PPS603 Microeconomics of International Development Policy

PPS603Microeconomics of International Development Policy 6.1. FOOD AND NUTRITION

Labor In this section, we continue our investigation of the process of development by looking at another important input in the production function of the economy, viz. labor. By “labor,” what I mean specifically in this context is “labor quality,” i.e., how healthy and educated the labor force is. We will thus look at food and nutrition; health; and education over the next several lectures.

Food Security, Consumption, and Nutrition Poverty entails a lack of essential goods including basic nutrients. Thus “development” often means: 1. Alleviation of hunger; 2. Improvement in longevity; and 3. Improvement in physical well-being. This is also often true of poverty in the US.

Food Security, Consumption, and Nutrition Given the foregoing, many development practitioners and researchers spend a great deal of time measuring, monitoring, and attempting to improve human nutrition, especially among children. In the extreme, faming occurs. But as per Amartya Sen’s insight, note that famines rarely (if ever) occur because of a lack of food to go around. For that insight, as well as for his work on poverty and famine, Sen won the Nobel in 1998.

Engel Curves A longstanding empirical question in development economics relates to how changes in income, aggregate expenditures, and other indicators affect patterns of food consumption, human nutrition, health, and well-being. The central debate revolves around Engel curves, which describe the relationship between consumption (here, consumption of food) and income.

Engel Curves Budget share of food (%) Income

Engel Curves If Engel curves are reasonably steep, then income growth can achieve the welfarist goals of improved nutrition and health. But if food consumption, nutrient intake, and human health respond weakly (or not at all) to changes in income, then income growth-based development strategies are ill-advised.

Engel Curves Structural interventions (e.g., clean water, waste disposal, deworming, vaccination, primary health care, health education, credit market access, etc.) may be more effective. Thus, the debate about income elasticities – i.e., how sensitive is food consumption and nutrient intake to changes in income – is central to the question of which policies are best-suited to improve health and nutrition.

Engel Curves Note the use of “welfarist” vs. “nonwelfarist” criteria. Some economist are dismayed by the fact that policymakers and development practitioners are suspicious of our notion of (money metric) “utility” as welfare. Utility, after all, is unobservable.

Engel Curves We must accept that as fact, especially in light of the Easterlin Paradox. Easterlin (1974) founded the sub-field of “happiness economics” when he identified the following empirical regularity: “(…) contrary to expectation, happiness at a national level does not increase with wealth once basic needs are fulfilled.”

Engel Curves More importantly, if one cares about the health and nutritional status of women and children – people who often have little or no bargaining power in developing countries –the use of income (and income elasticities) may very well be ill-advised, considering intrahousehold allocations.

Engel Curves Moreover, if people sincerely care about their own health but only have limited information, suffer from addictions, or face other constraints to making optimal choices, then simply assuming that individuals’ chosen allocations are optimal may be incorrect. In other words, the invisible hand may very well need a little nudging.

Engel Curves There is, however, a strong correlation between income and nutrient intake in both cross-sectional and time series data. So the key question is really about the magnitude of the effect. Is that correlation weak or strong?

The Dual Purpose of Food Food plays a dual purpose role in consumption: It is a direct source of utility to consumers; It is an input in consumers’ health production function. The problem is that most of micro theory only focuses on the former.

The Dual Purpose of Food Let’s start by following the traditional line of reasoning – food purely as a consumption good – to then move towards the research frontier – food as an intermediary input in the production of the health component of human capital.

Expenditures and Income Elasticities of Demand for Food Engel’s Law: Food is a normal good (i.e., quantity demanded increases as income increases), but also a necessity (i.e., income/expenditure elasticity of demand between zero and one.) That is, the poor spend a much larger share of their income on basic necessities than the rich do. In other words, the Engel curve for food looks like…

The Engel Curve for Food Budget share of food (%) Income

The Engel Curve for Food Total expenditure on food Income

Expenditures and Income Elasticities of Demand for Food It is thus not surprising that the budget share of staples is often close to 85 percent in developing countries (Barrett and Dorosh, 1996). In industrialized countries, the budget share of food is usually less than 10 percent. This suggests that income elasticities are low.

Expenditures and Income Elasticities of Demand for Food Indeed, empirical findings suggest that estimated elasticities lie between zero and one. Thus, it seems that increased incomes would constitute a sufficient condition for improved nutrition. Over the last 25 years, however, this income-nutrition relationship has been the subject of heated debates.

Expenditures and Income Elasticities of Demand for Food Behrman and Deolalikar (1987) and Bouis and Haddad (1992) are examples where income elasticities are extremely close or not statistically significantly different from zero. This means that nonwelfarist objectives – i.e., objectives unrelated to increasing incomes; perhaps behavioral “nudges” – may be better suited. Thus, obsessing over incomes may not be the right thing to do for policymakers.

Expenditures and Income Elasticities of Demand for Food This is important, for if the relationship between income and nutrition or health is negligible, then it calls into question the appropriateness of income and wealth metrics for development. This is not just an arcane debate about elasticities – this points to a more fundamental philosophical debate about the meaning of “development.”

Expenditures and Income Elasticities of Demand for Food What are the core questions? Elasticity of what? Food expenditures, food consumption, nutrient availability, nutrient intake, nutritional status (anthropometric indicators, e.g., BMI/HAZ/WHZ) What is the outcome of interest? Expenditure/consumption/etc. by whom? Households or individuals? Population or vulnerable sub-populations? What is the relevant unit of analysis?

