Poverty impacts of changes in the price of agricultural commodities Recent evidence from Argentina XI Arnoldshain Seminar Antwerp, June Pedro E. Moncarz Universidad Nacional de Córdoba

In the last 10 years there has been and important increase in the world prices of most commodities

Argentina benefited greatly from the increase in world commodity prices Quantity and Price contributions to changes in export values

However, it is necessary to look at some potentially harmful effects:  How commodity prices affect consumption prices (mainly food goods)

 The increase in agricultural commodity prices may affect more to poorer households: foods goods weight more in household consumption Consumption shares and household expenditure per capita  Other effect, with a more ambiguous direction, works trough changes in factor princes, mainly labor

Theoretical framework I follow Deaton (1989) and Benjamin and Deaton (1993): two relationships need to be established: 1. From world commodity prices to domestic prices (goods and factors) 2. From domestic prices (goods and factors) to welfare

From world commodity prices to welfare Mix of HO model with monopolistic competition A small open economy that produces and trades S primary commodities, of which S A  S are agricultural commodities If the number of factors is less or equal to the number of primary commodities  factor rewards are fully determined by commodity prices: Since our economy is small:

From world commodity prices to welfare There are also M traded manufacturing sectors, of which M F  M produce food goods The M manufacturing sectors are monopolistically competitive. In each M sector each producer, domestic or foreign, produces a differentiated variety under IRS, using all factors of production and primary commodities. There are also N non-traded sectors, also monopolistically competitive and producing under IRS using only the production factors Factors of production are perfectly mobile across all sectors  the price, in local currency, of each domestic variety of the M and N sectors can be expressed as a function of world commodity prices, and other parameters such that nominal exchange rate, domestic taxes/subsidies, trade policy etc.

From world commodity prices to welfare Finally, to calculate the welfare effects of changes in world commodity prices, I calculate the “compensating variation” as in Porto (2006)

From world commodity prices to domestic consumption prices: where: P d m,t : domestic price index for good m; P* s,t : world price of commodity s; E t : nominal exchange rate; XD A,t : export tax rate on exports of agricultural commodities; TREND: tendency; t : monthly fixed effect; u m,t : error term.

From world commodity prices to wages where: W g,t : average wage rate paid by sector g (primaries, manufactures, and services), P* s,t : world price of commodity s; E t : nominal exchange rate; XD A,t : export tax rate on exports of agricultural commodities; TREND: tendency; t : monthly fixed effect; u m,t : error term.

From domestic prices (goods and factors) to welfare where: e h : household h initial expenditure; s h m : expenditure share in tradable good m, s h n : expenditure share in non-tradable good n,  h j : labor income share of member j in household h total income,  j w,psA : wage elasticity with respect to world price of agricultural commodites.

Elasticities Consumption prices Agricultural Commodities Export taxes Food and beverage Clothing Housing Equipment Health Transport and communication Leisure Education Other Wages Primary Manufactures Services

Consumption effect of a 100% increase in world agricultural commodity prices

Labor income effect of a 100% increase in world agricultural commodity prices

Total welfare effect of a 100% increase in world agricultural commodity prices

Welfare effect of a 20% export duties on agricultural commodities

Welfare effect of the elimination of the VAT on Food and Beverages

Conclusions Ex-ante, an increase in the international price of agricultural commodities has a negative effect on poverty. This effect is channeled through the higher prices paid by consumers, especially of goods that constitute the food basket. This effect hurts the most to the poorest households. A less direct channel works through changes in wages  more beneficial to high income households. The application of export duties has a limited effectiveness to counter the effects of rising international prices of agricultural commodities. The removal of VAT on the consumption of food and beverage would reach to compensate for about a half of the negative effect of rising world prices of agricultural commodities, as well as the elimination of export duties.