Domestic food prices, undernourishment and policy

implications

Hassan Zaman

Lead Economist

The World Bank

March 2010

Structure

Trends in global and domestic food prices Measuring the impact on undernourishment Learning from the responses to the 2008

food crisis Concluding thoughts

Global food prices on the rise World Bank food benchmark index increased

23% Jan-Dec 09

Global food prices on the rise (cont.)

Sugar prices rose 80% during this period (figure 2) and rice prices (Thai 5%) increased 9% in December 2009 alone. On the other hand global wheat and maize prices relatively stable

Domestic food prices Tracking domestic prices is important in order to provide

early warnings about food crises. Regular monitoring is just as important (eg in Malawi in 2001, maize prices rose by 50% in one month following months of stability - signaled extent of food shortages)

Domestic staple price increases in many countries greater than the rise in global grain prices (using FAO food price data in 58 countries).

Localized factors – conflict, supply disruptions, weather – lead to divergence from global price trends especially in less integrated economies

Kenya maize prices compared with global prices

Domestic staple price increases (source ‘Food Price Watch’

February 2010, World Bank)

Price Increase, January 2009- October 2009   Average price increase, 2008-2009

CountryFood Item

Caloric contribution

Price Increase Country

Food Item

Caloric contribution

Price Increase

Nigeria Sorghum 13% 50% Mozambique Cassava 33% 61%

Uganda Maize 10% 35%Dem. Rep. Congo Cassava 55% 60%

Bhutan Rice .. 26% Sudan Sorghum 26% 38%

Sudan Sorghum 26% 24% Kenya Maize 36% 21%

Tanzania Maize 34% 23% Chad Sorghum 18% 18%

Kenya Maize 36% 16% Burkina Faso Sorghum 27% 15%

China Rice 27% 15%   Tanzania Maize 27% 14%

Methodology for estimating nutritional impacts of food price increases (details in Tiwari and Zaman (2010) ‘The impact of economic shocks on global undernourishment’ Policy Research Working Paper 5215, The World Bank)

1. Estimate a calorie-income (Engel) relationship using a cross country panel data for which data on per capita income (WDI) and per capita calorie consumption (FAO) was available (83 countries over 8 years, 742 observations)

2. Use income distribution data to generate a cumulative distribution function (CDF) for per capita country for every country.

3. Determine the minimum daily calorie intake threshold below which an individual is deemed undernourished.

Methodology for estimating nutritional impacts of food price increases (cont.)

4. Using the Engel relationship, determine what the income requirement for the threshold calorie level is.

5. Using the CDF we work out what fraction of the population cannot afford this level of calories, and use population weights to derive regional estimates for undernourishment.

6. When prices increase, Engle curve shifts “down” or to the “right” (price change multiplied by price elasticity of calories).

Food price scenarios in 2008 and impact on undernourishment

    2008 - Full Passthrough2008 - Partial Passthrough

% Increase from 2007 5% 25% 35% 50% 35% 50%Sub-Saharan Africa 1% 4% 5% 7% 4% 6%

Asia and Pacific -4% 6% 11% 19% 8% 14%Latin America and Caribbean 0% 10% 16% 24% 12% 18%

Middle East and North Africa -1% 13% 20% 31% 15% 24%

Total   -2% 6% 10% 16% 7% 12%

  Baseline 2008 - Full Pass through2008 - Partial Passthrough

(incidence in millions) FAO 2007 5% 25% 35% 50% 35% 50%Sub-Saharan Africa 236 239.3 245.5 248.6 253.4 246.4 250.2

Asia and Pacific 583 561.5 619.7 649.6 695.5 628.6 664.8

Latin America and Caribbean 51 50.8 56.2 59.0 63.2 57.0 60.4

Middle East and North Africa 37 36.6 41.8 44.4 48.5 42.5 45.8

Total 923 902.2 974.9 1012.2 1069.4 986.5 1031.1

Bottom line estimate…and methodological caveats

Our preferred estimate relates to 35% price increase scenario (average food price change 2007-08) and partial pass-through of prices which implies 64 million more undernourished

Caveats include (i) use of undernourishment as an indicator (ii) use of a single calorie price elasticity (iii) not knowing what a reasonable price pass through rate is.

Country specific impacts of changes in 2009 food prices on undernourishment (source: ‘Food Price Watch’ Poverty Reduction Group, The World Bank)

 

% Increase Domestic

Price of Staples in

2009

Change in Undernourish

ment Incidence

% Change (over

2008 estimate)

Projected per

capita growth (2009)

Mozambique 61% 763,291 8% 2.2%

Kenya 21% 453,897 5% 0.3%

Burkina Faso 15% 149,592 3% 1.3%

Tanzania 14% 444,599 4% 0.0%

The financial crisis has affected household food security...evidence from a crisis-monitoring survey in Turkey (source: Human Development Division, ECA, World Bank)

Poorest 20% Middle 20% Richest 20%0%

20%

40%

60%

80%75%

32%29%

14%14%

5%

% of households that use the following coping mechanisms

Decreased the amount of food consumption Reduced the use of health servicesReduced education expenditures

Asset Quintile

14

Cash trans-fer

Food for work

Food ration/ stamp

School feed-ing

-10%

0%

10%

20%

30%

40%

50%

60%

Existing Safety Net Interventions(% of all 118 countries)

Source: Data based on responses from 118 country teams

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Reduc

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odgr

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Releas

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odgr

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Expor

t res

trict

ions

Price

cont

rols/

con

sum

er s

ubsid

iesNon

e

0%

10%

20%

30%

40%

50%

Food Price Policies(% of all 118 countries)

Source: Data based

on responses from 118 country teams

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Distribution of safety nets and food price policies during 2008 food crisis (source: Wodon and Zaman (2009) ‘Higher food prices in Sub-Saharan Africa: Poverty Impact and Policy Responses’, World Bank Research Observer)

Food price policies Subsidies – important to distinguish between

universal subsidies which depress incentives and take up large share of budget vs. smaller subsidies targeted at vulnerable groups

Stock management – professional management/oversight essential to minimize leakages, losses and market disruptions

Tax cuts – fiscal and distributional implications

Overall, significant scope for assistance in these areas during a ‘non-crisis’ period

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Spending on Safety Nets is Modest (source Grosh et al 2009)

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Mean 1.7% of GDP; median 1.4% of GDP (n=72)

For 1/2 of countries is about 1-2 % of GDP

Linking safety nets with the growth agenda

Growth angle necessary to mobilize political support for more domestic and external funding for safety nets

Growth pathways which need to be quantified include (i) Consumption multiplier impact e.g. foodstamps multiplier

largest in US stimulus package (Zandi 2009)

(ii) Infrastructure creation (public works)

(iii) Human capital impact (CCTs)

(iv) Conflict reduction potential (eg programs for ex-soldiers)

Concluding thoughts

Global and domestic price trends of food staples can differ significantly; monitoring domestic staple prices essential.

Nutritional impacts will have irreversible consequences

and hence direct interventions for children under 2, pregnant/lactating women needed as income growth won’t be sufficient (eg India).

2008 food crisis policy instruments will be re-used so donors could assist in improving their implementation

Linking safety nets with growth strategy important to mobilize political support for expenditure reallocations and external resources

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