*
A&B
Dom
Gre
Mon
St KN
St L
St VG
-10
Headline inflation
Food inflation
Non-food inflation
Source: ECLAC based on official information.
* Data up to March 2009.
Regardless of specific differences at the country level, the available data show that, from June
2006 to June 2009, food inflation was the main driver of overall inflation in the Caribbean.
Furthermore, although in all cases the rise in food prices surpassed non-food inflation by a wide
margin, food inflation was generally more acute in MDC than in ECCU countries. Thus, more than
half of the MDC group of countries posted food inflation rates above 30% whereas, in ECCU
countries, the maximum rate of 29.9 % was recorded by Anguilla
This may seem surprising, inasmuch as ECCU countries are more dependent on food imports
than MDC countries. However, the explanation must lie in the more successful anti-inflationary
73
CPI data for Anguilla is available only up to March 2009, while all the other ECCU countries have data
up to June 2009.
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policies implemented by ECCU countries. As smaller economies tend to be more open, the size of
ECCU countries could have provided their authorities with stronger incentives for more prudent
conduct of monetary policy, given that openness reduces the effect of money growth on domestic
output.74
The better inflation performance of ECCU countries compared to MDCs is clearly shown in
figure 16, where Jamaica, Guyana, Suriname, and Trinidad and Tobago exceeded both (simple
average) food and non-food subregional inflation between July 2006 and June 2009, in some cases by
a large amount. In contrast, most ECCU countries posted food inflation rates lower than the
subregional average (28.9%), whereas only Anguilla exhibited food and/or non-food inflation rates
slightly higher than the simple subregional average.
FIGURE 16
CARIBBEAN FOOD AND NON-FOOD INFLATION, JULY 2006 TO JUNE 2009
(Percentage)
Inflation in the Caribbean Region, 2006 - 2009
65%
T&T
Jam
Food Inflation Jul 2006 - Jun 2009
60%
55%
50%
45%
40%
35%
Sur
Ang
30%
AVERAGE
Bar
25%
Bel
20%
Gre
Mon
Dom
Bah
A&B
15%
Guy
St . V&G
St . K&N
St . L
10%
5%
0%
0%
5%
10%
15%
20%
25%
30%
35%
Non-Food Inflation Jul 2006 - Jun 2009
Source: Figures 15a and 15b.
The evolution of food inflation within the Caribbean has generally followed the same path as
global food inflation, reaching record levels during mid- 2008, and decelerating substantially
afterwards. In fact, several Caribbean countries recorded lower values of food inflation during the first
semester of 2009, compared to previous periods of 2008 and 2007, reflecting the drastic fall in
international food prices during 2009.
74
IMF (2006) found that – after controlling for fiscal balance, inflation in advanced economies, depth of
financial sector, Central Bank independence and exchange rate regime – an emerging country whose tradeto-GDP ratio is 25 percentage points higher than that of another country, is over 10 percentage points more
likely to exhibit single-digit inflation rates.
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FIGURE 17A
FOOD INFLATION PER SEMESTER, 2007-II, 2008-I, 2008-II AND 2009-I
(Percentage points)
20
18.3
14.3
15
11.5
10.4
9.7
10
5
19.0
18.0
5.2
3.7
1.5
8.1
6.8
7.8
6.1
8.9
8.6
5.4
3.9
2.5
1.4
3.6
3.2
2.0
0
Bah
-5
Bar
-3.6
Bel
Guy*
-3.2
Jam
Sur
T&T
-1.5
-4.0
-8.0
-10
2007-II
2008-I
2008-II
2009-I
Source: ECLAC, based on official information.
* Data up to March 2009.
Figure 17A shows food inflation recorded in Caribbean countries during the second semester
of 2007 (2007-II), the first and second semesters of 2008 (2008-I and 2008-II) and the first semester
of 2009 (2009-I). Comparison by countries and by semesters shows clearly that the Caribbean has
followed a quite common trend, with high food inflation values recorded up to 2008, and significantly
lower values for 2009. As an example, food inflation in the Bahamas has followed a rising trend,
topping 5.2% in accumulated inflation for the second semester of 2008. However, during the first
semester of 2009, food inflation in the Bahamas has only amounted to 1.4%, just one quarter of its
previous value.
Similarly, Jamaica has suffered extremely high food inflation during 2007 and the first half of
2008, recording the highest values at the subregional level (18% and 14.3%). However, during the last
semester of 2008, food inflation in Jamaica declined to 8.6%, further shrinking to 3.6% during the first
semester of 2009. Moreover, in some MDC countries, food inflation during the first semester of 2009
has even recorded negative values, reflecting the drastic reduction in food prices in those countries.
Such is the case of Suriname (-8.0%), Barbados (-3.6%), Belize (-3.2%), Guyana (-4.0%) and
Trinidad and Tobago (-1.5%).
In the case of ECCU countries, the evolution of food inflation rates has been similar to that of
MDC countries; however, there are some significant differences. As figure 17B shows, most ECCU
countries have registered the highest inflation rates during 2007 and 2008, with rates falling
significantly during the first half of 2009. Antigua and Barbuda is one exception to this trend: after
recording relatively small food inflation rates during 2008, inflation rates have risen significantly
during the first semester of 2009 to an accumulated 5.8% for the period. Meanwhile, during the same
first semester of 2009, all other ECCU countries have recorded inflation rates lower than in previous
periods and, in the cases of Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines,
have even achieved negative rates.
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FIGURE 17B
FOOD INFLATION PER SEMESTER, 2007-II, 2008-I, 2008-II AND 2009-I
(Percentage points)
20
15
11.6
8.5
7.0
5.8 6.3
5
10.1
9.7
10
3.8
3.7
2.0
1.8
1.2
3.2
5.8
5.7
6.8
5.0
3.8
3.9
3.0
2.0
1.7
1.5
0
Ang*
A&B
Dom
Gre
6.4
Mon
7.2
3.9
2.1
-0.3
St KN
-0.7
St L
-1.9
St VG
-3.4
-5
-5.0
2007-II
2008-I
2008-II
2009-I
Source: ECLAC, based on official information.
* Data up to March 2009.
The explanation for this phenomenon of lower, or even negative, food inflation rates during
2009 is twofold: firstly, dwindling international prices for the main food commodities have
undoubtedly translated into a significant reduction in the cost of food imports. Caribbean countries are
heavily dependent on imported food, so domestic markets are very sensitive to changes in
international prices. Secondly, the Governments of several Caribbean countries have introduced
diverse policy measures aimed at tackling food inflation, reducing costs and fighting speculative
pressures. The most commonly-adopted measures included tax reductions or exemptions on food
sales, price controls on essential food items, and the elimination of tariffs and duties on food imports.
Although a precise assessment of the specific impact of those measures is not included in the
present paper, it is fair to assume that the aforementioned measures have contributed in some way to
tackling food inflation rates in their respective countries.
However, even in the case of countries where food inflation rates have become negative
during 2009, reflecting a reduction in prices, the negative rates recorded are, in absolute terms, far
below the positive values recorded during 2007 and 2008 when rising food prices were the norm. In
other words, although food prices in the Caribbean have started to fall during 2009, this has not been
enough to fully compensate for the previous price hike. There are several reasons to explain this
downward price inelasticity, including consumer and producer expectations, lingering speculative
forces, and inefficient market structures that have encouraged imbalances and distortions. The main
implication is that food prices in the Caribbean are not likely to go back to the levels existing prior to
the global food crisis, despite the current downward trend.
