What can (and shouldn’t) be done about rising food prices in developing countries

Nobel Prize winning economist Gary Becker offers his views on what can and shouldn’t be done to address rising food prices in developing countries. As the world economy recovers from the Great Recession, food prices have increased to levels higher than prior to the financial crisis. Governments in poor developing countries responded with a range of interventions in order to lower the cost of food to consumers but Prof Becker notes that these interventions usually came, “…at the expense of inducing inefficient behaviour by farmers and consumers, and often even at the expense of the poor.”

Some countries such as Russia and Ukraine responded by banning food exports. However, Prof Becker notes, “[Although] this lowers the price of food to urban consumers in these countries, and thereby helps the urban poor…such bans reduce the prices received by poor farmers of these countries. This reduces their incentives to raise their production of food, and makes these farmers worse off. It also raises the cost of food to families in food-importing countries, and thereby hurts the poor in these countries.”

Other countries such as China introduced price controls on foods that the poor typically purchase. However, Prof Becker states that price controls are likely to hurt the majority of poorer families because, “…price controls on food prices reduce the incentives of farmers to grow more food since they cannot benefit from what would be higher prices. Artificially lower food prices not only discourage food production but also increase the demand for food. The resulting excess demand for food means that price controls cause food rationing at both the retail and wholesale levels. Richer families tend to gain from this rationing compared to poorer families since they can offer “under the table” payments and other inducements to retailers to give them a disproportionate amount of the limited available food”.

Another favourite common policy intervention is to provide subsidies for specifically targeted foods such as bread, rice etc. Apart from also subsiding middle income and rich households Becker notes that one of the weaknesses of subsidising specific foods is that, “… they discourage any efforts by consumers to shift some of their food purchases away from bread and other staples that would be rising a lot in prices without these subsidies, and toward other foods that would increase by smaller amounts”.

Finally Becker proposes direct income subsidies as a potential measure to reduce the suffering by poor families facing rising food costs. He states, “If families below a specified poverty income level received an income supplement, then this level should be indexed to the cost of living by poor families. Especially in poorer nations this means indexing definitions of poverty to the cost of food. An income subsidy approach has the advantage of allowing prices of foods and other goods to be determined by the forces of supply and demand. As a result, it encourages famers to grow more food when food prices rise, and also encourages poor (and other) consumers to reallocate their spending away from foods that rise most in price, and toward other foods and consumer goods.”

Source: Gary Becker How to (and not to) Help Poor Families in Developing Countries Cope with Rising Food Prices The Becker-Posner Blog, 17 April, 2011

For text: http://www.becker-posner-blog.com/2011/04/how-to-and-not-to-help-poor-families-in-developing-countries-cope-with-rising-food-prices-becker.html

First published by The Becker-Posner Blog

FMF Policy Bulletin/ 19 April 2011
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