Do higher food prices help or hinder poverty reduction?

by on January 2, 2017 at 1:55 pm in Economics, Food and Drink | Permalink

The answer may surprise you, here is part of an abstract from Derek D. Headey:

In this article World Bank poverty estimates are used to systematically test the relationship between changes in poverty and exogenous changes in real domestic food prices. We uncover indicative evidence that increases in food prices are associated with reductions in poverty, not increases. We empirically explain this result in terms of relatively strong agricultural supply and wage responses to food price increases, and the fact that the majority of the world’s poor still heavily rely on agriculture or agriculture-related activities to earn a living.

Here is the full (gated) article, via the excellent Kevin Lewis.

1 Lanigram January 2, 2017 at 4:23 pm

Welfare destroyed Native American agriculture, according to my professor of anthropology at lefty university. I have always wondered about the impact of cheap imported food on local agriculture. Same for emergency aid, which is a humanitarian necessity in a crisis, like Haiti after a hurricane.

In an industrial or post-industrial service economy, local agricultural networks are not so important in my unsophisticated non-economist view.

I lived through a major earthquake in a modern coastal city. People were killed, buildings and bridges and freeways collapsed. There were landslides, dust everywhere in the air. The power was out for about a week, water system destroyed, no traffic lights. Everyone was calm and polite, every intersection an orderly 4 way stop with no gov intervention. There was no violence, no crime. The stores opened powered by generators or lit by flashlights, truckers delivered goods to stores, people went to work in dark buildings. I went to the local lumber yard – darkened but powered by a generator – and bought everything I needed to secure my badly damaged and precarious mountain home. There were no shortages of food, water, medicine, batteries, flashlights, radios, or toilet paper. Life went on….

Secure economic networks, and people committed to their operation, are important.

Just sayin’…

2 anon January 2, 2017 at 4:27 pm

I think I have read similar reports in the last few months. I can’t remember now if it was on impacts of random aid trials ..

3 mulp January 2, 2017 at 5:09 pm

If you are surprised, it’s because you believe in free lunch economics. Voodoo economics. Supply side economics.

If you are a Keynesian or even Adam Smithian, you know economies are zero sum.

Prices == labor costs == wages == consumption.

You can not have low prices, low labor costs and high incomes and high consumer spending.

You can not have high economic profit and gdp growth because consumption is being depressed by the low labor costs that produce the profits.

Economists since circa 1980 lost all understanding of demand elasticity. Lower food prices by cutting unit labor cost will not make workers better off like cutting the costs of things like aluminum, electronics, plastics in the 60s and 70s. Aluminium replaced returnable glass bottles increasing the unit sales of beverages so much that those workers displaced handling bottles were employed handling aluminum cans with added workers required. Plastic likewise replaced returnable glass and not only did milk consumption increase for a time, but now water got sold at high prices by the liter.

But by the 80s, unit sales maxed out, so cutting labor costs in packaging with aluminum and plastic resulted in net job loss.

Quick freeze displaced fresh seasonal and canned, but did not change quantities. Wealthier union workers opened up selling prepared food, moving free labor in the home into the factories or mass production food vendors, aka McDs, Pizza Hut, Bonanza Ponderosa. But shifts in who prepares food by cutting unit paid labor costs has demand price elasticity only for a finite increase in quantity shift from free labor to paid labor.

Even with shifts from free labor to lots of paid labor in the food sector has failed to increase unit labor costs and quantities can not increase to infinity, so the result is less income in the food portion of the economy than in the 20s-30s. While “wages” were lower in the 20s, in the 20s, the wages came with room and board – a farm family and it’s attached labor got low wages, but grew their own food and energy and consumed it without paying for their labor. Today, food workers get paid somewhat more in wages, but they must pay far more for food, energy, housing.

Economists often argue that being poor today is like being rich because things like cell phones are common today. The argument is a cell phone is qualitatively better than RFD First Class which became universal in the 30s, or telephone party lines that became common in the 30s. But food is not qualitatively better today than in the 20s and 30s. Greater choice of inferior food is not qualitatively better foor.

To get qualitatively better food, you need to be rich, like Trump serving snails out of all cultural and local economy context. But snails were historically “working class”. They were eaten when available to those who were hungry and found the work required to be less than preferred alternatives. Just like berries.