In order to determine the real impact of the rise in food prices on overall price inflation across
the Caribbean, the links between food inflation and headline inflation must be examined. Table 3
shows the contribution of food inflation to headline inflation during the period July 2006 to June 2009,
in absolute and relative terms. The first column of table 3 shows the official headline inflation
observed in each Caribbean country in the period. The second column presents an estimate of headline
inflation without the contribution of food inflation: in other words, assuming that food inflation was
zero during that period. The third column shows the contribution of food inflation to headline inflation
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in absolute terms: in other words, how many additional points headline inflation has recorded due to
food inflation. The fourth and final column also presents the contribution of food inflation, in this case
as a percentage or share of headline inflation.
Thus, in absolute terms – percentage points of headline inflation – the highest impact of food
inflation was recorded by Jamaica (25.1 percentage points), Trinidad and Tobago (17.7 percentage
points), Saint Vincent and the Grenadines (14.2 percentage points), Guyana (13.1 percentage points)
and Suriname (11.2 percentage points). In contrast, the lowest effect was felt in the Bahamas, where
food inflation added just 2.5 percentage points to headline inflation, followed by Antigua and Barbuda
(3.8 percentage points).
TABLE 3
CONTRIBUTION OF FOOD INFLATION TO HEADLINE INFLATION, JULY 2006 TO JUNE
2009
(Percentage points and percentage)
Headline
inflation (with
food inflation)
Headline
inflation
(without food
inflation)
Contribution of
food inflation
(absolute
percentage
point)
Contribution of
food inflation
(percentage of
headline
inflation)
Bahamas (the)
9.1
6.6
2.5
27.1
Barbados
14.9
5.0
9.9
66.1
Belize
7.6
-0.2
7.8
102.2
Guyana*
22.7
9.6
13.1
57.5
Jamaica
45.5
20.4
25.1
55.3
Suriname
21.4
10.2
11.2
44.8
Trinidad and Tobago
29.5
11.8
17.7
60.2
Anguilla*
15.5
6.7
8.8
57.2
Antigua and Barbuda
5.2
1.4
3.8
73.3
Dominica
9.1
1.4
7.7
84.4
Grenada
11.2
3.2
8.0
71.7
Montserrat
11.1
1.0
10.1
90.4
Saint Kitts and Nevis
11.5
6.7
4.8
42.1
Saint Lucia
9.2
3.8
5.4
53.5
Saint Vincent and the Grenadines
17.7
3.5
14.2
80.2
MDCs
ECCU
Source: ECLAC calculations based on official data.
* Data up to March 2009.
In most countries, food inflation has accounted for more than half of overall inflation. The
exceptions were the Bahamas (27.1%), Suriname (44.8%) and Saint Kitts and Nevis (42.1%). In
Anguilla, Antigua and Barbuda, Barbados, Guyana, Jamaica, Trinidad and Tobago, Dominica,
Grenada, Montserrat, Saint Lucia, and Saint Vincent and the Grenadines, food inflation has explained
between 50% and 100% of headline inflation during the period July 2006 to June 2009.
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Belize stands out as the exception in this analysis, because the contribution of food inflation
to headline inflation is over one hundred per cent (102.2%). According to official data, during the
whole period of analysis, non- food inflation in this country has been negative, meaning that, had it
not been for the contribution of food inflation, overall inflation in Belize would have been negative,
reflecting a net price contraction.
Overall, it is undeniable that food inflation has made a distinct impact on headline inflation in
the Caribbean between 2006 and 2008, becoming the main force behind inflationary pressures across
the subregion. Figures 18A and 18B summarize this contribution, showing the values of overall
inflation for the period, with and without considering food inflation. In all the cases observed, food
inflation was a major contributor to headline inflation.
FIGURE 18A
HEADLINE INFLATION, OFFICIAL AND ESTIMATED FIGURES, JULY 2006 TO JUNE 2009
(Percentage)
50
45.5
40
29.5
30
22.7
20
21.4
20.4
14.9
10
6.6
9.1
10.2
9.6
7.6
11.8
5
-0.2
0
Bah
Bar
Bel
Guy*
Jam
Sur
T&T
-10
Not including food inflation
Including food inflation
Source: ECLAC calculations on the basis of official data.
* Data up to March 2009.
FIGURE 18B
HEADLINE INFLATION, OFFICIAL AND ESTIMATED FIGURES, JULY 2006 TO JUNE 2009
(Percentage)
20
17.7
15.5
11.2
11.5
11.1
10.1
9.1
10
6.7
6.7
5.2
3.8
3.2
1.4
1.4
3.4
1.0
0
Ang*
A&B
Dom
Gre
Mon
St KN
St L
-10
Not including food inflation
Source: ECLAC calculations on the basis of official data.
* Data up to March 2009.
100
Including food inflation
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The relationship between domestic food inflation and international food inflation is another
issue that deserves consideration. In order to estimate the impact of world food inflation on domestic
headline inflation, the transmission mechanisms, or pass-through effects, of international food price
increases on domestic food inflation, need to be addressed. In general, the higher the dependence of a
country on imported food, the higher the pass-through coefficient. In addition, this transmission
channel is highly sensitive to a number of economic policy tools such as price controls, subsidies,
exchange rate management and import tariffs.
A precise estimation of pass-through coefficients per country and by product rather than at the
aggregate food category is beyond the scope of this report. Therefore, the simplest (and roughest)
approximation to pass-through coefficients is calculated by dividing domestic food inflation by world
food inflation in a given period. Transmission coefficients between international and domestic food
inflation are presented in table 4, calculated using this approximation for two periods: firstly, for the
period July 2006 to June 2008, the period when international food prices were on the rise, and,
secondly, for the period from July 2008 to June 2009, when the international food prices began to
decline.
TABLE 4
PASS-THROUGH COEFFICIENT AND FOOD INFLATION WEIGHT ON CPI INFLATION,
SELECTED PERIODS
(Percentage)
Pass-through
coefficienta
July 2006 to June 2008
Pass-through
coefficienta
July 2008 to June
2009
Bahamas (the)
17.8
-32.4
Barbados
38.0
-27.9
Belize
34.2
-16.3
Guyana*
59.5
7.7
Jamaica
84.2
-61.2
Suriname
69.3
...
Trinidad and Tobago
74.6
-80.9
Anguilla*
44.2
-21.7
Antigua and Barbuda
17.1
-40.1
Dominica
32.7
-19.0
Grenada
38.1
-2.3
Montserrat
22.0
-41.1
Saint Kitts and Nevis
23.7
-85.9
Saint Lucia
19.9
-21.4
Saint Vincent and the Grenadines
46.2
-1.5
MDCs
ECCU
Source: ECLAC calculations on the basis of official data.
a Percentage of cumulative world food inflation transmitted to cumulative domestic food inflation calculated dividing
the latter by the former.
* Data up to March 2009.
