World Food Policy Volume/Issue 2-2/3-1 Fall 2015/Spring 2016 | Page 147

World Food Policy

to be the smaller the higher the level of
income, largely due to Engel’s law and the
resulting lower share of income spent on
food among richer households. Among
the countries included here, Vietnam is
again the only exception: an increase of
food prices is welfare improving for all
income quintiles in Vietnam.

The conclusion from all this is
that high food prices tend to hurt most
developing countries and most individual
households in that part of the world.7

How Should Policies Respond?

G

iven that high food prices cause
harm to consumers, and the more
so the lower the family income is,
it is not a good idea for developing country
governments to engage in policies, be it
domestically or at the border, that support
prices of agricultural products at a higher
level than the market would generate.
While this statement sounds nearly
trivial, governments of several developing
countries have a tendency to disregard
it, placing more weight on the impact
of prices on agricultural producers. In
many cases this appears to be the case
based on the notion that higher prices
(and subsidies, be it on inputs or output)
provide incentives for farmers to expand
output, raising the availability of food on
the market. The fact that high prices at

the same time make it more difficult for
consumers to have access to food appears
to be discounted in the process of political
decision making. Given that in many
developing countries (and in the group of
developing countries overall), the volume
of food consumption is larger than that
of food production, and hence that high
prices do more harm than good, there
should be more awareness of the negative
implication of high-price policies.

However, there are indications
that the level of support provided
to farmers in developing countries,
including support through price raising
policies, is on the rise. The measure
used in the OECD to quantify the level
of support provided by governments is
the producer support estimate (PSE).
In its percentage version, this indicator
expresses the share of total farm revenue
that comes from government policies as
opposed to markets. As can be seen in
Figure 13, in the rich countries, i.e., in the
OECD area, this was at the level of around
30%–35% in the mid-1990s and declined
to ~20% more recently.

If we set against that a number
of selected emerging economies we
can see that the level of support they
are providing to their agriculture has
increased quite a bit in recent years and a
good part of that is indeed price support.
Among the overall group of countries
covered in this analysis, the share of farm

7

This conclusion is obviously derived from a purely static argument. In a dynamic analysis, rising
food prices can trigger income growth among food producers and rural workers. Where this results
in a shift from net food buyer to net food producer status, rising food prices can have positive welfare
implications for the households concerned. However, it will take some time for this effect to dominate. For a more extensive discussion and references to relevant literature, se Filipski and Covarrubias
(2012).
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