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This Special Report was prepared by a team from the Economics and Research
Department. Food prices have increased sharply since mid-2007 and accelerated
alarmingly in early 2008. Rice and wheat prices have spiked at levels not seen in over
three decades. This threatens to exacerbate poverty in developing Asia by reducing
the real incomes of the already poor, while pushing many others below the poverty
line. The report proposes appropriate policy responses to the challenge of food price
inflation in order to avoid the reversal of the gains in poverty reduction in the region.
SPECIAL REPORT
Food Prices and Inflation
in Developing Asia:
Is Poverty Reduction Coming to an End?
April 2008
This special report was prepared by a team led by William E. James. Other authors
include Shikha Jha, Lea Sumulong, Hyun H. Son, Rana Hasan, Muhammad Ehsan
Khan, Guntur Sugiyarto, and Fan Zhai. Research assistance was provided by Juan
Paolo Hernando, Pilipinas F. Quising, Anneli Lagman-Martin, Maria Rowena M.
Cham, J. Salcedo Cain, Rhoda A. Magsombol-Miranda, and Eric Suan.
Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines
www.adb.org/economics
I. Introduction 1
References 36
iii
Tables, Boxes, Figures
iv
Figure 1 5 Percent Broken Milled White Rice, Thailand 1
Figure 2 No. 1 Hard Red Winter Wheat, FOB Gulf of Mexico 2
Figure 3 Breakdown of World Rice Supply 3
Figure 4 Major Rice Exporters for 2007 3
Figure 5 Breakdown of World Wheat Supply 3
Figure 6 Major Wheat Exporters, 2007 4
Figure 7 Food Price Index of Net Rice/Wheat Exporters 4
Figure 8 Food Price Index of Net Rice/Wheat Importers 4
Figure 9 World Year-end Stock of Selected Grains 5
Figure 10 Changes in Inflation Rates 9
Figure 11 Changes in Private Consumption Growth 9
Figure 12 Changes in Fixed Investment Growth 10
Figure 13 Changes in GDP Growth 10
Figure 14 India: Fiscal Cost of Increase in Procurement
Prices of Wheat and Rice 12
Figure 15 Philippines: Fiscal Cost of 50% Increase
in Rice Import Price 12
Figure 16 Relationship between Private Credit
and Fertilizer Use 12
Figure 17 Share of Rice Expenditure to Total Expenditure 14
Figure 18 Percentage Reduction in Average Standard
of Living when Food Prices Increase by 10% 16
Figure 19 PRC Gains in Terms of Trade 19
Figure 20 Food Production Expansion 19
Figure 21 Percentage Change in Household Income
and Overall Price 20
Figure 22 Percentage Change in Output 21
Figure 23 Rice and Wheat Yields for Top 10 Global Producers 22
Acronyms
vii
Introduction
I. Introduction
For decades, food prices had been declining in real terms,
allowing millions of people around the globe to escape from the trap
of poverty. This long-term trend took place despite rapid income
and population growth, as agricultural productivity rose steadily.
However, productivity gains began to stagnate in the face of continuing
growth in demand, bringing about a reversal of this long-term trend.
Rising food prices contributed to an acceleration of inflation across
the Asia and Pacific region during 2007, and in 2008 the further
rise in food prices has reached alarming proportions. The rise in
food prices is worrisome precisely because food price inflation is the
most regressive of all taxes—it hurts the poor the most. This paper
addresses the dimensions of the so-called “food crisis” in developing
Asia, including the relationship of rising international prices of staple
foods to domestic food prices; the impact of dramatically higher
prices on growth, inflation, fiscal balances, as well as poverty and
inequality; and the policy choices and responses to elicit a supply
response and, in the longer run, realize sustainable productivity
gains in agriculture that will mitigate the current crisis. First, recent
trends in global food prices and their implications for food prices in
developing Asia are examined. Section II explains the reasons behind
the recent surge in food prices, while Section III provides a scenario
analysis of macroeconomic impacts of food prices on inflation and
growth in 2008 and 2009, and explores the fiscal consequences of
measures aimed at sheltering consumers from the full brunt of the
price increases. Section IV presents an assessment of how the rise in
food inflation will affect the incidence and severity of poverty and
inequality prior to any supply response (the pure price effect). Section
V analyzes the supply response as prices rise and farmers respond,
using a computable general equilibrium model. Section VI identifies
medium-term and long-term prospects for investment and productivity FIGURE 1
growth in agriculture that are essential if developing Asia is to manage 5 PERCENT BROKEN MILLED
the problem, so that the hard won reductions in poverty incidence WHITE RICE, THAILAND (US$/METRIC TON)
600
in the region are not reversed. Section VII reviews policy responses
across the region and concludes with the key messages of the paper.
