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High Commodity Prices: Impact on Poor People

Global Economic Prospects 2009: Commodities at the Crossroads

Woman buying bread

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Food and fuel prices have boosted inflation in developing countries. In general, higher food prices have had a more severe effect on poverty, because poor households tend to spend more than half their incomes on food and only a tenth on fuel. 

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High commodity prices pose challenges for poor people, especially in consuming countries. Sharp price rises for heavily traded commodities like oil can pose balance of payments problems and make net importers more vulnerable. But high food prices cause balance of payments issues only in a handful of countries, because most food commodities are consumed in the country where they are produced.

The larger issue is the costs that higher commodity prices, especially food prices, impose on the very poor. Both food and fuel prices have boosted inflation and cut sharply into real incomes in developing countries, pushing more people into poverty, and worsening the situation of those already poor.
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Food price hikes and shares in consumption vary by region
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Key impacts seen

  • Globally, the cost of higher food and fuel to consumers in developing countries was equal to about $680 billion in 2008 ($400 billion related to oil and $240 billion to food).
  • High oil prices increased current account deficits in a number of countries by as much as 5 percent of their GDP.
  • Higher food prices drove up poverty because poor households tend to spend more than 50 percent of their incomes on food, and only about 10 percent on fuel, on average. Fuel is also relatively easy to replace by biomass.
  • Internationally traded and dollar-denominated food prices increased by 54 percent between Jan. 2005 and Dec. 2007. However, the real-local currency price of food rose by much less in most developing countries because: people eat a wider range of food products and the prices of many of these rose by less; many countries took steps to prevent the pass-through of high prices; and the dollar was depreciating. Real food prices did not rise uniformly everywhere: prices in Africa rose by an average of 8.3 percent compared with 19.8 percent in the Middle East, which relies more heavily on imported foods like wheat.
  • The rise in food prices is estimated to have pushed between 130-155 million more people into extreme poverty.
  • The share of extremely poor people rose by 1 or more percent between 2005 and early 2007 in East Asia, the Middle East, and South Asia. The impact was less in Africa because food prices rose less there and more of the poor live in rural areas.
  • In general, the urban poor were affected more strongly than the rural poor, because they benefit only indirectly from farmers’ higher revenues and associated long-term gains to the agricultural sector.
  • For very poor people, reducing consumption from already low levels even for a short period has severe long-term consequences. Higher food prices during 2008 alone may have increased the number of children suffering permanent cognitive and physical injury due to malnutrition by 44 percent.

What is very evident from these impacts is that countries must react to higher food prices by targeting assistance to people who are poorest and most at risk. While all people suffer from higher food prices, governments and international aid agencies cannot afford to offset all of the increased costs, which amount to as much as 26 percent of GNI (equal to total government expenditures) in some countries.

Instead, efforts need to be focused on the very poor, who are most at risk. The cost of offsetting high food prices for these people alone is a more manageable $34 billion worldwide or $2.4 billion if only the poor in the poorest countries are considered.

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Higher food prices have increased both the incidence and severity of poverty worldwide
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