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The analysis presents some interesting results. In MDCs, in the first period between July 2006
and June 2008 (when international food prices were rising), the highest values of pass-through
coefficient are those of Jamaica (84.2%), followed by Trinidad and Tobago (74.6%), expressing a
very strong link between increases in international food prices and increases in domestic food prices:
in the case of Jamaica, more than four-fifths, and in the case of Trinidad and Tobago nearly threequarters, of world food inflation was transmitted to domestic food prices in the period analysed. In
Suriname and Guyana, the pass-through coefficients were also high. In the other MDC countries, passthrough coefficients were lower, especially in the Bahamas (17.8%)
In ECCU countries, pass-through coefficients for the period July 2006 to June 2008 were
lower, with a maximum of 46.2% recorded by Saint Vincent and the Grenadines, followed by
Anguilla with 44.2%. In Dominica and Grenada, approximately one-third of foreign food inflation
was transmitted to domestic food prices, and the pass-through effect was quite low in Saint Lucia
(19.9%) and Antigua and Barbuda (17.1%). These results concur with previous findings showing that
domestic food inflation among ECCU countries was, on average, lower than among MDC countries,
reflecting a lesser degree of vulnerability to international food prices.
The magnitudes of the pass-through coefficients seem plausible and are comparable to those
calculated by other recent studies for other countries. For instance, Dawe (2008) calculates the passthrough coefficient of world rice inflation to domestic rice inflation in seven large Asian countries in
Q4 2003 to Q4 2007 in a similar fashion, finding low values in the Philippines (6%), India (9%) and
Vietnam (11%), but much higher values in China (64%), Thailand (53%), Bangladesh (43%) and
Indonesia (41%). Following a different methodology and using regression analysis for Colombia in
Q1 1990 to Q2 2008, Gómez P. (2008) found a pass-through coefficient of 16.8% of world food
inflation adjusted by the nominal depreciation of domestic currency vis-à-vis the United States dollar.
However, this adjustment is irrelevant in the Caribbean, since most countries either have fixed
exchange rate regimes in place (ECCU, Bahamas, Barbados and Belize) or quasi-fixed regimes
(Suriname and Trinidad and Tobago).
However, there was a different development for the period July 2008 to June 2009 during
which international food prices fell steeply. Practically all the countries in the Caribbean subregion
present negative coefficients for this period, with the sole exception of Guyana, which presents a
positive but very low (7.7%) coefficient. In contrast, countries like Trinidad and Tobago (-80.9%) and
Jamaica (-61.2%) present very high, negative values. Similarly, several others countries show negative
values significantly below minus 20.0%. These negative coefficients imply a disconnection during
that period between international food prices, which were going down, and domestic food prices in
several Caribbean countries, which were still going up.
Many possible factors could explain this phenomenon such as, for example, inefficiencies and
distortions linked to monopolistic or oligopolistic market structures in some Caribbean countries, or
the existence of a lag between international and domestic food prices. Likewise, increases in domestic
costs of labour or transportation could have been keeping inflationary pressures up. Another possible
factor is the development of adaptive expectations in Caribbean countries, in which producers and
consumers form expectations about the future evolution of food prices, based on the experience of
previous years when international and domestic food prices reached record levels. Such adaptive
expectations would fuel speculative pressures in the domestic markets, helping to push prices up.
Finally, changes in consumer behaviour in Caribbean countries may have played a role. In the light of
high food prices and facing a reduction in purchasing power, consumers across the subregion may
have opted to reduce their consumption of non-essential items in order to preserve their consumption
levels of essential items like food, thus contributing to keeping domestic demand and food prices at
high levels.
The hypotheses mentioned here are not conclusive, and do not preclude the existence of other
factors. However, it is clear that in many Caribbean countries, there has been an undeniable
divergence between external and domestic food prices from the middle of 2008 onwards. Figure 19A
presents the evolution of international and domestic food price indices from June 2006 to June 2009 in
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the world and in the MDC countries, using the IMF international food price index and the respective
national price indices for food.
FIGURE 19A
WORLD AND CARIBBEAN FOOD PRICE INDICES, 2006 TO 2009
(Base June 2006 = 100)
World Food Index
Bah
Bar
Bel
Guy*
Jam
Sur
T&T
175
150
125
100
Jun-09
Apr-09
Feb-09
Oct-08
Dec-08
Jun-08
Aug-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Oct-06
Dec-06
Jun-06
Aug-06
75
Source: ECLAC on the basis of official data.
* Data up to March 2009.
The data presented in Figure 19A show clearly that during the first period analysed, from
June 2006 to June 2008, the behaviour of both international and domestic food indices was similar,
with rising values reflecting climbing food prices both in the Caribbean and in the world. However,
from mid-2008 onwards, while the world index experienced a drastic fall, food price indices in the
Caribbean have behaved quite differently.
For example, the indices of Trinidad and Tobago and Jamaica have continued to climb
strongly in reaction to continuous increases in domestic food prices. Other MDC countries like
Barbados or Belize exhibit similar behaviour, although at a more moderate pace, and show signs of
price stabilization, or mild decrease, during the first half of 2009. However, such reductions were not
of the same dimension as those of international prices, even in the case of countries like Suriname or
Guyana, which experienced a clear reduction in the food price index.
The Bahamas food index presents the most stable evolution for the whole period.
Additionally, the Bahamas and Suriname are the only two countries whose price indices were at the
same level or lower than the world food price index in June 2009. All other MDC countries had price
indices above the world index, reflecting the existence of domestic food inflation rates higher than the
international food inflation rate.
ECCU countries behaved quite differently from MDC countries. Thus, the evolution of food
price indices among ECCU countries has been comparatively moderate, with indices moving upwards
during the period at a relatively slower pace. In fact, since June 2009, domestic food price indices for
all ECCU countries were below, or slightly above, the value recorded by the world food price index.
Again, the more stable evolution of food price indices among ECCU countries could be explained by
domestic factors, such as more effective counter-inflationary policies by Governments.
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FIGURE 19B
WORLD AND CARIBBEAN FOOD PRICE INDICES, 2006 TO 2009
(Base June 2006 = 100)
World Food Index
Ang*
A&B
Dom
Gre
Mon
St KN
St L
St VG
175
150
125
100
Jun-09
Apr-09
Feb-09
Oct-08
Dec-08
Jun-08
Aug-08
Apr-08
Feb-08
Oct-07
Dec-07
Jun-07
Aug-07
Apr-07
Feb-07
Oct-06
Dec-06
Jun-06
Aug-06
75
Source: ECLAC, on the basis of official data.
* Data up to March 2009.
Overall, it is clear that there has been a discrepancy between the evolution of international
food inflation and domestic food inflation in many Caribbean countries from the end of 2008 onwards,
with food prices in those countries still standing at high levels – or increasing further – even after
international prices started to fall during the second half of 2008 and continued falling during 2009.
This reinforces the notion that in the Caribbean food prices are upwardly flexible and downwardly
sticky.
The implications of this downward stickiness with respect to international food prices are
significant: that domestic food prices will probably continue to exert a significant impact on domestic
inflation rates in some Caribbean countries for a long time, regardless of the economic slowdown and
the fall in international prices, perhaps even almost replicating the already-high inflation rates posted
during previous periods.
