Demand Analysis
2.7. Policy Implications
2.7.1. Setting Commodity Priorities in Agricultural Research for Nutritional Improvement A given agricultural research budget can be allocated to generate exogenous changes in the supply of a large number of alternative commodities. The question addressed here is how best to improve the nutritional status of the urban poor in Colombia (Pinstrup-Andersen, de Londoño, and Hoover, 1976). A complete matrix of direct and cross-price elasticities of
demand for 18 food items was estimated from cross-sectional data and the flexibility of money under the want independence assumption (although, as correctly argued by Brandt and Goodwin, 1980, this assumption may not be warranted at such a fine level of disaggregation).
Starting from an exogenous rate of change in the supply of each of the 18 commodities, the new market equilibria (given by the rates of change in equilibrium prices and quantities) are then calculated, using the matrix of price elasticities of demand and setting the short run elasticity of supply equal to zero. The predicted changes in total demand are then allocated across income groups on the basis of demand elasticities specific to each group. Using transformation coefficients to convert food into calories, the direct impact of the supply shift in commodity i on calorie consumption is the increase in consumption of i while the indirect impact is the sum of the adjustments in the consumption of all other foods. The net effect is the sum of these two effects, and it gives the change in calorie consumption brought about by an increase in the supply of commodity i.
Before supply increases, the households in income stratum 1, which represent 18.3% of all households in the city of Cali, are deficient in calorie consumption, with only 89% of their calorie intake requirements satisfied. The results in Table 2.4 show that the net impact of a 10% increase in supply on per capita calorie intakes among the deficient stratum is highest for basic staples such as rice, maize, and cassava. By contrast, increasing the supply of beef and milk is largely wasted in increasing the calorie consumption of the nondeficient strata. It is notable that some commodities have large negative indirect effects that can eventually fully cancel the positive direct effects on calorie consumption. This is the result of the high direct- and cross-price elasticities (absolute value in excess of one) of these foods, their large shares in total expenditures, and their relatively high nutrient content. When the supply of one of these foods increases, total consumer outlay for the food increases. Due to the budget constraint, outlays on other foods tend to decrease as reflected by the cross-price elasticities, causing the net result of a smaller nutritional impact than that of the direct effect alone. With some items, such as peas and tomatoes, the net effect can be negative, with the paradoxical result that increasing the supply of these foods may end up reducing the calorie intake of a deficient group.
Table 2.4 approximately here
Finally, it is notable that the reduction in calorie deficiency that results from an increase in supply is small, with most of the nutritional benefits captured by the nondeficient groups.
With a zero supply elasticity, a 10% increase in the production of rice and maize would reduce calorie deficiency by 18% and 16%, respectively. The greater the elasticity of supply response, the less the fall in price induced by a same percentage increase in supply and the less the increase in consumption. Hence, if the elasticity of supply response is one, the same calorie increases are reduced to 6% and 5%, respectively. Thus we draw two important conclusions: (1) The choice of budgetary allocation across commodities in agricultural research does have an impact on who will benefit nutritionally. While not the sole goal in agricultural research, nutritional implications for the poor should be taken into account when establishing commodity priorities in agricultural research, particularly if considering no other policy intervention. (2) Because malnutrition is the outcome of absolute poverty, however, significant declines in malnutrition require a more direct approach that raises the incomes of the poor or transfers food to them in the form of food subsidies. Although new technology resulting in shifts in supply and reduced prices is important to improving human nutrition, the
full nutritional potential of such technology is reached only if accompanied by rapid increases in incomes and food availability among low-income groups.
2.7.2. The Relationship between Calorie Intake and Income
The calorie (c) elasticity with respect to price and income derives directly from the price and demand elasticities of demand for food items and technical coefficients (aci) measuring the calorie content of each food i. The calorie elasticities with respect to the price of a food i (Eci) and to income (ci) are:
Eci dc/c dpi/pi
acjqjEji
j
acjqj
j
, and cy
dc/c dy/y
acjqjj
j
acjqj
j
.
There are substitutions between quantity of calories and quality of food as income increases, leading to a shift to higher nutrient cost foods. As a result, it is no surprise that the income elasticity of calorie intake is smaller than the income elasticity of food expenditures.
