Higher food prices can reduce poverty and stimulate growth in food production

Summary

The 21st century has been marked by a series of ‘food crises,’ notably in 2007-2008, 2010-2011 and most recently in 2021-2022, which are characterised by sharp increases in global food prices. Whilst these higher food prices can cut into the disposable income of the poor, they also potentially increase the income of those involved in agricultural production. As of 2013, 75% of the world’s poor - defined as below the $3.20-per-day poverty line in lower-middle income countries - were rural, the majority of whom earn money through agriculture (this is just one of several lines set to define poverty). Therefore food price increases may have a net beneficial effect on poverty in countries with high levels of agricultural employment. A previous study in India  illustrated that higher prices incentivised a food supply response from farmers, who raised their demand for labour, which puts upwards pressure on wages. An economy-wide simulation model for Uganda (a low-income country) reached similar conclusions. A series of retrospective World Bank national poverty assessments conducted several years after the 2007–2008 crisis concluded that higher food prices tended to reduce poverty in the studied countries, at least in rural areas. This paper extends these studies in three ways; by analysing annual data from 33 countries from 2000 to 2019 to evaluate the ‘short run’ response (where short run is defined as responses observed in the same year as food prices rising); by evaluating how the extent of urbanisation or non-agricultural employment affects the poverty rate change and by exploring mechanisms by which higher food prices could reduce poverty; and by providing an empirical exploration into a key mechanism by which higher food prices could reduce poverty, the stimulation of a short-run agricultural supply response. Food price rises were defined as a positive percentage difference between the food and non-food consumer price indices (CPI).

The results determined that the response to food price rises vary across LMICs, with a positive response in less urbanised economies and negative responses in countries with urbanisation rates above 65%. Overall, an increase in food prices reduced poverty levels during all three crises in less urbanised LMICs and had little impact on aggregate poverty in more urbanised economies. This relationship held when considering the poverty headcount for a given country and the poverty gap index (the poverty headcount measures the share of the population falling into or out of poverty, the poverty gap tells us about changes in the depth of poverty, defined as how far on average the poor are from the poverty line). A 5% increase in the food-to-non-food CPI ratio led to a 1.25% reduction in poverty headcount in the least urbanised countries and a 0.6% reduction in the poverty gap index for rural economies. The analysis also demonstrated that higher food prices stimulate an agricultural supply response through increased food production, which in turn raises wage earnings and reduces poverty levels. Interestingly, livestock production does not increase with higher food prices. This is because, unlike crop production where inputs can be expanded quickly in response to prices (for example, seeds, fertilisers, labour and machinery), expanding livestock production requires acquiring larger herds or changing herd composition, which would be almost impossible in the short run.

The authors note five limitations of the analysis:

• Only national-level poverty and food price data was available. The lack of separate rural and urban poverty data from the World Bank hinders detailed research on differential associations between poverty and food prices in different urban and rural populations.
• The findings demonstrate correlation, but not causation. Domestic food price changes may be correlated with unobserved factors that independently influence poverty, such as government policy.
• Third, this study focused on the welfare effects of food price increases, but not fertiliser or fuel price increases, which recent simulation analysis demonstrate could independently increase poverty. There is a need for further research on this issue, including the complexities around the extent to which governments subsidise and stabilise fuel and fertiliser prices.
• Fourth, the paper focuses on an annual definition of the ‘short run’, which appears to encompass sufficient time for food supply and wage responses to higher food prices. More work is needed on high-frequency income, wage and food price data. However this would require the adoption of high-frequency real-wage monitoring by international agencies and national governments.
• The results offer limited insights into the outcomes of the 2021-2022 food price spikes because of additional limitations on the ability of agricultural supply to respond to price spikes in the wake of COVID-19 and the ongoing war in Ukraine. For example, unlike in 2007-2009, LMIC governments have more limited fiscal capacity to facilitate strong supply responses in the wake of the COVID-19 pandemic, and access to agricultural inputs (especially fertiliser) has been significantly reduced through the war in Ukraine.

Abstract

Food prices spiked sharply in 2007–2008, in 2010–2011 and again in 2021–2022. However, the impacts of these spikes on poverty remain controversial; while food is a large expense for the poor, many poor people also earn income from producing or marketing food, and higher prices should incentivize greater food production. Short-run simulation models assume away production and wage adjustments, and probably underestimate food production by the poor. Here we analyse annual data on poverty rates, real food price changes and food production growth for 33 middle-income countries from 2000 to 2019 based on World Bank poverty measures. Panel regressions show that year-on-year increases in the real price of food predict reductions in the US$3.20-per-day poverty headcount, except in more urban or non-agrarian countries. A plausible explanation is that rising food prices stimulate short-run agricultural supply responses that induce increased demand for unskilled labour and increases in wages.

Reference

Headey, D. and Hirvonen, K., 2023. Higher food prices can reduce poverty and stimulate growth in food production. Nature Food, pp.1-8.

Find the article here and comments on the paper here, as well as our own blog on the response of the food industry to covid