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Timothy A. Wise

Dani Rodrik is back, and he reignites an old debate with his recent blog post. He asks if high food prices are good or bad for poverty, and answers, “It depends on whether the poor are selling or buying, of course.” Citing a recent paper by Jacob Swinnen, he goes on, “High food prices benefit poor farmers who are net food sellers, and hurt poor food consumers in urban areas. Low food prices have the opposite effects. In each case, the net effect on poverty depends on the balance between these two effects.”

Seems obvious, but not so fast: What if the poor also work for wages and agricultural prices affect labor markets? Sandra Polaski and others have shown that when one incorporates labor market effects of high vs. low agricultural prices, high prices will clearly be better for many developing countries.

In her Carnegie Endowment report, “India’s Trade Policy Choices,” she and her co-authors use their innovative model to examine the effects of price increases and decreases for international prices for rice and wheat, both grown and consumed by Indian farmers. Their model is innovative because it incorporates labor market effects of policy reforms in ways that most other prevailing models – including the World Bank models cited by Rodrik in his earlier posts on the issue – do not. They punch a major hole in the “net buyer/net seller” analysis of food prices.

Carnegie finds that higher rice prices have positive overall poverty impacts, and lower prices have significant negative impacts on poverty, and that this is true even among many groups of urban consumers. Based on their modeling of a 25% decrease in world rice prices, they find: “Seventy-eight percent of households would experience real income losses from such a price change, and the distributional impact would be regressive, with the poorest households losing the most.” (p. viii)

In their chapter explaining their agricultural modeling, they explain why even the urban poor – net buyers all of them – experience losses from lower agricultural prices: “The likely channel through which the decrease in the price of rice affects poor urban households is the labor market. The drop in rice prices reduces demand for labor in rice production sharply, by almost 12 percent in the case of a 50 percent decline, and reduces overall demand for labor in the agricultural sector. Displaced rural laborers spill over into urban unskilled labor markets…. The incomes of illiterate workers in urban areas, typically the least skilled, decline.” (p. 29)

They conclude: “Adverse agricultural price shocks can have negative effects on poor urban households through labor market transmission, which can offset the gains they might realize as net consumers of agricultural products.”

Conversely, they find that when rice prices go up the overall impact is progressive. The demand for unskilled labor in agriculture goes up, which raises incomes, and raises wages not just in agriculture but generally across unskilled labor markets. The rural poor are the clear winners, earning higher prices for their crops and higher wages (or incomes) from their labor, even if they are net buyers of food. Some of the urban poor end up worse off, but some of their fellow net food buyers end up better off in spite of higher food prices. They are earning more for their labor.

Carnegie recognizes that this will play out differently from country to country, but the report’s conclusions for India are unequivocal: high prices for agricultural commodities are progressive and certainly preferable to low agricultural prices which hurt the poor the most.

George Dyer showed the same thing in some of his modeling related to higher corn prices in Mexico. Dyer modeled higher corn prices, looking only at rural areas, to examine the effects on net sellers and net buyers in rural Mexico. He found that the main source of income gains in rural Mexico came not from crop sales but from higher wage income. The negative effect of high prices on net food buyers was cushioned in the case of subsistence farmers, by higher wage income and some increase in their own production. (See my summary and reference, p 27.)

The models most commonly used (e.g., GTAP) often fail to capture these distinctions because they impose fixed constraints on employment. Carnegie, in its various Doha studies, showed just how important that can be. In the case of agriculture, it turns out to be critical, precisely because the rural and urban poor both depend on wage income, agricultural employment is significant and is strongly impacted by prices, and agricultural labor markets have an impact on urban labor markets.

What is perhaps most telling about the price increases of recent years is the negative impact of their extreme volatility. Both high and low prices have winners and losers, but volatility hurts everyone except the traders and speculators. Stable and remunerative prices should be the goal. That is what will attract investment into agriculture and bring long-term benefits beyond the short-run effects.

11 Responses to “Are High Agricultural Prices Good or Bad for Poverty?”

  1. Eduardo says:

    This is most ,and only study, about food prices that is accurate. For years, as a producer in Brasil, I right and post comments in sites I made just to complain, the fact that food prices are not the cause and does not ever increase poverty.

    What the world still have is a misconception about values. We valeu more some things that we are used to, but we never compare than: For exemplo you can pay US$ 100,00 for a Vodka, but you almost sure will complain to pay US$ 4,00 for a litre of milk.

    The food prices are just a small part of a systemic disease in the economic and financial organization that have to change, and most certain will change, so every country could produce their food in their prices, not competing with others in the world, keeping the country man in their land and all countries will have only a little surplus to be managed very carefully by Internacional food agencies around the world.

