Will Rising Food Prices Reduce Poverty? (They Can, but They Won’t)

At the opening of the UN Food Summit in Rome recently, UN Secretary General Ban Ki-Moon noted that food prices threaten to harm the world’s poorest. World Bank President Robert Zoellick—photographed for dramatic effect with a loaf of bread in one hand and a bag of rice in the other at the IMF-World Bank Spring Meetings—has suggested that food prices would set progress against poverty back seven years. Gloomy views like these are commonly heard in the offices of rich-country donors, namely, that recent rises in food prices will sharply increase poverty in the developing world. But lost amid all the talk of “food crisis” is the possibility that higher food prices may actually reduce poverty in the poorest areas of poor nations: the countryside.

Most generalizations about the effect of food prices on poverty fall apart when examined at the household level in developing countries, where several patterns are evident. First, urban households tend to have higher average incomes than rural households. Second, net buyers of food tend to be richer than net sellers of food. Third, net consumers of food in rural areas derive large shares of their income from farm work. A recent World Bank study shows that in Ethiopia, one of the most food-stressed countries on the planet, more than 50% of rural households (compared to about 4% of urban households) are net producers of food. In Vietnam, where more than 70% of the population is rural (and where 90% of rural residents own their own land) 57% of rural households vs. 9% of urban households are net food sellers. Of the poorest 40% of rural households in Vietnam, 56% are net producers.

These gaps imply that—all things being equal—a rise in food prices will transfer wealth from urban households to rural households and from higher-income food consumers to lower-income food producers. In other words, higher food prices may reduce the extreme poverty often found in rural areas, where about three-quarters of the world’s poorest live today. Depending on the concentration of rural and urban populations, higher food prices may also reduce income inequality in some countries.

Of course, don’t expect rural poverty or inequality to fall anytime soon. Governments in food-stressed countries, along with bilateral donors and international organizations are busy designing approaches to prevent this reversal of misfortune. Currently, the global alarm over food prices reflects a basic political axiom of most developing countries: urban groups have a far greater political voice than rural groups. Urban interest groups—manufacturers, laborers, and other urban consumers, rich and poor—are relatively small in poor countries and are, consequently, more easily mobilized. Meanwhile the subsistence farmers, small-holders, and landless peasants who constitute large portions of the population are much harder to organize. Add to this the fact that urban food buyers know exactly how much the rising cost of wheat or rice will affect their budgets, whereas food price effects on rural residents will be filtered through a number of unpredictable factors, including access to markets and demand for farm labor. In other words, rural food producers have a much foggier idea of how food prices are going benefit them. When potential losers know precisely how much they stand to lose, expect their voices to be the loudest. When those same potential losers also have a greater weight in their political system, expect governments to respond to their demands first. The results are familiar to anyone glancing at the headlines—food riots in the cities and a host of responses from price controls to export bans designed to mollify urban dwellers.

Rural areas in developing nations have long been discriminated against through a series of economic policies designed to transfer wealth to the cities. Policies that limit crop prices or that raise input costs for agriculture are among the clearest indicators of these distortions. Although in recent years the well-known “urban bias” in development has lessened—and the urban-rural gap has closed—some legacies of decades of pro-urban planning have left their imprint, mainly in the form of tax policies and public expenditures that favor cities at the expense of the countryside.

The richer donors, meanwhile, face an opposite distortion at home—a “rural” bias based on the protection of their agricultural sectors, and the subsidization of agricultural imports. An alliance of farm lobbies (who do no want to compete with developing-country farmers) and environmental groups (who oppose genetically-modified crops) in the US and the EU have effectively blocked foreign assistance that aims to boost agricultural productivity in the developing world. In the recent Starved for Science, Robert Paarlberg documents the gutting of agricultural assistance in the aid budgets of rich nations and international development banks over two decades. International organizations, too, act in concert with the interests of their stakeholder governments, both rich and poor. But where rich stakeholders shy away from long-term agricultural assistance while poor stakeholders demand short-term relief, the result is what we saw in Rome: lots of talk about hunger relief, food aid, and other remedies (that will disproportionately benefit urban centers), but few pledges to expand the yields or capacity of local growers.

None of this is to suggest that emergency food aid is unnecessary. National and international actors do need to take steps to limit the malnutrition and starvation that rising food prices will cause. But they also need to understand both the causes and consequences of their combined neglect of agricultural investment.