Rising food prices in Bangladesh: Causes, poverty impacts and policy actions
Quazi Shahabuddin, Ph.D. | Saturday, 9 August 2008
FOOD prices in both domestic and international markets have reached all-time high in recent times. The surge in the prices of food grains, especially that of rice, has become a matter of serious concern not only in Bangladesh, but also in Asia as well as around the globe. There has been considerable erosion of purchasing power of the poor who spend more than 60 per cent of income on food. This has obviously put them at greater risk of hunger and malnutrition, which has threatened to undermine the gains in poverty reduction that Bangladesh has achieved in recent years. In fact, this may even reverse the trend of poverty reduction unless effective and coherent actions to assist the vulnerable population to cope with the drastic hikes in their food bills are implemented by the government on an urgent footing.
The combination of new and ongoing forces is driving the world food situation and the prices of food products. One emerging factor contributing to rising food prices is the high and rising price of energy. Energy and agricultural prices have become increasingly intertwined. With oil prices at an all-time high approaching $150/barrel, the U.S. government is subsidizing farmers to grow crops for energy. The U.S. farmers have massively shifted their cultivation towards bio-fuel feed stocks. High energy prices have also made agricultural production more expensive by raising cost of mechanical cultivation and fertilizers, as well as marketing including cost of transportation. At the same time, the growing world population is demanding more and different kinds of food.
Rapid economic growth in many developing countries, especially China and India has pushed up consumers' purchasing power, generating increased demand for food. This has shifted food demand away from traditional staples and toward higher-value foods like meat and milk.
This dietary shift is leading to increased demand for grains used to feed livestock. It needs to be noted here that although both cyclical and structural factors have contributed to recent surge in prices, the latter are likely to dominate the former causing the higher prices to persist for the foreseeable future.
Bangladesh, a net importer of food grains, has been seriously affected by food shocks, driven by higher international prices and domestic production shortfalls following the natural disasters. Although domestic upward price pressures eased somewhat by early May, the prices of rice and wheat in the domestic market are still much higher than those of the preceding year. Bottlenecks in the distribution and retail marketing chain, hoarding and panic buying by consumers aggravated the domestic price situation. The administrative action by the government was largely counter-productive and failed to arrest the upward trends in prices. Despite a bumper boro harvest, there is fear of supply shortage, if the next aman is adversely affected by natural disasters. In that case, the shortfall will have to be addressed by creating buffer stocks through higher imports.
The boro procurement target of the current season is 1.2 to1.5 million tons, which is 50 to 80 per cent higher than average boro procurement in the last five years. At the beginning of FY08, the public food distribution system (PEDS) had a stock of 0.6 million ton of food grains compared to one million ton recommended by National Food Policy. Despite higher imports compared to the previous year, food grain stocks of the PFDS had depleted to 0.5 million ton at the end of March 2008 due to higher off-take for the targeted distribution under the safety net programmes.
Net food importing countries such as Bangladesh are struggling to meet domestic food demand. Surging food prices hit those most, who can afford it the least-the poor households. Households that are net buyers of food represent the large majority of the poor households. They are adversely affected. Adjustments in the rural economy, which can create new income-earning opportunities, would also take time to reach the poor. The nutrition of the poor is also at risk when they are not insulated from price increase. Higher food prices lead the poor to limit their food consumption and shift to even less balanced diets with harmful effects on their health in the short - and long-terms.
High food inflation has two important implications. First, high food inflation increases the price of food-related non-food items and since higher proportion of the consumption basket of the poor in Bangladesh is allocated to food items, the poor have to buy some food items at higher prices. Ideally, households buy less of the relatively more expensive items, food in this instance. But since the poor mostly survive at the subsistence level with little scope to further reduce food consumption, there is not much reprieve through the substitution effect. As such, the poor bear almost the full brunt of food inflation. Second, since food inflation reduces the real income of the poor, there is less money left after food purchases to consume other necessary goods and services such as education, health, fuel and energy. In other words, the income effect also hurts the poor more. Thus, higher inflation adversely affects the welfare of the poor, because they have no substitute for food, on one hand and their real incomes are reduced, on the other.
