# **_Poverty and Distributional Impacts_**

The impact of rising food prices on poverty in an individual country depends on several factors including: (i) the extent world market prices are passed through to domestic prices; (ii) the initial poverty level and number of people clustered around the poverty line; (iii) the number of net buyers or net sellers of the commodities in question; (iv) the share of poor people’s budgets devoted to food overall and key staples in particular; (v) the extent of own-consumption relative to market purchases; and (vi) the effect of food price increases on real wages of poor people. (World Bank 2008a).

A recent study in eight countries estimates that the rise in food prices between 2005 and 2007 increased poverty by 3 percentage points on average. Extrapolating these results globally suggests that, as a result of the rise in food prices, total world poverty may have increased by 73-105 million people. (World Bank 2008a) For South Asia, a definitive analysis of how the food price increase affected poverty is currently underway using country level data<sup>5</sup> . Preliminary findings from the study indicate that the net effect will be to increase poverty significantly. This can be appreciated from the following points. First, South Asian poor on average spend between 25-60 percent of their total income on staple food; this share rises as we go down the expenditure/income scale. Second, there are many more poor household who are net buyers of staple food than net sellers. Third, availability and access to official safety net programs is hugely limited by inadequate fiscal space and weak institutions.

Among all South Asian countries, Afghanistan arguably is most vulnerable to increases in staple food prices. Unfortunately, as noted, Afghanistan also suffered the most increase in prices in the region. Afghanistan’s sensitivity to food prices can be gauged from the fact that Afghanistan’s poverty estimates range from a low of 33 percent in the normal food season to 42 percent in the lean season. Some 35 percent of Afghan households do not meet their minimum daily calorie intake and 46 percent are classified as having very poor dietary diversity and poor food consumption.

For Pakistan, a simulation based on the 2005/006 PSLM suggests that the 73 percent food price inflation between January 2007 and July 2008 would lead to a 3.2 percentage point increase in the national poverty headcount rate.

In the case of Bangladesh, a simulation study assessed the impact of a nearly 40 percent increase in retail rice price between May 2007 and April 2008. In the short run, a majority of households are adversely affected by the rice price increases because only 17 percent of Bangladeshi household are net suppliers of rice. In the absence of any wage adjustment, the increase in rice price reduces real household’s expenditures by an average of 5 percent. The impact is larger for urban (5.5 percent) than for rural households (4.6 percent). The impact is much worse for the bottom quintile, where average income declines by 10.5 percent as compared with less than 2.5 percent for the top two quintiles. Among the occupation group, only households headed by farmers (24 percent of all

> 5 A regional policy note on food price impact on the poor is in progress.

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