1 Introduction2 Methodology3 The Data4 Experiments4.1 Impacts of 10 price increases4.2 Impacts of higher food prices on poverty5 Results5.1 Impact of a 10 percent increase in food prices5.1.1 Commodity Price Impacts5.1.2 Commodity Price and Wage Impacts5.2 Impact of the 2005-7 global food price increases on poverty6 Robustness Checks7 Concluding Remarks7.1 References8 Appendix A8.1 The Methodology used in the Analysis9 Appendix B: Robustness Checks 9.1 The size of the price change9.2 Robustness to changes in the poverty line9.3 Labor Market SpecificationPo l i c y Re s e a R c h Wo R k i n g Pa P e R4594Implications of Higher Global Food Prices for Poverty in Low-Income CountriesMaros Ivanic Will MartinThe World BankDevelopment Research GroupTrade TeamApril 2008WPS4594Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedProduced by the Research Support TeamAbstractThe Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.Po l i c y Re s e a R c h Wo R k i n g Pa P e R 4594In many poor countries, the recent increases in prices of staple foods raise the real incomes of those selling food, many of whom are relatively poor, while hurting net food consumers, many of whom are also relatively poor. The impacts on poverty will certainly be very diverse, but the average impact on poverty depends upon the balance between these two effects, and can only be determined by looking at real-world data. Results using household This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the department to understand the implications of trade policies and world price developments for poverty. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at [email protected]. data for ten observations on nine low-income countries show that the short-run impacts of higher staple food prices on poverty differ considerably by commodity and by country, but, that poverty increases are much more frequent, and larger, than poverty reductions. The recent large increases in food prices appear likely to raise overall poverty in low income countries substantially.Implications of Higher Global Food Prices for Poverty in Low-Income Countries Maros Ivanic* Will Martin * The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not represent the views of the World Bank or any other individual or organization.Implications of Higher Global Food Prices for Poverty in Low-Income Countries 1 Introduction Since 2005, the world has experienced a dramatic surge in the price of many staple food commodities. The price of maize increased by 80 percent between 2005 and 2007, and has since risen further. Many other commodity prices also rose sharply over this period: milk powder by 90 percent, wheat by 70 percent and rice by about 25 percent. Annual average prices of key staple foods are shown in Figure 1. Clearly, such large increases in prices may have tremendous impacts on the real incomes of poor households in developing countries. Despite widespread concern about the impacts of high food prices on poor people and on social stability (eg FAO 2007; World Bank 2008a), little hard information appears to be available on actual impacts on poor people. The overall impact on poverty rates in poor countries depends on whether the gains to poor net producers outweigh the adverse impacts on poor consumers. Whether higher food prices improve or worsen the situation of particular households depends importantly on the products involved; the patterns of household incomes and expenditures; and the policy responses of governments (World Bank 2008b). Existing analyses tell us that the impacts of higher food prices on poverty are likely to be very diverse, depending upon the reasons for the price change and on the structure of the economy (Hertel and Winters 2006; Ravallion and Lokhsin 2005). A great deal depends on the distribution of net buyers and net sellers of food among low-income households (Aksoy and Isik-Dikmelik 2007). Only with careful examination of outcomes at the household level is it possible to tell whether changes in the prices of specific staple foods will help or hurt poor people. A particular reason for concern about the impacts of high food prices on poor countries arises from the fact that the poorest people spend roughly three quarters of the2incomes on staple foods (Cranfield, Preckel and Hertel 2007). On the other hand, the incomes of farm households—frequently one of the poorest groups in low-income countries—may be increased by higher commodity prices (Hertel, Ivanic, Preckel and Cranfield 2004). However, the benefits of higher food prices to poor farm households may be less than they might at first appear, since these benefits depends not on what they produce, but on their net sales of these goods. In this study, we attempt to address the main implications of higher food prices on poverty following the methodologically simple yet data-intensive approach of calculating the short-run impacts on households’ income and costs of living following the changes in food prices. We do so using household surveys containing at least a thousand households in each of nine low-income countries, for which the data on consumption and production of the main food commodities are available. Besides calculating the change in household real income, we also estimate the impact of food prices on poverty rates and poverty gaps. We consider two experiments in this paper. First we estimate the importance of small changes in the prices of individual commodities on poverty rates in each of our sample countries. We do so by conducting a stylized simulation in which we increase
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