Although there is no systematic analysis of the relationship between inflation and poverty rates in the context of Bangladesh, a casual look at the historical data shows that the overall poverty was higher during the period of rapid inflation, particularly in the 1970s and 1980s. The incidence of poverty started to decline in the early 1990s, when inflation rates were also substantially lower. However, inflation has become a major problem in Bangladesh at present, led by rapidly rising food prices. According to a recent Centre for Policy Dialogue (CPD) estimate, the gross income of the poor decreased by 36.7 per cent between January 2007 and March 2008 mainly due to price hike of food and inflationary pressure. Due to such income erosion, an additional 8.5 per cent people or 2.5 million households have fallen below the poverty line over the period of those 15 months.
The empirical exercise recently carried out by Bangladesh Bank (2008) demonstrates that the poor people generally face a higher rate of inflation than the non-poor in Bangladesh. This is likely to have further adverse consequences on the welfare of the poor in both rural and urban areas in the country. The analysis also shows that the higher inflation rate of the poor in recent years has mainly arisen from higher food prices which have larger weights in the consumption basket of the poor. These findings thus have significant implications for designing appropriate anti-inflation policies by the government. Similar picture is also obtained from estimates of inflation for selected marginalized groups recently published in the Bangladesh Economic Outlook (June, 2008).
Moreover, the rural households in the poorest quintile earn on an average 63 per cent of their income from on-and off-farm wages. The majority are net food buyers; only 12 per cent are net food sellers. These characteristics indicate that the poorest households are highly vulnerable to food price increases and experience high welfare losses.
The increase in food prices has a dominant role in fuelling inflation in many countries including Bangladesh. However, it would not be prudent to address these specific causes of inflation with general macroeconomic and monetary instruments. Specific policies are needed to deal with the causes and consequences of high food prices (IFPRI Policy Brief, April 2008). Over the short term, the focus of policy actions should be on targeted interventions to protect the poor who are most vulnerable in the face of rising food prices. With target support to the poor rather than general price subsidies, the government will be able to ensure better coverage as well as free up resources and minimize distortions in the incentives for framers. Farmers should be ensured timely, adequate and affordable access to agricultural input (seed, fertilizer, irrigation etc.) to generate a strong supply response for the coming crop seasons.
The government will need to increase its capacity to operate a public food distribution system in collaboration with the private sector to stabilize prices and assist the poor and vulnerable groups in the society.
Over the medium to longer term, the focus should be on improving productivity by disseminating modern production technologies, developing rural infrastructure including reliable and expanded irrigation systems, bringing ecologically unfavorable areas under cultivation, strengthening extension services, improving marketing services, providing quality seeds through public-private partnership and ensuring rural financial services.
The writer is Director General, Bangladesh Institute of Development Studies, BIDS, He can be reached at Email: dg_bids@sdnbd.org, or shahab@sdnbd.org
The combination of new and ongoing forces is driving the world food situation and the prices of food products. One emerging factor contributing to rising food prices is the high and rising price of energy. Energy and agricultural prices have become increasingly intertwined. With oil prices at an all-time high approaching $150/barrel, the U.S. government is subsidizing farmers to grow crops for energy. The U.S. farmers have massively shifted their cultivation towards bio-fuel feed stocks. High energy prices have also made agricultural production more expensive by raising cost of mechanical cultivation and fertilizers, as well as marketing including cost of transportation. At the same time, the growing world population is demanding more and different kinds of food.
Rapid economic growth in many developing countries, especially China and India has pushed up consumers' purchasing power, generating increased demand for food. This has shifted food demand away from traditional staples and toward higher-value foods like meat and milk.
This dietary shift is leading to increased demand for grains used to feed livestock. It needs to be noted here that although both cyclical and structural factors have contributed to recent surge in prices, the latter are likely to dominate the former causing the higher prices to persist for the foreseeable future.
Bangladesh, a net importer of food grains, has been seriously affected by food shocks, driven by higher international prices and domestic production shortfalls following the natural disasters. Although domestic upward price pressures eased somewhat by early May, the prices of rice and wheat in the domestic market are still much higher than those of the preceding year. Bottlenecks in the distribution and retail marketing chain, hoarding and panic buying by consumers aggravated the domestic price situation. The administrative action by the government was largely counter-productive and failed to arrest the upward trends in prices. Despite a bumper boro harvest, there is fear of supply shortage, if the next aman is adversely affected by natural disasters. In that case, the shortfall will have to be addressed by creating buffer stocks through higher imports.