400
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
FIGURE 2 basket in Asia—has also had a spike in international prices albeit not
NO. 1 HARD RED WINTER WHEAT,
FOB GULF OF MEXICO (US$/METRIC TON) as pronounced as in the case of rice (Figure 2). Since rice is the basic
500
staple for over 2 billion Asians and wheat for an additional billion,
400 there is concern that unless the problem is managed well, there could
be social tension and unrest on the horizon.
300
M AP 1
AGRICULTURAL M AP OF ASIA: RICE AND WHEAT AREAS
Rice
Wheat
Arid or Semiarid
Humid or Subhumid
Irrigated
Area outside the extent of agriculture
Sources: Adapted from World Bank, World Development Report 2008 (World Bank 2008b, Map 2.1); Foreign Agricultural
Service, United States Department of Agriculture, available: http://www.usda.gov, downloaded 24 April 2008.
Introduction
FIGURE 3
In general, international markets in rice are shallow and subject BREAKDOWN OF WORLD RICE SUPPLY
(MILLION METRIC TON)
to heavy regulation and protection compared with those for wheat. 600
The sensitivity of rice prices to slight changes in international supply 500
and demand compounds the difficulty of managing the problem of
400
high rice prices relative to that of high wheat prices.
300
food items are also experiencing high prices including vegetable oils, 100
soybeans, meat products, and fish. Across developing Asia, rising food
0
prices are pushing up inflation. There is a clear and present danger 2000 01 02 03 04 05 06 07
that rising food prices will push large numbers of households back Stocks Production Exports/Imports
below the poverty line in developing Asia. Note: For World, accounting identity dictates
exports=imports; however world exports and
imports have a 6% discrepancy due to grain in
transit, reporting discrepancies, and trade to
In the first months of 2008, food price inflation has hit double countries outside the USDA database.
Source: Foreign Agricultural Service, United States
digits in Bangladesh; People’s Republic of China (PRC); Hong Kong, Department of Agriculture, available:
http://www.usda.gov, downloaded 16 April 2008.
China; Indonesia; Pakistan; and Viet Nam. Food price inflation is FIGURE 4
also rising in India, Malaysia, Philippines, Singapore, and Thailand. M AJOR RICE EXPORTERS, 2007
(AS A PERCENT OF TOTAL WORLD RICE EXPORTS)
And although no 2008 figures are yet available for Sri Lanka, there
is little doubt that food prices are also rising at double digits there as Others
18%
well. Wheat-dependent countries in Central and West Asia are also Thailand
32%
experiencing double-digit rates of food inflation (ADB 2008). Pakistan
11%
(compare Figure 7 and Figure 8). The indices understate the true
Source: Foreign Agricultural Service, United States
amount of food inflation pressures as governments have introduced Department of Agriculture, available:
http://www.usda.gov, downloaded 16 April 2008.
numerous policy measures to suppress prices.
FIGURE 5
BREAKDOWN OF WORLD WHEAT SUPPLY
(MILLION METRIC TON)
900
600
300
0
2000 01 02 03 04 05 06 07
Stocks Production Exports/Imports
Note: For World, accounting identity dictates
exports=imports; however world exports and
imports have a 6% discrepancy due to grain in
transit, reporting discrepancies, and trade to
countries outside the USDA database.
Source: Foreign Agricultural Service, United States
Department of Agriculture, available:
http://www.usda.gov, downloaded 16 April 2008.
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
FIGURE 6
M AJOR WHEAT EXPORTERS FOR 2007 It can readily be seen that the general index of domestic food
(AS A PERCENT OF TOTAL WORLD WHEAT EXPORTS) prices in developing Asia (Figures 7 and 8), while on an upward trend,
Others Australia
7% Kazakhstan
is not anywhere near as pronounced as the rise in international rice
11% 8% and wheat prices (Figures 1 and 2). The first reason is that cereal
EU-27 grains imports make up a fairly small percentage of consumption
8%
United and production in most developing Asian countries with significant
States
32%
Argentina
9% agricultural sectors. Rice and wheat also constitute roughly a quarter of
Russian the weights in food used to construct the consumer price index (CPI).
Canada
Federation
12% Furthermore, international prices are denominated in United States
13%
(US) dollars, and most regional currencies have appreciated somewhat
Source: Foreign Agricultural Service, United States
Department of Agriculture, available: against the dollar over the last year or so. Finally, governments have
http://www.usda.gov, downloaded 16 April 2008.
intervened to cushion consumers from the sharp rise in staple food
prices through various measures. Still, the sharp acceleration of food
prices in recent months is evident in the figures.
FIGURE 7
FOOD PRICE INDEX OF NET RICE/
WHEAT EXPORTERS (JAN 2006 = 100) The explosion in food prices across the region is a threat to
155
macroeconomic stability through inflation, the rising fiscal cost of
Viet Nam
145
food subsidies, and the possible exchange rate depreciation in food-
135 importing countries. The rate of inflation measured by the CPI in
125 Pakistan 2007 accelerated in developing Asia to 4.3%, up from 3.3% in 2006,
and currently is forecast to surge further in 2008 to 4.8% (ADB 2008).
