The impact of increasing food prices in Uganda

Bjorn Van Campenhout

IFPRI - Kampala

IFPRI-Kampala workshop 27 June 2012

Protea Hotel Conference Center, Kampala

Impact of price changes on welfare:

FAO

The long-term downward trend in agricultural commodity prices threatens the food security of hundreds of millions of people in some of the world's poorest developing countries (2005)

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The number of hungry people increased by about 50 million in 2007 as a result of high food prices (2008)

World Bank

The combination of depressed world prices …have discouraged farm output and hence lowered rural incomes. Because the majority of the world‟s poorest households depend on agriculture and related activities for their livelihood, this … is especially alarming. (1990)

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The increase in food prices represents a major crisis for the worlds poor. (2008)

IFPRI

The combination of agricultural protectionism and subsidies in industrialized countries [leading to low prices] has limited agricultural growth in the developing world, increasing poverty and weakening food security in vulnerable countries. (2002)

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…rapidly rising food prices began to further threaten the food security of poor people around the world. … The current food-price crisis can have long-term, detrimental effects on peoples’ health and livelihoods, and can contribute to the further impoverishment of many of the worlds poorest people. (2007)

Prices

Prices by commodity

Prices by location

So are high prices good or bad?

• Depends… what price at what time and in what market you are referring to

• Depends…

– If you sell it is good

– If you buy, it is bad

• Heterogeneity leads to confusion

• Effect depends on what group of people you talk about

Effect of changes in food prices

• Immediate effect: how much money needed to compensate for the price change (i.e. keep quantities fixed)

• Intermediate effect: quantities of commodities produced and consumed can change

• Long run effect: activities are allowed to change – > outline of presentation will follow this typology

Short run impact of these price changes

• Duality of smallholder farmer reflected in analysis:

• Effect = production effect – consumption effect

𝐶𝑉𝑡=𝑎 = 𝐿𝑤𝑡=𝑎 − 𝐿𝑤𝑡=𝑏 - 𝑞𝑝𝑡=𝑎 − 𝑞𝑝𝑡=𝑏

Short run impact on welfare and poverty

Welfare impact on different types of households

Medium run impact

• Are there changes in market participation?

• Are there changes in the amounts marketed?

– Double hurdle model

Long run impact

• Economy wide impact

– Computable General Equilibrium Model: models how a shock (such as a change in prices) resonates through an entire economy, including markets for labour, capital and commodities.

– In our 2007 SAM, we have 50 commodity and activity accounts, with 19 ag sectors, 6 production factors and 5 household types

SAM

Sim

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Macroeconomic and sectoral impacts

• If world price goes up, imports reduce and exports increase -> reduction in welfare

GDP = C + I + G + X - M

Domestic absorption= C + I + G = GDP + M - X

Macroeconomic results

Sectoral GDP

Prices and Output

Factor incomes, welfare and poverty

Conclusion

• Short run effects provide a theoretical worst case scenario

– large reductions in welfare, increase in poverty by 33%, taking us back to 2005/06.

• Long run effect is positive, and especially the rural poor benefit

• But effect is quickly eroded if TFP is not maintained