Chapter 20 – Policies Aimed at Lowering the Price of Food Through Subsidized Consumption

Chapter 20 – Policies Aimed at Lowering the Price of Food Through Subsidized Consumption

I. Explicit food subsidies A. Rationale 1. Developed countries have surplus food

2. Logical to feed hungry people now, whereas agricultural research & education may take a long time to increase supply 3. Rich people prefer to give hungry people food instead of money

4. Many in exporting countries benefit from sending food to LDCs a. Food processors & input suppliers b. Farmers c. Grain elevators d. Sea-freight shippers e. Relief agencies

5. LDC governments want to keep urban groups happy with cheap food a. Military b. Civil servants c. Urban labor d. Industry

II. Food aid A. Value of food aid is >$3 billion/year 1. 45% is emergency famine relief 2. 30% is for specific development projects

3. 25% is nonproject food aid a. Money is given to buy food from the donor country (usually grains)

B. Costs of food aid are high 1. Cost of sea-freight to ship food from U.S.  53% of the value of the food 2. Including warehousing, transportation, & administration of distribution could increase costs to 89% of the value of the food

C. Food aid is provided both bilaterally & multilaterally 1. Bilateral aid is country to country aid 2. Multilateral aid is from many countries

3. UN aid programs a. UNDP: UN Development Program b. FAO: Food and Agriculture Organization c. WFP: World Food Program

4. NGOs - Non-Governmental Organizations (nonprofit privately run groups) CARE Red Cross Oxfam Save the Children Lutheran Relief Service Catholic Relief Services

a. Get their money from private contributions b. Many NGOs focus on small, community or microeconomic development projects that benefit the poorest of the poor

D. U.S. has been the largest source of food aid since 1954 1. U.S. Agricultural Trade Development & Assistance Act was enacted in 1954 a. Commonly referred to as Public Law 480 (PL 480) or “Food for Peace”

III. Effects of food aid A. On the positive side 1. May provide immediate relief in times of famine 2. Can provide food for free or at low prices to the poor

3. Provides food to use to pay for work on development projects or food to sell to get money to pay for development projects

4. If food for aid is bought in recipient country, increase in demand for food increases prices, which provides an incentive for agricultural production

B. Negative effects of food aid 1. Greater supply of food causes prices in the recipient country to go down. Lower prices decrease the income of farmers & discourage them from producing.

a. Discouragement effects can be minimized if: 1) Food is only sold or given to those who could not afford to buy any 2) The quantity of food aid is low relative to the agricultural production of the recipient country

2. Country could become dependent on food aid instead of developing its own agriculture 3. The supply of food aid is uncertain because quantities vary from year to year

4. Urban consumers usually receive a greater benefit than the rural poor a. Harder to distribute food in rural areas b. Urban groups have more political power

5. Famine may be the result of political forces and food aid increases the power of those in control (Box 18.4-p.301)

6. Sometimes after a disaster, food aid is not needed and hurts farmers in the recipient country by lowering prices when they need the money the most (Box 18.3-p.298)

IV. Marketwide explicit subsidies A. Subsidies are available to all

B. Brazil 1. The government became the sole buyer and seller of wheat (both domestic and imported) 2. Farmers were encouraged to produce wheat through a price-support program

3. Consumers got wheat for a price below that paid to farmers 4. Government made up the difference 5. Only 19% of the subsidy went to low-income consumers

C. Egypt’s policy “Cheap food for all” 1. Is keeping undernutrition to a minimum 2. Takes up 17% of government expenditures

3. North America & Europe help out by providing food below world prices 4. Has been criticized as inefficient a. Bread is wasted b. People eat more wheat than if it sold at the world price c. Government money spent on food subsidy not used for development

V. Targeted subsidies A. Targeting – a person receives the food subsidy only if they meet a certain criteria

1. Individuals must fall below a maximum level of income 2. Geographic targeting a. Find villages with a high number of children with undernutrition b. Identify households within those villages who are most in need

B. Self-targeting 1. Subsidize foods eaten by the poor (inferior goods)

C. Direct distribution 1. Supplemental feeding programs targeted at vulnerable groups (infants, preschoolers, pregnant and lactating women)

D. Rationing 1. Ration card holder gets to purchase certain foods and amounts at below-market prices 2. Requires government to set up its own marketing systems or to contract with and monitor private retailers

E. Food stamps 1. Given or sold to low-income consumers 2. Allows them to purchase the foods they prefer 3. Cheaper for the government than rationing

F. Food-for-work 1. Food given as payment for work 2. Provides productive activities for those who would be un- or under-employed

3. Increases productivity of the region as projects usually improve rural infrastructure 4. If projects help private landowners, this could help the rich get richer

Chapter 20 – Policies Aimed at Lowering the Price of Food Through Subsidized Consumption