1 Measuring the Poverty Effects of Higher Food Prices Rafael de Hoyos DECPG Washington DC, October 2, 2008

2 Motivation From January 2002 to February 2008 the WB global “real” food price index rose 140 % From January 2002 to February 2008 the WB global “real” food price index rose 140 % The massive increase in food prices have important redistributive and poverty impacts around the world The massive increase in food prices have important redistributive and poverty impacts around the world   What are the (simple) methods available to measure the poverty effects?

3 Motivation 75% of the world’s poor live in “agricultural households” 75% of the world’s poor live in “agricultural households” An increase in food prices can increase the income of the poorest households An increase in food prices can increase the income of the poorest households Therefore, the global poverty effects of an increase in food prices are not clear Therefore, the global poverty effects of an increase in food prices are not clear Objective: show the possible poverty effects of the recent changes in food prices Objective: show the possible poverty effects of the recent changes in food prices Source: Bussolo, De Hoyos and Medvedev (2008)

4 Outline Food Prices and Poverty: Conceptual Links Food Prices and Poverty: Conceptual Links International vs. Domestic Food Prices International vs. Domestic Food Prices Simulation Results using the Global Income Distribution Dynamics (GIDD) dataset Simulation Results using the Global Income Distribution Dynamics (GIDD) dataset  Change in the Urban Poverty Deficit  National Poverty (headcount and gap) Effects Limitations Limitations

5 Conceptual Framework

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7 International vs. Domestic Food Prices Is the increase in international food prices a good indicator of the reduction in purchasing power suffered by consumers in developing countries?

8 International vs. Domestic Food Prices Nominal Cumulative Increase (LCU, Jan 2005 – Dec 2007)

9 International vs. Domestic Food Prices Relative Cumulative Increase (LCU, Jan 2005 – Dec 2007)

10 Measuring the Urban Poverty Effects Change in the Poverty Deficit (Dessus, Herrera, de Hoyos, 2008) : The change in PD can be approximated by the following equation: Old Poor New Poor

11 Data Requirements Household survey data: Household survey data:  Household welfare aggregate  Food share  Rural/urban households classification Domestic change in CPI, and food CPI Domestic change in CPI, and food CPI Elasticity of Substitution Elasticity of Substitution

12 Assumptions used in Dessus et al. (2008)

13 Results from Dessus et al. (2008) 90% of the increase in PD is due to the “old poor”

14 Poverty Effects: Including Rural Households Real income can be defined as follows (De Hoyos and Medvedev, 2008) : if : then: Which simplifies to: Share of Income from Agricultural Activities Share of Total Household Budget Spent on Food

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17 Data used in De Hoyos and Medvedev (2008) Household survey data for 73 developing countries coming from the GIDD Household survey data for 73 developing countries coming from the GIDD  Food share observed for 21 countries and imputed for the rest using Engel curves (De Hoyos and Lessem, 2008)  Agricultural income shares observed for 19 countries (RIGA project) and imputed for the rest using polynomial regressions Domestic CPI, and food CPI for period Jan to Dec coming from ILO. Domestic CPI, and food CPI for period Jan to Dec coming from ILO.  All the simulations are based on changes in relative food prices

18 Results: Total Poverty Effects The change in the headcount implies an extra 155 million under the poverty line and an increase in 7% in the poverty deficit

19 Results: Total Poverty Effects Large heterogeneity across countries Large heterogeneity across countries

20 Limitations Which price shock should we use? Nominal, real, relative? Which price shock should we use? Nominal, real, relative? Focusing on food CPI instead of particular commodities could hide important price effects within the food basket. Focusing on food CPI instead of particular commodities could hide important price effects within the food basket. More country-specific information on the % of total income that is coming from agricultural self-employed activities rural households More country-specific information on the % of total income that is coming from agricultural self-employed activities rural households General equilibrium effects? Substitution effects are important. General equilibrium effects? Substitution effects are important.