# 6 Conclusions

The spike in food prices between 2005 and the first half of 2008 has highlighted the vulnerabilities of poor consumers to higher prices of agricultural goods and has generated calls for massive policy action. This paper has provided a formal assessment of the firstand second-order implications of higher prices for global poverty using a representative sample of 63 to 93 percent of the population of the developing world. Using data on changes in the domestic food CPI over the period covering January 2005 and December 2007--when food prices increased by an average of 5.6 percent in real terms--the paper finds that the implied increase in the extreme poverty headcount at the global level is 1.7 percentage points. This estimate takes into account both the increase in the cost of each household’s food consumption basket and the rise in incomes of households that derive at least some of their earnings from the production of agricultural goods. The global number hides a significant amount of regional variation, with poverty in Eastern Europe and Central Asia and Latin America remaining roughly unchanged, while the headcount ratios in East Asia and the Middle East and North Africa increase by more than almost 6 and 2.4 percentage points, respectively.

Although agricultural prices have declined from their mid-2008 highs, there are some indications that the long-term downward trend in the prices of agricultural commodities may be coming to an end, and thus the recent food crisis may be just a 'preview' of a world with higher food prices. By linking the household survey data with a general equilibrium model, the paper finds that a 5.5 percent increase in agricultural prices due to rising demand for first-generation biofuels could raise global poverty in 2010 by 0.6 percentage points at the extreme poverty line and 0.9 percentage points at the moderate poverty line. Poverty increases at the regional level vary substantially, with nearly all of the increase in extreme poverty occurring in South Asia and Sub-Saharan Africa. Although farmers benefit from higher output prices, they also tend to consume more food than the richer urban dwellers, which results in the agricultural poverty headcount remaining unchanged while the non-agriculture poverty headcounts increases by 1.3 percentage points.

The results in this paper suggest that the poverty consequences of higher food prices are substantial, but that the implied total poverty elasticity of high prices (taking indirect effects into account) is much lower than the first-order, or direct, elasticity. Still, millions of consumers could fall into extreme poverty due to higher food prices, and millions more already under the poverty line are likely to experience a further deterioration in their living standards. The paper's results are dependent on a number of assumptions and estimated relationships--including food consumption shares in a number of countries, the share of self-employed income of agricultural households, structural features of the general equilibrium model, and the link between variables of the micro-simulation--and therefore should not be interpreted as _the effect_ of higher food prices on poverty. The results nonetheless provide an important contribution to the discourse by identifying the relevant transmission channels, establishing the orders of magnitude, and exposing the regional and country variation concealed in the aggregate numbers.

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