It seems that harvests are bad this year and that food prices have gone up. The effect of high food prices on poverty is not straightforward. Poor people do indeed spend a large proportion of their income on food, which means that increases in prices have a direct effect on their financial situation and can even cause hunger. On the other hand, many poor people make their living in agriculture. Higher prices can mean higher incomes for them. The poor are, however, increasingly urban poor, and for them higher food prices are entirely bad news. So it’s not crazy to blame poverty on rising food prices. According to the World Bank, food prices have pushed 44 million people into poverty in 2010-11.
The question is then: what’s causing these prices to rise? The weather is partly to blame – there has been an unprecedented drought in the United States and extremely dry weather conditions in Europe – but so are governments. Government promotion of biofuels, for instance, means that raw food materials are used for petrol alternatives and hence don’t go into food production. This lowers the supply of food and causes prices to rise. I’ve argued before that many make too much of this argument, but there is something to it. Land grabs can also become a problem when biofuels are subsidized or when rules mandate that x% of every litre of fuel sold should be biofuel. These land grabs for biofuel production result in displacement of local production for local consumption, impacting the income of both local producers and consumers: people have to buy the food that they would otherwise have grown, and they have to buy it from further away.
Some government policies designed to remedy the problem only make it worse. Governments that restrict exports of food in order to pump up supply and hence reduce prices – or in order to shield their national market against increasingly expensive imports – may end up pushing prices even higher. When farmers can’t export, their incentives to farm are affected. Result: supplies go down and prices rise even further.
What can be done? Well, inefficient or counterproductive policies should be halted. Biofuel mandates should be scrapped. And in countries with large proportions of poor people governments should offer insurance against drought or bad harvests as well as better safety nets.
More posts in this series are here.