115 India
The fiscal burden of food subsidies will mount in 2008 given the
105 Thailand sharp rise in food prices that is occurring across the region. Already,
95
PRC some rice-importing countries are experiencing weakening currencies
Jan
06
Apr
06
Jul Oct
06 06
Jan
07
Apr
07
Jul Oct
07 07
Jan
08 against the US dollar, which threatens to push inflation rates even
Note: Based on exports and imports for 2007. higher in 2008.
Sources: CEIC Data Company Ltd.; Foreign
Agricultural Service, United States Department of
Agriculture, available: http://www.usda.gov; The
Institute of International Finance database; all Food prices carry considerable weight in consumer expenditure
downloaded 17 April 2008.
baskets (see Table 1) used to construct the CPI in developing Asia,
and there is a strong correlation between food price inflation and
general CPI inflation (ADB 2008).
FIGURE 8
FOOD PRICE INDEX OF NET RICE/
WHEAT IMPORTERS (JAN 2006 = 100)
155
Sri Lanka
145
135
Indonesia
125
115 Philippines
Bangladesh
105
Malaysia
95
Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 06 06 06 07 07 07 07 08
Note: Based on exports and imports for 2007.
Sources: CEIC Data Company Ltd.; Foreign
Agricultural Service, United States Department of
Agriculture, available: http://www.usda.gov; The
Institute of International Finance database; all
downloaded 17 April 2008.
Explaining the Underlying Causes of High Food Prices
Table 1
Food Weights in CPI
Economy Share (%) Economy Share (%)
China, People’s Rep. of 33.20 Malaysia 30.00
Hong Kong, China 26.94 Philippines 46.58
India 57.00 Singapore 23.38
Indonesia 42.30 Taipei,China 25.00
Korea, Rep. of 14.00 Thailand 32.71
Sources: National statistics offices; ADB resident missions.
Prices of close substitutes for rice are rising sharply as well: wheat,
maize, and soybeans are all at record highs. Three sets of factors must
be taken into account in order to explain what is happening to food
prices in developing Asia. First is the distinction between structural
and cyclical factors; second is the distinction between supply and
demand; and third is the relationship between international and
domestic markets.
growth for several years. Rice and wheat stocks have ebbed and now 500
are about 200 million metric tons, compared with 350 million metric 400
tons in 2000, a decline of about 43% (USDA 2008). The current
300
steep increases in the price at which rice is traded in international
markets reflect not only shortfalls in production relative to current 200
consumption but also reflect the attempt to rebuild stocks themselves, 100
putting even greater upward pressure on demand relative to supply.
0
As was illustrated above, international rice markets are extremely thin 2000 01 02 03 04 05 06 07
as a result of asymmetry between the large numbers of consuming Rice Wheat Corn
countries as opposed to those few countries that produce exportable Source: Foreign Agricultural Service, United States
Department of Agriculture, available:
surpluses. http://www.usda.gov, downloaded 16 April 2008.
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
Explaining the Underlying Causes of High Food Prices
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
Food prices have been rising since 2007, but in the first three
months of 2008, the rate of increase has accelerated. The World Bank’s
food price index climbed 57.5% in the first quarter of 2008 relative to
the corresponding figure a year ago. Some grain prices have increased
by much more—wheat prices are up by over 100%—during the same
period. At the same time, energy prices have also been on an upswing,
with the World Bank’s oil price index growing by 66.5% in the first
quarter of 2008. These global developments are likely to cascade to
developing Asian economies’ growth and inflation prospects.
Macroeconomic Effects of High and Rising Food Prices
FIGURE 10
CHANGES IN INFLATION R ATES
In the second scenario, the impacts are much more pronounced, (PERCENTAGE POINTS)
with regional inflation rising by 2.37 percentage points in 2008. 5
2008
However, the results are further magnified in the second year under
both scenarios, since the model takes time to adjust to the exogenous 4
food and oil price shocks. With food and oil accounting for a large
3
share of consumer price indexes in the region, and with a majority
of countries being net food and oil importers, the consequent rise in 2
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rate, the steepest fall in private consumption growth is registered. 5
2009
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rates to prevent inflation from spiraling uncontrollably. Given the Scenario 1 Scenario 2
extent of consumer price rises in the region, the model sees interest Source: Oxford Economics simulations.
