Income Distribution Effects of Food Prices Increases. Trade and Pro-Poor Growth Thematic Working Group. Dr. I. Mogotsi.

Transcription

1 Trade and Pro-Poor Growth Thematic Working Group Income Distribution Effects of Food Prices Increases Dr. I. Mogotsi December 2009 indigenous growth

2 1. INTRODUCTION Over the past 2 3 years: , the world experienced a hiking of food prices. Prices of the basic commodities like maize, sugar rice, beef etc rose by as much as 100% or even more in some cases. Figures 1 4 below present the peak and trough price of some of these food prices for selected SACU countries. These are compared with world prices, as proxied by prices in the major world producing countries for those commodities, such as Thailand for rice, Australia for beef, USA for maize etc. As indicated by Fig 1, world beef prices increased by about 100%, although for the SACU countries, the increase was less, ranging from 28% for Botswana to 63% for Namibia. Similarly, for poultry, the world prices as proxied by Brazilian prices, increased by more than 100%, from R7.4 R20.39, while in the SACU countries, poultry prices rose by 31% (Botswana), 38% (South Africa, 50% (Namibia) (Fig 2). However, for the grains, we see a mixed bag, with world price for rice increasing by 211% in Thailand, as compared to 345% for Swaziland and 88% for South Africa. Botswana had the lowest price increase, from R per kg, (5.6%) (Fig.3).

3 In terms of maize, which is the most staple food commodity in the SACU region, especially for the low income households, the price increase was more than 200% in the USA, but in the SACU countries, it increased by slightly more than 100% in Botswana, but in Namibia the increase was only 28%, while South Africa saw maize prices increasing by about 50% (Fig 4). From the above, clearly the domestic prices seem to be influenced very little by world prices. A possible explanation is that these commodities are, by and large, non tradable commodities: most of these commodities are produced domestically, at least within the region, and therefore the influence of world prices may be minimal e.g. maize, beef, poultry. However, some commodities that constitute a sizeable proportion of total expenditure of households, such as wheat (for bread) and rice, are imported. It is, therefore, expected that prices of these commodities would be affected by world prices.

4 When prices increase, the impact on consumers may be different for the poor vis à vis the non poor. Depending on how the different income groups perceive of the commodity: whether it is a necessity or not, price increases may have a very big impact on the poor substantially more than the non poor. This section therefore attempts to estimate the impact of the price increases of some of the basic consumer food items on the different income groups in the SACU region. The commodities examined are: (i) Maize; (ii) Sorghum; (iii) Rice; (iv) Sugar; (v) wheat; (vi) Beef; and (vii) Poultry. 2. METHODOLOGY In estimating the impact of price increases on the poor, we estimated the change in quantity demanded as a result of the change in price. This is done by using past studies on estimated own price elasticity of demand for the different commodities, for South Africa. A comparison of these impacts on the low income households is made with the middle and the high income households. For all the countries, low income households are taken as the first 3 income deciles, the middle income are the next 3 deciles and the high income group is made up of the last 4 income deciles. It is expected that the low income/poor households consume proportionately more of their income on the staple food items such as Maize, Sorghum than the non poor (the middle and high income households). More than that, it is expected that their relative responsiveness to price changes of these basic food items is lower than that of the non poor i.e. their price elasticity of demand for these food items is lower (they are price inelastic). This is because they cannot afford any alternative food items, therefore, even when prices increase, they do not cut their consumption by much (they may even increase their consumption of a commodity as its price rises a case of Giffen goods). We estimate the impact of the price increases on the low income versus middle and high income households, by estimating the loss of consumer surplus. 1 1 Consumer surplus estimated as the area under the demand curve, between the two prices.

