UG

PHD PROPOSAL

PHILIP KOFI ADOM

PH.D RESEARCH PROPOSAL

TITLE:

THE IMPACT OF RISING FOOD PRICES ON HOUSEHOLD WELFARE IN GHANA

PHILIP KOFI ADOM

UNIVERSITY OF GHANA

DEPARTMENT OF ECONOMICS

Email: adomonline@yahoo.co.uk

TELEPHONE: 00233-246763661

UG

PHD PROPOSAL

PHILIP KOFI ADOM

1.1 Introduction and Problem Statement The period 1974 to 2005witnessed a fall in food prices on world markets by three quarters in real

terms (Wodon and Zaman 2008). There was however, a reversal in the trend between 2005 and

2008 as international prices of most staple food commodities rose significantly. In 2007, for

instance, whereas rice and wheat prices rose by 25 percent and 70 percent respectively, maize

prices increased by 80 percent, and dairy prices by 90 percent (Ivanic and Martin, 2008). After a

marginal fall in 2008-2009, international food prices resumed their upward trends in mid-2009.

This increase continued until the later part of 2010. Consequently the World Bank food price

index rose by 15% between October 2010 and January 2011. This level was just 3% below its

previous (2008) peak Ferreira et al. (2011).

The main factors responsible for the price increases are not only complex but there are also

varying views on their relative importance on how they cause prices to increase. However, there

is a growing consensus that a combination of demand and supply sided factors and policy

decisions are the main driving forces. The supply -sided factors include lower levels of cereal

stocks by world‘s major cereals producers, which leads to higher price volatility; reduction in

productivity as a result of bad weather; and increasing petroleum prices, which affect food

prices through transport cost and agricultural inputs such as fertilizer. On the demand side,

factors include increasing demand from the emerging biofuels market and changes in

consumption patterns in large emerging economies such as China and India. Policies such as

export bans by key wheat and rice producers and the use of food grains to produce biofuels and

financial market (speculation) and trade policy responses have also compounded the problem

(Mitchell 2008).

UG

PHD PROPOSAL

PHILIP KOFI ADOM

Depending upon the type of domestic market structures, price control measures and trade

regimes, rising world food prices have different pass-through effects on domestic prices. Even

though these pass-through effects may vary very much among countries, there is growing

evidence that higher food inflation has become a major socio-political issue which has led to

social unrest across all continents (Wodon and Zaman, 2008). Food price inflation increased

significantly in 2007/08 ranging from the Kyrgyz Republic (32%) to Vietnam (26%) and Chile

(16%). Several countries in the West Africa sub-region-including Ghana also experienced double

digit inflation due to the soaring food prices. These levels of higher food inflation led to concerns

that poverty might increase substantially and rapidly in many countries (FAO 2007; World Bank

2008a). Current evidence on the possible effects of higher food price on the poor has confirmed

these fears (e.g. Ivanic and Martin 2007). Beyond the short-term impact of higher food prices on

the cost of the food purchased by households, there is growing evidence that higher overall

inflation hit the poor hardest (Easterly and Fischer 2001; Ravallion and Datt 2002). In the long

run higher food prices could lead to lower caloric consumption leading to increased child

malnutrition (see, Del Rosso,1999; Alderman et al. 2006). There is also evidence that when

households are faced with large negative shocks, there is the tendency for them to sell off their

productive assets such as seeds and livestock, which have the negative effect of reducing their

future earnings (Carter et al. 2004; Fafchamps et al. 1998; Jalan and Ravallion 2002; Lokshin

and Ravallion 2000). In Ghana if unabated, these rising food prices have the potential of erasing

the modest gains made in poverty reduction that have been achieved in the last decade and also

reduce the growth rate in GDP. There will therefore be delays in meeting the first Millennium

Development Goal, which is, the eradication of hunger and extreme poverty.

UG

PHD PROPOSAL

PHILIP KOFI ADOM

An important policy issue is to determine who is being hurt or benefited by the soaring food

prices. Urban and rural non-farm households are the most likely to be affected by the food crisis,

and even more proportionally the poorer who have higher food budget shares. But the question

of what is the distribution of the welfare gains and loses from higher food prices still remains

unresolved. Other questions relevant to the food crisis is the over all impact on inequality and

whether government policy through targeted cash transfers is enough to mitigate some of the

negative impacts. In totality, are the poorest the hardest hit? It is therefore critical to identify the

welfare impact of the increasing food prices on households in Ghana.