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2009
0
With consumption and investment demand squeezed by rising
inflation and interest rates, gross domestic product (GDP) growth in
developing Asia is estimated to decline by 1.05 percentage points in -2
2008 under the first scenario (Figure 13). PRC, Indonesia, Philippines,
and Singapore all experience falls in GDP growth in excess of 1
-4
percentage point in the first year. Despite being a food exporter, higher
domestic prices slash the PRC’s growth by a substantial amount. In
scenario 2, regional GDP growth sinks by 1.41 percentage points. -6
Among the 10 developing Asian economies in the model, only the
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FIGURE 12
CHANGES IN FIXED INVESTMENT GROWTH
(PERCENTAGE POINTS) than 1 percentage point between scenario 1 and scenario 2. This is
2008
2 perhaps reflective of the Philippines’ greater reliance on imported
food and oil. Conversely, the limited impact for Hong Kong, China
0
may be due to its dependence on the PRC, which is a large supplier
of both its food and oil.
-2
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2009
2
sluggish global growth significantly reduces demand for the region’s
0 exports, particularly since developing Asia remains heavily reliant on
industrial countries’ demand.
-2
-4
In the short run, governments may opt to keep interest rates on
hold to moderate the negative impact of rising prices on domestic
-6 demand. Table 2 shows a comparison of changes in GDP growth rates
-8
under fixed and flexible interest rate regimes in the region. Keeping
interest rates at baseline levels eases the impact on fixed investment
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Scenario 1 Scenario 2
Source: Oxford Economics simulations. in GDP growth rates under fixed interest rates is about half those
arising from flexible interest rates.
FIGURE 13
CHANGES IN GDP GROWTH
(PERCENTAGE POINTS) However, fixing interest rates may be acceptable only in the short
1
2008 run, when rising inflation is caused by cyclical factors. Countries may
also permit their exchange rates to appreciate in the face of imported
0 inflation. But Section II clearly shows that the current increase in
global food prices is driven both by structural and cyclical factors.
-1
Keeping interest and exchange rates steady amid inflationary pressures
-2 caused by structural factors imposes the danger of inflation becoming
ingrained in the economy. This may bring down productivity growth
-3
and undermine the economy’s ability to maintain its long-term
-4 sustainable growth path. In short, inflation needs to be nipped in the
bud to limit its impact on long-term growth. Allowing currencies to
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0
2009 appreciate combined with monetary policy tightening are desirable
tools in addressing this issue. While Table 2 shows that economic
-2 growth will suffer in the short run, it is the price the economy must
pay in order to return to its long-term high growth path. In the
-4 interim, governments may undertake targeted subsidy programs to
alleviate the impact of rising inflation on the poor.
-6
-8
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Scenario 1 Scenario 2
10
Macroeconomic Effects of High and Rising Food Prices
Table 2
Changes in GDP Growth Under Fixed and Flexible Interest Rate Regimes (percentage points)
2008 2009
Flexible Fixed Flexible Fixed
Interest Rates Interest Rates Interest Rates Interest Rates
Economy Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
1 2 1 2 1 2 1 2
China, People’s Rep. of -1.20 -1.47 -1.01 -1.23 -5.18 -5.86 -2.46 -2.78
Hong Kong, China -0.77 0.50 -0.46 0.86 -1.25 -1.65 -1.36 -1.57
India -0.81 -1.61 -0.67 -1.21 -1.11 -2.70 -0.88 -1.52
Indonesia -1.19 -1.94 -0.69 -0.87 -1.50 -2.42 -1.14 -1.14
Korea, Rep. of -0.77 -0.83 -0.28 -0.28 -0.71 -1.01 -0.26 -0.27
Malaysia -0.89 -1.63 -0.61 -1.04 -1.57 -1.88 -1.43 -1.42
Philippines -1.40 -2.49 -0.84 -1.36 -2.15 -3.48 -1.31 -1.50
Singapore -2.74 -3.52 -2.55 -3.22 -5.11 -6.49 -4.72 -5.81
Taipei,China -0.66 -0.65 -0.06 0.04 -0.56 -0.77 0.24 0.40
Thailand -0.69 -1.67 -0.51 -1.02 -2.66 -3.26 -2.31 -2.23
Developing Asia -1.05 -1.41 -0.78 -0.99 -3.39 -4.15 -1.75 -2.03
11
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
800
820
subsidized sales equals the food subsidy. The fertilizer subsidy is added
700
705 to this to get the total fiscal cost to the government.
602
600 571
500 458 Three scenarios are analyzed for India, namely, 10%, 20%, and
400
30% increases in the procurement prices of rice and wheat (Figure
2003–04 04–05 05–06 06–07 07–08 14). The estimates show that the increases in the budgetary cost from
Actual Scenario 1
Scenario 2 Scenario 3
higher procurement prices in India would be of the order of 4%, 9%,
Sources: Staff estimates. For baseline data: Ministry of and 13%, respectively, for the three scenarios.
Finance, Government of India (2008).