5 2.1 Limitations of this Study A major limitation of this study is lack of data. In some countries, expenditure of the basic food items is categorized as Cereals instead of disaggregated into Maize, Sorghum, Rice etc. The problem here is that, some of the cereals are basic commodities, such as maize and sorghum, and these are expected to have low price elasticities, while others are luxury commodities, such as rice. To lump them together as cereals may not give an accurate picture of the impact of these food items on the poor in particular. Nevertheless, the analysis below does give an indication of how price increases have impacted on the poor. In particular, the analysis does separate for the different income groups: the low, the medium and the high income households. 3. EFFECT OF PRICE INCREASES ON THE LOW VERSUS MIDDLE AND HIGH INCOME HOUSEHOLDS IN SACU COUNTRIES The analysis below discusses the impact of the price increases on the low income households versus the middle and high income households. The source of the price increase could be international price increases, tariff increases, domestic issues such as those of market structures etc. The important issue here is the effect of these price increases on the low income households. For each of the SACU countries, for lack of data we adopt the price elasticity of demand for South Africa for the different commodities. In other words, we assume that the cultures are similar in these countries, especially amongst the poor households; that they consume the same basic commodities, and that they respond to price changes in similar patterns. Own price elasticities obtained from previous studies carried out on consumer demand in South Africa are presented by Table 1 below. Table 1 : Own Price Elasticities of Demand Food Item Entire sample Rice * Sorghum Maize Beef * Poultry * Sugar * Wheat Sources: *Bopape and Myers (2007), Analysis of Household Demand for Food in South Africa; Model Selection, Expenditure Endogeneity and the Influence of Socio Demographic Effects. + Mabiso and Witherspoon (2008), Fuel and Food Trade offs; A Preliminary Analysis of South African Food Consumption Patterns. Because of problems of data availability (on price elasticities), we note the following: The own price elasticities of demand for rice was not available, therefore the Marshallian/uncompensated own price elasticity for grains was used as a proxy for this food item.

6 The own price elasticity of meat and fish was used as a proxy for that of beef as well as poultry. The own price elasticity of demand for bread was used as a proxy for wheat. Finally, since the price elasticity of demand for sorghum was not available in the study used, we used that of maize; because it is expected that maize and sorghum, being the staple diets for the low income households in the Southern African region, the latter would respond in more or less similar patterns whenever the prices of these commodities rise. In addition, we note that the price elasticities of demand for maize (and therefore sorghum) and wheat were only available for the total sample. These elasticities were therefore applied to all income groups. From Table 1, we observe that, as can be expected for the relatively more luxury type of food commodities (such as beef and poultry), price elasticity of demand declines with increase in income: in other words, the poor are relatively more responsive to price increase of the luxury commodities than the non poor. We also observe that maize and sorghum are price inelastic i.e. the elasticity is less than unity, which is according to expectation; these are basic commodities for the low income households, and therefore the poor households are expected to not alter their consumption of these commodities by much even when their prices rise. Even though for the other commodities the price elasticity is more than unity, we nevertheless note that these are not as high as was estimated in other studies (Bopape and Myers, 2007), and therefore this is considered a reasonable estimation of elasticities in South Africa. As stated above we adopt these for the rest of the SACU countries. Tables 2 6 below present the estimates for loss of consumer surplus for each commodity, each income group in each of the SACU countries. For some of the countries, we provide a summary of the assumptions made for that country. These were made because of data limitations, where therefore we had to extrapolate, which meant making some assumptions. It should be noted that the general assumptions that cover all the countries are stated above. Table 7 gives a summary of the total loss of consumer surplus for each of the income groups, aggregated for all the 7 commodities analyzed, for each of the countries. A. BOTSWANA Table 2: Loss of Consumer Surplus by Commodity and Income Group (Actual Prices ) Botswana Loss of Consumer Surplus (Rand per month) Rice 6,969, ,789, ,278, Sorghum 9,707, ,676, ,728, Maize 23,972, ,127, ,306,789.88

7 Beef 6,706, ,013, ,880, Poultry 2,358, ,703, ,472, White Sugar 4,000, ,781, , Wheat flour 7,531, ,139, ,754, Total loss of Consumer Surplus 61,246, ,230, ,035, Total loss as % of total spending As can be seen from Table 2, for the poor households, loss of consumer surplus is highest for maize, followed by sorghum. This is as expected, since maize and sorghum are the most popular staple food commodities for the poor. For the high income group, the loss of consumer surplus is relatively low for these 2 food items, and relatively high for beef and poultry. This indicates maize and sorghum as inferior goods in Botswana. B. LESOTHO Table 3: Loss of Consumer Surplus by Commodity and Income Group (Actual Prices ) Lesotho Loss of Consumer Surplus (Rand per month) Rice 38, , , Sorghum 40, , , Maize 1,712, ,610, ,316, Beef 12, , , Poultry 223, , ,326, White Sugar 28, , , Wheat flour 273, , , Total loss of Consumer Surplus 2,328, ,007, ,011, Total loss as % of total spending Again, as for Botswana, we see loss of consumer surplus for the poor highest for maize, but unlike in Botswana, it is relatively low for sorghum. But an interesting aspect emerges for Lesotho: that loss of consumer surplus rises with a rise in income, for all commodities. This indicates that all commodities are normal in Lesotho, in particular, that maize and sorghum are not inferior commodities. Nevertheless, loss of consumer surplus as a result of the rise in food prices is high as a proportion of total spending for the poor as compared to the non poor.