1.2 Objective and Motivation of the study

Recent studies in the rising food prices literature focused on the determinates of the trends in

international prices, their relative importance, the transmission of prices to domestic markets, as

well as their the prospects for future price trends (Dawe, 2008;Wodon and Zaman, 2008; De

Janvry and Sadoulet, 2009; Vu and Glewe 2010 and Chauvin 2011) . Yet a lot of such other

studies consider the microeconomic impact of the crisis (Ivanic and Martin, 2008; Aksoy and

Isik-Dikmelik, 2008; Dessus et al., 2008; and Rios et al., 2008a). This study which follows the

latter strand is concerned with assessing the potential welfare impact of high food prices on

households in Ghana. Compared to the available literature, this study makes an extra stride by

differentiating the impact of the increase in food prices across the major subgroups within the

population. Specifically, the main objective of present study is to examine how household

characteristics, access to assets and markets, and livelihood strategies are correlated with the

magnitude and direction of the impact of the rising food prices on the household’s welfare.

Also this study deviates from the use of panel regression models in the literature to the use of

country-specific regression analysis. By this approach the study hopes to bring out the real

country issue of rising food prices and household welfare for purposes of policy making.

UG

PHD PROPOSAL

PHILIP KOFI ADOM

The motivation for this objective is informed from the need to identify the specific groups of

households that are most likely to be affected by the rising crisis, which is very critical for policy

concerns than just investigating the average gains or losses to society. For instance if rising food

prices hit the rich hardest that the poor then such crisis triggered some progressive redistribution

of resources, and for which governments may not worry too much (especially if their policy

objective is driven by reducing poverty) and vice versa.

1.4 Methodology

1.4.1 Data sources

The data on which this study is based are those derived from the third, fourth and fifth rounds of

the Ghana Living Standards Survey (GLSS). The GLSS is a multi-purpose survey of households

in Ghana, which collects information on the many different dimensions of their living conditions

on, among others, education, health and employment. These data are collected on a countrywide

basis. Five rounds of data have been collected, starting in 1987/88. In this study we focus on the

three most recent rounds—those conducted in 1991/92, 1998/99 and more recently in 2005/06.

The 2005/06 edition for instance is a sample of at least 8,687 households containing over 37,128

persons including about 22,147 adults aged 15 years and over. The questionnaires used for these

three rounds were almost identical, meaning that their results can be directly compared. By

contrast, the first two rounds were based on different questionnaires, making comparison with

the later rounds more difficult.

1.4.2 The model

This paper is preoccupied with the immediate impact of high food prices on household welfare,

which in effect depends on whether the household is a seller or buyer of the food. Other factors

that are equally important in such analysis like the short term labour market effects (analyzed for

instance by Ivanic and Martin, 2008) and longer run supply response as well as general

UG

PHD PROPOSAL

PHILIP KOFI ADOM

equilibrium effects (through the induced changes in productivity, and relative output, input and

factor market prices) are not considered by this study due to lack of data.

In this framework, for any given change in food prices, the net effect on household welfare

depends on whether the household is a net seller or net buyer (in the aggregate or for any specific

food item). If the household belongs to the former category then for any increase in food prices

increase, the household will experience a welfare gain in the short run but a welfare loss if it is a

net buyer. To quantify this change in welfare the study employs the compensating variation

method; which attempts to measure the gain/loss in welfare in terms of the income/monetary

transfer needed to restore the household to the level it was before the change in price occurred.

Thus the methodology used in this study follows the work by Deaton (1989) which have been

applied in many other empirical studies such as Budd (1993), Barrett and Dorosh (1996), Minot

and Goletti (2000) and, recently, Ivanic and Martin (2008) and Rios et al. (2008a).

More formally, the immediate welfare impact of a change in the price of a staple food for a

household id is given as:

[ ] iLCRPRPW γ+−∆=∆

Where:

W∆ is the welfare effect expressed in percentage terms of the consumption level of household1 i,

P∆ represents the percentage change in food prices, PR is the food production ratio ( measured

as household’s agricultural sales divided by its total income or consumption); CR is the food

expenditure ratio ( computed as household’s food consumption divided its total income or

consumption); and γ is the wage rate elasticity arising from the changes in food price and L -

labour share in total household income or consumption.

