Food price inflation and poverty in South Asia

A new ADB study (Global Food Price Inflation and Developing Asia) finds that a 10% rise in domestic food prices in developing Asia, home to 3.3 billion people, could push an additional 64 million people into extreme poverty based on the $1.25 a day poverty line. Also, if the global food and oil price hikes seen in early 2011 persist for the remainder of the year, economic growth in the region could be reduced by up to 1.5 percentage points.

The report estimates that a 10%, 20% and 30% increase in food prices would increase percentage of poor by 2.0, 4.1, and 6.1 percentage points respectively in Nepal. This translates into 0.55, 1.10, and 1.65 million people respectively. This calculation is based on food price elasticity of poverty. To address food insecurity, the Nepali government has planned to import 100,000 tons of rice (to be financed by WFP) and is releasing 30,000 tons of rice allocated for food deficit mid-and far-western regions. It is also subsidizing food prices at government depots.

The table shows corresponding figures for the other countries in South Asia (excluding Afghanistan and Maldives). It looks like rural India would have the largest impact of food price inflation on poverty. Sri Lanka faces the least impact (among South Asian countries) by food price inflation.

Food prices and poverty (USD 1.25-a-day poverty line) in South Asia
ADB 2011 estimate	Change in percentage of poor (in percentage points) with an increase in food prices by			Change in number of poor (in millions) with an increase in food prices by
	10%	20%	30%	10%	20%	30%
Bangladesh	2.5	5	7.5	3.83	7.65	11.48
Bhutan	1.8	3.5	5.3	0.01	0.02	0.03
India—Rural	2.9	5.8	8.8	22.82	45.64	68.45
India—Urban	2.1	4.3	6.4	6.68	13.36	20.04
Nepal	2	4.1	6.1	0.55	1.1	1.65
Pakistan	2.2	4.5	6.7	3.47	6.94	10.41
Sri Lanka	1.2	2.4	3.6	0.24	0.47	0.71

The report notes that production shortfalls caused by bad weather along with the weak US dollar, high oil prices and subsequent export bans by several key food producing countries have caused much of the upward global price pressure since last June, with double digit increases seen in the price of wheat, corn, sugar, edible oils, dairy products and meat. Rice prices are likely to continue their uptrend as the effects of La Niña persist, prompting consumers to seek less costly and less nutritious substitutes. Persistent structural and cyclical factors such as rising demand for food from wealthier emerging economies, changing diets, competing uses for food grains, shrinking available agricultural land, and stagnant or declining crop yields, are also causing the upward pressure.

In the longer term, structural adjustments are needed to secure food supplies. These include measures to improve crop productivity, increased infrastructure investments (e.g. irrigation and food transport/storage), stronger market integration, and closer global/regional cooperation on food production and supplies. Countries should refrain from export bans on food items.

Meanwhile, a different study by Maros, Martin and Hassan (2011) of the WB found that the food price rise of 2010-11 led to an average poverty change of 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries. The net increase in poverty was 44 million people (falling below the $1.25 per day extreme poverty line).

A loner Paul Krugman!

New York magazine has an interesting profile of one of my favorite economists, Paul Krugman. The author portrays Krugman as a loner trying to counter unrealistic conservative ideas and policies from the left.

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[…] For Krugman, the path forward was perfectly clear: The only way to avert a deepening crisis was massive Keynesian stimulus. During the nineties in Japan, he had seen the nightmare alternative. Officials in Tokyo, faced with a very similar scenario, had done too little to stimulate the economy, again and again, and as their nation’s recovery stumbled, they found they were toggling an unplugged joystick.

[…] Paul Krugman is a lonely man. That he is comfortable in his solitude, that he emphasizes its virtues, that his intelligence gives it a poetic gloss, none of this diminishes the poignancy of his isolation. Krugman grew up an only child and is deeply self-conscious. He will list his shortcomings as though he’d been preparing for the chance: “Loner. Ordinarily shy. Shy with individuals.” He is married but has no children nor—rare for a Nobelist—many protégés. When I asked him if there were any friends of his I could talk to in order to understand him better, he hesitated, then said, “That’s going to be hard.”

