Sections 4 and 5 describe the methodology and present the estimates of direct and indirect poverty impacts, respectively. Section 4 develops two simulations: the first one, particularly relevant for urban areas where the income effects tend to be small or nonexisting, takes into account the consumption effect only, while the second simulation combines income and consumption effects imputing a household-specific share of agricultural income in rural areas. Section 5 adds the second-order impacts of higher food prices on poverty to the analysis by linking the household survey data with a global general equilibrium model in a macro-micro simulation framework. Scenarios in this section link higher food prices to the recent and expected (2004-2010) trends in the production of biofuels and allow the households (at the macro level) to re-optimize their consumption and labor supply choices. Section 6 offers concluding remarks.

# 2 Food Prices and Poverty: Conceptual Links

An increase in international food prices will redistribute resources domestically as long as the pass-through or link between international and domestic food prices is different from zero (Macro Level in Figure 1). Assuming a positive pass-through effect, the increase in international food prices will be followed by an increase in domestic food prices enhancing a redistribution of resources from non-agricultural to the agricultural sector of the economy. According to Bussolo, De Hoyos and Medvedev (2009), almost 45 percent of the population in the world lives in a household where the main income-generating activity of the household head takes place in the agricultural sector. The authors show that a large share of this agriculture-dependent group, close to 32 percent, is poor and that these so-called “agricultural households” contribute disproportionately to global poverty: three of every four poor people belong to this group (see Table 1). So redistributing resources from agricultural to non-agricultural households --as an outcome of higher food prices-- could help reduce global poverty and inequality via higher incomes for farmers. However, household purchasing power will also deteriorate as a result of the increase in prices, making the link between agricultural trade liberalization and global household welfare a complex one. Higher food prices will enhance a redistribution of _real income_ between _net_ food producers and _net_ food consumers of agricultural products, with the welfare of the former improving at the expense of the latter (see Micro Level in Figure 1).<sup>3</sup> Finally, factor prices will also change following the change in prices of final products therefore changing the real incomes of households that are not directly involved in agricultural production (see Meso Level in Figure 1).

**Table 1: Poverty is higher among agricultural households even if their incomes are less unequal**

||**Gini**<br>**(%)**|**Pop**<br>**Shares**<br>**(%)**|**Average Monthly**<br>**Income**<br>**(US$ of 1993, PPP)**|**1-Dollar Poverty**<br>**Incidence (%)**|**Poverty Share**<br>**(%)**|
|---|---|---|---|---|---|
|**Agriculture**|44.9|44.8|65.4|31.7|75.9|
|**Non-Agri.**|62.8|55.2|328.9|8.1|24.0|
|**World**|67.0|1|210.8|18.7|1|

Source: Bussolo, De Hoyos and Medvedev (2009) 3 A household is defined as a net producer (consumer) of agricultural products when the monetary income it derives from merchandising these products is greater (smaller) than the amount spent on them.

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