1 Expenditure is used a proxy for household welfare because its been adjudged a good proxy for permanent income and thus also for long term average well-being (Balisacan et al. 2003)

UG

PHD PROPOSAL

PHILIP KOFI ADOM

The intuition behind equation (1) is that if the household is a net seller of food (in the aggregate

or for any specific food item) PR will be greater than CR so that the household benefits from the

price increase. On the contrary, if the household is a net buyer of food then the household will

experience a welfare loss. Households in our model are expected to experience a deteriorating in

welfare from any given change in food process because they are net buyers of food. The second

term in equation one attempts to capture the possible compensating effect of higher wages for

those households who provide wage labour in food producing farms. The study is limited to short

run analysis because of lack of existing data to capture potential gains through wages.

Multivariate analysis

To test the robustness of the study we employ a multivariate analysis by running a regression of

the simulated percentage welfare change on a number of household demographic, asset and

socio-economic characteristics as used in the paper by Chen and Ravallion (2004 and) and Zezza

et al. (2008). Following the work by Zezza et al. the model for our multivariate analysis is

expressed as:

iii XW εβα ++=

Where: iW represents the estimated change in welfare expressed as a percentage of initial per

capita consumption expenditure of household I, iX are categorical variable representing a

vector of household characteristics which are likely to influence the expenditure per capita and �

is the error term.

In this paper, the first set of independent variables used include: Sex of the household head

(Male or Female); Area in which household resides (Urban or Rural); Regions (divided into 10

regions; Education level of household head (categorized in seven levels: Never, Primary School,

Junior High School, High School, Technical Training, Vocational Training, and College or

Higher) - to represent human capital; Occupation and marital status of household. Other

UG

PHD PROPOSAL

PHILIP KOFI ADOM

variables such as age and age-square of household head as well as log of household size are also

added.

The next set of variables measures household access to natural and physical capital, as well as

household wealth. Natural capital is measured by hectares of land owned, and quality is

approximated by two dummy variables indicating whether the household used any fertilizer or

pesticides during the year preceding the survey. The choice of assets included agriculture-

specific assets (such as tractors, threshers, harvesters) for agricultural wealth and household

durables (e.g. TV, stove, refrigerator) for non-agricultural wealth.

We expect agricultural assets to be positively related to changes in welfare as they are likely to

be correlated with the ability to produce a surplus in staples. As it has descriptively been shown

earlier, however, the relationship may not be linear in the case of land, as larger landowners may

diversify away from staple food crops. We therefore include a squared term for land owned in

our regressions. We also expect the use of inputs like fertilizers and 17 pesticides to be a good

predictor of surplus production, as they have been shown elsewhere to be consistently positively

correlated to successful performance in agricultural output markets (Rios et al., 2008b; Zezza et

al., 2008). Finally, the set of regressors includes a measure of access to infrastructure and

markets, created in a manner similar to the wealth indices, including both public goods

(electricity, telephone, etc.) and distance to infrastructure (schools, health centers, etc.).

References

Alderman, H., J. Hoddinott, and B. Kinsey. 2006. “Long Term Consequences of Early Childhood Malnutrition”. Oxford Economic Papers Vol. 58(3): 450–474.

Aksoy, A. and A. Isik-Dikmelik. 2008. “Are Low Food Prices Pro-Poor? Net Food Buyers and

Sellers in Low-Income Countries”. World Bank Policy Research Working Paper No. 4642

UG

PHD PROPOSAL

PHILIP KOFI ADOM

Barrett, C. D. and P. A. Dorosh, 1996. “Farmers' Welfare and Changing Food Prices:

Nonparametric Evidence from Rice in Madagascar, American Journal of Agricultural Economics, 78(3): 656-69.

Budd, J. W., 1993, Changing Food Prices and Rural Welfare: A Non-Parametric Examination of the Cote d’Ivoire, Economic Development and Cultural Change, 41(3): 587-603. Carter, M. R., P. D. Little, T. Morgues, and W. Negatu, 2004. “Shocks, Sensitivity and

Resilience: Tracking the Economic Impacts of Environmental Disaster on Assets Ethiopia and Honduras”. BASIS Research Program on Poverty, Inequality and Development, Wisconsin.