IMPORT BILL AND TRADE BALANCE
Caribbean countries are net importers of food. Thus, increases in world food prices also have a
negative impact on trade (and current account) balances. Table 5 shows merchandise imports
composition in 2008 for MDC countries. As seen in table 5, the share of food imports in total goods
imports ranges from 6.2% in Trinidad and Tobago to 16.5% in Barbados.
TABLE 5
MERCHANDISE IMPORTS COMPOSITION, 2008
(Percentage)
Food
Non-food
Total
(Millions of
US$ )
Bahamas (the)
14.0
86.0
3,129.0
Barbados
16.5
83.5
1,684.7
MDCs
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Belize
9.5
90.5
870.0
Guyana
12.6
87.4
1,300.2
Jamaica
12.1
87.9
7,742.3
Suriname
..
..
..
Trinidad and Tobago
6.2
93.8
9,973.0
Source: Central Banks and other official sources.
.. = not available.
A traditional indicator used to evaluate a country’s vulnerability to external shocks is the
import coverage (in months) provided by net international reserves available to the Central Bank.
Countries with higher levels of international reserves in relation to their import requirements would be
more resilient to external shocks. By combining this indicator with the ratio of food imports to total
goods imports, figure 20 maps the external vulnerability of Caribbean countries attached to imported
food dependence and rising world food prices. Countries located in the upper left hand quadrant are
more vulnerable, due to the high share of food imports in total imports, combined with a low import
coverage, whereas those located in the lower right hand quadrant are less sensitive to increases in
international food prices, because of the smaller share of their food imports in total imports, and
longer import coverage. The quadrants are determined by (simple) averages of the share of food
imports on total imports (11.8%) and of imports coverage (4.4 months).
FIGURE 20
EXTERNAL VULNERABILITY TO RISING WORLD FOOD PRICES, 2008
External Vulnerability
20%
Food Imports/Total Imports 2008
Bar
15%
Bah
Guy
Jam
10%
Average
Bel
T&T
5%
0%
0
3
6
9
Imports Coverage 2008 (Months)
12
Source: ECLAC, on the basis of official data.
Note: Import coverage estimated considering the average monthly import bill during the year 2008, and available
international reserves as of December 2008.
Overall, the Bahamas appears to be the most vulnerable country in the group as a result of a
relatively high food imports-to-total imports ratio (14.0%), coupled with a low level of international
reserves equivalent to only 2.2 months of imports. Although Belize exhibits import-coverage of
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international reserves almost as low as the Bahamas, its situation is comparatively better because the
share of food imports in total imports is lower (9.5%). Likewise, Guyana and Jamaica combine a low
level of import- coverage with a near-average food imports-to-total imports ratio, of 12.6% and
12.1%, respectively. The opposite is true in Barbados, which counterbalances high food imports
(16.5% of total imports) with 4.8 months of international reserves coverage, the highest in the
subregion, after Trinidad and Tobago.
In contrast, Trinidad and Tobago shows by far the strongest position in the subregion. As an
exporter of oil and gas, Trinidad and Tobago has accumulated significant trade and current account
surpluses over the last few years, fuelled by rising energy prices in world markets. Consequently, net
international reserves have soared, tripling between 2003 and 2007, when they amounted to US$
6,659 million. Although the windfall from high oil prices came to an abrupt end during 2008, Trinidad
and Tobago still enjoys the highest import coverage of the whole subregion, amounting to 11.8
months.
Table 6 explores the vulnerability of Caribbean countries to changes in international food
prices. It considers how an increase of 40% in world food prices would affect import bills during
2009. It assumes an income elasticity of demand for food equal to one (so that imports as a share of
GDP remain unchanged at constant prices), a price elasticity of food imports demand of -0.2,75 and
2009 GDP growth rates equal to the values forecast by ECLAC (2009).76
TABLE 6
IMPACT ON IMPORT BILLS OF A 40 PER CENT INCREASE IN WORLD FOOD PRICES,
2009e
(Millions of United States dollars)
Food imports
value 2008
Food imports
value 2009e
Increase in food
imports value
2008e
Bahamas (the)
438.3
589.5
151.2
Barbados
278.6
378.2
99.6
Belize
83.0
115.8
32.8
Guyana
163.7
225.9
62.2
Jamaica
940.2
1,269.3
329.1
..
..
..
618.4
856.4
238.1
MDCs
Suriname
Trinidad and Tobago
Source: ECLAC calculations.
e = estimate
.. = not available.
As shown, the effects of a world food inflation rate of 40% on the import bills are significant
in all countries. The impact would be the highest in Jamaica (an additional US$ 329.1 million on the
import bill), Trinidad and Tobago (an additional US$ 238.1 million), and the Bahamas (US$ 151.2
million).
75
76
This implies that a 40% increase in world food prices will decrease food import volumes by 8%.
See Annex II.
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This would widen the already substantial trade (and current account) deficits in most
countries.77 In MDCs, for instance, trade deficits as a share of GDP in 2007 were in the 30% to 35%
range in the Bahamas, Barbados, Guyana and Jamaica. In ECCU countries, the trade gap was even
more pronounced, above 35% of GDP in all cases, with a maximum as high as 96% of output
recorded by Anguilla. Thus, an escalation in the world food crisis will make external vulnerability
more acute.
As net importers of food, Caribbean countries need to get financial resources and foreign
exchange to finance the import bill. Although food import dependency is not a recent but rather a
chronic problem, its economic and social relevance has increased in the current context of high
international food prices. With several countries in the subregion challenged by considerable
dependency on imported food, insufficient levels of economic development and diversification, and
low levels of international reserves, the already high external vulnerability of Caribbean countries is
on the rise.
POVERTY AND INDIGENCE
Undoubtedly, food prices, food safety and food security are topics intimately linked to poverty issues
in developing countries. Thus, it is no coincidence that eradicating extreme poverty, indigence and
hunger is the foremost of the Millennium Development Goals.78 In this regard, the Caribbean is no
exception, although poverty and indigence rates in some countries are much lower than in others, as
table 7 shows. In general, indigents are defined as people not able to afford a food consumption basket
that provides a minimum amount of kilocalories per day, whereas poverty refers to the population
without the capacity to purchase a basic consumption basket that also includes non-food items.
TABLE 7
POVERTY AND INDIGENCE RATES IN THE CARIBBEAN, LAST YEAR AVAILABLE
(Percentage of total population)
Indigence rate
Poverty rate
including
indigence
Bahamas (the) (2001)
..
9.3
Barbados
..
..
Belize (2002)
10.8
33.5
Guyana (2007)
13.0
31.0
Jamaica (2006)
..
14.3
Suriname (2000)
20.0
63.1
Trinidad and Tobago (2005)
1.2
16.7
2.0
23.0
MDCs
ECCU
Anguilla (2002)
77
The exceptions are Suriname and Trinidad and Tobago which recorded trade and current account
surpluses in 2007 due to their significant exports of oil and/or mining products. For instance, Trinidad and
Tobago posted trade and current account surpluses of 21.8% and 18.6% of GDP, respectively.
78
See United Nations (2008).
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Antigua and Barbuda (2005-2006)
3.7
18.3
Dominica (2002-2003)
15.0
39.0
Grenada
..
..
Montserrat
..
..
Saint Kitts and Nevis (1999-2000)
12.9
31.0
Saint Lucia (2005-2006)
1.6
28.8
..