8 C. NAMIBIA Table 4: Loss of Consumer Surplus by Commodity and Income Group (Actual Prices ) Namibia Loss of consumer surplus (Rand per month) National Urban Rural Rice 51,114, ,256, ,779, Sorghum 4,842, ,609, ,426, Maize 9,858, ,070, ,050, Beef 17,536, ,862, ,022, Poultry 108,663, ,139, ,148, White Sugar 61,432, ,724, ,400, Wheat flour 61,016, ,448, ,559, Total loss in Consumer Surplus 314,464, ,111, ,387, Total loss as % of total spending (a) Namibia had no expenditure data for poultry; instead the data was on meat. The assumption therefore is that: Meat includes beef as well as poultry. The ratio of poultry to beef consumption in South Africa is similar to that in Namibia. Therefore, that ratio is used to separate meat into beef and poultry, for Namibia. 2 (b) Namibia also had no disaggregated expenditure data for Sorghum/Maize/Rice/Bread; instead the data was for Cereals and Bread. Therefore, we took the proportion of expenditure on each of these individual commodities in South Africa, to total expenditure of all the 7 commodities analyzed in this study, to estimate the expenditure in Namibia for each of these commodities. In summary, the assumption made here is that the propensity to consume each of these food items in Namibia is similar to that in South Africa. This is done for each of the income groups separately; in other words, if for example, bread takes 10% of total consumption for the low income group in South Africa, the assumption is that this is the same in Namibia. 2 For example, if beef consumption in South Africa was found to be X Rands, and poultry was Y Rands, and expenditure on Meat in Namibia was Z Rands, then the estimation of Poultry consumption in Namibia was made as = X/(X+Y).Z.

9 D. SOUTH AFRICA Table 5: Loss of Consumer Surplus by Commodity and Income Group (Actual Prices ) South Africa Loss In Consumer Surplus (Rand per month) Rice 119,741, ,003, ,966, Sorghum 9,711, ,871, ,043, Maize 1,828,179, ,812,084, ,249,340, Beef 230,443, ,320, ,289,940, Poultry 661,687, ,024,884, ,642,399, White Sugar 23,280, ,976, ,710, Bread flour 82,023, ,092, ,112, Total loss in Consumer Surplus 2,955,067, ,537,234, ,430,513, Total loss as % of total spending As with Botswana, in South Africa loss of consumer surplus is highest for maize. Again, this shows maize as the most popular food item, and consumers are adversely affected the most when its price increases. E. SWAZILAND Table 6: Loss of Consumer Surplus by Commodity and Income Group (Actual Prices ) Swaziland Loss In Consumer Surplus ( Rand per month) Rice 1,230, ,561, ,776, Sorghum 99, , , Maize 18,779, ,614, ,833, Beef 2,367, ,286, ,250, Poultry 6,797, ,527, ,871, White Sugar 239, , , Bread flour 842, , , Total loss of Consumer 30,355, ,335, ,511, Surplus Total loss as % of total spending

