In a four-part analysis, Dr. Thai Van Can and Dr. Dang Trinh, consultants to the World Bank and IMF, dissect the global food price crisis and the impact on Vietnam.
In today’s third installment, the experts discuss how a Vietnam affected by increasing food prices can protect itself from a large growth in poverty.
Since Vietnam is a net grain exporter, it had been relatively insulated from shocks on the international market until the beginning of 2008.
As Table 1 below shows, rice prices did not change (and in fact even declined in some areas) between 2006 and 2007 and started to change in 2008.
It is clear that the recent rice price fluctuations which started on April 27, were caused by traders and distributors.
TABLE 1: RICE PRICES IN VIETNAM (VND/KG)
Mar-2006
Mar-2007
Mar-2008
April 27, 2008
Hanoi
5,700
5,500
9,800
15,000-20,000
HCMC
3,900
4,200
7,800
20,000
Consumption patterns revealed in other surveys suggest that price changes for rice and edible oil of this kind of magnitude (between 50-100 percent) will have an especially large impact on consumers and therefore on poverty in Vietnam.
A difficult question is whether or not increases in consumer prices translate into increases in production prices.
While data is not available, anecdotes from a local newswire VnExpress indicate that in general, producers did not gain from these price increases.
At least three factors may dilute the impact of rising food prices on the incomes of farmers.
First, the existence of a third party – traders, distributors, or middle men that pocket part or all of the price increases.
Second, production costs for farmers as well as transport costs are likely to be rising due to higher costs for oil-related products.
It is reported that these costs may account for 30-40 percent of the price increases.
Third, a lack of information on the farmers’ side, especially in a volatile market, may mean that they do not insist on being paid the higher prices.
Because it is difficult to assess whether producers will benefit substantially from higher food prices, one can place an upper limit for the impact of the rise in prices on poverty by considering only the impact on consumers, and a lower limit by factoring in a proportional increase in incomes for producers when consumer prices go up.
While precise estimates of the impact of the food crisis on poverty in Vietnam can only be carried out with further data, it is clear that poverty will rise following the price increases of major staples such as rice and edible oil.
However, the increase in poverty is likely to be larger in urban areas than in rural areas.
Urban households tend to consume without actually producing any food while rural households tend to produce and consume food, which mitigates the impact of food price increases.
Hence, when the consumer and producer impacts are considered together, the increase of poverty is less.
Possible policy responses in Vietnam
As mentioned above, policy interventions to tackle the food crisis can be divided into three broad categories: (i) interventions to ensure household food security by strengthening targeted safety nets;(ii) interventions to lower domestic food prices through short-term trade policy measures or administrative action, and (iii) interventions to enhance longer-term food supply.
All categories involve fiscal cost, thereby limiting the time and magnitude of the interventions.
Policy interventions in Vietnam need to consider the following issues.
First, the higher world prices are here to stay, at least for the next three years.
It is therefore important to limit the magnitude and duration of the policy intervention, even if fiscal consideration is not an issue, so that consumers will eventually adjust to the right relative prices.
Second, at no time should farmers be made to subsidize the consumers.
This is bad economics and will lead to long term supply problems for the country.
Third, even for short term interventions, there are policies that are better than others, as discussed in the next article.
Whether a particular policy should be adopted depends not only on fiscal consideration, but a careful analysis of the policy impact on the pattern of production and consumption in the short and long run.
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