# **4. Implications for Poverty**

What would be the welfare implications of modifying the relevant factors determining the price differentials in South Sudan? To address this question, we match the expected price effect arising from changing a specific determinant with the only household survey data available, i.e. the 2009 National Baseline Household Survey (NBHS). These need to be interpreted as partial equilibrium effects (i.e. everything else equal). Among the possible factors, we consider road quality and diesel price as those are amenable to policy interventions and are significant determinants of price differentials in **Error! Reference source not found.** . .

Due to data limitations the estimation relies only on the welfare effects via consumption but not via production.<sup>23</sup> The basic principle consists of applying the changes in prices faced by the household from modifying a specific factor to the overall household’s tradable expenditures.

We start from the consideration that households minimize a household expenditure function C(u,p), which finds the minimum cost to attain utility level u given prices p (Deaton and Muellbauer, 1980; Friedman and Levinsohn, 2002). Any changes in the vector of prices that the household is exposed to would have a direct impact on its consumption, which can be measured as ∆����∆� where q is a vector of quantities consumed and Δp is a vector of price changes. This expression approximates the compensating variation, i.e. the change in income required to restore the household to the pre-price change utility level. The expression can be re-formulated in terms of initial expenditures of household j introducing the distinction between goods produced and consumed: Where P is the purchase of household j of good i, S is the sale and Exp is the total initial expenditure of household j. Expression (3) defines the effects of price changes on the basis of whether the household is a net seller or buyer of good i. In the former case the compensating variation for the price change of i will be negative (i.e. a positive effect of price increase). The variable dlnp is the change of the natural logarithm of price for good i.

This is an approximation of the compensating variation as there are two missing elements. First, changes in prices may also be associated with changes in wage income for the household members’ working in the production of good i. Second, households could respond to the change in relative prices by changing the allocation of expenditures across consumption items. In particular they would tend to shift towards the consumption of relatively cheaper items to stay on the highest possible indifference curve. Due to data limitations, we do not take into account either of these two elements, which is likely to bias our estimates of the impact of changes in prices on welfare upwards (in absolute terms). However, the size of this bias should be moderate for two reasons: first wages take time before adjusting to price changes; second, South Sudan produces only half of what it consumes, so other goods which the households may try to switch to in response to price changes may also be imported and thus be subject to similar price changes. In case they are

> 23 See Calì and Varela (2013) for a detailed discussion on these limitations.

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