Advancing a Free Society

How to Help Poor Families in Developing Countries Cope with Rising Food Prices

Monday, April 18, 2011

Food prices are on the move once again as the world economy recovers from the financial crisis. The Commodity Research Bureau’s index of the prices of foods- including corn, wheat, steers, and sugar- doubled between 2002 and 2008, fell by 25% during the crisis, and has increased since the world recovery to a level beyond the prior peak. Higher prices of foods mainly hurt the poor since poor countries and poorer families within a given country spend a much larger fraction of their incomes on foods than do rich countries, and then richer families within a country. For example, the share of national income spent on food is over 40% in India, less than that but still large in China, and under 15% in the United States. If families were spending 40% of their income on food, a 30% increase in food prices would raise by 12% the income they would need to maintain the same level of consumption of all goods. By contrast, a family spending only 15% of its income on food would only need a 4.5% increase in their income to maintain the same consumption basket. This simple arithmetic explains why the current rapid price increase in foods and other commodities, and past large increases in these prices, often caused great distress among poor families of Africa, Asia, and elsewhere in the world. This distress led to food riots in many countries, and other protests by the poor against the large rise in their cost of living. Governments responded to these protests in various ways that often lowered the cost of food to consumers, but usually at the expense of inducing inefficient behavior by farmers and consumers, and often even at the expense of the poor.

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(photo credit: lorena pajares)