ADB: High food prices affect poor most, cause more poverty

from Inquirer

By Doris Dumlao
Philippine Daily Inquirer

MANILA, Philippines -- For every 10 percent increase in food prices, about 2.3 million more Filipinos fall into poverty, a new study by an Asian Development Bank economist suggests.

The conclusion of a new research paper -- “Has Inflation Hurt the Poor? Regional Analysis in the Philippines” authored by ADB economist Hyun Son -- was that inflation was hitting poor Filipino consumers harder than the more affluent ones.

"Specifically, the poor are highly sensitive to the price changes in food, particularly staple food items such as rice,” the study said.

"In addition, concerns over rising food prices are surmounting because such increase can undermine the gains from poverty reduction and human development that developing countries have experienced for the last decade or so,” it added.

Estimates on the price elasticity of poverty by commodity in the Philippines suggested that a 10 percent increase in non-food prices -- such as fuel and utilities -- would drive an additional 1.7 million people into poverty.

Separating the impact of specific commodity increases, the study said a 10 percent increase in the price of rice would force an additional 660,000 Filipinos into poverty.

An increase in fuel prices of 10 percent was also seen driving more people into poverty, but with a smaller headcount of 160,000.

The study showed that since 2003, the price increases in the Philippines have led to greater sufferings for the poorest segment of the population.

The effects of rising food prices were observed to be different across households.

"Rising food prices may lead to income gains for net producers. However, many urban and rural poor who are food consumers and not necessarily producers suffer the most from rising food prices,” the study said.

“Thus, with increasing food prices, some will gain and some will lose,” it said.

Using household surveys and detailed price data, the study analyzed the impacts of higher food prices on the average standard of living and on poverty for the Philippines. The study showed the dominating effect of rising food prices on poverty over the period of 2003-06.

“In particular, the severity of poverty rose by 16.8 percent while the standard of living declined by about 1 percent over the period,” the study said.

The study also suggested that the decline in the standard of living due to food price increases was particularly greater for the poorest of the poor.

“At worse, these households struggling to meet the minimum standards of living might have no choice but to cut down their expenditures on health and children's education,” the study said.

“Hence, safety measures will be required particularly for the poorest of the poor to be able to cushion the negative impact of higher food prices on their spending,” it said.

The study thus proposed an alternative price index for the poor that takes into account the consumption patterns of the poor.

Finally, the study found that the increase in food prices has been the major factor causing high inflation in the Philippines in recent periods. The non-food items of consumption have played a relatively minor role.

“It is wiser thus to direct government policies towards stabilizing food prices,” the study said. “Given these current trends moreover, monetary policy may not be an effective tool to combat rising inflation. Such policies may push the economy into recession, which will hurt the poor even more.”

The surge in the country's inflation rate to a three-year high of 8.3 percent in April has put the Bangko Sentral ng Pilipinas under more pressure to tighten monetary policy.

During the BSP's latest quarterly inflation briefing Thursday, top BSP officials said there were indications that demand pressures, and not just supply shocks, were also contributing to the sharp increases in consumer prices and that the central bank would have a role to play in cooling inflation and managing people's expectations.

BSP Deputy Governor Diwa Guinigundo said: “We're looking at two things. First, we're looking at the second-round effects. If there are wage adjustments and transport fare adjustments, even in terms of utilities charges, once you see an early sign of evidence of second round effects, I think monetary policy will have a good scope for addressing inflation.”

The second trigger, Guinigundo said, was the role of the inflation expectations channel in managing actual inflation.