..
Saint Vincent and the Grenadines
Source: Survey of Living Conditions except for Belize (Living Standards Measurement Survey), Guyana (Household
Income and Expenditure Survey) and Suriname (General Bureau of Statistics).
.. = not available.
Clearly, Suriname stands out, with an estimated poverty rate of 63.1%. Far behind, but with
poverty incidence still high is Dominica (39%), followed by Belize, Guyana, and Saint Kitts and
Nevis, where about one-third of the population lived under the poverty line in the year of the last
survey of living conditions. In contrast, the Bahamas exhibits a poverty rate below 10%, the lowest
within the subregion. Poverty rates in the other countries range between 14.3% in Jamaica and 28.8%
in Saint Lucia. Data for Montserrat were not available and those of Barbados, Grenada and Saint
Vincent and the Grenadines were too outdated. In the countries reporting indigence rates, the highest
was again reported in Suriname (20%). In Belize, Guyana, Dominica and Saint Kitts and Nevis,
indigence stood between 10% and 15%, while in Trinidad and Tobago, Anguilla, Antigua and
Barbuda and Saint Lucia, indigence levels were less than 4%.79
Inflation affects poverty and indigence rates through the erosion of real incomes. Food
inflation will not only erode purchasing power but will also raise poverty and indigence lines
significantly. Thus, the escalation in world food prices from 2006 to 2008, further exacerbated by the
global economic slowdown of 2009, is expected to have a perceptible effect on global poverty and
indigence rates.
Unfortunately, in most Caribbean countries the needed statistical information is not available
(or not accessible). Addressing this issue deserves an independent study beyond the scope of the
present report. However, accessible information lends itself to a preliminary assessment of the impact
of food inflation on indigence and poverty rates in Trinidad and Tobago. The 2005 Trinidad and
Tobago Survey of Living Conditions (SLC) estimates the indigence and the poverty line at TT$ 255
and TT$ 665 per month, respectively. The same Survey states that the indigence rate is 1.2% (or 0.8%
of households) and the poverty rate is 16.7% (or 11% of households). This source also shows that the
maximum per capita consumption level within the poorest quintile (20% of the poorest households
representing 29.1% of the population) amounts to TT$ 884 per month.
By dividing the first quintile into 20 equal segments (or percentiles), and assuming that the
difference in per capita consumption from one percentile to the next is uniform between the percentile
on the indigence line (that is, the first percentile) and the one on the poverty line (that is, the eleventh
percentile), and then between the eleventh percentile and the last one within the first quintile (that is,
the twentieth percentile), it is possible to derive values for per capita consumption expenditure for
each percentile from the first percentile (the poorest) to the twentieth percentile (the richest within the
poorest quintile). The results are shown in table 8.
79
Note: these figures correspond to different years ranging from 2000 in Suriname to 2007 in Guyana. This
comparison is done merely for illustrative purposes. The poverty and indigence rates shown here are not
strictly comparable between countries, due to methodological differences, different periods of analysis, and
so on and are for the purpose of reference at the individual country level.
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The third column shows monthly per capita consumption levels, adjusting 2005 values by
CPI headline inflation from 2006 to 2008 (34.4%), thus assuming that per capita consumption levels
remain constant in real terms. In the same way, indigence and poverty lines are updated using food
(86.1%) and non-food (16.5%) inflation rates observed in the period from 2006 to 2008. Based on
these calculations, the indigence rate would have increased from 1.2% in 2005 to 5.0% in 2008,
whereas the overall poverty rate would have gone from 16.7% to 19.1% during the same period.
TABLE 8
TRINIDAD AND TOBAGO: PER CAPITA MONTHLY CONSUMPTION EXPENDITURE BY
PERCENTILE, 2005 AND 2008 e
(TT$ at current prices)
Household percentile (%)
Cumulative
percentage of
population (%)
Per capita
monthly
consumption
expenditure 2005
Per capita
monthly
consumption
expenditure 2008e
0.8 (Indigence line 2005)
1.2
255
343
1
1.5
262
352
2
3.0
301
405
4.5
341
458
3.3 (Indigence line 2008 )
5.0
354
476
4
6.2
387
520
5
7.7
427
574
6
9.2
467
627
7
10.7
506
680
8
12.2
546
734
9
13.7
586
787
10
15.2
625
840
11 (Poverty line 2005)
16.7
665
894
18.1
689
926
12.8 (Poverty line 2008 )
19.1
708
951
13
19.5
714
959
14
20.8
738
992
15
22.2
762
1,025
16
23.6
787
1,057
17
25.0
811
1,090
18
26.3
835
1,123
19
27.7
848
1,139
20
29.1
884
1,188
3
e
12
e
Source: ECLAC calculations on the basis of Kairi Consultants Ltd. (2007)
e = estimate
In absolute terms this means that, between 2005 and 2008, the total population of indigent
people in Trinidad and Tobago could have risen from 15,000 to 64,000, while the total population of
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poor people (including indigent and non indigent) could have risen from 216,000 to approximately
250,000 in the same period: implying that approximately 49,000 already-poor people would have been
brought into indigence, while approximately another 34,000 non-poor people would have been pushed
below the poverty line.
Figure 21 presents the official indigence and poverty rates released in 2005 with the latest
Survey of Living Conditions, as well as the ones estimated above. As mentioned before, the indigence
rate would have risen from 1.2% to 5.0% in this scenario, practically quadrupling the percentage of
indigent people. However, although the total poverty rate would also have increased, such growth,
from 16.7% to 19.1%, would have been comparatively smaller than the increase in the indigence rate.
Furthermore, in absolute terms, the increase of the indigent population would have been larger than
the increase in the total number of poor people.
FIGURE 21
INDIGENCE AND POVERTY RATES IN TRINIDAD AND TOBAGO, 2005 AND 2008e
(Percentage of total population)
20
15
14.0
10
15.5
19.0
16.7
5
5.0
0
1.2
2005 Survey
2005 Survey
2008 Estim ate
2008 Estim ate
-5
Indigent
Poor but not indigent
Total poor
Source: Table 8
e = estimate
These results indicate that, in a scenario of high food inflation and deteriorating living
conditions, the poor population would be more affected compared to the non-poor population.
Moreover, the poor population would be affected in differing degrees; those with fewer resources (the
indigent and those just above the indigence line) being the ones to suffer the most, compared to the
non-indigent poor population and the non-poor population living just above the poverty line. Thus, an
episode of food inflation not only has a quantitative but also a qualitative social impact, increasing
both the incidence of poverty and its severity: a food price crisis is likely to increase the number of
poor people, but it will also make people who are already poor, poorer.
However, this analysis is based on a number of assumptions. In particular, it is assumed that
the distribution of consumption remains constant, and that the difference in consumption per person
from one percentile to the next is the same between the original indigence line (that is, the official
2005 figure) and the original poverty line, and then between the latter and the richest percentile within
the poorest quintile (that is, the twentieth). In the same way, it is assumed that the population is not
capable of increasing their income to a level that compensates for higher prices and that preserves
their purchasing power. Perhaps the strongest assumption yet is that social policies are totally
ineffective in ameliorating the advance of poverty and indigence. In the scenario proposed here, both
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the population and the Government are unable to compensate for, or reduce the impact of, rising food
prices.