Expenditures and Income Elasticities of Demand for Food Question 1 arises from the fact that people like variety and quality in food, not just nutrients – Banerjee and Duflo (2007) practically admonish the poor for not going for calorie-dense millet rather than sugar. Jensen and Miller (2011) study the impact of a randomized program of large food price subsidies for poor households. No evidence that subsidies improve nutrition. Via a wealth effect, households simply substitute toward better-tasting, but calorically less dense foods.

Expenditures and Income Elasticities of Demand for Food Food consumption generates pleasure directly, not just indirectly through health, although this appears to be a luxury good: only in a very rich society can we glorify chefs and claim to be “foodies,” and dedicate considerable amounts of time to watching the Food Network. Bennett’s Law: As incomes grow, people substitute fine grains (e.g., rice) for coarse grains (e.g., sorghum) and roots and tubers (e.g., cassava). At higher levels, they substitute meat for grains.

Expenditures and Income Elasticities of Demand for Food A consequence of this is that income elasticities tend to be underestimated, because price per nutrient increases as people consumer more variety and quality (i.e., substitute fine grains for coarse grains, then meat for grains), which includes paying for food processing and preparation. So if food for health is our concern, we should focus on nutrient intake, and not expenditures.

Expenditures and Income Elasticities of Demand for Food But then, which nutrients should we focus on? Most studies focus on calories, some focus on protein. But that’s not the whole story. The most common problem in developing countries is lack of micronutrients (e.g., minerals and vitamins), not macronutrients (e.g., calories, fat, protein).

Expenditures and Income Elasticities of Demand for Food Side note: Obesity related to excessive macronutrient (simple carbohydrates, essentially) intake is rapidly becoming a public health problem in low- and middle-income countries. Example: Central America and China, where overweight is a serious public health concern. In Guatemala, people start drinking Coca Cola instead of water as they get wealthier (Marini and Gragnolati, 2003).

Expenditures and Income Elasticities of Demand for Food Vitamin A deficiency is the primary source of blindness among children and young adults in the world. One-third of children under 5 are thought to suffer from vitamin A deficiency, which claims the lives of nearly 700,000 children every year. (By the way, it turns out your mom was right: carrots are a good source of vitamin A.)

Expenditures and Income Elasticities of Demand for Food More than one billion people are at risk of iodine deficiency, the single, largest source of brain damage and mental retardation in the world. Iodine is found mainly in kelp, but a cheap and easy means of delivering it is through the sale and distribution of iodized salt. Twice that number suffer from anemia, mainly children and women.

Expenditures and Income Elasticities of Demand for Food The problem is that there is little to no empirical evidence about whether micronutrient intake even responds to changes in income. This is especially true at the intrahousehold level, i.e., the relevant level. Why? My own view is that it is an issue of perception: unlike macronutrients (i.e., carbohydrates, fats, protein), it’s difficult to tell if you’re deprived of micronutrients (e.g., vitamins).

Expenditures and Income Elasticities of Demand for Food Moreover, micronutrient intake information is little understood by the population at large, especially in places where most people can barely read. Finally, it is extremely costly to collect data on micronutrient intake, and it can also be very invasive.

Famines No module on food and nutrition would be complete without a discussion of famines. This is especially true given the recent famine in Southern Somalia which, for now, represents the apex of the food crisis that began at the end of 2010. Permanent food crisis in the Sahel, too. You’ve read my stuff on food riots for discussion. Once famine strike, it is too late for food riots, because people are too weak. Riots are thus an early warning signal.

Famines Three excellent references about food in general and famines in particular: Ó Gráda, C. (2009), Famine: A Short History, Princeton: Princeton University Press. Fraser, E.D.G., and A. Rimas (2010), Empires of Food, New York: Free Press. Dikötter, F. (2010), Mao’s Great Famine, New York: Walker & Co.

Famines When the UN declared the situation in Southern Somalia to be a famine last summer, it had been almost 40 years since the term had been used by officials When is a famine declared? According to the UN, a famine meets three conditions: 20 percent or more of the population must have less than 2100 kcal per day; 30 percent or more of children must be acutely malnourished; and Two (four) deaths or more per 10,000 adults (children) daily.

Famines Sen’s insight was that famines never occur in democratic countries and in countries where there is a free press. Of course, famines are usually the consequence of some natural disaster combined with a failure of governance. The natural disaster need not necessarily be a drought or a flood. There is some evidence that volcanic eruptions often set in motion chains of events that lead to famines the following year.

Famines Two cases in point. The Chinese Famine of 1958-1961 Referred to as the “three years of natural disasters” in China. The impacts of a drought were magnified by Mao’s Great Leap Forward: peasants were ordered to produce iron and steel and away from agriculture; collectivization of agriculture. Food diverted from rural to urban areas (Bates, 1981). In rural areas, people would eat bark, clay, each other’s children, etc. See Dikötter (2010) for a completeaccount.

Famines The Current Famine in Southern Somalia The current famine in Southern Somalia began with the worst drought in 60 years in East Africa. Many refugees have left Southern Somalia for Kenya and Ethiopia. Everyone has seen pictures of Dabaab refugee camp. As proof that famine is the result of political conditions, militant Islamic group Al-Shabaab tightly controls the region and prevents the delivery of aid. See Polman (2010) for more examples of this, and Barrett and Maxwell (2005) on food aid in general.

PPS603 Microeconomics of International Development Policy