Higher food prices can reduce poverty and stimulate growth in food production

The impact of food price spikes on poverty remains a contentious issue. While higher food prices disproportionately affect the poor due to their high food expenditure, many poor people also generate income from food production and marketing. Short-run simulation models often overlook these production and wage adjustments, potentially underestimating the positive effects of higher prices for poor producers. This study addresses this limitation by analyzing annual data on poverty rates, real food price changes, and food production growth in 33 middle-income countries from 2000 to 2019, using World Bank poverty measures. The research questions revolve around understanding the relationship between food price increases and poverty reduction, and whether this relationship differs across countries based on their level of urbanization or agricultural employment. The study's significance lies in its potential to inform policies aimed at mitigating the negative impacts of food price volatility and promoting sustainable poverty reduction strategies. The existing literature is divided; some studies solely focus on net food consumption, concluding that higher prices increase poverty, while others, including retrospective World Bank assessments, find that higher prices can reduce poverty in rural areas. This study aims to resolve this inconsistency by using a detailed analysis with a longer time frame and including the role of agricultural production responses to food price changes. The timeliness of this research is underscored by recent food crises in 2007-2008, 2010-2011, and 2021-2022, highlighting the continued need for a comprehensive understanding of the impact of food prices on global poverty.

Previous research on the impact of food price increases on poverty has yielded mixed results. Short-run simulation studies, often focusing solely on net food consumption, typically predict increased poverty due to reduced disposable income among the poor. These studies were influential during the 2007-2008 food crisis. However, these models largely ignore the income-generating potential of food production and marketing for poor households, particularly in rural areas. In contrast, some studies and retrospective national poverty assessments have found that higher food prices can reduce poverty, particularly in rural areas, due to induced agricultural supply responses and increased labor demand. These studies suggest that higher prices incentivize farmers to increase production, leading to higher demand for unskilled labor and increased wages, benefiting the poor involved in agriculture or related activities. A previous study examining rural India demonstrated how increased food prices stimulated a food supply response, raising labor demand and wages, thus offsetting the negative impacts of higher prices on net food consumers. Similarly, an economy-wide simulation model for Uganda reached similar conclusions. A cross-country panel data analysis also indicated that increases in domestic food prices predicted reductions in national poverty rates in developing countries over a 1-5 year timeframe. Methodological issues, such as underestimation of agricultural income and output due to limitations in data collection methods, have also been noted. These inconsistencies highlight the need for a more nuanced approach that considers both the consumption and production sides of the food economy.

This study employs a cross-country panel data analysis, examining the relationship between food prices, poverty, and food production across 33 middle-income countries (MICs) from 2000 to 2019. The key improvements over previous studies include: (1) using annual data to capture the short-run dynamics of food supply and wage responses; (2) modeling heterogeneous effects across countries by incorporating interaction terms between food price changes and urbanization or non-agricultural employment shares to account for differences in economic structures; and (3) providing an empirical investigation into the mechanism by which higher food prices might reduce poverty, focusing on the short-run agricultural supply response and its impact on labor demand and wages. The dependent variable is the annual change in the US$3.20-per-day poverty headcount. The key explanatory variable is the annual change in the ratio of the food CPI to the non-food CPI. The analysis uses panel regression techniques, including ordinary least squares (OLS) regression and first differencing to account for country-specific effects. Interaction terms with urbanization and the share of the labor force in the non-agricultural sector are included to capture the heterogeneous impacts across countries. Robustness checks are performed using alternative poverty measures, robust regression methods, and by controlling for various confounding factors. To explore potential mechanisms, the study also analyzes the relationship between changes in various measures of agricultural production (food production, agricultural GDP, crop production, and livestock production) and changes in the real domestic food price index using panel regressions. Data sources include the World Bank for poverty measures, the International Monetary Fund (IMF) and the Food and Agriculture Organization (FAO) for price indices, and FAOSTAT for agricultural production data. All data used are publicly available.

The main regression results demonstrate a negative association between changes in real food prices and changes in the US$3.20-per-day poverty headcount. Increases in real domestic food prices predict reductions in poverty, on average. However, this effect is conditional on the level of urbanization or agricultural employment. The beneficial impact of higher food prices on poverty reduction is attenuated or even reversed in countries with higher urban population shares or a lower share of employment in agriculture. In less urbanized and more agrarian economies, higher food prices are significantly associated with poverty reduction. For instance, a 5-percentage-point increase in food prices is associated with a 1.25-percentage-point reduction in poverty in the least urbanized countries. This relationship is also evident when using the poverty gap index as the dependent variable. The analysis of agricultural production reveals a positive and statistically significant relationship between changes in real food prices and changes in total food production and crop production, particularly for crop production. This indicates a strong short-run supply response to food price increases, mainly driven by crop production, supporting the mechanism of increased labor demand and wage increases. The relationship is less pronounced for total agricultural GDP and is not significant for livestock production. Sensitivity analyses show that the main findings are robust to the inclusion of confounding variables, the use of alternative poverty measures (US$1.90-per-day poverty headcount), and alternative regression techniques (robust regression and quantile regression). The results are also robust to the inclusion of potential confounding factors such as non-agricultural GDP growth, money supply changes, exchange rate fluctuations, terms of trade, and temperature changes.

The findings support the hypothesis that higher food prices can reduce poverty, but this effect is strongly conditioned by a country's level of urbanization and agricultural employment. The results suggest that the benefits of higher food prices on poverty reduction are primarily concentrated in less urbanized and more agrarian economies where a substantial portion of the population is directly or indirectly involved in food production. The observed negative association between food price increases and poverty in these settings can be explained by the stimulation of short-run agricultural supply responses. Higher prices incentivize farmers to increase production, leading to increased demand for unskilled labor and higher wages, thus benefiting poor rural households. These findings challenge the conventional wisdom that higher food prices inevitably lead to increased poverty and suggest a more nuanced relationship shaped by the economic structure and the role of agriculture in generating income for poor households. This underscores the importance of considering the production side of the food economy when evaluating the impact of food price shocks on poverty. The study's results contribute to the ongoing debate on the effects of food price volatility, offering valuable insights for policy formulation aimed at mitigating the adverse impacts of food price shocks and implementing targeted poverty reduction strategies. The findings also highlight the potential for policies that promote agricultural productivity and rural development to help reduce poverty.

This study provides strong evidence that higher food prices can reduce poverty, particularly in less urbanized, more agrarian middle-income countries. The key mechanism appears to be the stimulation of short-run agricultural supply responses, leading to increased labor demand and wages. The results challenge the common assumption that higher food prices are universally detrimental to the poor and underscore the importance of considering the heterogeneity of impacts across countries with differing economic structures. Future research should focus on disaggregated data on rural and urban poverty and income to provide more precise estimates and strengthen causal inference. Further investigation into the dynamics of wage adjustments, rural-urban income spillovers, and the role of government policies in influencing food production and prices would enhance our understanding of these complex interactions. The development of high-frequency monitoring systems for real wages could provide more timely insights into the impact of food price shocks on different segments of the population.

This study uses national-level data, hindering a direct examination of rural-urban differences in poverty and food price impacts. The reliance on aggregate data may mask heterogeneity within countries. While the study addresses potential confounders, the possibility of omitted variables influencing the relationship between food prices and poverty cannot be entirely ruled out. The analysis focuses primarily on the effects of food price increases, not fertilizer or fuel prices, which may also significantly impact poverty. The generalizability of findings to low-income countries and the specific context of recent food crises might be limited. Lastly, while the annual time frame allows for observation of supply and wage adjustments, high-frequency data would provide a more detailed picture of these dynamic responses.