taxes or spending cuts – the results for this scenario are virtually identical to the _base_ . By 2015, borrowing-financed subsidies ( _sub+bor_ ) have brought about a fairly strong reduction in poverty but by 2025, poverty has increased as the negative impact of borrowing on domestic private investment makes itself felt. Financing via spending cuts ( _sub+spnd_ ) or taxes ( _sub+tax_ ) have similar impacts on poverty. The main difference between the two is that _sub+spnd_ permits more rapid private investment growth while _sub+tax_ permits more rapid growth in growthpromoting government services. The absolute and relative impacts of these two scenarios depend on the details and various trade-offs are at work. For example, spending cuts focused on unproductive spending would lead to less poverty; while higher direct taxes for high-income households do not distort relative prices, they reduce growth via the savings – privateinvestment channel. For MDG 1u (rate of undernourishment; Figure 3.7), the food subsidy scenario does better than the transfer scenarios; among the food subsidy scenarios, the ranking is similar, including a long-run negative effect also on this MDG if the subsidy is financed via domestic borrowing; the only exception if borrowing-financed subsidies, which are counterproductive, raising undernourishment. MDG 4 (under-five mortality rate; Figure 3.8) increases most strongly if government spending is cut or if subsidies are financed by borrowing; only the aid-financed subsidy scenario reduces the rate significantly.

In sum, these results suggest that governments that prioritize MDG achievements may do best protecting vulnerable households via targeted transfers (as long as this can be done with moderate administrative costs); in order to avoid increased undernourishment, they may also consider targeted food subsidies (as opposed to the untargeted subsidies that are simulated here), perhaps as a complement to transfers, possibly administered in conjunction with a transfer system. If transfers and administrative targeting are not feasible, then untargeted food subsidies can reduce the negative impact of world price shocks on nutrition. The impact on nutrition and the broader economic consequences are more positive it the subsidies can be financed with taxes that protect private investment or vulnerable households and/or with spending cuts that are focused on relatively low-priority areas.

# <u>4. MAIN CONCLUSIONS</u>

This paper presents a set of simulations aimed at exploring how structural features, domestic policy responses, and foreign aid together condition the medium- to long-run impact of world food prices on MDGs and other economic indicators in two archetype low-income countries (LICs), a net food exporter and a net food importer.

For the net food exporter, the main findings are that a doubling of world food prices has a positive impact unless the price increases are limited to its food imports. The impacts on the macro level and for MDGs are all positive, including reduced undernourishment. At a more disaggregated level, the different types of factor incomes grow more rapidly and the different household groups (urban and rural, both divided into upper and lower income) are all better off. If the price increases are limited to imports, then the impact is negative but relatively limited, given a small import share for food. Unless the increase in world prices is limited to 17