The Economics of Food Price Increases in Africa Adapted from a presentation by Shantayanan Devarajan and Delfin S. Go 1
I. The size of the external shock Nominal increase ranges from 72 to 103 percent since end 2006. The dollar weakening ameliorated the impact, but the real increase still ranges from 45 to 70 percent historical highs 350 300 250 Import price index of food in SSA Franc zone countries more affected by their imports of higher priced food wheat and rice Middle income hurt by the alignment of their currencies to the dollar 200 Nominal dollar price 150 100 Real index 50 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Land-locked, low income countries relatively less affected 2
II. Inflationary impact affected by Macroeconomic management Exchange rate management Fiscal policy (subsidies) Monetary policy Amount of pass-through of food prices determined by Relative importance of imported food in household budgets of urban and rural areas Substitution with non-traded food (e.g. cassava, yams etc.) 3
Macroeconomic management - African countries have achieved macro stabilization Inflation Pattern in Africa The regional inflation rate has fallen to less than 10% since 2002 Higher food and oil prices will test countries and threaten achievement Only one severe case of hyperinflation Zimbabwe But a number of countries are now experiencing a significant rise in inflation: Ethiopia, Burundi, Uganda, South Africa, Cameroon No. of Countries 50 45 40 35 30 25 20 15 10 5 0 5 4 3 6 6 4 6 6 4 7 7 3 4 2 2 2 5 2 2 4 5 2 0 3 3 3 5 1 3 3 5 12 2 7 7 9 6 11 8 5 5 10 21 20 20 20 18 20 21 22 1986 1987 1988 1989 8 4 10 17 1990 1991 1992 1993 1994 1995 1996 2 1 2 3 3 2 4 5 3 2 1 2 25 28 30 32 33 3 3 2 3 0 0 2 0 2 1 1 2 1 1 5 2 3 9 7 12 10 9 4 36 32 34 31 32 33 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 4 >50% 31~50% 21~30% 11~20% <=10%
III. Terms of trade shock: Rising commodity prices have generally been beneficial to SSA s terms of trade up to 2007 Commodity and oil prices (Price indices, 2000=100) Terms of Trade Index in SSA 1973-1980 and 1999-2006 (1973, 1999 = 100) 350 300 250 200 150 100 50 Metals and minerals Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 160.0 150.0 140.0 130.0 120.0 110.0 100.0 Oil 90.0 80.0 70.0 Agriculture 60.0 1974 2000 1975 2001 1976 2002 1999-2006 1977 2003 1978 2004 1973-1980 1979 2005 1980 2006 5
Potential vs. actual terms of trade impact will likely differ across countries Potential TOT impact given trade quantities shows some countries could be affected adversely. TOT shock for many countries migitated by overall buoyant commodity prices: for example, higher fuel and food prices in Ghana offset by higher prices for cocoa and for gold. Some countries: eg. Lesotho, Ethiopia having difficulty meeting import bills However, the actual impact will likely differ given financing constraint trade quantities will change, Substitution from cheaper alternatives, and the real exchange rate will likely adjust 6
IV. Impact on the poor : Possible channels and issues Consumption channels Cost of same basket more because of higher prices Food is over 50 percent of consumption of poor households In rural areas, impact is dampened for households with ownproduced food Substitution between traded and non-traded food will affect outcome Production channels Income gains from selling food at higher prices, especially in rural areas Wage gains in agriculture sector & for unskilled labor Supply response in agriculture will also add to income 7
IV. Impact on the poor: Some facts Household food budget share averages 55% in 23 African countries The share is higher in rural areas, low income, countries, and lowest income quintile Highest national food budget shares in Burundi, DRC, Niger, Tanzania, Zambia, Kenya, Cameroon, Madagascar Share of Food Expenditure in Household Budget of 23 African Countries (%) National Rural Urban Q1 Q5 Ave of 23 African Countries 55 61 48 63 48 Income Level Low Income Countries 59 64 50 67 52 Middle Income Countries 45 54 42 51 38 Degree of Urbanization Low Urbanization 61 65 48 68 54 Medium Urbanization 60 66 54 67 52 High Urbanization 49 56 45 56 42 Region East 64 71 46 73 56 West 53 60 47 62 46 South 57 62 51 66 49 Central 50 55 49 50 45 Source: Household Expenditure Survey Database, Africa Region, The World Bank 8
Poverty Impact May be Sizable A 50% increase in selected food prices will increase poverty by 1 to 8 percentage points depending on the combined consumption and production effects based on projections prepared by Quentin Wodon Countries with potentially large impact on poverty include Niger, Liberia, Mali, and DRC Higher costs of food also limits availability of emergency assistance 9
IV. Impact on the poor: Additional facet Issue is more than food prices: Food prices index in May: 275 (2000=100) Fuel price index: 425 Fertilizer index: 490 Increase is both large and rapid Jan-Dec 2006 First half 2008 Urea 223 434 Phosphate 44 288 Potassium 174 420 10
Implication for Subsistence Farmers Net food purchaser might need income support (at least until wages adjust) Net producer may need increased credit but can recoup cost with high prices of output Subsistence farmer that achieves that state with, say, one bag of DAP on one hectare will be hard pressed to stay at subsistence Some subsistence farmers, however, use few inputs; they may be relatively unaffected in short run but overall development path might have to adjust to current prices 11
Increasing world prices for food and fuel present a range of policy challenges Not passing through price increases is undesirable on fiscal and efficiency grounds Passing through price increase is undesirable on equity grounds High return to developing a targeted social safety net: serves to address climate variability as well The policy challenge in short-term in lowincome countries is to compensate for absence of safety net and targeting capability 12
V. Policy Responses Trade policies Export restrictions and taxes ( beggar thy neighbor ) aggravate price increases elsewhere, encourage smuggling, and lower returns to domestic farmers Lowering import tariffs may provide temporary relief to consumers, but also lower fiscal revenues Agricultural policies Government policies and regulations may hamper supply response Transport and other infrastructure bottlenecks Higher costs of fertilizer and seeds Social protection policies Which targeted social assistance programs can be scaled up? Fiscal policies How to protect the poor without jeopardizing macroeconomic stability Price controls can be counterproductive (create shortages) Untargeted consumer subsidies can be fiscally costly 13
Concluding remarks Africa s decade-long resumption of growth and poverty reduction is threatened by the sharp increase in food prices Higher inflation undermines macroeconomic stability Terms-of-trade shock could slow economic growth High budget shares of food means poverty will increase But: Inflationary pressures in only a handful of countries Terms-of-trade shock can be managed, especially since overall terms of trade are rising for many countries Impact on the poor can be contained by expanding targeted social assistance programs and avoiding counterproductive policies such as price controls and export restrictions And: High food prices are an opportunity for African farmers, provided their producer prices rise and some of the constraints facing them, such as infrastructure and access to fertilizers and seeds, are relaxed 14