5.3 4.7
Artificially setting prices for procurement is distortionary. It is
4.2
possible to run food-based safety-net programs without distorting
0
2006 2007 2008
prices. Procurement at market prices would give the right signals to
Baseline 50% Import Price Increase farmers. Fiscal costs could be reduced through reform measures such as
Sources: Bureau of Agricultural Statistics, available:
http://www.bas.gov.ph; National Food Authority,
removing inefficiencies in the functioning of the distribution systems
available:http://www.nfa.gov.ph; Datastream, all
downloaded 21 April 2008; staff estimates.
and allowing competition in the market for fertilizer. In India, only
about 60% of the fertilizer subsidy reaches the farmers (Government
of India 2004). As Figure 16 shows, instead of subsidizing fertilizer,
FIGURE 16 making credit available to farmers can increase the use of fertilizer.
RELATIONSHIP BETWEEN PRIVATE CREDIT
AND FERTILIZER USE This will in turn increase agricultural productivity and incomes.
14
But these reforms would not diminish the need for continuing and
(100g/ha of arable land)
12
y = 1.9136 + 1.2811x strengthening safety nets for the poor, who are hit significantly more
R² = 0.4268
10 from the immediate impact of a food price rise than those above the
Fertilizer use
0
0 1 2 3 4 5 6
Private credit (percent of GDP)
Notes: Variables are averages from 2002 and 2005 and
converted to logarithms; y is fertilizer use; x is private
credit.
Sources: World Bank, World Development Indicators
online, downloaded 24 April 2008; Claessens and Feijen
(2007); staff estimates.
12
Impact of Rising Food Prices on Households: Poverty and Distribution Analysis
Table 3
Share of Food Expenditures to Total Expenditures (percent)
Quintile Bangladesh India Indonesia Philippines
1st 69.3 62.0 63.3 64.6
2nd 66.9 59.4 58.1 59.2
3rd 63.2 56.2 54.1 54.1
4th 58.7 50.8 49.0 47.7
5th 45.2 36.4 37.9 36.4
13
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
FIGURE 17
SHARE OF RICE EXPENDITURE TO TOTAL EXPENDITURE expenditures on food than richer ones. In each of the four countries,
(PERCENTAGE SHARE BY QUINTILE) a clear majority of the expenditure of the poorest 20% is on food. In
Bangladesh
40 contrast, the share of food in total expenditures tends to be around
25 percentage points less for the richest 20%. As a result, the poorer
30 population subgroups are more vulnerable to rising food prices.
20
To the extent that some households produce (and consume) their
own food, they will tend to be relatively shielded from increases in
10
food prices. In fact, those with a marketable surplus may even benefit.
Nevertheless, the household expenditure survey data used here suggest
0
1st 2nd 3rd 4th 5th that for all quintile groups in all four countries, a majority of food
India
consumption is purchased. In the case of rice, for example, typically an
40 average of around 70% or more of total rice expenditures is purchased
in any given quintile group in rural areas. A smaller percentage is
30
purchased for some quintile groups in rural Bangladesh (a little less
than 60%). However, this is for the top two quintiles.
20
As it turns out, the fact that the increase in food prices has been
10
driven to a large extent by increases in the price of rice has a special
0
significance for the poverty and distributional impacts of the recent
1st 2nd 3rd 4th 5th increase in food prices in Asia. This is because of the large share of rice
Indonesia in expenditures—not just food expenditures but total expenditures—in
40
Asian economies, especially among their poor. Figure 17 describes
the average share of rice in total expenditures across quintile groups
30
for the four countries considered in Table 3. As can be clearly seen,
20
while rice can easily account for roughly 20–35% of total expenditure
for the bottom quintile across countries, it can account for as little as
10 5–10% of total expenditure for the top quintile.
14
Impact of Rising Food Prices on Households: Poverty and Distribution Analysis
presented in this Section IV are pure price effects assuming that per
capita expenditure remains constant.
Table 4
Impact of Price Increases on Poverty
Change in Number of Poor (in millions)
15
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
FIGURE 18
PERCENTAGE REDUCTION IN AVERAGE STANDARD The larger poverty impact of the food price increase in Pakistan
OF LIVING WHEN FOOD PRICES INCREASE BY 10% relative to that in the Philippines can be explained by the difference
Philippines
Richest Poorest in the share of food in total expenditure. The average Pakistani spends
0
10th 9th 8th 7th 6th 5th 4th 3rd 2nd 1st about 50% of his/her total expenditure on food. For the average Filipino,
-1 food expenditure is about 40% of his/her total expenditure. From this
-2 observation it can be said that the poorer the country, the greater will
Percentage change
-5
Table 5 presents the impact of food price increases on inequality.
-6
The Gini index, which is the most widely used measure of inequality,
Share of the population
-7
is used in this analysis. The impact on inequality is similar for the
two countries: an increase in food prices tends to intensify income
Poorest
Pakistan
Richest inequality. The results show that an increase in food prices by 10% will
0
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
increase the Gini index by 0.55 percentage point for the Philippines
-1 and by 0.39 percentage point for Pakistan. As expected, the impact
-2 on inequality becomes much sharper with rising food prices. Because
Percentage change
-3 of the food price increases for the first quarter of 2008 (7.19% for
-4 the Philippines and 18.31% for Pakistan) inequality worsens by 0.39
-5 percentage point for the Philippines and 0.71 percentage point for
-6
Pakistan.