[…] Krugman had begun the work that would eventually win him the Nobel Prize—an aggressive revision of international trade theory—by the time he was in his mid-twenties, and so for nearly all of his adult life he has had good evidence for the proposition that he is smarter than just about everyone else around him, and capable of seeing things more clearly. Krugman is gleeful about being right, joyous in the revelation of his correctness, and many of his most visible early fights were with free-trade skeptics on the left. Of Robert Reich, for instance, Krugman wrote: “talented writer, too bad he never gets anything right.” He was a liberal and a Democrat, but even in 1999, when he was hired by Howell Raines to write his Times column, “I still saw equivalent craziness on both sides.”

[…] But Krugman’s writing voice—sarcastic, data-driven, flecked with just a little bit of maybe-there’s-a-bomb-in-the-wastebasket zeal—was perfect for the Internet. His self-certain empiricism matched liberal vanities as precisely as Rush Limbaugh’s stagy authenticity matches conservative ones, and he became a vehicle for the concentrating energies of the progressive generation of 2006.

[…] I ask Summers what he thinks is Krugman’s underlying complaint with the Obama administration. “Paul may be the smartest and most creative applied economic thinker of this era,” he says, “but there is some element of him that is like the guy in the bleachers who always demands the fake kick, the triple-reverse, the long bomb, or the big trade.”

The two economists have known each other since the late seventies, when they were both graduate students in Cambridge, and there were moments in conversation with Krugman that I began to suspect he viewed Summers as a one-man control group for his study of himself. They each share a high assessment of the other’s intellect (“Larry’s extremely smart—ask him and he’ll tell you,” Krugman says). Krugman’s sense of humor is built upon self-deprecation, and sometimes Summers’s sense of humor is built upon deprecating Krugman, too. In the early eighties, when the two worked together in the Reagan administration, Krugman realized that Summers had a talent for effectiveness—winning meetings, organizing subordinates, convincing economic novices of his point of view—that he himself could not hope to match. Summers became the insider and Krugman the outsider.

[…] I brought up the work of the legal scholar Cass Sunstein, now with the Obama administration, who has studied the radicalizing effects of ideological isolation—the idea, born from studies of three-judge panels, that if you are not in regular conversation with people who differ from you, you can become far more extreme. It is a very Obama idea, and I asked Krugman if he ever worried that he might succumb to that tendency. “It could happen,” he says. “But I work a lot from data; that’s enough of an anchor. I have a good sense when a claim has gone too far.”

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How agriculture supports structural transformation?

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“After 20 years of neglect by international donors, agriculture is now again in the headlines because higher food prices are increasing food insecurity and poverty. In the coming years it will be essential to increase food productivity and production in developing countries, especially in Sub-Saharan Africa and with smallholders. This however requires finding viable solutions to a number of complex technical, institutional and policy issues including land markets, research on seeds and inputs; agricultural extension; credit; rural infrastructure; storage; connection to markets; rural nonfarm employment and food price stabilization. This paper reviews what the economic literature has to say on these topics. It discusses in turn the role played by agriculture in the development process and the interactions between agriculture and other economic sectors; the determinants of the Green Revolution and discuss the foundations of agricultural growth; issues of income diversification by farmers; approaches to rural development; and finally issues of international trade policy and food security which are at the root of the crisis in agricultural commodity volatility in the past few years.”

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Read the full paper by Dethier and Effenberger (2011). Structural transformation is usually thought of as moving labor and production from agriculture to industrial sector. Development of agriculture sector would facilitate structural transformation. But, development of agriculture itself plays a vital role in bringing about structural transformation. They key is to raise productivity by using a range of factors, such as new technologies, farm size and access to land. The most difficult are institutional challenges related to market failures, missing markets and property rights. They argue that because agriculture links to small cities and rural areas, it can also be an engine of growth and provide employment opportunities for the rural non-farm economy.

Food prices in 2010-11 and its impact on poverty

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Global food prices have increased substantially since mid-2010, as have prices in many developing countries. In this study we assess the poverty impact of the price changes between June and December 2010 in twenty-eight low and middle income countries. This is done by gathering detailed information on individual households' food production and consumption levels for thirty-eight agricultural and food commodities to assess the impacts on household welfare. This study estimates that this sudden food price surge increased the number of poor people globally, but with considerably different impacts in different countries. The heterogeneity of these impacts is partly related to the wide variation in the transmission of global prices to local prices and partly to differences in households' patterns of production and consumption. On balance, the adverse welfare impact on net buyers outweighs the benefits to net sellers resulting in an increase in the number of poor and in the depth of poverty. We estimate that the average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries with a net increase of 44 million people falling below the $1.25 per day extreme poverty line.

