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The World Bank Policy Research Working Paper No. 5633, April Maros Ivanic, Will Martin and Hassan Zaman (2011)

 The paper assesses the poverty impact of food price changes between June and December 2010 in twenty-eight low and middle income countries. Detailed information was gathered on individual households' food production and consumption levels for thirty-eight agricultural and food commodities to assess the impacts on household welfare. The authors estimate that there was a net increase of 44 million people falling below the extreme poverty line during that period.

The steep rise in global food prices between June 2010 and early 2011 substantially increased poverty levels and surpassed the 2008 food price crisis peak levels in the World Bank Food Price Index. Although similar, the recent price surge is much more broadly-based across food groups – this implies a different impact on poverty because prices of commodities such as rice has increased moderately whereas prices of commodities such as edible oil has seen increased more drastically than in 2008. Another major difference between the two price surges lies in the extent to which changes in world prices of key staples have been translated into domestic markets.

The authors suggest that evidence from the 2008 food price spike shows that typically poverty will increase in response to substantial rise in food prices both in rural and urban areas, and even short-lived price spikes can have significant poverty and nutritional implications. This is because poor consumers tend to spend a considerable portion (as much as three-quarters) of their income on food and as such experience a fall in their purchasing power due to any decline in their real income levels. Poor farmers / producers in low-income countries are typically net buyers of food and they do not have adequate time and resources to respond to these price changes, and similarly the short-term nature of these price surges provide little opportunity for households to cushion the blow by increasing their output of food or augmenting their incomes. The extent to which increases in global food prices affect poverty levels depends upon a number of factors, such as the rate at which global prices are passed on to local prices, the distribution of net sellers and buyers of food staples, the specific commodities for which prices have increased, the availability of cheaper substitutes, coping strategies available to households and adequate government policy responses.

The authors focus on how sharp changes in food prices have impacted poverty between June and December 2010 in twenty-eight low and middle income countries. Data is gathered from detailed information on food production and consumption levels of individual households for thirty-eight agricultural and food commodities via a model that evaluates the impact of these commodity price changes on household welfare. By using the data on local price changes to assess the impact of higher prices the authors were able to arrive at a better approximation of the welfare impact for key consumption commodities in most countries. Agricultural commodities used by the authors include basic staples, such as wheat, maize and rice, as well as various animal products, such as poultry, eggs, pork and beef, and a number of other items, such as sorghum, groundnuts and soybeans, which are important for the poor in many developing countries. A set of observed and estimated changes in domestic agricultural and food prices is used by the authors in an attempt to analyze short-run global poverty impacts. Moreover, they sought to determine the changes in the poverty headcount and poverty gap for each country in the sample in accordance with the definition set forth by Foster, Greer and Thorbecke. As such, the poverty headcount measures the number of people with daily expenditure below the defined poverty- line income whereas the poverty gap takes into account the average expenditure gap as a proportion of the poverty-line income for the entire population.

The results of the study show that higher food prices increased poverty levels in all countries except Vietnam where it was translated into a reduction in poverty. Moreover, in nine countries (Côte d'Ivoire, Cambodia, Ecuador, Panama, Niger, Peru, Timor Leste, Nepal and Rwanda) the increase in headcount poverty rate was less than 0.20 percentage points. Furthermore, the authors found that agricultural commodity prices in Ecuador, Panama and Nepal appear to be relatively unaffected by the global price changes thus resulting in very small incremental changes in poverty in these countries; for Zambia, Moldova, Indonesia, Albania and Nicaragua changes in the poverty headcount were between 0.2 and 0.5 percentage points; and for Armenia, India, Mongolia, Nigeria and Yemen the increase was between 0.5 and 1.0 percentage points. From their sample of 28 countries the authors verify that Tajikistan has the largest estimated net increase in poverty 3.6 percent due to the price of wheat (constituting 54% of calorie consumption) increasing by 37% along with the higher price of sugar, oils and fats. The change in the poverty gap is smaller than the change in the poverty headcount in most cases – Niger is the most significant exception with a very small increase of 0.09 in the headcount and a 1.16 increase in the poverty gap. As such, the average change in poverty among low-income countries is estimated at 1.1 percentage points whereas for middle-income countries it is 0.7.

By applying the average changes to the total populations of the groups the authors determined that recent increases in food prices lead to a net poverty increase of 43.7 million (9.5 million people among low-income countries and 34.1 million among middle-income countries). However, the role of net sellers is predominantly similar in both groups and from these sample averages the authors concluded that 67.7 million people fell to poverty due recent changes in food prices whereas 24.0 million experienced a reduction in poverty due to the same price changes.

The authors conclude by stating that there are various aspects which impact how policy implications take into account the importance of cushioning poor households from sharp increases in food prices – a) countries may limit exposure to global commodity price fluctuations through market-based hedging mechanisms such as forward contracts; b) access to safety net programs can less the impact of local price volatility; c) investments in domestic agricultural productivity can increase domestic food supply and, d) domestic price volatility can be reduced via improved management of food stocks.