Share of the population
-7
The possible impact of food price increases on distribution can
Source: Staff estimates.
be also seen from the percentage reduction in the average standard of
living of different income groups (Figure 18). The estimates suggest
that if food prices go up by 10%, the average standard of living of
the people in the Philippines and Pakistan will decline by 4.16% and
4.84%, respectively. But rising food prices affect people at varying
income levels differently. Higher prices put upward pressure on the
cost of living and thus lower the overall standard of living. As Figure
18 suggests, the food price increase reduces the average standard of
living of the poorest 10% of the population more than that of the
richest 10% of the population in both countries. It can be observed
that the percentage reduction in the average standard of living declines
monotonically with higher level of per capita household income. This
Table 5
Impact of Price Increases on Inequality
16
Impact of Rising Food Prices on Households: Poverty and Distribution Analysis
supports the earlier finding in Table 5 that higher food prices will
lead to more unequal distribution of income or expenditure because
food takes a greater share in total expenditure for poorer individuals,
particularly for the poorest. Hence, safety measures are required for
the poorest of the poor to be able to mitigate the negative impact of
rising food prices on them.
The years 2003 and 2006 for the Philippines, and 2004–2005 for
Pakistan are used as base years (Table 6). Price increases are relevant
only for base years. In 2006, there were 22.73 million poor people
in the Philippines. If food prices had increased by 10% and people’s
nominal expenditure had not changed, then the number of poor
would have increased to 25.45 million people. Thus, a 10% increase
in food prices would have forced 2.72 million more people to fall
Table 6
Compensation Required for the Poor from Food Price Increases
Philippines Pakistan
2003 2006 2004–05
Number of poor before price increase (million) 20.66 22.73 33.35
Scenario 1: 10% food price increase
Number of poor after price increase (million) 23.12 25.45 40.40
Compensation to poor (million PhP/Rs) 10025.35 13906.92 14587.94
(0.23% of GDP) (0.23% of GDP) (0.22% of GDP)
Compensation to poor* (million PhP/Rs) 11673.54 16159.80 18537.61
(0.27% of GDP) (0.27% of GDP) (0.29% of GDP)
Scenario 2: 20% food price increase
Number of poor after price increase (million) 25.77 28.38 48.02
Compensation to poor (million PhP/Rs) 20050.70 27813.83 29175.89
(0.47% of GDP) (0.46% of GDP) (0.45% of GDP)
Compensation to poor* (million PhP/Rs) 27053.38 37346.07 46239.12
(0.63% of GDP) (0.62% of GDP) (0.71% of GDP)
Scenario 3: 30% food price increase
Number of poor after price increase (million) 28.66 31.58 55.31
Compensation to poor (million PhP/Rs) 30076.05 41720.75 43763.83
(0.70% of GDP) (0.69% of GDP) (0.67% of GDP)
Compensation to poor* (million PhP/Rs) 47108.89 64810.61 83203.69
(1.09% of GDP) (1.07% of GDP) (1.28% of GDP)
* Indicates the estimates with the old and new poor after the price increases. Note that the compensation estimates are yearly figures.
Source: Staff estimates.
17
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
V. Medium-Term Supply
Response and Poverty
Impacts
Thus far the paper has examined the impact of an exogenous
shock in terms of higher world food prices at two separate levels. In
Section III, a macroeconomic aggregate demand-driven model was
used to trace the effects of the exogenous shock on key macroeconomic
variables over the short term, i.e., the next two years. Following from
this analysis, Section IV examined the pure price effect of the exogenous
shock in the very short term, i.e., less than a year, on the incidence of
poverty and inequality that focused on household expenditures. In
both Sections III and IV, supply responses from agriculture to the
exogenous shock are not taken into account.
Over the medium term, persistent food price increases will induce
supply-side responses as resources are reallocated across sectors in
18
Medium-Term Supply Response and Poverty Impacts
FIGURE 19
PRC GAINS IN TERMS OF TRADE
A. Effects on the People’s Republic 3.0
of China
Percent change from baseline
2.5
2.0
The simulation results shown in Figure 19 suggest that the PRC
1.5
as a whole would gain from the rising international grain prices.
As a net food exporter, PRC’s terms of trade improves slightly in 1.0
0.5
More detailed descriptions about the Indonesian CGE model can be found 0
in Sugiyarto (2007), while the PRC model can found in Hertel and Zhai Real Income Terms of Trade CPI
(2006). Source: PRC CGE model simulation.
