Distributive policy

War-induced food price inflation jeopardizes the poor

The conflict in Ukraine has led to soaring food prices, especially wheat and corn. This column uses a newly developed toolkit to analyze the impacts of food price inflation on household welfare in developing countries. Average household well-being declines in 43 of the 53 countries in the sample, with an average real income loss of -1.5%. This impact varies widely across and within countries, with poorer households consistently experiencing larger welfare losses. Prolonged price increases will have long-term consequences for the prosperity of many of these countries, compounding the problems of poverty and inequality.

Editor’s note: This column is part of Vox’s debate on the economic consequences of war.

The war in Ukraine has led to a spike in global food prices (Arezki 2022) that threatens to push millions of people into poverty. This column presents estimates of the impact that the conflict-induced spike in wheat and maize prices is likely to have on low- and lower-middle-income countries. To this end, we use the Household Impacts of Tariffs (HIT) database and a new toolkit specifically designed to simulate the impacts of the Ukrainian war on poverty and inequality in low-income countries (Artuc et al. 2021, 2022). The HIT dataset contains household survey data from 53 low- and lower-middle-income countries, representing 1.6 billion people. The toolkit (which can be downloaded) has been specifically designed to model the welfare impacts of food price inflation.1

Ukraine and Russia together supplied more than a quarter of world wheat exports. Ukraine also accounts for 14% of world corn exports. Prices for these grains have already skyrocketed and are expected to remain high for the foreseeable future (Selier 2022, Vaitilingam 2022). The average daily price of wheat was 53% higher in the first week of March than it was in January, while the price of corn was 23% higher. Futures contracts suggest wheat prices in April will be about 40% higher than January, with corn prices expected to be 24% above their January levels.

Figure 1 Wheat and maize prices soar in response to conflict

Source: S&P Global Market Intelligence

What impact will these food price increases have on households in developing countries? Consumers will be affected by higher prices, but wheat and corn sellers will benefit. The end result depends on whether the household is a net buyer or a net seller of these food items: net consumers will lose while net producers will gain. The overwhelming majority of households (79.1%) in developing countries are net buyers of wheat and maize. On average, across the 53 countries in the HIT dataset, households spend 3.1% of their income on wheat, but derive only 0.4% from wheat sales. The average corn expense share is 1.4%, while the average corn revenue share is about 1.0%. This trend is exacerbated at the left end of the income distribution: poorer households tend to spend a larger share of their budget on wheat and maize. This is illustrated in Figure 2, which plots the average share of income spent on – and derived from – wheat and maize, respectively, against the rank of households in their national income distribution. The poorest households are therefore systematically more exposed to food price inflation.

Figure 2 Poorer households spend a larger share of their (net) budget on food

We use our simulation toolkit to quantify the welfare impacts of war-induced food price changes. For the purposes of this column, the measure of household well-being is real household income (Deaton 1989, Artuc et al. 2019). The estimates presented here assume that the price increases observed between January and the first week of March can be entirely attributed to the war in Ukraine and, also, that these price increases are fully transmitted to domestic prices. We start with a short-term analysis that exploits the expenditures and income shares of maize and wheat to calculate changes in real household income. This short-term analysis assumes any adjustment in consumption and income-generating behaviors and thus provides a quantification of the impact of the real effects of the conflict on income.

The resulting estimates for the 53 countries are shown in Table 1. Average household welfare declines in 43 of the 53 countries in the sample due to rising wheat and maize prices. The average real household income loss is -1.5%, but there is enormous global heterogeneity. The countries with the biggest losses are Armenia, Georgia, Kyrgyzstan and Tajikistan, where real household incomes could fall by more than 5% on average. A few countries that are not very dependent on imports of wheat and maize are little affected or may even gain if they are net suppliers of these products.

It is important to note that there is great heterogeneity of impacts within countries, with poor households generally bearing the brunt of the shock. Figure 3 shows how the estimated real income effects vary across status quo income distributions in Egypt, Georgia, and Pakistan. Each point represents a percentile of the income distribution. In Egypt, the poor suffer the greatest losses. In Georgia, middle-income households do. In Pakistan, poor households are suffering while relatively wealthier households stand to benefit from real income gains. In all three countries, food price increases are likely to exacerbate inequality, with the bottom 40% suffering systematically higher losses. Impact heterogeneity is predominant in our sample.

Table 1 Estimated Impacts of Wheat and Maize Price Inflation on Real Household Income

picture 3 Welfare impacts in selected countries

This pattern of income-unbalancing food price inflation applies more generally. When we group all the countries and then calculate the average of the percentiles, as shown in Figure 4, we can see that the real income losses are greater for the poorest households – which is the consequence of the fact that ‘they spend a greater share of their income on food (as was the case illustrated in Figure 2). On average, the poorest 40% lose on average -1.8% of their income while the households of the richest 60% should see their income decrease by -1.4%. Again, there is heterogeneity between countries, with 23 countries experiencing a reduction in the real income gap between the top 60% and the bottom 40%. By contrast, Pakistan, South Africa and Armenia are experiencing the largest increases in inequality (see Table 1); in these countries, the real income gap between the poorest 40% and the richest 60% increases by more than 3%. Poverty rates, measured using national poverty lines, increase by one percentage point on average in all countries.

Figure 4 Welfare impacts in 53 developing countries

To explore the longer-term impacts, we assume that price changes persist and we take into account that households are likely to adjust their consumption habits as well as their income-generating activities in response to changing prices. . The long-term analysis conducted with our simulation tool shows that welfare losses will persist in 31 countries, even after taking into account these household responses. The simulations also reveal that the deterioration in shared prosperity will be prolonged in 29 countries if higher wheat and corn prices persist.

The estimated welfare impacts of food price inflation are large, especially since we only looked at two commodities – wheat and maize. But the war has also increased the costs of other food items, such as oilseeds and energy, which may increase the burden on the poor. Direct energy expenditure alone represents 5.4% of household expenditure in the 53 countries in our sample. Our estimates therefore almost certainly underestimate the aggregate effects of conflict on well-being. At the same time, we have assumed perfect pass-through of international prices to consumers and no corrective action by governments to mitigate the shock.

Although the exact magnitude of the impacts of the war remains uncertain, it is clear that the war in Ukraine is already having significant negative spillover effects on developing countries, whose burden is mainly borne by the poor.

The references

Arezki, R (2022), “War in Ukraine, impact in Africa. The effect of soaring energy and food prices”, VoxEU.org, 17 March.

Artuc, E, G Porto and B Rijkers (2019), “Trade Off the Income Gains and the Inequality Costs of Trade Policy”, Journal of International Economics 120: 1-178.

Artuc, E, G Porto and B Rijkers (2020), “Inequality and trade: simulation data for 54 developing countries”, VoxEU.org, 6 January.

Artuc, E, G Porto and B Rijkers (2021), “Impacts of Tariffs on Households: Evidence and Evidence from Agricultural Trade Protection”, World Bank Economic Review 35(3): 563-585.

Artuc, E, G Porto and B Rijkers (2022), “World Bank Trade, Poverty and Inequality Simulation Tool”.

Deaton, A (1989), “Rice Prices and Income Distribution in Thailand: A Nonparametric Analysis”, Economic Review 99 (Supplement): 1–37.

Selier, P (2022), “The war in Ukraine raised long-term inflation expectations”, VoxEU.org, 12 March.

Vaitilingam, R (2022), “Economic Consequences of the Russian Invasion of Ukraine: Views of Leading Economists”, VoxEU.org, 10 March.

Endnotes

1 https://www.worldbank.org/en/research/brief/hit