Chen, S. and M. Ravallion, 2004. “ Welfare Impacts of China’s Accession to the World Trade

Organization, in D. Bhattasali, S. Li, and W. Martin, editors, China and the WTO: Accession, Policy Reform, and Poverty Reduction Strategies” Oxford University Press and the World Bank, Oxford and Washington DC.

Christiaensen, L. and L. Demery, 2007. “ Down to Earth: Agriculture and Poverty Reduction in

Africa, Directions in Development. World Bank, Washington, D.C. Dawe, D. 2008. “Have Recent Increases in International Cereals Prices Been Transmitted to

Domestic Economies? The Expeience in seven large Asian countries” ESA Working paper No. 08-03

Deaton, A. 1989. “Rice prices and income distribution in Thailand: A non-parametric analysis”.

Economic Journal. 99 (395) (Supplement): 1–37. Deaton, A. 1997. “The Analysis of Household Surveys: A Microeconometric Approach to

Development Policy”. Baltimore: Johns Hopkins University Press. De Janvry, A. and Sadoulet, E. (2009) “Impacts of food prices on poverty and Welfare in India”

University of California at Berkeley Del Rosso, J. M., 1999 “ School Feeding Programs: Improving Effectiveness and Increasing the

Benefit to Education", UK Partnership for Child Development, Oxford. Easterly,W. and S. Fischer, 2001. “ Inflation and the Poor, Journal of Money, Credit and

Banking 33(2): 160–178.

Dessus, S., S. Herrera, and R. de Hoyos, 2008. “The Impact of Food Inflation on Urban Poverty and Its Monetary Cost: Some Back-of-the-Envelope Calculations”. World Bank Policy Research Working Paper No. 4666, The World Bank, Washington, DC.

UG

PHD PROPOSAL

PHILIP KOFI ADOM

Fafchamps, M., C. Udry, and K. Czukas, 1998. “Drought and Saving in West Africa: Are

Livestock a Buffer Stock?” Journal of Development Economics 55(2): 273–305. Ferreira, F., P. Leite and M. Ravallion 2010. “Poverty Reduction without Economic Growth?

Explaining Brazil‟s Poverty Dynamics, 1985-2004”. Journal of Development Economics 93: 20-36.

Ferreira, F.H. G.,A. Fruttero, P. Leite, and L. Lucchetti1, 2011. “Rising Food Prices and

Household Welfare: Evidence from Brazil in 2008 Foster, James, J. Greer and E. Thorbecke (1984): “A Class of Decomposable Poverty Measures”,

Econometrica 52 (3): 761-766. Friedman, Jed and James Levinsohn (2002): “The Distributional Impacts of Indonesia‟s

Financial Crisis on Household Welfare: A “Rapid Response” Methodology,” World Bank Economic Review 16: 397–423

Ghana Statistical Service (2006), Ghana Living Standards Survey , various Reporst Ivanic, M., and W. Martin, 2007. “Implications of Higher Global food Prices for Poverty in

Low-Income Countries” Policy Research Working Paper 4594, World Bank, Washington, DC.

Ivanic, M. and W. Martin. (2008). “Implications of Higher Global Food Prices for Poverty in

Low-Income Countries”, Agricultural Economics, Vol. 39, pp. 405–16.

Jalan, J., and M. Ravallion, 2002. “ Household Income Dynamics in Rural China” Discussion Paper No. 2002/10, United Nations University, World Institute for Development Economics Research.

Klytchnikova, I. and N. Diop, 2006. “Trade Reforms, Farm Productivity, and Poverty in

Bangladesh” Policy Research Working Paper 3980, World Bank, Washington, DC. Lokshin, M., and M. Ravallion, 2000. “ Welfare Impacts of Russia’s 1998 Financial Crisis and

the Response of the Public Safety Net” Economics of Transition 8(2): 269–295. Minot, N., and F. Goletti. 2000. “Rice market liberalization and poverty in Vietnam” Research

Report 114, International Food Policy Research Institute (IFPRI). Mitchell, D., 2008 “ A Note on Rising Food Prices” mimeo, World Bank, Washington, DC.

