Rising Food Prices Hurt the Poor

April 20, 2011

Higher prices of foods mainly hurt the poor since poor countries and poorer families within a given country spend a much larger fraction of their incomes on foods than do the rich, says Gary S. Becker, a professor at the University of Chicago. 

  • For example, the share of national income spent on food is over 40 percent in India, compared to less than 15 percent in the United States.
  • If families were spending 40 percent of their income on food, a 30 percent increase in food prices would raise by 12 percent the income needed to maintain the same level of consumption of all goods.
  • By contrast, a family spending 15 percent of its income on food would only need a 4.5 percent increase in their income to maintain the same consumption.

This explains why the current rapid price increase in food and other commodities is causing great distress among poor families.  Governments often respond in ways that lower the cost of food to consumers, but usually at the expense of inducing inefficient behavior by farmers and consumers.

  • For example, during the current sharp run up in food prices, several food-exporting countries, have banned, or greatly restricted, the ability of farmers to export their produce.
  • This lowers the price of food to urban consumers in these countries, and thereby helps the urban poor; however, such bans reduce the prices received by poor farmers of these countries.
  • Many countries have also imposed retail price controls on foods that figure most prominently in the diets of lower income families; this reduces the incentives of farmers to grow more food since they cannot benefit from what would be higher prices, and thus increases the demand for food.
  • Higher demand for food means that price controls cause food rationing at both the retail and wholesale levels.
  • Another common policy is to subsidize staple products, such as bread and rice.

Direct income subsidies are probably the best way to reduce the suffering by poor families due to big increases in food prices.  An income subsidy approach has the advantage of allowing prices to be determined by the forces of supply and demand, says Becker.

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

 

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