In fact, Government authorities in Trinidad and Tobago and other countries in the subregion
have been quite active in implementing various measures to cope with rising food prices. In Trinidad
and Tobago, public assistance grants were increased substantially from 1 October 2008, ranging from
16% for households of 4 persons and above, to 31% for single person households. This would amount
to some TT$ 50.4 million during the fiscal year 2008/2009.80 Although a specific assessment of the
impact of these and other social programmes is not included in the present paper, policy measures
adopted in Trinidad and Tobago and in the rest of the Caribbean must undoubtedly have had some
impact in reducing the negative impact of rising food prices.
In our scenario, in order to maintain the indigence rate stabilized at the same values recorded
in the 2005 Survey of Living Conditions (1.2% of the population), approximately 50,000 persons at
risk of falling into indigence would need to be granted subsidies, to provide them with a minimum per
capita expenditure above the 2008 indigence line (set at TT$ 476 per month). Such a compensatory
programme, excluding administrative costs, would require some TT$ 37 million annually. Likewise,
keeping all indigent people above the 2008 estimate for the indigence line would require assisting
around 5% of the population (approximately 65,000 persons) with subsidies amounting to TT$ 62
million annually.
Additionally, it would require around TT$ 10 million annually to keep vulnerable non-poor
people out of poverty and maintain the poverty rate at the same level (16.7%) recorded in 2005.
Overall, the effort to keep indigence and poverty rates at the 2005 level would require approximately
TT$ 47 million a year. Given perfect targeting of beneficiaries and zero inefficiency, this would
amount to some 0.03% of projected GDP and 0.08% of projected fiscal revenues for 2008.
INEQUALITY
Finally, it is important to reiterate that the results presented in this analysis for Trinidad and Tobago
are fundamentally for reference purposes, and should be contrasted with empirical evidence and
updated data on poverty and indigence thresholds and rates in Trinidad and Tobago and the rest of the
Caribbean subregion. In particular, the impact in the subregion of increased costs of living during the
last few years should be further addressed, using specific data at the national level in order to achieve
more precise and reliable estimates on the number of people whose income and consumption levels
and living standards have been affected by rising food prices.81
According to UNDP (2008), the Gini coefficient across the world ranges from 0.247 in
Denmark (the best distribution) to 0.632 in Lesotho (the worst distribution). UNDP reports a value of
0.455 for Jamaica in 2004, and 0.389 for Trinidad and Tobago in 1992. Table 9 presents Gini
coefficients from national Household Surveys carried out in several Caribbean countries. According to
this measure, the Caribbean countries with the highest inequality of incomes are the Bahamas (0.57),
followed by Guyana (0.50) and Antigua and Barbuda (0.48). Countries with the most even income
distribution are Anguilla (0.31) and Dominica (0.35). The other countries are in intermediate
positions.
80
See Government of the Republic of Trinidad and Tobago (2008).
A study entitled “The Escalating Cost of Living and Poverty in the Caribbean: Mobilizing Collective
Response at the Regional Level,” prepared by Kairi Consultants Limited, was released in early 2008. Using
consumer price indices as proxy for the cost of living in the Caribbean subregion, the study identified a
group of food and non-food commodities with a significant weight in the cost of living, proposing the
removal or reduction of the CET (Common External Tariff) on those products.
81
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TABLE 9
GINI COEFFICIENT, LAST YEAR AVAILABLE
MDCs
Bahamas (the) (2001)
0.57
Barbados
..
Belize (2002)
0.40
Guyana (2007)
0.50
Jamaica (2006)
..
Suriname (2000)
..
Trinidad and Tobago (2005)
0.39
ECCU
Anguilla (2002)
0.31
Antigua and Barbuda (2005-2006)
0.48
Dominica (2002-2003)
0.35
Grenada
..
Montserrat
..
Saint Kitts and Nevis (1999-2000)
0.39
Saint Lucia (2005-2006)
0.42
Saint Vincent and the Grenadines
..
Source: Survey of Living Conditions except for Belize (Living Standards Measurement Survey), Guyana (Household
Income and Expenditure Survey) and Suriname (General Bureau of Statistics).
.. = not available.
As noted in the introduction, inflation is regressive, and food inflation even more so. This is
because the poor devote a larger share of their income/expenditure to purchasing staples and other
foodstuffs. Table 10 presents the share of food expenditure in consumption expenditure by quintile in
countries for which information was available.82 When comparing the percentage of consumption
expenditure devoted to food of the poorest quintile relative to the richest, the last column shows that
the former is almost three times the latter in Anguilla, more than double in Antigua and Barbuda and
Dominica, and around 70% higher in Trinidad and Tobago. In Jamaica, the difference is lower
(43.7%), as the richest quintile devotes more than a third of their consumption expenditure (35.9%) to
the purchase of food, by far the largest share within the five countries, where this figure is below 25%.
82
With the exception of Jamaica, which defines the quintiles as a percentage of the population, the other
five countries listed in table 10 do so as a percentage of households. In what follows, all quintile
information at the level of the household has been converted into per capita terms. As the poorest
households, on average, have more members than the richest, the first quintile in all five countries has
more individuals than the second one, the second quintile more than the third one, and so on.
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TABLE 10
PER CAPITA ANNUAL CONSUMPTION EXPENDITURE IN FOOD BY QUINTILE, LAST
YEAR AVAILABLE
(Share in total consumption expenditure)
I
II
III
IV
V
I/V
(%)
Jamaica (2003)
51.6
49.1
49.8
45.1
35.9
143.7
Trinidad and Tobago (2005)
41.1
36.2
31.4
28.4
23.7
173.4
Anguilla (2002)
35.0
27.0
23.0
20.0
12.0
291.7
Antigua and Barbuda (2005-2006)
40.6
37.5
27.9
22.2
18.3
221.9
Dominica (2002-2003)
54.0
47.0
47.0
38.0
24.0
225.0
Source: National Household Surveys.
This means that food inflation will have different impacts on people according to their
quintile location, and will affect the poorest households more adversely. The data presented previously
on food, non-food, and headline inflation among selected Caribbean countries was used to estimate
the differentiated effect of price increases across socioeconomic strata. Considering the real figures for
food, non-food and headline inflation during the year 2008, table 11 shows the inflation rates faced by
each quintile of households in those countries during 2008, taking into consideration the different
weights that food has in their consumption baskets.83
TABLE 11
INFLATION BY QUINTILE, 2008 e
(Percentage)
I
II
III
IV
V
I/V
Jamaica
18.9
17.9
18.2
16.5
13.1
144.5
Trinidad and Tobago
18.6
16.3
14.1
12.8
10.6
174.9
Anguilla
7.9
6.1
5.2
4.5
2.7
292.6
Antigua and Barbuda
1.0
0.9
0.7
0.5
0.4
250.0
Dominica
2.6
2.2
2.2
1.8
1.2
222.1
Source: National Household Surveys
e = estimate
As expected, the inter-quintile inflation rate would decrease as consumption expenditure level
rises, with poorer quintiles suffering a higher inflation rate than richer quintiles. Thus, the inflation
rate of the poorest quintile would be almost three times that of the richest in Anguilla, and more than
twice as high in Antigua and Barbuda and Dominica. In Trinidad and Tobago, the inflation rate of the
poorest 20% of the population would be close to twice the rate experienced by the richest 20%. The
difference would be lower in Jamaica, with the poorest quintile suffering an inflation rate just below
45% higher than the one experienced by the richest quintile.