The boro procurement target of the current season is 1.2 to1.5 million tons, which is 50 to 80 per cent higher than average boro procurement in the last five years. At the beginning of FY08, the public food distribution system (PEDS) had a stock of 0.6 million ton of food grains compared to one million ton recommended by National Food Policy. Despite higher imports compared to the previous year, food grain stocks of the PFDS had depleted to 0.5 million ton at the end of March 2008 due to higher off-take for the targeted distribution under the safety net programmes.
Net food importing countries such as Bangladesh are struggling to meet domestic food demand. Surging food prices hit those most, who can afford it the least-the poor households. Households that are net buyers of food represent the large majority of the poor households. They are adversely affected. Adjustments in the rural economy, which can create new income-earning opportunities, would also take time to reach the poor. The nutrition of the poor is also at risk when they are not insulated from price increase. Higher food prices lead the poor to limit their food consumption and shift to even less balanced diets with harmful effects on their health in the short - and long-terms.
High food inflation has two important implications. First, high food inflation increases the price of food-related non-food items and since higher proportion of the consumption basket of the poor in Bangladesh is allocated to food items, the poor have to buy some food items at higher prices. Ideally, households buy less of the relatively more expensive items, food in this instance. But since the poor mostly survive at the subsistence level with little scope to further reduce food consumption, there is not much reprieve through the substitution effect. As such, the poor bear almost the full brunt of food inflation. Second, since food inflation reduces the real income of the poor, there is less money left after food purchases to consume other necessary goods and services such as education, health, fuel and energy. In other words, the income effect also hurts the poor more. Thus, higher inflation adversely affects the welfare of the poor, because they have no substitute for food, on one hand and their real incomes are reduced, on the other.
Although there is no systematic analysis of the relationship between inflation and poverty rates in the context of Bangladesh, a casual look at the historical data shows that the overall poverty was higher during the period of rapid inflation, particularly in the 1970s and 1980s. The incidence of poverty started to decline in the early 1990s, when inflation rates were also substantially lower. However, inflation has become a major problem in Bangladesh at present, led by rapidly rising food prices. According to a recent Centre for Policy Dialogue (CPD) estimate, the gross income of the poor decreased by 36.7 per cent between January 2007 and March 2008 mainly due to price hike of food and inflationary pressure. Due to such income erosion, an additional 8.5 per cent people or 2.5 million households have fallen below the poverty line over the period of those 15 months.
The empirical exercise recently carried out by Bangladesh Bank (2008) demonstrates that the poor people generally face a higher rate of inflation than the non-poor in Bangladesh. This is likely to have further adverse consequences on the welfare of the poor in both rural and urban areas in the country. The analysis also shows that the higher inflation rate of the poor in recent years has mainly arisen from higher food prices which have larger weights in the consumption basket of the poor. These findings thus have significant implications for designing appropriate anti-inflation policies by the government. Similar picture is also obtained from estimates of inflation for selected marginalized groups recently published in the Bangladesh Economic Outlook (June, 2008).
Moreover, the rural households in the poorest quintile earn on an average 63 per cent of their income from on-and off-farm wages. The majority are net food buyers; only 12 per cent are net food sellers. These characteristics indicate that the poorest households are highly vulnerable to food price increases and experience high welfare losses.
The increase in food prices has a dominant role in fuelling inflation in many countries including Bangladesh. However, it would not be prudent to address these specific causes of inflation with general macroeconomic and monetary instruments. Specific policies are needed to deal with the causes and consequences of high food prices (IFPRI Policy Brief, April 2008). Over the short term, the focus of policy actions should be on targeted interventions to protect the poor who are most vulnerable in the face of rising food prices. With target support to the poor rather than general price subsidies, the government will be able to ensure better coverage as well as free up resources and minimize distortions in the incentives for framers. Farmers should be ensured timely, adequate and affordable access to agricultural input (seed, fertilizer, irrigation etc.) to generate a strong supply response for the coming crop seasons.
The government will need to increase its capacity to operate a public food distribution system in collaboration with the private sector to stabilize prices and assist the poor and vulnerable groups in the society.
Over the medium to longer term, the focus should be on improving productivity by disseminating modern production technologies, developing rural infrastructure including reliable and expanded irrigation systems, bringing ecologically unfavorable areas under cultivation, strengthening extension services, improving marketing services, providing quality seeds through public-private partnership and ensuring rural financial services.
The writer is Director General, Bangladesh Institute of Development Studies, BIDS, He can be reached at Email: dg_bids@sdnbd.org, or shahab@sdnbd.org