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Can High Agricultural Prices Benefit Developing Countries?

| Friday November 26th, 2010 | 2 Comments

Sounds backwards, right? Why would higher agricultural prices be a good thing for people struggling to buy food, especially in this tough economic environment? Dani Rodrick (citing Johan Swinnen) says, “High food prices benefit poor farmers who are net sellers, and hurt poor food consumers in urban areas. Low food prices have the opposite effects. In each case, the net effect on poverty depends on the balance between these two effects.” That sounds plausible, but not very encouraging. Rodrick goes on to cite several gloomy studies and quotes, and concludes by saying, “In other words, the news on the food prices front is always bad for the world’s poor, regardless of whether prices are rising or falling.” It’s probably true, but I prefer to believe Timothy Wise’s argument that high agricultural prices can benefit the world’s poor, wherever they may be.

Wise bases his dissent on new studies that take into account the effect of agricultural prices on the labor market and show that higher prices are better for developing countries. The studies use the example of the rise and fall in the price of rice and wheat in India and corn in Mexico. They modeled a 25% decrease in world rice prices and found that “78% of households would experience real income losses from such a price change, and the distributional impact would be regressive, with the poorest households losing the most.”

It boils down to this: when the rice prices go down, there is a reduction in demand for labor. Unemployed rural agricultural laborers are forced to search for work in urban areas, competing for jobs with unskilled urban workers. When there are more workers than jobs, wages go down and unemployment rises.

When rice prices go up, the opposite happens. Rural workers have abundant work and higher wages which are echoed generally across unskilled labor markets. In this scenario, the rural poor are better off, earning higher prices for crops and higher wages, even though they also buy the food at higher prices. However, the researchers acknowledge that some of the urban poor are worse off, although some fare well since the stronger labor market results in higher wages that offset higher prices.

The corn price study found that the income gains came primarily from higher wages, rather than crop prices. In both cases, researchers agree that a strong agricultural market is crucial to employ rural laborers to keep the rest of the urban labor market dominoes from falling.

One thing seems clear from both arguments is that there are winners and losers when prices and are high and when they are low. The best scenario seems to be stability in prices either way (rather than too much fluctuation). Both researchers make great points, backed up by investigation and studies. Between them, I prefer to believe in Wise’s argument. I hope that higher agricultural prices do benefit the world’s poor in some way. It would be one small ray of light in this economy.


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  • http://www.robotforex.org DavidGZ

    I was always one that believed the good of the money outweighs the good of the few, or the one. A price stable price balance between the farmer and the consumer is important, but from my perspective, lower food prices ensure limited inflation, and full bellies. When people have food on their plates, they are more efficient in their jobs.

  • http://nickpalmer.blogspot.com Nick Palmer

    The effects are further complicated by the fact that in “poorer countries” a greater percentage of the average persons income is spent on food. In “developed” nations the amount of average income spent on food percentage wise is much less.

    People in richer nations have far more money to spend on “discretionary” purchases – they need less for essential ones like food.