The rise in international food prices affects the entire social spectrum within Caribbean
countries. However, it is the poorest part of the population, with fewer resources and most of those
83
For figures on headline, food and non-food inflation in the Caribbean during 2008, see Annex III.
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resources invested in purchasing food, which is the most affected, experiencing a particularly high
inflation rate based on a differentiated consumption basket, compared to the better-off segments of
society. Figure 22 presents the different headline inflation rates of the poorest and richest
quintiles.
FIGURE 22
HEADLINE INFLATION FACED BY THE POOREST AND RICHEST QUINTILES, 2008
20
18.9
16.3
15
13.1
10.6
10
7.9
5
2.7
2.6
1.0
1.2
0.4
0
Jam
T&T
Ang
Poorest quintile
A&B
Dom
Richest quintile
Source: Table 11
The differing inflation rates for the poorest and riches quintiles of the population give an
approximation to the way in which inequality has been exacerbated by the rise in food prices. In this
context, with the poorer socioeconomic segment bearing a higher inflation rate relative to the richer
segments, we can expect to see an increase in per capita consumption inequality. Therefore, the
distributional impact of the hike in world food prices needs to be considered in the design and
implementation of social policies, which must target the poorest segments of the population in order to
better ameliorate the effects of rising food prices and headline inflation.
In order to assess the distributional impact of the difference in inflation rates of the various
quintiles in 2008, available national Household Surveys that currently correspond to different years
need to be standardized. Per capita consumption levels by quintiles need to be anchored in the same
year, in this case, 2007. Following Dessus et al (2008), this may be done by assuming that the
distribution of consumption in the survey year and 2007 remained unchanged, and that consumption
for all individuals grew at a rate equal to private consumption as reported in the national accounts.
Although these assumptions are strong, this seems to be the best way to proceed, given the
information constraints. Table 12 shows the results.
TABLE 12
TOTAL ANNUAL PER CAPITA CONSUMPTION EXPENDITURE BY QUINTILE, 2007e
(Local currency at current prices)
I
II
III
IV
V
V/I
Jamaica
49 135
77 846
109 501
149 388
310 054
6.3
Trinidad and Tobago
12 746
22 583
32 771
48 755
105 573
8.3
Anguilla
9 721
18 821
28 956
49 432
120 994
12.4
Antigua and Barbuda
3 584
7 228
10 170
14 888
41 394
11.5
Dominica
2 527
4 764
7 456
11 833
28 499
11.3
Source: ECLAC calculations based on national Household Surveys and National Accounts.
e = estimate
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The last column of table 12 provides the ratio of per capita consumption of the richest quintile
to that of the poorest quintile, a popular measure of inequality. Although this indicator does not report
on the distribution in the intermediate quintiles, it is simple to calculate and straightforward to
interpret. By this standard, the most inequitable countries of the sample are those of the ECCU,
especially Anguilla, where consumption per head in the richest quintile is 12.4 times that of the
poorest quintile, followed by Antigua and Barbuda (11.5) and Dominica (11.3).
In the other countries, the difference is lower, with values of 8.3 in Trinidad and Tobago.
Inequality of consumption is least is Jamaica, where the richest 20% of the population consumes (a
still high) 6.3 times that of the poorest 20% in per capita terms. Unlike Latin America – the region
with the highest inequality in the world – the countries of the Caribbean subregion are not particularly
inequitable.84
The evolution in headline and food inflation during 2008 has affected this indicator.
Assuming that consumption expenditure in all quintiles increases at the same rate as nominal GDP,85
and deflating the resulting per capita consumption levels by the corresponding estimated inflation rate
by quintiles shown in table 11, table 13 presents the estimated consumption per person in the year
2008, at 2007 prices. The last column of table 13 shows the ratio of per capita consumption of the
richest quintile to per capita consumption of the poorest quintile.
TABLE 13
PER CAPITA TOTAL ANNUAL CONSUMPTION EXPENDITURE BY QUINTILE, 2008e
(Local currency at 2007 prices)
I
II
III
IV
V
V/I
Jamaica
47 857
76 566
107 417
149 134
320 044
6.7
Trinidad and Tobago
12 670
22 960
34 035
51 301
113 346
8.9
Anguilla
9 420
18 576
28 840
49 580
123 535
13.1
Antigua and Barbuda
3 674
7 416
10 455
15 335
42 677
11.6
Dominica
2 594
4 905
7 677
12 234
29 652
11.4
Source: ECLAC calculations based on National Household Surveys and National Accounts.
e = estimate
The estimated increase in inequality in 2007 and 2008 brought about by the hike in world and
domestic food prices, and the resulting differences in inflation rates faced by the various quintiles of
the population, is demonstrated in Figure 22.
84
According to UNDP (2008), the most equitable country according to this indicator is Japan (3.4), whereas
the most inequitable is Sierra Leone (57.6). Within developed countries, this figure is 8.5 in the United
States, 7.2 in the United Kingdom, and 3.9 in Norway. In Latin America, the value of this indicator ranges
from 12.8 in Mexico to 42.3 in Bolivia. In the Caribbean, this source reports a figure of 7.6 in Trinidad and
Tobago (1992), 9.8 in Jamaica (2004), 26.6 in Haiti (2001) and 14.3 in the Dominican Republic (2004).
85
Considering a real GDP growth rate and the inflation rate collected by ECLAC (2009), as shown in
Annex I.
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FIGURE 22
PER CAPITA CONSUMPTION OF THE RICHEST QUINTILE OF THE POPULATION,
2007 AND 2008e
(Percentage of per capita consumption of the poorest quintile at 2007 prices)
20
15
12.4
10
8.3
6.3
13.1
11.5 11.6
11.3 11.4
A&B
Dom
8.9
6.7
5
0
Jam
T&T
Ang
2007
2008
Source: Tables 10 and 11.
e = estimate
As demonstrated, per capita consumption inequality increases in all cases. Although the
increase in concentration of per capita consumption may seem modest, it is not. In general, inequality
indicators tend to vary very slowly. Indeed, the estimates show that there are significant increases in
the ratio of per capita consumption of the richest quintile vis-à-vis the poorest quintile from one year
to the next, especially in Trinidad and Tobago (7.2%), Jamaica (6.3%) and Anguilla (5.6%).
Therefore, the distributional impact of the hike in world food prices needs to be considered in the
design and implementation of policies devised to ameliorate its effects.
CONCLUSIONS
The results presented in this report indicate that the main driver of domestic inflation in Caribbean
countries in recent years appears to have been the strong increase in international food prices. Despite
the fact that world food prices stabilized during the second half of 2008, prices in several Caribbean
countries have kept going up well into the first half of 2009, when domestic food inflation rates started
to fall across the subregion. With an estimated 23.5% increase in world food prices between July 2008
and June 2009, the report analysed domestic inflation, changes in poverty and indigence rates, and
inequality. Calculations were made with information available up to June 2009.