Hunter gatherers basically worked to eat and to have shelter and energy. Food workers work to feed other people for pay, but can’t afford to pay for their own food, energy, and shelter. Having a cell phone does not make today’s food worker better off than hunter gatherers. It’s the evil welfare state that provides today’s food workers a better life than hunter gatherers 500 years ago: food stamps, housing vouchers, free health care, cash aid (EITC), etc.

But the welfare state is a subsidy to the consumers of food and the businesses that sell the food and pays workers too little to live on.

Raising food industry wages by 100% would at a gross level increase food costs from 10% of gdp to 20%, but given workers in the industry are probably 20% of workers, the extra 10% of gdp would be paid by 100% of consumers, including the 20% of food workers, so the cost per consumer would only increase roughly 10% to much less of income. With static wages, food workers would see a huge increase in food costs, 20% to 40%, but with their income doubled, but welfare cut, they net higher income after paying for food. And everyone paying taxes will see lower taxes or other indirect costs. Plus food workers will spend every net income increase, so deducting lost welfare, gdp will increase by perhaps 5% due to increased consumer demand by the lowest 20%, and only the next quintile will cut other consumer spending to offset higher food costs. The top incomes will marginally cut savings and reduce derivatived asset price inflation: share prices.

But supply siders reject the concept of workers being consumers, and consumers being workers who must limit spending to what they earn, and therefore that reducing labor costs cuts gdp dollar for dollar in the long run. In the 80s, reduced labor costs were offset by much higher debt overall, but debt can’t increase as a share of the economy exponentially as it has since Reagan when the economy was not contracting or stagnant to reduce the debt burden.

4 Uribe January 2, 2017 at 5:44 pm

Someone is reasoning from a price change.

5 Careless January 2, 2017 at 5:39 pm

and the fact that the majority of the world’s poor still heavily rely on agriculture or agriculture-related activities to earn a living.

Yeah, don’t expect this to hold in the places that still have rapidly increasing populations, which have densities beyond maxing out agricultural productivity. Which also happen to be most of the poorest parts of the world.

6 Ray Lopez January 2, 2017 at 6:02 pm

Short answer: food is a normal good (Google this), and the correlation is spurious (people want more food as they get richer, which drives up the price, all things being equal, but driving up the price of food will not make people richer). Move along…

7 Cliff January 3, 2017 at 10:17 am

“EXOGENOUS changes in real domestic food prices”

8 Gaspar_Karas January 2, 2017 at 10:52 pm

The solution to not enough food for the poor folks is for them to move to where the food is. So suggested philosopher/comedian Sam Kinnison, prior to his untimely death.
** One could argue that the haves would rather pay the cost of shipping to the have nots from time to time, to avoid having the have nots among them most of the time. Also, for the good feeling that comes from doing something nice, by giving the have nots things the haves don’t really want anymore, such as surplus powdered milk..
If they (have nots) already living in a place with food, such as Rio de Janeiro, then the people who have food should share it with the people who don’t.
If the haves don’t want to voluntarily share it, the have nots should take it by force. If the haves don’t want the have nots to take it by force, they should hire some of the have nots and equip them with inexpensive buy highly lethal weapons to protect them.
Also they should build fences and walls and make the have nots pay for them, or make sure they live on hills where they are easy to watch.

9 Benny Lava January 3, 2017 at 11:08 am

Totally unsurprising. Just look at what happened in Ireland in the 1840s, the corn laws,etc.

10 Cooper January 3, 2017 at 1:32 pm

Did you forget the /s tag?

Ireland’s problem in the 1840s was a decline in the local food supply (potato famine) and the inability to import cheap food from overseas (Corn Laws).

High food prices helped the rich landlords and hurt the peasants.

11 Hazel Meade January 4, 2017 at 11:51 am

An interesting result but one that seems contingent on an economy being in a transitional phase between agricultural and industrial economic states of development. If only a small percentage of the population works in agriculture, then the effect should be to reduce poverty. Historically, during industrialization poverty among rural farm workers increased because they were being displaced and thrown out of work. That’s not a good argument against industrialization though. One would essentially be making the broken window fallacy again. You want the economy to complete the transition to the industrial state as fast as possible to minimize the number of people who become rural farm workers only to be unemployed later.

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