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Full paper by Maros, Martin and Hassan (2011). They find that on an average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries. The net increase in poverty was 44 million people (falling below the $1.25 per day extreme poverty line).

Meanwhile, Carnegie’s Shim and Vera explain the differences between the food price rise in 2010/11 and 2007/08. They argue:

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Several of the factors behind today’s increase parallel those that drove the 2007/2008 food-price crisis—including export controls, biofuels production, high oil prices, and poor harvests. But the prices of cereals, particularly rice, have increased less than in 2008 and domestic prices in some of the world’s poorest countries have actually fallen amid better local harvests. The lower incidence of harmful policy responses, which amplified the crisis last time, likely helped as well.

Although these factors have lowered the surge’s impact, prices are likely to remain elevated and volatile for the next few years. Policy makers must heed the lessons of the past if they are to prevent more hunger now.

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The China of India is…

… the state of Gujarat. Steven Pearlstein explains:

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The biggest obstacle to India’s industrialization remains the lack of infrastructure, and no state is tackling that more aggressively than Gujarat. The entire state has been turned into one large public works project, with billions of dollars in investment being poured into dams, canals, power plants, highways, gas pipelines, electric grids and ports. The state is even assembling the land to create industrial cities along the path of a high-speed rail freight line that the central government is planning between Delhi and Mumbai.

Gujarat’s notoriously efficient, autocratic and incorruptible chief minister, Narendra Modi, is a strong adherent to the Asian-style industrial policy who believes that if you build it, they will come. And they have, bringing oil refineries, shipbuilding facilities, steel and auto plants and LNG terminals. With 5 percent of India’s population, 15 percent of its industrial production, 17 percent of its capital investment and 22 percent of its exports, the joke is that Gujarat has become the China of India.

Rajan Shah started Harsha Engineers in Ahmedabad in 1972, back when textile mills were what passed for Gujarat’s manufacturing base. Harsha got its big break in 1997 when Timkin, the giant ball-bearing maker in Canton, Ohio, decided to stop making the metal cages that are used to hold its bearings and rely on Harsha instead, and the company has grown steadily ever since. Shah figures he still has a 10 to 15 percent cost advantage over global competitors, thanks in part to Gujarat’s low wages and the ready availability of good design and production engineers. But just in case, he’s opening a second plant — in China.

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But economic hurdles remain in India:

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Despite such successes, India has a long way to go to modernize an economy where 80 percent of economic activity takes place in the “informal” sector. Beyond the more obvious problems of corruption, poor infrastructure and a low-productivity workforce, too much of the formal economy is controlled by a handful of family-run conglomerates who are quick to use their political and financial muscle to move into any sector that shows promise. In a nation of naturally entrepreneurial people, this creates headwinds for independent companies trying to attract talent and capital. It contributes to the growing concentration of wealth in the hands of a business elite that by all accounts has grown increasingly disconnected from the rest of the country. And it has encouraged many of the best and the brightest either to leave the country or follow the golden path into real estate and finance rather than manufacturing or government.

It also has an effect on foreign investors, who are keenly aware of the dangers of trying to compete against the local oligarchs. Enron tried it and wound up losing $1 billion on an ill-fated energy project. And I found it telling that Wal-Mart, which for years has been pushing hard for the government to relax rules that prevent foreign firms from opening stores in India, may chose to continue its joint venture with the Bharti family rather than go it alone.

A somewhat closed financial system is also restraining growth. India’s central bank is most proud that its tight restrictions on the flow of borrowed money into the country minimized the impact of the recent global financial crisis on India. But business executives complain that those same restrictions also prevent the development of a corporate bond market that is badly needed as a source of infrastructure funding. They require banks to keep so much of their deposits on reserve, or directed to low-return loans to farmers, that the cost of borrowing for businesses and consumers is two percentage points higher than it needs to be. It also doesn’t help that Indians continue to put much of their savings into gold rather than into a financial system that would recycle it into the economy.

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Can Keynesians be anti-Keynesian?

