FOOD SECURITY C oncepts, Basic Facts, and Measurement Issues

1. FOOD SECURITYConcepts, Basic Facts,and Measurement Issues June 26 to July 7, 2006 Dhaka, Bangladesh

2. Rao2b: Analytics 2: Comparative Statics • Learning: Trainees will become familiar with the use of comparative static analysis using the aggregative model. Different sorts of parametric changes will be considered along with specific examples.

3. Brief Contents • the aggregative model as an engine of analysis • meaning of parameters, parametric changes and comparative statics • supply parameters and demand parameters identified • impacts of changes in input prices, technology and imports • impacts of changes in income distribution and other demand parameters • impacts of improvements in marketing

4. Comparative Statics • The basic model of food deficits as presented above provides an "engine" of analysis • i.e., an approach that can be employed to examine the causal impact of changes produced by a variety of policy and non-policy changes that operate on availability, access and stability of food via their impact on production, entitlements including people's initial endowments (or property rights) and on marketing • The latter changes are called "parameter" changes (or "exogenous" changes) where "parameter" means anything that is fixed from outside the model. Such an analysis is also called "comparative statics“.

5. Comparative Statics • "Experiment”: • Change x, keeping all else constant • Result y • Then, x causes y • "Comp. Statics”: • Change x, keeping all else constant • Result y • Then, x causes y

6. Comparative Statics (1)Changes in Supply Parameters • Supply parameters include: • Land • Labour • Weather conditions, • Technology • Inputs available, • Labour and input costs • Decisions of farmers and traders

7. Comparative Statics (1)Changes in Supply Parameters • The Role of Supply Response to Price Changes • This is a core issue. • Supply elasticity defined • We must distinguish: • Supply response to changing input versus output prices • Individual crop versus aggregate agricultural supply response • Short-term versus long-term supply response • Own-price versus cross-price elasticities • Price elasticities at different price and production levels

8. Comparative Statics (1)Changes in Supply Parameters • How Big is Supply Response? Short answer: Not Very! Based on empirical studies….. • Elast. of different crops/regions can be/are very varied • individual crop elast. vary from <0 to >1 (elastic): • typically 0--1/3 in Short Run, 1/3--2/3 in Long Run • aggregateelast. is much less than for individual crops • e.g., range of 0.05 to 0.09 for SAR of India (Deccan) • Importance: All this shows that the importance of prices for agricultural performance must not be exaggerated. • Non-price supply shifters (technology, irrigation, access to credit, institutions) tend to be at least as important

9. Comparative Statics (1)Changes in Supply Parameters Fig. 2.4: Impact of lower input costs on food production and supply

10. Comparative Statics (1)Changes in Supply Parameters Fig. 2.4b: Impact of technology improvements on food production & supply

11. Comparative Statics (1)Changes in Supply Parameters Fig. 2.5: Impact of food imports on food production and supply

12. Comparative Statics (2)Changes in Demand Parameters • Demand parameters include income and prices • Consumer-good price changes produce real income effect: • This is larger if budget share is larger • This is a critical issue for FS Policy: • By Engel's Law, low-income HH have large food budget shares. • So they are STRONGLY affected by food price increases. • e.g., with 80% VS 20% budget share for food, a 10% rise in food price means 8% VS 2% reduction in real income.

13. Comparative Statics (2)Changes in Demand Parameters • Individual VS Aggregate Income • SUM of individual HH incomes = National income OR Σi y = Y • But Y is more or less unequally distributed. • Q: Does it make sense to ADD low and high incomes • NOTE: Not just low average income but also inequality of income is a major cause of FIS

14. Comparative Statics (2)Changes in Demand Parameters Figures 2.6.a & 2.6.b: Income, prices and food demand (a disaggregated view)

15. Comparative Statics (2)Changes in Demand Parameters • Note on subsistence production… • Subsistence production often constitutes a substantial part of the 'real household income' and has a significant impact on household food supply, demand, and hence overall household food entitlement and food security. With subsistence production, availability of and access to food are directly linked. Hence, households with subsistence production do not depend or depend less on the market, and their effective market demand for food will be less or, if a household produces all the food it needs, zero. Transferred to the national level this means that, the larger the share of subsistence food production is in an economy, the lower is effective market demand. This does, however, not necessarily mean that there is a demand deficit - the contrary may be true.

16. Comparative Statics (2)Changes in Demand Parameters Fig. 2.7: Impact of an overall income growth/decline on food demand and supply

17. Comparative Statics (2)Changes in Demand Parameters Fig. 2.8: Impact of income distribution on food demand and supply

18. Comparative Statics (3)Changes in Marketing Parameters Figure 2.9: Food production in relation to consumer and producer prices

19. Comparative Statics (3)Changes in Marketing Parameters Fig. 2.10: Impact of improved marketing performance on food supply & demand

20. Comparative Statics (4)Combined Impact Fig. 2.11: Path towards a reduction and final elimination of food deficits