There have been quite a number of research reports dealing with the impacts of a hike in commodity prices on income and poverty levels in affected countries. But for three main reasons, one of the papers by Joseph V. Balagtas, Mahabub Hossain and others has drawn our attention. Firstly, the study is based on household level information using panel data. Secondly, the paper has been selected as the best research paper by the International Association of Agricultural Economists (IAAE). Thirdly, it sheds important light on income and poverty determination – issues that have hardly been mentioned in various studies undertaken earlier. The authors assessed the effects of a dramatic rise in agricultural commodity prices during 2007-2008 period on income dynamics and poverty among rural households in Bangladesh.
Bangladesh, along with other parts of the world, enjoyed two decades of relative success in reducing rural poverty, from 62 per cent in 1988 to 44 per cent in 2004. It is perceived that especially a monotonic fall in rice prices paved the way for poverty reduction during those periods. More importantly, this improvement in poverty incidence was associated with a shift towards non-farm employment facilitated by human capital accumulation. However, while everything sounded soothing in the world of satisfaction in rice consumption, Bangladesh was suddenly caught in a quagmire. The world witnessed a record level rise in food prices so much so that the price of a balanced food basket increased by more than 50 per cent during 2000-2008 period, while household income rose only by 15 per cent. As a consequence, the incidence and severity of rural poverty in Bangladesh fell to pre-2000 levels during 2004-2008 period. There were some models measuring the impacts of theoretical price change but the actual impacts would depend on the magnitude of actual price change, household response to those price changes, and potentially macroeconomic considerations.
The authors used longitudinal data from rural households to document actual changes in household income and poverty during 2004-2008 period, compare those changes to trends during 1988-2004 period, and identify the household characteristics and market environment that either mitigated or exacerbated the impact of food crisis on household income and rural poverty. The survey instrument is a semi-structured questionnaire designed to collect information on multiple aspects of rural economy and livelihoods, including resource endowments, farm and non-farm activities, income and expenditure, employment and commodity prices, poverty, gender, and government welfare programmes. The researchers also used econometric models of household income in order to assess the determinants of income and poverty.
The analysis reveals that the trends in poverty incidence and depth reversed course, increasing to pre-2000 levels. The authors reckoned that an additional 13 million people fell into poverty in Bangladesh. They also found that the increase in poverty incidence is caused by a decrease in upward poverty mobility as well as an increase in downward poverty mobility. This suggests that anti-poverty measures should target not only the poor, but also the non-poor households who are vulnerable to becoming poor. The panel estimate of the income equation largely confirms previous cross-sectional work, with some important modifications. For example, a key finding is that an additional overseas migrant worker raises household income by approximately 30 per cent. The total non-farm income grew at a slightly faster rate than farm income during 2004-2008 period.
But perhaps the most striking feature of non-farm income is the dramatic shift in composition. For example, income from services which accounted for 35 per cent of total income in 2004 fell by about 19 per cent during 2004-2008 period. The shortfall was balanced by large remittances. Remittance grew to account for 23 per cent of total income in 2008 nearly as much as the contribution from rice income.
The authors also shed important insights into chronic poverty. While the rest of the rural population in Bangladesh has dramatically increased its holdings of non-agricultural capital and diversified income away from agriculture, the chronic poor have concentrated their assets and labour in agriculture.
While quantifying the effects of various household characteristics on the probability of being poor, the authors revealed a few important caveats absent in earlier analysis. For example, an additional overseas migrant worker reduces the probability of falling into poverty by 2.0 per cent in 2004 and by 22 per cent in 2008. Again, a great dependence on agricultural income increased the likelihood of becoming poor in 2004, but significantly decreased the likelihood of being poor in 2008. It is because of falling prices during 1988-2004 period and rising prices since 2004. Thus while high food prices during 2007-2008 period caused higher cost of living for all households, it appears that farm income served as a hedge against high food prices, either directly through higher commodity prices or perhaps indirectly through own consumption.
At the very least, these results suggest a great deal of caution in prescribing policies based on causes of poverty and on imperfect forecasts of economic conditions, especially agricultural prices. These, of course, remain fruitful topics of further research. The point remains that the paper hardly addressed the issue of price hike on nutritional status of women and children. As we all know, price escalation of essentials, as it happened during 2004-2008 period, most pervasively affected the nutritional status of women and children. The policy implications of such adverse impact could be altogether different than that was associated with poverty. By and large, not only poverty increased following the price hike, but also malnutrition was observed by other studies.
The writer is a Professor of Economics at Jahangirnagar University.
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