There has been an intense debate on the magnitude of the calorie elasticity. Earlier estimates by Knudsen and Scandizzo (1982) for five LDCs had found income elasticities of calories in the range of 0.53 to 0.74 for the lowest income quartile. Using much more detailed data, with estimations of nutrient-expenditure elasticities for 120 foods in South India, Behrman and Deolalikar (1987) found that these elasticities are not significantly different from zero: as incomes rise, consumers shift to higher food quality and higher nutrient cost foods. This was, however, challenged by Strauss and Thomas (1990) with data from Brazil and by Subramanian and Deaton (1992) with data from Maharastra in India. Using flexible functional forms, these researchers showed that the calorie-expenditure relation is positively sloped for the lowest three quartiles of per capita expenditures. While this elasticity is less than that for food expenditure, it is significantly different from zero, in the 0.25 to 0.3 range in the lowest expenditure decile in Brazil and 0.3 to 0.5 in rural Maharastra.
The analysis of calorie consumption has been extended to the intrahousehold allocation of food, particularly after initial studies revealed a strong gender bias against female children (Sen and Sengupta, 1983). A controversy has also arisen here between those who look at the household as a single decision-making unit and those who use a bargaining approach between household members. Following the first approach, Rosenzweig and Schultz (1982) hypothesized that parents make allocations of food to children based on the present value of the future contributions which the child is expected to make to family income. This is confirmed by their finding that, in areas of rural India with greater female employment, households invest more in female children, resulting in improved nutrition and lower mortality rates for these children. Following the second approach (Folbre, 1984; McElroy, 1990), women have greater bargaining power within the household in areas where they have higher fallback options outside the household determined in particular by greater access to the labor market. A key issue for the bargaining approach is that income may not be pooled within the household, and that income controlled by women may have a greater impact on child nutrition and health than income controlled by men, an effect empirically confirmed by Thomas (1990) for Brazil. The impact of the opportunity cost of time for husbands and wives on the intrahousehold allocation of food can derive from both a joint household utility function and a bargaining model. Senauer, Garcia, and Jacinto (1988) estimate the relative
allocation of calories within households for husbands, wives, and children in the rural Philippines. They find that the mother’s wage rate has a positive impact on the calorie allocation for children, while that of the husband has a negative impact, suggesting the importance of improving the employment conditions of women in order to improve intrahousehold resource allocation toward children.
Finally, studies of intrahousehold calorie-price responsiveness are important to design schemes of food subsidies in relation to individual types within households. Empirical analyses show that price elasticities differ across members and foods, and these differences tend to be large. For southern India, Behrman and Deolalikar (1990) find that price elasticities tend to be more negative for female members, implying that food price increases during the lean season or drought years fall disproportionately on this group. As a consequence, they are the group most at risk as prices fluctuate. Regarding different foods, an increase in the price of sorghum, the main staple in the diet, has a negative effect on nutrient intake, but increases in the prices of rice and milk have strong positive impacts. A positive relation suggests that households value nonnutritional attributes of food in their choices. This also suggests that price subsidies on foods other than inferior ones such as sorghum may actually reduce the nutrient intake of household members. Garcia and Pinstrup-Andersen (1987) similarly find that the calorie intake of children in the Philippines is positively related to the price of rice, while that of the whole household is negatively related, suggesting caution in the choice of foods to be subsidized in terms of the differential nutritional welfare of household members: a subsidy to the price of rice may improve household nutrition but worsen that of children.
Exercise 2
Food Subsidies in Morocco
Morocco has maintained for many years an expensive system of untargeted food subsidies that absorbed, in the early 1980s, as much as 10% of the government budget.
Attempts at scaling down these subsidies as part of the stabilization program that followed the end of the phosphate boom and reduced capacity to borrow on the international financial market have been highly conflictive. Subsidies on meat, butter, and other dairy products have been removed since the early 1970s, but attempts at raising the prices of soft wheat, edible oils, and sugar have been strongly opposed, leading to deadly street riots.
This food subsidy policy exercise (file 2DEMAND) is based on the study by Laraki (1989). The objective is to explore alternative ways of reducing the government’s food subsidy budget while preserving the real income or the nutritional status of the poor.
Although we limit ourselves to the rural sector, a similar analysis can be conducted for the urban sector. After having estimated a complete system of demand for the rural sector, we simulate the impact that alternative redefinitions of the food subsidy program would have on three policy criteria:
The real income of the rural poor (y), Their calorie intake (qc),
The government’s food subsidy budget (B).
Data on rural household expenditures on 6 food categories and on nonfood for 10 income deciles are reported in cells A7–J19 of Table 2E.1. Since we have only cross-sectional expenditure data, we can estimate price elasticities either using the separability hypothesis with a chosen flexibility of money as explained in section 2.2.2 or the Deaton approach presented in section 2.4. We start with the first and will proceed with estimates obtained by Laraki using the second.
Table 2E.1 approximately here