In the last five years, higher food prices have provoked government interventions in agricultural markets across the globe, often in the name of protecting the poor. But do higher food prices actually hurt the rural poor?
In a recent working paper, Hanan Jacoby addresses this question using a general-equilibrium trade model applied at the district level. He finds that wages for manual labor inside and outside of agriculture rose faster in rural Indian districts growing more of the crops with large price run-ups between 2004 and 2009. A welfare and distributional analysis consistent with the theoretical model shows that rural households across the income spectrum benefit from higher food prices. Indeed, rural wage adjustment appears to play a much greater role in protecting the welfare of the poor than the Public Distribution System, India’s giant food-rationing scheme. Moreover, policies such as agricultural export bans, which insulate producers and consumers from higher international price, are particularly harmful to the rural poor. A partial equilibrium welfare analysis, taking rural wages as fixed, would lead to radically different conclusions.