Dave Altig, senior vice president and research director at the Atlanta Fed argues:

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One of the interesting things about the article is that among the economists cited as being among the critics of "Keynesianism," you find the names John Taylor, Robert Mundell, and Kenneth Rogoff. I find that list interesting because if you follow the links I attached to those names you will find work with models that are decidedly Keynesian in structure. Works by Taylor and Rogoff are, in fact, seminal contributions to the "New Keynesian" paradigm that dominates macroeconomics today.

As far as I know, none of these men have repudiated the basic worldview that motivates the referenced work. In fact, as recently as last year John Taylor approvingly described, as he has many times, a key characteristic of the paradigm for monetary policy that was in place the decades before the financial crisis:

"… the central bank has a strategy, or rule, to adjust the interest rate depending on economic conditions: In general, the interest rate rises by a certain amount when inflation increases above its target and the interest rate falls when by a certain amount when the economy goes into a recession."

I added the emphasis to the last part of that passage as it is a feature of the so-called Taylor rule that is entirely built on the foundation of the New Keynesian model.

How, then, to explain the Keynesian predilections of the economists mentioned as presumed carriers of the anti-Keynesian mantle? The source of the confusion, I think, goes back to the historical, but somewhat obsolete, distinction between so-called Keynesianism and monetarism. The latter was, of course, personified in Milton Friedman and his dispute with what was the orthodoxy in the three decades following the Great Depression. Lost in the early-days labeling, however, was the fact that the disputes were more about the empirical details of theory rather than the theory itself.

In particular, Friedman did not deny the effectiveness of policy in principle but rather its wisdom or impact in practice. This sentiment is exactly the one he expressed in his prescient and transformative 1968 presidential address to the American Economics Association:

"In the United States the revival of belief in the potency of monetary policy was strengthened also by the increasing disillusionment with fiscal policy, not so much by its potential to increase aggregate demand as with the practical and political feasibility of so using it."

[…] My point is not to dispute or defend the truth of the Ricardian proposition. My point is that it has absolutely nothing to do with whether one believes (or does not believe) that the New Keynesian framework is the right way to view the world. The essential policy implications of the New Keynesian idea (like the old Keynesian idea) is that changes in gross domestic product can be driven by changes in desired spending by households, businesses, foreigners, and the government in sum. You can believe that and still believe in fiscal policy ineffectiveness, as long as you believe that total spending is unaltered by a particular policy intervention.

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Size of shadow economy in Nepal

In terms of ranking, Nepal has 76th largest shadow economy (p.31) among the 120  countries considered by Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010). The size of Nepal’s shadow economy is equal to about 37.5 percent of GDP, according to new estimates in WDR 2011. It is increasing since 2002. The average size of informal economy in South Asia is 34 percent of its GDP.

The latest WDR 2011 notes: “Shadow economies are a near universal phenomenon throughout the world. The shadow economy is commonly defined to refer to all market-based legal production of goods and services that is deliberately concealed from public authorities. The empirical method used in this paper is based on the statistical theory of unobserved variables, which considers multiple causes and indicators of the phenomenon to be measured, i.e. it explicitly considers multiple causes leading to the existence and growth of the shadow economy, as well as the multiple effects of the shadow economy over time. In particular, we use a Multiple Indicators Multiple Causes (MIMIC) model – a particular type of a structural equations model (SEM) – to analyze and estimate the shadow economies of 162 countries around the world. These estimates over the period 1999 to 2006/2007 suggest that shadow economies accounted for as much as 35 percent of official gross domestic product, on average, in 98 developing countries, 38 percent in 21 Eastern European and Central Asian countries, and 18 percent in 25 high-income countries in 2006. The major driving force toward informal economies seems to be high taxes (direct and indirect), combined with labor market regulations, the quality of public goods and services, and the condition of the “formal” economy. Across a broad set of countries, the model suggests that reducing taxes followed by a reduction in fiscal and business regulation will enhance of the appeal of work in the formal sector. However, the relative importance of these driving forces differs significantly across country groups.” [Source for WDR 2011: Schneider, Friedrich, Andreas Buehn and Claudio E. Montenegro (2010), Shadow Economies all over the World: New Estimates for 162 Countries from 1999 to 2007, Background paper for the World Bank study of the informal sector in Central, Southern Europe and the Baltic countries (Task number P112988).]