Estimated figures reveal that domestic inflation accelerated in most Caribbean countries up to
the first half of 2008 as a consequence of the growing food crisis. Furthermore, from the middle of
2008 onwards, domestic food prices in the Caribbean have been somewhat downward sticky, and
therefore have not fallen to the same degree as international food prices.
Due to data limitations, the impact of external food inflation on poverty and indigence was
only carried out for Trinidad and Tobago. According to the estimated results, the effect would be
significant, with the indigence rate climbing from 1.2% in 2005 to 5% in 2008; and the poverty rate
from 16.7% to 19.5% in the same period. Food inflation would also have adverse distributional
effects, considering that inflation for the poorest segment of the population was significantly higher
than inflation for the richer segments, in the five Caribbean countries where data were available.
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The analysis presented clearly shows that food inflation is a phenomenon with widespread
social and economic implications which, therefore, deserves the utmost attention from policymakers
in the Caribbean. Some of the main policy implications related to fighting inflation and food
insecurity, and achieving a reduction in poverty and inequality would be:
(a)
To foster anti-inflationary (monetary, fiscal and exchange rate) policies, putting in
place an economic policy mix consistent with increasing the funding of social programmes; this may
include tax reforms that raise fiscal revenues through the widening of tax bases rather than increasing
rates or introducing new taxes
(b)
To introduce competence in the distribution and commercialization of imported food,
so as to make a decrease in international food prices transferable to consumers, thus helping to fight
inflation and increasing domestic consumption and overall welfare
(c)
To reduce imported food dependence by promoting domestic production of
agricultural products, with special emphasis on essential staples. Given the small size of domestic
markets and taking into account constraints (actual or potential) in productive resources such as land,
water and labour, this could be addressed at the subregional level through CARICOM
(d)
To reduce the consumption of imported foodstuffs by promoting consumption and
nutrition patterns less dependent on imported food, particularly wheat- based products given that this
cereal is not produced in the subregion
(e)
To implement social programmes well-targeted to the poor and vulnerable population
(children, elderly, HIV/AIDS -infected people, pregnant and breastfeeding women, and so on) focused
on providing food support
(f)
To link nutrition and health policies, taking the former as preventative health
policies.
There is no arguing the need for Caribbean countries to devise economic policies to control
inflation and reduce external deficits. By the same token, there is consensus regarding the convenience
of reducing poverty and indigence through social programmes and other policy tools. Some
economists argue that equity considerations are irrelevant if poverty is actually defeated: that, once
every household is above the poverty line, it does not matter how income is distributed. Moreover,
some argue that a concentration of income would be desirable inasmuch it would foster the savings
and investment process due to the higher propensity to save of the rich.
However, the deterioration in income and expenditure distribution that food inflation brings
about should not be overlooked, as it may exert a negative influence on economic growth and
development. Social capital is a needed factor of production to foster economic growth.86 The concept
of social capital alludes to civic norms that are in place in a society, to the level of trust among their
inhabitants, to the capacity to generate social consensus, and to the degree of cooperation among
different groups and individuals (Dasgupta and Serageldin, 2000). Equity, seen as effective equality of
opportunity rather than egalitarianism, is one of the key elements for the promotion of social capital
formation. It is the cornerstone of a democratic society.
86
See, for instance, Temple and Johnson (1998).
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Bibliography
CFNI (2007), “Overview. Vulnerability and food and nutrition security in the Caribbean”,
Caribbean Food and Nutrition Institute, August.
Dasgupta, P. and I. Serageldin (2000), “Social Capital: A Multifaceted Perspective”, The World
Bank.
Dawe, D. (2008). “Have recent increases in international cereal prices been transmitted to
domestic economies? The experience in seven large Asian countries”, ESA Working Paper
No. 08-03, Agricultural Development Economics Division, Food and Agriculture
Organization, April.
Dessus, S., S. Herrera and R. de Hoyos (2008), “The impact of food inflation on urban poverty
and its monetary cost: Some back-of-the-envelope calculations”, Policy Research Working
Paper 4666, The World Bank, July.
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“The escalation in world food prices and its implications in the Caribbean.”
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_____ (2006), “Nutrition, Gender and Poverty in the Caribbean Region” (LC/CAR/L.105), Portof-Spain, Trinidad.
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([E/]LC/CAR/L.140), Port-of-Spain, Trinidad, October.
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Annex I
VARIABLES AND SOURCES
FOR THE ECONOMETRIC ESTIMATION OF WORLD FOOD INFLATION
Variable
Definition
Source
World food inflation rate
Percentage change of food price
index
United Nations Food and
Agriculture Organization
Oil price increases
Percentage change of oil prices in
US$ per barrel (WTI and Brent)a
International Monetary Fund
Fertilizer price increases
Percentage change of fertilizer prices
in US$ per metric tonne
(diammonium phosphate, phosphate
rock, potash, triple super phosphate
and bulk urea)a
International Monetary Fund
Chinese imports volumes
Percentage change of Chinese
imports in $Y deflated by Chinese
CPI
International Monetary Fund
Indian imports volumes
Percentage change of Indian imports
in $R deflated by Indian CPI
International Monetary Fund
Ethanol production
Ethanol production in the United
States in thousands of barrels
United States Renewable Fuel
Association
Speculative investment in
agricultural commodities
futures and options
markets
Percentage change in the number of
futures and options contracts in
wheat, corn, oats, soybean, soybean
meal, soybean oil and rough rice
Chicago Board of Trade
Depreciation of the
United States dollar
Depreciation rate of the United States
dollar vis-à-vis the Euro
International Monetary Fund
Source: Author’s calculations.
a
Each type was used alternatively in different specifications of the model.
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Annex II
GDP GROWTH RATE, 2009f
(Percentage)
MDCsa
-3.5
Bahamas (the)
-2.2
Barbados
1.5
Belize
0.0.
Guyana
-3.0
Jamaica
2.5
Suriname
0.5
Trinidad and Tobago
-3.5
ECCUa
Anguilla
-1.8
Antigua and Barbuda
5.1
Dominica
1.5
Grenada
0.3
Montserrat
2.5
Saint Kitts and Nevis
-0.6
Saint Lucia
-1.1
Saint Vincent and the Grenadines
0.4
Source: ECLAC (2008).
a Simple average.
f = forecast.
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Annex III
INFLATION RATES IN THE CARIBBEAN, 2008
(Annual percentage change)
Headline
inflation
Food inflation
Non-food
inflation
Bahamas (the)
4.5
9.1
3.8
Barbados
7.3
16.4
1.8
Belize
4.4
15.4
-1.6
Guyana
6.4
11.6
2.1
Jamaica
16.9
24.1
12.0
Suriname
9.3
21.4
3.6
Trinidad and Tobago
14.5
30.6
7.1
Anguilla
5.3
15.1
1.1
Antigua and Barbuda
0.7
3.8
-0.1
Dominica
2.0
8.8
-1.7
Grenada
5.2
11.7
1.2
Montserrat
4.5
11.0
-1.6
Saint Kitts and Nevis
7.6
9.0
7.0
Saint Lucia
5.6
5.6
5.6
Saint Vincent and the Grenadines
8.7
14.3
1.6
MDCs
ECCU
Source: ECLAC on the basis of official data.
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