10 Expenditure data for Swaziland was not available. The extrapolation made here, again used South African data. We took the GDP for Swaziland, as a proportion of that of South Africa (which was roughly 1%). That proportion was used to estimate the expenditure for each of the commodities, for each of the income groups in Swaziland. 3 The assumption here is that: Swaziland consumption patterns are similar to those of South Africa, such that if in South Africa, the low income group consumed X% of their total income on bread, in Swaziland it would be the same. In other words, again we assume similar average propensity to consume in Swaziland as in South Africa. Because of these assumptions, loss of consumer surplus for Swaziland is seen to be directly proportional to that of South Africa. Table 7 below presents the total loss of consumer surplus for the SACU countries, for the income groups. Table 7: Total Loss of Consumer Surplus (Actual Prices ) SACU Total Loss of Consumer Surplus (Rand per month) Botswana 61,246, ,230, ,035, Lesotho 2,328, ,007, ,011, Namibia 314,464, ,111, ,387, Swaziland 30,355, ,335, ,511, South Africa 2,955,067, ,537,234, ,430,513, EFFECT OF PRICE SHOCKS ON THE LOW VERSUS MIDDLE AND HIGH INCOME HOUSEHOLDS IN SACU COUNTRIES Having examined the loss of consumer surplus as a result of the actual price increases of food prices, which means a loss of consumer surplus in nominal terms, we attempt in this section to isolate the effect of the shock from that of a normal price increase. This is done by estimating the difference between the price that would have been, in 2008, without the shock, and the actual price, with the shock. The price that would have been, that we can refer to as the normal price for 2008, was obtained by using the average inflation rate for each of these countries between , which was lower than the inflation rate for 2008, on the actual price in 2006 and 2007, to get to the normal 2008 price. Out of that, we estimate the loss of 3 For example, with Swaziland GDP at 1% of that of South Africa, this was used to say if total expenditure on bread was XRands in South Africa, then it will be 1% of that XRands for Swaziland, for that particular income group.

11 consumer surplus for the price difference between the normal 2008 price and the actual 2008 price. This gives the loss of consumer surplus arising purely from the shock. As can be see from Table 8 below, there does seem to have been a shock in average consumer prices in 2008, as compared to before and after. Table 8. Consumer Prices (Annual average, percent change) Botswana Lesotho Namibia South Africa Swaziland SACU SADC Source: IMF, The results of this separation of the effect of the price shock on consumer surplus are presented by Tables 9 to 13 below. Table 14 gives the summary of loss of consumer surplus, for all commodities taken together for each country. The loss of consumer surplus is expected to be positive, which means that the average inflation rate, which gives the normal 2008 price, is lower than the actual 2008 price. But a negative loss of consumer surplus would mean that the actual 2008 prices for the commodities studied here were lower than the normal prices, when we use the average inflation rates as presented here to inflate the prices of those commodities. The latter cases are rare, as can be seen from the Tables 9 13 below. Loss of consumer surplus is found to be negative for sugar in all countries except in Namibia where it was positive. This is because, although actual sugar prices did rise in 2008, the rise was less than when we use a price that is adjusted for the average inflation rate. In other words, it means that the actual price increase was less than the average inflation over the 2 year period from Wheat is another commodity that showed a negative loss of consumer surplus, but only for Lesotho, for the same explanation as for the sugar case.

12 F. BOTSWANA Table 9: Loss of Consumer Surplus (Actual vs Normal 2008 Prices) Botswana Loss in CS Low Income Middle income High Income Rice 2,895, ,868, ,330, Sorghum meal 5,414, ,396, , Maize meal 12,133, ,162, ,673, Beef, veal 2,182, ,567, ,269, Chicken 156, , , Sugar 4,193, ,914, , Wheat flour 3,336, ,555, , Total Loss in CS 21,924, ,147, ,559, Total loss as % of total spending What we notice for Botswana is that the loss of consumer surplus is more, in relative terms, for the low income group, as compared to the middle and high income group. In other words, as a proportion of the total spending by that income group, it is highest for the low income group, at 10%. We note again that the loss of consumer surplus is highest for maize, followed by sorghum, and that it declines for those food items for the higher income groups. This is as we saw when using nominal prices (Table 2 above) G. LESOTHO Table 10: Loss of Consumer Surplus (Actual vs Normal 2008 Prices) Lesotho Loss in CS Rice 1, , , Sorghum 2, , , Maize 674, ,028, ,700, Beef 7, , , Poultry 119, , , Wheat 173, , , Sugar 87, , , TOTAL 719, ,096, ,773, Loss as % of total spending

