# <u>1. INTRODUCTION AND CONTEXT</u><sup>1</sup>

In recent years, world food prices have increased and fluctuated widely. This may have serious consequences for the achievement of Millennium Development Goals (MDGs) as food prices are linked to the broader economy through a wide range of channels: nutrition, trade, production, consumption and the government budget. These impacts are likely to vary across countries and household groups, depending on structural features. For a country, they depend in part on whether the country is a net exporter or a net importer of food. For households, the effects depend on the consequences of world food prices changes for incomes and for prices of the full set of goods and services in their consumption baskets, with food items having a particularly strong link to nutrition outcomes.

This paper explores how structural features, domestic policy responses, and foreign aid together condition the impact of world food prices on MDGs and other economic indicators in low-income countries (LICs). In terms of method, we employ MAMS, a CGE model developed at the World Bank for analysis of medium- to long-run country strategies, including strategies aimed at improving MDG outcomes.<sup>2</sup> Given the focus of this analysis, MAMS has here been extended to cover undernourishment. MAMS is applied to an archetype LIC database with two variants that differ in terms of trade structure, a net food exporter and a net food importer. The simulations, which cover the period 2009-2025, address the consequences of changes in world food (processed and unprocessed) price changes for MDGs and other indicators, as well as how domestic policy responses (subsidies and transfer schemes) may mitigate negative repercussions, with additional financing mobilized from alternative sources (domestic taxes, domestic borrowing, and foreign grant aid).

In outline, we proceed as follows. Section 2 describes the model structure and the database, while Section 3 presents the simulations and analyzes their results. The main conclusions are summarized in Section 4. Appendices 1 and 2 provide additional details on the database and the simulation results, respectively.

# <u>2. MODEL STRUCTURE AND DATABASE</u>

MAMS is a dynamic Computable General Equilibrium (CGE) model designed for country-level analysis of medium- and long-run development policies, including strategies for reducing

> 1 The author is in the Development Economics Propsects Group of the World Bank. He extends his thanks to Alejandro Quijada for high-quality research support and helpful comments on an earlier version of this paper. He is also grateful for inputs and comments from the following colleagues: Perrihan Al-Riffai, Clemens Breisinger, Martin Cicowiez, Benedicte De La Briere, Christopher Delgado, Moataz El-Said, Delfin Go, Maryla Maliszewska, Israel Osorio-Rodarte, Hans Timer, and Jos Verbeek. Funding from the Knowledge for Change Program (KCP) Trust Fund to the development of MAMS is also highly appreciated. The views, findings and conclusions expressed in this paper are entirely those of the author and do not necessarily reflect those of the World Bank, its Executive Board, or member country governments.

> 2 For more on MAMS, visit www.worldbank.org/mams

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