Food Prices and Poverty

Dani Rodrik wrote a blog post about whether high food prices are good or bad for the poor in developing countries. He points out that international organizations – Oxfam as well as World Bank – describe high or low food prices as bad for the poor, dependent on the situation in the food markets. When prices were low, for example in 2005, Oxfam wrote that this is bad for the poor peasants because the markets are flooded with highly subsidized agricultural products especially from Europe. 3 years later, when prices were high, the same organization wrote that this is bad for the poor in urban areas because they can’t afford to buy the food they need.

In my opinion, Rodrik is right in some way, but he oversimplifies the problem. Of course, while high food prices are bad for those who don’t produce it and must therefore buy it in the marketplace, low prices are bad for food producers because they cannot cover their costs. And therefore it is not really inconsequent to name both a problem. As Rodrik himself notes,

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.

But, the two are in balance only within a particular band of price levels. If you consider the flooding of developing countries markets with subsidized food, the prices forced by this are below that band – the harm to peasants is greater than the benefit enjoyed by food buyers. On the other hand, if you remember the heights reached by prices of agricultural products in 2008, you will know that it was the opposite – they were thus high that the harm to the urban poor outweighed the benefit to the peasants.

Furthermore there is the problem of who gets the money when prices are high (and when they are low as well)? It often are not the poor peasants in the countries considered, but large multinationals who can deal (and benefit) with both. As one of the comments (written by this blogger) of the post goes:

You have to go deeper than this to get a sense of what’s going on. Food prices are higher, yes. But that doesn’t mean farmers’ profits are higher. Increased costs of diesel fuel, fertilizer, pesticides, herbicides, seeds, transportation, increased volatility from flooding, drought, monetary instability, and decreased yields from soil degradation are all contributing to put the hurt on farmers around the world, and will continue to do so for the foreseeable future. Frankly, farmers (and small farmers in particular) lack the market position to increase their profit margin, despite increased revenues, as they face enormous pricing pressure from large distributors.

Thus, in spite of my great reverence towards Mr Rodrik, I think, in this case he presented a problem not really existent in the form described by him. Food markets aren’t that simple.

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