UG

PHD PROPOSAL

PHILIP KOFI ADOM

Nganou, J. P., J. C. Parra Osorio, and Q. Wodon, 2008 (forthcoming). “ Oil Price Shocks,

Poverty and Gender: A Social Accounting Matrix Analysis for Kenya” in M. Bussolo and R. De Hoyos, editors, Gender Aspects of the Trade and Poverty Nexus: A Macro-Micro Approach, World Bank, Washington, DC.

Pedro, C. and R.U. Mendoza 2008. “Anatomy of the Global Food Crisis” United Nations

Development Programme (UNDP) Rashid, S. 2002. “ Dynamics of Agricultural Wage and Rice Price in Bangladesh: a

Reexamination” MSSD Discussion Paper No. 44, International Food Policy Research Institute, Washington DC.

Ravallion, M., 2000. “ Prices, Wages and Poverty in Rural India: What Lessons Do the Time

Series Data Hold for Policy?”. Food Policy, 25(3): 351-64. Ravallion, M. 1990. “ Welfare changes of food price changes under induced wage responses:

Theory and evidence for Bangladesh” Oxford Economic Papers, 42: 574–85. Ravallion, M. and G. Datt, 2002. “ Why has economic growth been more pro-poor in some states

of India than others?” Journal of Development Economics 68:381-400. Ravallion, M. and D. van de Walle, 1991. “ The impact on poverty of food pricing reforms: a

welfare analysis for Indonesia” Journal of Policy Modeling, 13(2):281-99 Rios, A. R., W.A. Masters and G.E. Shively. 2008a. “Agricultural Prices and income

Distribution among Framers: A whole-Household, Multi-Country, Multi-Year Analysis. Purdue University, Mimeo, May 25.

Robles, M. and M. Torero (2010) “Understanding the Impact of High Food Prices in Latin

America”, Economía 10 (2): 117-164. Singh, I., L. Squire, and J. Strauss, 1986. “ Agricultural Household Models: Extensions and

Applications” Johns Hopkins University Press, Baltimore. Son, H. and N. Kakwani 2009: “Measuring the Impact of Price Changes on Poverty”, Journal of

Economic Inequality 7: 395-410. SMERU, 2003, Poverty and Social Impact Analysis: Indonesia rice tariff, mimeo, SMERU. Sumarto, S., A. Suryahadi, and W. Widyanti, 2005, Assessing the Impact of Indonesian Social

Safety Net Programmes on Household Welfare and Poverty Dynamics, European Journal of Development Research, 17(1): 155-77.

UG

PHD PROPOSAL

PHILIP KOFI ADOM

Timmer, C. P., and D. Dawe, 2007, Managing Food Price Instability in Asia: A Macro Food

Security Perspective, Asian Economic Journal, 21(1): 1-18. Vu, L. and Glewe, D. 2008 “Impacts of food prices on poverty and Welfare in Vietnam”

Department of Applied Economics, University of Minnesota. Warr, P., 2005, Food Policy and Poverty in Indonesia: A General Equilibrium Analysis,

Australian Journal of Agricultural and Resource Economics, 49(4): 429-51. Wodon, Q. and H. Zaman, 2008. Rising Food Prices in Sub- Saharan Africa: Poverty Impact and

Policy responses” World Bank Policy Research Working Paper 4738 Wodon, Q., C. Tsimpo, P. Backiny-Yetna, G. Joseph, F. Adoho, and H. Coulombe., 2008a,

“Potential Impact of Higher Food Prices on Poverty: Summary Estimates for a Dozen West and Central African Countries” mimeo, World Bank, Washington, DC.

World Bank, 2008a.” Addressing the Food Crisis: The Need for Rapid and Coordinated Action”

Background paper for the Finance Ministers Meetings of the Group of Eight, Poverty Reduction and Economic Management Network, Washington, DC

Zezza, A., P. Winters, B. Davis, G. Carletto, K. Covarrubias, E. Quinones, K. Stamoulis, T. Karfakis,

L. Tasciotti, S. Di Giuseppe and G. Bonomi. 2007. “Rural Household Access to Assets and Agrarian Institutions: A Cross Country Comparison” ESA Working Paper 07-17, Rome: FAO.

Zezza, A., B. Davis, G. Carletto, C. Azzari, K. Covarrubias, L. Tasciotti, and G. Anriquez (2008).

“The Impact of Rising Food Prices on the Poor”. ESA Working Paper 08-07, Rome: FAO.