13 A similar situation is found for Lesotho as for Botswana: the loss of consumer surplus is proportionally highest for the low income group, as compared to the middle and high income groups. This means that the poor were more hard hit by the price increases, relative to the non poor. Again, we see that maize has the highest loss of consumer surplus, and that it rises with a rise in income. Again, it can be argued that maize is not an inferior commodity in Lesotho, unlike in all the other countries of the SACU region. H. NAMIBIA Table 11: Loss of Consumer Surplus (Actual vs Normal 2008 Prices) Namibia Loss in CS Food item Total Urban Rural Rice 15,770, ,316, ,178, Sorghum meal 2,767, , ,772, Maize 6,587, ,784, ,935, Beef, veal 7,139, ,714, ,690, Chicken 61,153, ,544, ,991, Sugar 35,067, ,675, ,701, Bread flour 31,758, ,900, ,178, TOTAL LOSS OF CS 160,243, ,769, ,450, Loss as % of total spending Again, we see a relatively greater impact of the price increase on the low income group relative to the middle and high income group. Unlike with the other countries in the region, in the case of Namibia we see maize having a relatively lower loss of consumer surplus that the other commodities except sorghum. I. SOUTH AFRICA Table 12: Loss of Consumer Surplus (Actual vs Normal 2008 Prices) South Africa Loss in CS Rice 68,635, ,956, ,395, Sorghum 6,237, ,982, ,239, Maize 1,368,029, ,355,985, ,883, Beef and veal 135,887, ,097, ,335,400.77

14 Poultry 385,912, ,377, ,984, White sugar 36,597, ,101, ,697, Bread flour 48,480, ,683, ,298, TOTAL 1,976,584, ,302,980, ,754,439, Loss as % of total spending J. SWAZILAND Table 13: Loss of Consumer Surplus (Actual vs Normal 2008 Prices) Swaziland Loss in CS Rice 553, , , Sorghum 52, , , Maize 13,448, ,330, ,190, Beef 1,295, ,355, ,341, Poultry 3,691, ,742, ,285, White Sugar 617, , , Bread flour 468, , , TOTAL 18,892, ,902, ,075, Loss as % of total spending The loss of consumer surplus is, again, highest for maize meal for all the income groups in South Africa as well as Swaziland.. In summary, we can say that loss of consumer surplus was highest for maize meal, for all income groups, as compared to the other food items. Also that, except for Lesotho, it declined with increase in incomes, which may be interpreted to mean that the price increases hit hardest on the poor in their consumption of maize. With regard to the other commodities, loss of consumer surplus increased with increase in incomes, which is interpreted to mean that these are relatively normal goods, whose consumption increases with increase in incomes. Thus with the other commodities, all income groups are adversely affected by the price increases. Table 14: Total Loss of Consumer Surplus (Actual vs Normal 2008 Prices) SACU Total Loss of Consumer Surplus (Rand per month)

15 Botswana 21,924, ,147, ,559, Lesotho 719, ,096, ,773, Namibia 160,243, ,769, ,450, Swaziland 18,892, ,902, ,075, South Africa 1,976,584, ,302,980, ,754,439, Overall, all countries experienced a loss of consumer surplus as a result of the price shocks of 2008, even when we compare the actual 2008 prices with prices that would have prevailed, on average, using the average inflation rates for the respective countries. The loss is highest for maize, the staple food item for the majority of the people in the SAZCU region, especially for the poor. Because of maize as a prominent food item in the SACU region, the Appendix below is presented to show the quantities of maize consumed in each country, by each income group, in 2006 before the price shock, and after the price shock of Consumption of maize is taken to include most of the maize products: Maize, Maize meal, samp, mealie rice and corn flakes. Prevailing market prices were used to estimate from expenditures (HIES Reports) to quantities. Because of loss of volume when processing, for which it is estimated that every I kg of maize meal comes from 1.7 kg of maize, for all the maize products, except maize itself, we multiplied the quantity of the product by 1.7, to get to the amount of maize that was used to process that product. Table A1: MAIZE QUANTITIES CONSUMED 2006 TOTAL(KGS) TOTAL (tonnes) Botswana 15,098, ,157, ,082, ,339, , Lesotho 865, ,320, ,182, ,368, , Namibia 580, , , , South Africa 924,503, ,364, ,786, ,472,654, ,472, Swaziland 9,496, ,413, ,489, ,399, , Table A2: MAIZE QUANTITIES CONSUMED 2008 TOTAL(KGS) TOTAL (tonnes) Botswana 12,455, ,379, ,718, ,552, , Lesotho 616, , ,554, ,111, , Namibia 500, , , , South Africa 658,335, ,539, ,893, ,760,769, ,760, Swaziland 6,762, ,703, ,621, ,087, ,087.13

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