energy prices on poverty

BOX 1.4 The impacts of rising global food and energy prices on poverty

Food prices rose by 5 percentage points more than core inflation (estimated as the median of country inflation data) in the two years prior to March 2022 (Ha, Kose, and Ohnsorge 2021). Energy prices rose by 11 percentage points more than core inflation in this period, but they are expected to rise 50 percent in 2022 (Ha, Kose, and Ohnsorge 2021; World Bank 2022a). The increases observed so far are very similar to those during the 2008 food price crisis. The prices of agricultural inputs such as fertilizer also rose dramatically in both periods, increasing 266 percent in the two years prior to June 2008 and 217 percent in the two years prior to March 2022. In 2022, prices of wheat and corn spiked, but rice prices remained relatively unaffected. By contrast, rice prices doubled in 2007, alongside wheat and corn price increases.

Immediate and long-run impacts of higher food prices

The immediate impacts of rising food prices are likely to hit the poor the hardest. However, simulations that focus only on the immediate impacts of higher prices are unlikely to capture the full nature of the price impacts in the long run because they do not consider several factors that may dampen the immediate impact of the food price shock (Minot and Dewina 2015). Consumers seek substitutes for the foods whose relative prices are increasing (Andreyeva, Long, and Brownell 2010; Friedman and Levinsohn 2002), food producers benefit from higher prices in their next sale, wages adjust, and agricultural investment and production increase (Ivanic and Martin 2014; Jacoby 2016; Van Campenhout, Pauw, and Minot 2018). These changes occur within a matter of months, reducing any immediate impact quite quickly.

Analysis of 300 different poverty episodes drawn from the World Bank’s global poverty data finds that increases in international food prices are correlated with reductions in poverty over the next one to five years (Headey 2018). The reductions are attributed to the agricultural supply response and, to a lesser extent, to the wage response to higher food prices.

A look back at periods of high food prices and effects on poverty

The remainder of this box looks at poverty assessments that considered the drivers of poverty trends during the periods of high food prices from 2008 to 2011.

In Uganda, Simler (2010) predicted an increase in national poverty of 2.6 percentage points due to higher global food prices in 2008. However, official poverty estimates pointed to an annual 1.6 percentage point reduction in poverty from 2006 to 2013. Good rainfall and prices accounted for two-thirds of the growth in crop income of the bottom 40 percent from 2006 to 2012 (World Bank 2016).

Ivanic and Martin (2008) simulated the short-run impacts of increasing global food prices between 2005 and 2007 in several countries, including Cambodia, and projected a 1.5 percentage point increase in national poverty rates in Cambodia. However, the pace of poverty reduction increased from 2007 to 2009 because of increasing rice prices, which particularly benefited rural poverty reduction (World Bank 2013b). Increases in farmers’ incomes as a result of higher goods prices, better rural wages, and higher income from nonfarm self-employment were drivers of poverty reduction in rural areas.

In Bangladesh, the food price spike in 2008 resulted in real wage growth for agricultural workers, reversing the short-term impact of higher prices for rural households (World Bank 2013a). Similarly, Jacoby (2016) found that agricultural wages rose faster in rural Indian districts growing a higher share of crops that experienced larger relative price increases and that the rise in agricultural wages had significant spillover effects on nonagricultural wages as well.

In Ethiopia, poverty fell fastest when and where agricultural growth was strongest, and a driver of agricultural growth was higher food prices (World Bank 2015). However, high food prices hurt

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BOX 1.4

The impacts of rising global food and energy prices on poverty (continued)

agricultural households in the poorest decile in Ethiopia, who produce very little, and unskilled wage workers in urban areas for the four to five months that wages took to adjust to food price increases (Headey et al. 2012). A review in Brazil also found that, although the market income effects of food price increases were positive for the rural poor, they were not positive for urban populations (Ferreira et al. 2013).

Overall, official estimates show reductions in poverty and inequality arising in the long run from high food prices. However, some vulnerable groups—urban households and marginal agricultural households—do not necessarily stand to benefit. This finding points to the need to provide households with quick, time-bound, targeted support immediately after a price crisis. It also points to the need to remove constraints to agricultural investments that will enable realization of the positive impacts of high food prices on production.

wage effects). Artuc and his colleagues do not include any government response to the increase in food prices.

The authors estimate that the bottom 40 percent of each country faces, on average, 3 percentage point higher inflation than the top 60 percent. Across 36 countries in Sub-Saharan Africa, this equates to food price inflation that is roughly twice as high as nonfood price inflation. In the downside scenario, the number of extreme poor increases by over 18 million on top of the estimated 667 million poor in 2022 (figure 1.12, panel b). However, as noted, this impact could be a short-run downside one.

Governments can mitigate such impacts through social protection policies. However, somewhat different from the previous periods of high food price inflation, and as part 2 discusses, governments’ finances have been depleted by the various fiscal measures enacted through the COVID-19 crisis. For economies still reeling from the pandemic, these inflationary pressures could not have come at a worse time.

Inflation forecasts are subject to great uncertainty, and it is possible that food and energy prices will rise further. Figure 1.13 shows how the share of food in total consumption changes across the income distribution to highlight why further increases in food prices, beyond what was anticipated, would increase the pressures on poor households in the short run. This analysis uses data on food consumption shares and mean consumption by quintile from household surveys from 71 countries across the income spectrum. The food consumption share is then regressed on log consumption to predict the share for any given consumption level.18 This analysis based on Mahler et al. (2022) reveals that people living in extreme poverty spend about two-thirds of their resources on food.19 As online annex 1C reports, 81 percent of people living in extreme poverty live in rural areas, and so for some of these households further increases in food prices may also increase incomes, thereby reducing negative impacts. However, there is significant regional variation in the share of the extreme poor who live in rural areas, ranging from 43 percent in Latin America and the Caribbean to 87 percent in South Asia. Regions in which a large share of poor people live in urban areas (such as Latin America and the Caribbean and Europe and Central Asia) are likely to be more adversely affected by rising food prices.