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Coping with High Prices: What Works for Consumers

Global Economic Prospects 2009: Commodities at the Crossroads

Helping hand

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Governments need to address the immediate needs of the poorest people, while minimizing the impact on already strained public budgets. Subsidies and price floors are expensive and poorly targeted anti-poverty measures.

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In recent months, governments have reacted to the food and fuel prices crisis by increased government funding of existing social safety net programs such as subsidies, conditional transfer programs, and food distribution schemes. Others have responded by trying to keep prices low via tax reductions or export bans. These measures have proved relatively expensive, increasing government spending by as much as 2 to 4 percent of GDP.

Often, poor targeting has meant that much of the spending does not benefit those most in need. Interference with market prices has also likely worsened the extent and duration of price rises by reducing producers’ incentives to increase output and consumer’s incentives to conserve. For example, India’s ban on rice exports in late 2007 led to a notable increase in international rice prices.
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Figure 3.25

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Figure 3.16

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Targeted assistance for poor people

Going forward, policymakers need to target their support to the poorest people. Of the various options available, targeted cash transfers tend to succeed best because they require less administrative capacity and minimize diversion of resources to less needy groups.

However, these programs run the risk of excluding those who cannot meet the conditions.In-kind programs such as school feeding or distribution of fortified weaning food for toddlers can be more effective in fiscally constrained countries.

Subsidies, even targeted ones, tend to be much less efficient, with as little as one-fifth of the money spent actually benefiting poor people, and public works programs rarely cover enough ground.

The policies adopted must be presented as temporary to avoid creating an unnecessary and unsustainable fiscal burden.

High food prices can help reduce poverty among farmers and farm workers in the long term, as they bring additional income to areas where 75 percent of the world’s poor live. For these potential gains to be realized, governments will need to invest in infrastructure, including roads and marketing institutions that get farm products to markets and inputs to farmers.

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International responses

Steps taken by the international community so far have focused on reallocating existing funds toward those most in need and strengthening the finances and capacity of emergency food aid agencies such as the World Food Program. Further steps that could be considered include providing the WFP with a more stable source of financing and giving it a line of credit so that it can move quickly when food prices are unusually high.

The international community could also better coordinate the management of grain reserves so that they can be brought to the aid of those in need more easily.

Trade reform also needs to be part of the solution. Steps are needed to control export bans by countries as a mechanism to reduce domestic prices. While a successful conclusion to the Doha round of trade reform negotiations might raise prices temporarily in the short term, it would likely benefit developing
countries by making their agricultural sectors more competitive and reducing their reliance on imported food.

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Conditional cash transfers — getting money to the poor

Huts

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Targeted cash transfers that help provide poor households with the resources needed to survive are the cornerstone of social safety nets in most countries that have such programs.

These programs are flexible and can be adapted to different circumstances. Countries of varying income levels from Mexico to Zambia have used these programs effectively.
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  • Even poor countries can afford to allocate resources for social safety nets. Costs range from 0.4 percent of GDP in Chile for a well-targeted program to more than 1 percent of GDP in Ethiopia for lifting VAT on food grains, raising the wage for the cash for work program and distributing wheat to the urban poor at lower prices.
  • The design and implementation of these programs has a large impact on how effective they are. While no program is a guaranteed success, few are guaranteed failures.
  • Conditional cash transfers such as Mexico’s Opotunidades and Brazil’s Bolsa Familia have proven to be effective ways to direct assistance to poor people. However, because they may exclude the neediest when services are scarce, and because they are not easy to set up, they can be part of an immediate crisis response only if they already exist.
  • The increase in the size and scope of a targeted safety net does not need to be permanent.

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