Over at the Economist, a debate is heating up over the following proposition: "There is an upside for humanity in the rise of food prices." I just checked, and right now the votes stand at 59 percent "pro" and 41 percent "con." It seems to me that the result is a bit skewed, however, given the wording of the question - I can imagine few things in the world that don't have at least some upside. In support of the proposition is Homi Kharas, a senior fellow at the Wolfensohn Centre of the Brookings Institution. Here is his take:
The good news is that higher food prices are exactly what is required to restore balance in the market. With rising demand and constrained supply the iron law of economics permits no other response. In a market economy, when demand exceeds supply, prices rise. Higher prices discourage consumption, but they also encourage more investment and enhance production.
This is the standard argument of mainstream economics - supply will respond to price signals in the long run. Of course, the obvious criticism is that the long run may be too long for a lot of the world's poor, particulary in urban centers. But it gets even more complicated than that. I'd like to add one more angle to Kharas's argument - in at least some cases, higher food prices could help reduce child labor.
Writing in the Journal of International Economics, authors E.V. Edmonds and N. Pavacnik found that increases in the price of rice caused a reduction in child labor in Vietnam. The paper, entitled The effect of trade liberalization on child labor, makes use of changes in relative prices for rice in Vietnam that resulted from trade liberalization in the 1990s. As the authors explain:
We find that increases in the relative price of rice are associated with large declines in child labor. The observed 30% increase in the price of rice is associated with about a 9% point decline in child labor in rural Vietnam. Moreover, our results emphasize the
importance of accounting for the income effect of relative price changes through household net production of rice. The response of child labor to rice price increases varies with household exposure to rice prices through production and consumption. Children in households with landholdings such that the household is a large net producer of rice experience especially large reductions in child labor. The observed income effect on child labor is sufficiently large in magnitude that even child participation in agriculture declines despite the increased earnings opportunities in agriculture that accompany rice price increases in households that are large net producers. In contrast, a negative income effect associated with higher rice prices actually increases child labor in households that are large net consumers of rice. However, land is sufficiently equitably distributed in Vietnam such that most households are positioned to gain from rice price increases. Overall, rice price
increases can explain almost half of the decline in child labor in rural Vietnam between 1993 and 1998.
Of course, while the net effect of rising rice prices in Vietnam reduced child labor, it is impossible to extrapolate that to the world. First, individual government policies regarding subsidies and tariffs means that price signals will vary from country to country. Second, one has to look at what percentage of households with child labor are net producers or consumer of foodstuffs. Nevertheless, I think it is useful to keep this example in mind when looking around the world to see how rising food prices are affecting the welfare of the poor.
Update: I decided to look for additional data related to child labor and food prices. I checked the most recent world development report, which focused on Agriculture for Development. I found this little nugget on page 219:
The ILO estimated the number of child laborers at 218 million in 2004. Most help their families at home, on the farm, or in the family business...Compared with 19 percent for urban areas of developing countries, 31 percent of the children 5-14 in rural areas reported working...
So, clearly, the rise in world food prices could have significant consequences - for better or for worse - for the incidence of child labor. Vietnam would suggest for better, but I found a case that suggests the opposite. According to this paper by Diana Kruger, the coffee boom in Nicaragua had the effect of increasing child labor.
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