Did trade-policy responses to food-price spikes reduce poverty?

Kym Anderson, Maros Ivanic , Will Martin, 3 August 2013

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Food prices in international markets have spiked three times in the past five years: in mid-2008, early 2011 and mid-2012 (Figure 1). The first prompted urban riots in dozens of developing countries when rice prices more than doubled. It may even have contributed to the unrest that led to the Arab Spring.

Figure 1. Monthly real food price indexes in international markets, 2000 to June 2013 (2002-04 = 100)

Source: FAOSTAT, www.fao.org, accessed 1 August 2013.

Governments responded in various ways, often belatedly, and only a few did so effectively. The most common response was to alter trade restrictions so as to insulate the domestic market from the international price rise (see Rocha, Giordani and Ruta 2012). And the most common justification for that action (tighter export restrictions or lower import barriers on food staples) was to reduce the number of people who would fall into poverty.

Can trade policy halt global poverty?

Did those trade-policy actions actually prevent a rise in global poverty? Certainly food prices rose less in countries that insulated themselves from the global prices, which may have prevented some consumers from falling below the poverty line. However, such policy actions have two other effects that have the opposite impact on poverty:

  • First, it increases the number of poor producers of food in the insulating countries whose greater earnings from food sales otherwise would have risen enough to pull them above the poverty line.

The second reason is more subtle but far more important effect from the global perspective:

  • Procyclical trade policy amplifies the price spike thus raising the possibility of more people falling into poverty in other countries than are saved from that fate in the insulating countries.

Price swings are exaggerated when nations lower export restrictions or reduced import barriers in reaction to higher prices.

That second effect ensures that even when it may appear to each individual country that its policy action has been successful in suppressing its own rise in poverty, that success can turn out to be illusionary when many countries do the same. The illusion can result from comparing the rise in the food price domestically with the actual rise in international markets. What is relevant, though, is what the international price rise would have been had no countries altered their trade restrictions. Indeed, it has been shown that if both exporting and importing country groups happened to insulate to the same extent, domestic prices in both country groups would rise just as much as if no country had insulated (Martin and Anderson 2012, Anderson and Nelgen 2012).

In reality, however, countries intervened to different extents, so that the impact of price insulation on poverty in any one country depended on both the actions taken by that country and the collective impact of interventions by all other countries.

That is, the net effects on national and global poverty of such domestic market-insulating actions could be favourable or unfavourable. On the one hand, if countries where the poor are most adversely affected by higher food prices insulate more than countries where the poor are less vulnerable to, or would benefit from food price spikes, it is possible that such insulation would reduce the number of people driven into poverty. A related possibility is that, if countries where producers and consumers are better able to deal domestically with such shocks transmit a larger portion of the increase in international food prices to their domestic markets, the adverse global poverty impact of the original shock will be less (Timmer 2010).

On the other hand, a more pessimistic possibility is that many of the countries that insulate against shocks to international food prices are countries for which the impacts on domestic poverty of higher food prices are minor or even pro-poor – where many poor people are net sellers of food staples. High-income countries, for example, are well placed to absorb price shocks. This is because of the small shares of farm produce in the expenditures of their consumers, their producers’ access to risk management tools such as futures and options markets, and their relatively well-developed social safety nets. Even so, some high-income countries continue to use insulating policy instruments such as variable import levies, or even just specific tariffs whose ad valorem equivalent varies inversely with the border price. Another example of this possibility is where large, poor, food-importing countries – for which insulation is more expensive because it turns their terms of trade against them – insulate less than would a small but otherwise similar country, and hence may not avoid adverse poverty outcomes because of inadequate domestic social safety nets.

Trade restrictions can affect poverty levels

It is clear from these examples that, other things equal, alterations in trade restrictions could increase or reduce the national and global poverty impacts of higher international prices. Only by looking at data on the changes in agricultural distortions during periods of rapid increases in international food prices, and estimating the impacts of consequent domestic price changes on poverty in different countries, is it possible to ascertain the net effects on national and global poverty.

New research

In a recent paper (Anderson, Ivanic and Martin 2013) we do so by first looking at data on the consumption patterns and income sources of low-income households in a sample of thirty developing countries, where three-quarters of the world’s poor live, in order to assess which commodities are likely to be important in affecting poverty through changes in their commodity prices. We then provide new estimates of agricultural price distortions to assess the extent to which countries insulated their domestic market from the changes in international food prices during 2006-08. We use a simple model to compare the actual changes in domestic prices with those that would have occurred in the absence of price-insulating policies. These price scenarios are then used to assess the impacts of food price changes on poverty both with – and in the absence of – price-insulating policy behaviour.

This approach allows us to make a much broader assessment of the impacts of price-insulating behaviour on national and global poverty than has previously been available. We find that market-insulating actions added substantially to the spike in international prices for rice, wheat, maize and oilseeds. As a result, while domestic prices rose less than they would have without insulation in some developing countries, in many other countries they rose more than had there been no such insulation.

The study finds that the actual poverty-reducing impact of insulation is much less than its apparent impact. If the impact of policy actions on international prices is ignored, we estimate that 82 million people would have been saved from falling into poverty net of those net sellers of food who would have been lifted out of poverty. However, when the impact of policy actions on international prices is taken into account – as it needs to be – the net effect on world poverty in 2008 is negligible. The biggest difference is in South Asia: the number saved falls from almost 70 million to virtually zero in that region once international price effects are properly accounted for.

Figure 2. Poverty effects of countries insulating themselves from the 2006-08 spike in international food prices

Source: Anderson, Ivanic and Martin (2013).

Policy implications

Since there are domestic policy instruments such as conditional cash transfers that could now provide social protection for the poor far more efficiently and equitably than variations in border restrictions, we suggest it is time to seek a multilateral agreement to desist from changing restrictions on trade when international food prices spike, and to focus on measures that can actually reduce – rather than merely rearrange – the impacts of high food prices on the poor.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.

References

Anderson, K, M Ivanic and W Martin (2013), “Food Price Spikes, Price Insulation, and Poverty”, CEPR Discussion Paper 9555 July.

Anderson, K and S Nelgen (2012), “Agricultural Trade Distortions During the Global Financial Crisis”, Oxford Review of Economic Policy 28(2), 235-60, CEPR Discussion Paper 9086, August.

Martin, W and K Anderson (2012), “Export Restrictions and Price Insulation During Commodity Price Booms”, American Journal of Agricultural Economics 94(2), 422-27, CEPR Discussion Paper 8494, July.

Timmer, C P (2010), “Reflections on Past Food Prices” Food Policy 35, 1–11.

Rocha, Nadia, Paolo Giordani and Michele Ruta (2012), “Export policy and food price escalation”, VoxEU.org, 9 May.

Topics: Development, International trade
Tags: food prices, Poverty, trade policy

George Gollin Professor of Economics and Foundation Executive Director of the Centre for International Economic Studies (CIES) at the University of Adelaide and CEPR Research Fellow

Consultant with the Trade Department of the Development Economics Research Group, World Bank

Research Manager, Agriculture and Rural Development, The World Bank