    The world does not suport any more agressive trade on food, with hight profits. We have to turn to a production needed and suported for the internal market’s and feel very confortable to pay better and hight prices for the food we eat, knowing that this maney is growing our economy in whatever country we live in.

  2. What we call high agricultural prices are those which are not held artificially low by use of displaced and criminalized virtual slave labor, or, heavily subsidized taxes, fuel, transport facilities, chemical fertilizers, poisons and war.

    Agricultural should be respected for it’s close relationship with nature, all humanity hears and feels more about natural bounty and beauty when more neighbors are fully immersed in natural law and listened to by the larger public. Increasing respect decreases stress on the environment and allows for planetary life support healing.

    A fair wage for agricultural work is what will attract a work force from the citizenry. Yes, there are many countries where governmental and corporate power strip the population of rights and create internal political slaves. The answer is to avoid the mirage of subsidized globalism and simply adjust import sales prices to reflect low standards for wages or pollution controls.

    Positive cultural benefits occur when US or other government subsidies quit disrupting free markets by holding the cost of food low with subsidies. There is a huge reduction in crime, major savings on war expense, increase in health, decrease in pollution and environmental rebound. Disappearance of major costs associated with a false economy deformed by subsidies will more than pay for any price increase. Add creativity increases from a more relaxed and less fearful citizenry and we begin to see that justice and equity extended to agricultural workers will help create an overall sustainable human culture.

  3. Lord says:

    It seems like this would vary with the percentage of people in agriculture and degree of urbanization and the effect would reverse in industrialized countries where few remain in agriculture though even their poor would be wealthy by third world standards, which would mean that poorer countries would prosper even if wealthier ones would be diminished by higher prices.

  4. Nadia says:

    …. then why was it called a Global Food CRISIS in 2008? A misnomer?

  5. Timothy A. Wise says:

    I appreciate the comments and questions. Just to clarify the main points here:

    1. high agricultural prices will have positive economic effects in countries that still have significant numbers of people employed in agriculture, as in India, the subject of the Carnegie study. That only stands to reason. The main effects on poverty have to do with labor markets, and Carnegie’s study showed positive labor market effects which raised wages and/or employment beyond agricultural labor, across unskilled labor markets. This will likely not be true in countries with relative small agricultural sectors, so there one would indeed expect that higher prices would hurt the poor overall. But the majority of the world’s hungry live in rural areas and most have some direct connections to agriculture.

    2. Volatility is bad for almost everyone. It was called a global food crisis in 2008 because it indeed increased the number of hungry people in the world considerably. Would moderate and sustained price increases have caused the same kinds of deprivation? There is no reason to believe they would, and the recent price spikes are no useful indicator in any case. What we saw before the price spikes were many years of persistent low prices, and Oxfam and others are certainly right to say this caused hunger and poverty in many developing countries. What we saw with the price spikes was speculation-fueled volatility, and it’s not wrong to say that was bad for the poor too. There is no contradiction.

    3. Remember that agricultural prices are not food prices, there is a large layer of agribusiness in between. Much evidence shows that high agricultural prices tend to get passed on to consumers by agribusiness but low prices do not, or at least do not get passed along quickly. Rodrik asked about food prices. I asked about agricultural prices. They are closely related but definitely not the same thing.

  6. Brad Wilson says:

    This has all long been argued by the family farm movement in the U.S., and nonprofits put out good info on it during the pre-internet farm crisis (1980s), as I demonstrate in my historical YouTube videos, “Farm & Food Policy 2, Jobs & Stimulus” and “… 3 World Poverty & Hunger” (click on my name?). It deals with US also. & remember, Least Developed Countries average 70% rural. IATP and others did great work on the harm of export dumping, but it was all forgotten with the “food crisis.” Most (I think) “global food crisis” articles directly or indirectly called for renewed dumping to cure food high prices, which is the agribusiness position. Examples (ie. common dreams, change.org, Oxfam, Bread for the World): google “Brad Wilson” and “Food Crisis”. Someone should mention policy here! The food movement has usually been wrong, on the opposite side. What worked before (& now has international support): price floors & supply management on bottom, reserve supplies & price ceilings on top (nffc.net, Food from Family Farms Act). I’ve proven Garrett Connelly wrong 4 ways in my “Michael Pollan Rebuttal”: farm commodities lack price responsiveness on both supply and demand sides, so in free markets we usually lost money on US farm exports and dumped on the poor (when we had no/low price floors, etc.).

  7. [...] has an extremely interesting recent post on the question of ag-commodity prices and poverty in the global south. What happens to poor people [...]

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  11. It seems like this would vary with the percentage of people in agriculture and degree of urbanization and the effect would reverse in industrialized countries where few remain in agriculture though even their poor would be wealthy by third world standards, which would mean that poorer countries would prosper even if wealthier ones would be diminished by higher prices.

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