19
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
FIGURE 20 the wake of the world grain prices hike. This leads to gains in real
FOOD PRODUCTION EXPANSION
25 income, which rises by 0.3% of GDP. Rising import prices of grains
Percent change from baseline
10
Rising grain prices improve the incentives of farmers to increase
5 inputs in food production. Figure 20 shows that as a result, the output
0 of the grain sector expands by 20% following the rise of international
food prices. Other agricultural sectors experience slight output
-5
Grain Other Manufacturing contraction because their resources are diverted to grain production.
Crops Agriculture
Source: PRC CGE model simulation.
The aggregate welfare gains from improved terms of trade are not
distributed evenly across households. The detailed household results
show that rural households benefit from the improved agricultural
terms of trade, but urban households would experience losses in real
income because of higher food expenditure. Urban households at
lower income levels lose more owing to their larger proportion of
food consumption in total expenditure. The largest welfare gains
are associated with agriculture-specialized rural households. The
progressive effects of food price inflation on urban households result
in an increase in the urban Gini, which rises slightly from 0.2587 in
the model’s base year to 0.2629. The national Gini declines by 0.02
because of the income increase of rural households. The Gini coefficient
within rural areas also declines slightly. Using $1/day poverty lines
and adjusting them to the change in CPI, the simulation indicates
that rural households in the PRC enjoy a significant reduction in the
incidence of poverty.
B. Effects on Indonesia
4.0
in the world market. As Indonesia is a net importer of food crops
3.0
(including cereals), producers there respond by reallocating their
2.0 outputs toward the domestic market, causing a 0.02% increase in
1.0 domestic sales following a 0.7% decline in exports. Overall, as shown
0.0
in Figure 21, real GDP falls by 0.4%.
-0.1
Real GDP CPI
The food crops subsector expands by 3.1%, while other agriculture
Source: Simulation results. subsectors contract from 1.98% (livestock) to 3.57% (fisheries). The
20
Long-Term Policy Responses for Food Security
21
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
22
Long-Term Policy Responses for Food Security
23
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
Imports
4 As a result of both domestic and international factors, food
prices in India have been rising faster than the general rate of
0
inflation. The food surplus situation of a few years ago arose,
-4 Exports largely owing to artificially hiked prices through the support price
policy and input subsidies, gave the impression that availability
-8
is not as much of a problem as is providing economic access to
-12 the poor. But the availability of cereals has since been declining,
1970 75 80 85” 90 95 2000 05
driven mainly by market forces. Record surpluses of rice and
Wheat Rice
Source: Foreign Agricultural Service, United States wheat that occurred during 1998–2002 turned into deficits by
Department of Agriculture, available:
http://www.usda.gov, downloaded 16 April 2008. 2006 as per capita food grain output fell to the 1970s’ level and
imports increased (Box Figure 1.1), although India remained a
net exporter in 2007.
BOX FIGURE 1.2
YIELD GAPS IN RICE AND WHEAT
Yields of key food crops across states have reached a plateau.
Yield gap* in wheat, 2002/03–2004/05
Uttaranchal Although about 90% of wheat areas and 75% of rice areas are
Madhya Pradesh planted with high-yielding varieties, average yields in major
West Bengal
Karnataka states are much lower than yield levels achieved in experiment
Uttar Pradesh
Bihar
stations (Box Figure 1.2).
Himachal Pradesh
Maharashtra
Gujarat It is projected that food grains demand in India would grow
Punjab at 2–2.5% per annum during the 2007–2012 Five-Year Plan
Rajasthan
Haryana period, by the end of which import demand may exceed 20
0 10 20 30 million tons if the stagnation in cereal yield growth continues.
Percent below potential
Also, India has emerged as the largest importer of edible oils,
Yield gap* in rice, 2003/04–2004/05
Jammu and Kashmir with more than 40% of its domestic demand met through
Uttar Pradesh imports. Increasing demand and slower growth in domestic
Chhattisgarh output can increase dependence on imports. Although, as seen
Uttaranchal
in Box Figure 1.3, import dependence at present is minimal for
Bihar
Gujarat
cereals, this could change in the future. Food imports to sustain
Jharkhand domestic consumption may not suffice in the changing global
Manipur food scenario.
Assam
0 20 40 60 What are the options for India at this juncture of rising world
Percent below potential
prices and increasing domestic demands? Should it turn toward
Irrigated
Rainfed (upland)
self-sufficiency or import dependence? Or should it establish
Rainfed (shallow lowland)/boro itself as a major world player in the global food market? Does
* Improved versus farmers' current practice.
Note: Potential yield refers to that obtained in the
it have the capacity to become a key exporter and seize the
demonstration fields where improved or opportunity brought about by external factors?
recommended technology is adopted vis-à-vis
farmers' current practice.
Source: Personal communication with Ramesh
Chand, ICAR National Professor, National Centre for
Agricultural Economics and Policy Research, New
Delhi.
