Domestic food prices, undernourishment and policy implications

1. Domestic food prices, undernourishment and policy implications Hassan Zaman Lead Economist The World Bank March 2010

2. Structure • Trends in global and domestic food prices • Measuring the impact on undernourishment • Learning from the responses to the 2008 food crisis • Concluding thoughts

3. Global food prices on the rise • World Bank food benchmark index increased 23% Jan-Dec 09

4. Global food prices on the rise (cont.) Sugar prices rose 80% during this period (figure 2) and rice prices (Thai 5%) increased 9% in December 2009 alone. On the other hand global wheat and maize prices relatively stable

5. Domestic food prices Tracking domestic prices is important in order to provide early warnings about food crises. Regular monitoring is just as important (eg in Malawi in 2001, maize prices rose by 50% in one month following months of stability - signaled extent of food shortages) Domestic staple price increases in many countries greater than the rise in global grain prices (using FAO food price data in 58 countries). Localized factors – conflict, supply disruptions, weather – lead to divergence from global price trends especially in less integrated economies

6. Kenya maize prices compared with global prices

7. Domestic staple price increases (source‘Food Price Watch’ February 2010, World Bank)

8. Methodology for estimating nutritional impacts of food price increases (details in Tiwari and Zaman (2010) ‘The impact of economic shocks on global undernourishment’ Policy Research Working Paper 5215, The World Bank) • Estimate a calorie-income (Engel) relationship using a cross country panel data for which data on per capita income (WDI) and per capita calorie consumption (FAO) was available (83 countries over 8 years, 742 observations) 2. Use income distribution data to generate a cumulative distribution function (CDF) for per capita country for every country. 3. Determine the minimum daily calorie intake threshold below which an individual is deemed undernourished.

9. Methodology for estimating nutritional impacts of food price increases (cont.) 4. Using the Engel relationship, determine what the income requirement for the threshold calorie level is. 5. Using the CDF we work out what fraction of the population cannot afford this level of calories, and use population weights to derive regional estimates for undernourishment. 6. When prices increase, Engle curve shifts “down” or to the “right” (price change multiplied by price elasticity of calories).

11. Food price scenarios in 2008 and impact on undernourishment

12. Bottom line estimate…and methodological caveats Our preferred estimate relates to 35% price increase scenario (average food price change 2007-08) and partial pass-through of prices which implies 64 million more undernourished Caveats include (i) use of undernourishment as an indicator (ii) use of a single calorie price elasticity (iii) not knowing what a reasonable price pass through rate is.

13. Country specific impacts of changes in 2009 food prices on undernourishment (source: ‘Food Price Watch’ Poverty Reduction Group, The World Bank)

14. The financial crisis has affected household food security...evidence from a crisis-monitoring survey in Turkey (source: Human Development Division, ECA, World Bank)

15. Distribution of safety nets and food price policies during 2008 food crisis (source: Wodon and Zaman (2009) ‘Higher food prices in Sub-Saharan Africa: Poverty Impact and Policy Responses’, World Bank Research Observer)

16. Food price policies Subsidies – important to distinguish between universal subsidies which depress incentives and take up large share of budget vs. smaller subsidies targeted at vulnerable groups Stock management – professional management/oversight essential to minimize leakages, losses and market disruptions Tax cuts – fiscal and distributional implications Overall, significant scope for assistance in these areas during a ‘non-crisis’ period

17. Spending on Safety Nets is Modest (source Grosh et al 2009) Mean 1.7% of GDP; median 1.4% of GDP (n=72) For 1/2 of countries is about 1-2 % of GDP

18. Linking safety nets with the growth agenda • Growth angle necessary to mobilize political support for more domestic and external funding for safety nets • Growth pathways which need to be quantified include • Consumption multiplier impact e.g. foodstamps multiplier largest in US stimulus package (Zandi 2009) • Infrastructure creation (public works) • Human capital impact (CCTs) • Conflict reduction potential (eg programs for ex-soldiers)

19. Concluding thoughts • Global and domestic price trends of food staples can differ significantly; monitoring domestic staple prices essential. • Nutritional impacts will have irreversible consequences and hence direct interventions for children under 2, pregnant/lactating women needed as income growth won’t be sufficient (eg India). • 2008 food crisis policy instruments will be re-used so donors could assist in improving their implementation • Linking safety nets with growth strategy important to mobilize political support for expenditure reallocations and external resources