Food Price Distortions and Economic Growth

What happens to economic growth when governments tinker with prices in order to ensure higher prices to producers or, as is more common in developing countries, lower prices to consumers?

The University of Adelaide’s Kym Anderson and Markus Brückner, who both do excellent work, answer this question in a recent VoxEU column:

Economic growth in sub-Saharan Africa has been slow for decades.

  • Sub-Saharan African real income per capita grew at less than 1% over the past half century.
  • Some countries have enjoyed faster growth in recent years, but the reasons for that acceleration, and the extent of its sustainability, are still uncertain.

Among the candidates, though, are reductions in distortions to producer incentives, particularly to farmers who over that time period accounted for more than half of African labour and between one quarter and one third of the region’s GDP.

A database recently compiled as part of a World Bank study on policy distortions to agricultural incentives since 1955 reveals that there have been numerous price and trade policy reforms in Africa since the 1980s, although they have not been as extensive as reforms in Asia or even Latin America. That raises the question: How much can differences in reforms explain differences in national economic growth rates within Africa? To address that question, we have made use of the World Bank’s distortions database plus other variables to examine econometrically sub-Saharan Africa’s patchy growth performance. (…)

[F]or the majority of those sub-Saharan African countries, there was a strong policy bias against agriculture over the past half century (a negative relative rate of assistance). (…)

Our key finding is that policy-induced price distortions had a quantitatively large negative effect on economic growth. In other words, reductions in those distortions in recent decades have contributed significantly to economic growth in sub-Saharan Africa. More specifically, a one standard-deviation decrease in distortions to relative agricultural prices raised real GDP per capita growth in the region by about half a percentage point per annum on average.

The full results of their investigation, along with the methodology they use, can be found here. Unfortunately, I could not find an ungated copy of the paper.

The (almost) systematic bias against producers (really, a bias in favor of consumers and urban areas more than anything) is documented extensively and discussed by Bates (1981) in his classic monograph on agricultural policy in sub-Saharan Africa. As countries get wealthier and food occupies a decreasing share of household budgets, however, the bias tends to invert itself to become in favor of producers.