Higher food prices are better for the poor in the long run

The mid-2000s saw some fundamental shifts in the global economy, not least the many global imbalances and policy mistakes that contributed to the financial crisis. Less well known, however, is the dramatic reversal in international food price trends. After a long-term secular decline over the 1980s and 1990s, food prices surged upwards from 2006 to 2008. The international prices of wheat and maize approximately doubled over this period and the price of rice spectacularly tripled in the space of a few months between late 2007 and mid-2008. These rapid changes in the prices of mankind’s most essential commodity became known as the “global food crisis”, but many researchers are now questioning whether it should ever have been labelled as such, as it has since been shown that higher food prices can greatly contribute to poverty reduction in rural communities.

Of course this surge in food prices was not labelled a crisis without some justification. Few experts predicted the surge in food prices, and few knew when it would end. Major players in the international grain trade panicked in response to this uncertainty and withheld supply through export restrictions, or imported far more than they normally would in order to sure up stocks. The UN’s World Food Program faced tremendous difficulties in obtaining the grains it needed to distribute to the world’s most vulnerable people. Preliminary evidence and logic also suggested that the bulk of the world’s poor buy more food than they produce, meaning higher food prices would reduce their disposable incomes (at least in the short term). The urban poor were particularly hard hit – since they earn little or no income from farming – and the peak of the 2008 crisis saw food riots across many developing countries, and even the overthrow of the government in Haiti.

But although the surge in global food prices was a crisis in some ways, it is also possible that higher food prices have helped reduce global poverty in the long term. The reason is this: While the poor invariably spend much of their income on food, many of them also derive that income from growing food or other agricultural commodities. Indeed, the vast majority of the world’s poor (defined by the World Bank as those living on less than $1.25 per day) live in rural areas; perhaps as much as 75%. Most of these depend primarily on family farming for their livelihoods, or on hiring themselves out as agricultural workers. In the short term, it is true that many of the rural poor will not produce enough food to feed themselves, and could therefore be hurt by higher food prices. But higher food prices also lead farmers to invest more in agriculture in an effort to increase their profits. One of these investments is hiring more labour, and agriculture in developing countries is highly labour-intensive. This increased demand for labour will have a large impact on the wages of the poor, especially in economies with large agricultural sectors, especially since labour is effectively a non-tradable commodity with no international substitutes. For these reasons, several economists are beginning to find it quite conceivable that higher food prices could ultimately benefit the poor.

Recent research at the International Food Policy Research Institute examined the impact of higher food prices on poverty rates, in a sample that covers some 68 developing countries and over three decades of data. Our results overwhelmingly suggest that increases in food prices predict reductions in poverty, rather than increases. Moreover, the predicted effects are relatively large: A 1% increase in real food prices is expected to reduce the $1.25 per day poverty rate anywhere between 0.35 and 0.64 percentage points. The evidence also points to these benefits emerging relatively quickly – in the space of one to two years.

Two other recent studies have also suggested that wage responses to higher food prices are large enough to overturn the idea that higher food prices hurt the poor. World Bank research on rural India, the country with the single largest concentration of the world’s poor, found that wage responses are large enough to overturn the initially adverse effect of higher food prices on disposable incomes. Furthermore, IFPRI researchers have used an economy-wide simulation model to separate the short and long-term effects of higher food prices on Uganda’s poor. As in rural India, wage responses in Uganda overturn the initial conclusion that higher food prices increase poverty. In the long run, higher prices are actually a boon for poverty reduction.

Despite reaching a common conclusion across three very different methods, these studies remain quite controversial. The more popular narrative in 2008 was that higher food prices were an unmitigated disaster for the world’s poor. But while the poor may have been worse off in the short term, that narrative seems at odds with the remarkable progress against poverty across the developing world. The World Bank’s official global poverty estimates suggest an uninterrupted decline in global poverty rates during the global food crisis. Many developing countries also appear to have achieved a substantial acceleration in agricultural production, which is quite probably a supply response to higher food prices.

What about the policy implications of these findings? Surprisingly, many of the policy recommendations touted in 2008 remain valid despite these findings. Even if the poor stand to benefit in the long run, sudden increases in food prices do hurt the poor in the short term, and often have distributional consequences that have the potential to create civil unrest. So there is still an important role for social safety nets, as well as cost-effective measures to reduce food price volatility. But measures to substantially prevent the pass-through of higher international prices to the domestic economy – measures which are often touted as pro-poor – would ultimately seem regressive given that rural populations are invariably poorer than urban populations.

Another prominent recommendation in 2008 was for the developing world and its development partners to scale up investment in agriculture after 20 years of widespread neglect. From the mid-1980s to the mid-2000s the share of the international development budget to agriculture dropped by two-thirds. Private investment also floundered, largely as a result of low international prices and unfavorable domestic policies. Since the mid-2000s, however, the situation has changed radically. Higher food prices raise the returns to both private and public investments in agriculture, and increase the incentives for poor farmers to adopt modern technologies and integrate with markets.

It is therefore fair to say that the international community is facing a window of opportunity to reinvigorate agricultural development and accelerate rural poverty reduction. And this is an opportunity that can’t be missed.