24
Long-Term Policy Responses for Food Security
India first needs to set right the domestic agricultural policies. BOX FIGURE 1.3
IMPORT DEPENDENCE IN INDIAN AGRICULTURE,
Agricultural input and output subsidies have not only been 2007
unproductive, financially unsustainable, and environmentally Wheat
damaging; they have also accentuated inequality among rural Sorghum
Indian states (Fan, Gulati, and Thorat 2007). Resources can Rice, milled
instead be diverted to investments for enhancing agricultural Corn
growth. A combination of lower subsidies on fertilizer, irrigation, Sunflowerseed oil
power, and credit; higher investments in agricultural research and Soybean oil
are a must to sustain agricultural growth in the long term and Palm oil
-20 0 20 40 70 80 100
to reduce poverty.
Net imports/domestic consumption (%)
Source: Foreign Agricultural Service, United States
India can indeed leapfrog into an era of high productivity in Department of Agriculture, available:
http://www.usda.gov, downloaded 24 April 2008.
the medium term of 2–3 years. If all the states (as in Box Figure
1.2) successfully tapped their yield potential, they would produce
an additional 13 million tons of wheat and 19 million tons of
rice, equivalent to 19% and 20% of their current production.
25
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
However, with the recent rises in world prices for major food
commodities such as wheat, rice, maize, and oilseeds, investments
in the agriculture sector have become more attractive. This is
despite the fact that the prices for major inputs such as seed
and fertilizers, and costs of cultivation and irrigation have also
risen sharply. A case in point is the irrigation sector in Pakistan.
In 2002, an ADB technical assistance project assisted in the
formulation of a medium-term investment plan that compared
and prioritized a number of potential projects, some of which
were assessed to be economically not viable (Government of
Pakistan 2002). A reevaluation of economic viability of some
of these projects in 2007–2008 suggests that many of these
projects will be economically viable if the high level of prices
were to prevail (Box Table 2.2).
26
Long-Term Policy Responses for Food Security
27
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
28
Long-Term Policy Responses for Food Security
29
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
31
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
32
Policy Responses: Safety Net Programs for Food Security and Policies to Mitigate Rising Food Pricess
must act to keep trade open and to avoid costly interventions that
drive trade underground. Export restrictions should not be resorted
to, rather, relative price changes should be allowed, to send the right
signals to farmers and consumers alike. Domestic markets should
likewise be unrestricted, and administrative controls over prices and
resource allocation should be avoided so that markets can become
more efficient. The extremely poor, including the new poor, must be
provided well-targeted assistance over the next 3–12 months in the
form of purchasing power—cash transfers, food-for-work, feeding
programs, and food stamps—to alleviate the pure price effect. The
governments of developing Asia must work to ensure that small and
marginal farmers have equal access to credit, fertilizer, improved seeds,
pesticides, electricity, and water. Market access should be provided
to farmers across the region and in the global marketplace to allow a
maximum supply response and to provide order and reduce uncertainty.
Over the long haul, improvements in land and labor productivity in
agriculture will be essential in rice, wheat, and edible oils. This can
only be attained through long-term investments and technological
advances that have been identified in Section VI above. These include
a rejuvenation of research and development and education that enable
farmers to take advantage of technologies. Land use must also be made
sustainable; this will entail better practices in protecting watersheds
and forests. The economic viability of farm activities and investments
must be the determining factor in what is produced domestically and
what is imported.
33
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
Faced with the challenge of rising food prices and the need
to improve production of major commodities, governments will
need to have an action plan that addresses the range of issues
from the immediate to the long term. In the immediate term
(prior to any supply response in output), governments will need
to focus on protecting the poor from high and rising food prices,
which can be accomplished through programs targeted at the
poor to provide them access to food commodities through cash
transfers, food-for-work, or food stamp programs. Through
targeted support to the poor rather than general price subsidies,
governments will be able to ensure better coverage as well
as free up resources for addressing the needs in the “5 Is”.
Provision of targeted support will also help minimize the adverse
impacts on the poor of rising food prices, and will enable the
governments to address the distortions in the incentives in the
short term. The right incentives accompanied by dependable,
affordable, and timely access to inputs and credit at market
interest rates will enable farmers to invest in improved and
appropriate levels of input usage (improved seed, fertilizers,
pesticides, and irrigation), which will then lead to an expansion
in production levels and will stabilize and keep prices from
spiraling up. However, the supply response, while significant,
will be limited under the current levels of technology options
and inputs available at the farm-gate level. In the medium to
long term, governments will need to further build on the gains
in supply by addressing the inadequacies in infrastructure and
ineffectiveness of institutions, and by promoting research and
development of new technologies. In addition, provision of more
equitable access to education will expand capacities for future
farmers to take advantage of advances in technology.
34
Policy Responses: Safety Net Programs for Food Security and Policies to Mitigate Rising Food Pricess
Poverty
Reduction
Inclusive
Growth
• Ensure availability of
inputs in timely manner
(seeds, fertilizers,
pesticides, and credit)
35
Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End?
References
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36
References
37