62 CHAPTER 3


Another admittedly indirect indicator that countries are suffering as a result of rising prices is the change in cereal imports in 2007 and 2008. USDA data suggest that most developing regions experienced declines of 10–20 per- cent in 2007 or 2008 (Appendix Figure A.1). The main exceptions are wheat imports in the MENA region, as discussed above.


Food Price Trends in Developing Countries (Transmission) The transmission of rising international prices into domestic markets is quite complex. Analytically speaking, “transmission” refers to several steps. The first step is the conversion of dollar-denominated international prices into local currency prices, as discussed above. The second refers to domestic policies that alter the local price of foods through tariffs, subsidies, export bans, reserve systems, price controls, and so on. However, the effects of these factors are generally bundled together as a residual. This residual also reflects a range of other factors, including substitutability between imported and domestic foods; supply and demand responses to price changes; and, more problematically, domestic factors that may have nothing to do with rising international food prices, such as exogenous supply shocks related to weather, the rising cost of oil, or nonfood inflationary factors (for example, monetary policies). Thus it may be possible that the change in domestic prices is very high, even though, strictly speaking, there is little transmission of international prices.


Bearing these important caveats in mind, how strongly might international prices be transmitted to domestic markets? Both commodity-specific prices and consumer price indexes can be used to assess this issue. Each approach has different strengths. Commodity-specific approaches are useful for assess- ing transmission proper, including the impacts of exchange rate movements. In principle, the food consumer price index (CPI) is more comprehensive and should be a better indicator of welfare costs, especially when it is deflated by the nonfood CPI to look at the terms of trade for food, or real food-price trends. A potential weakness of this type of measure is that if oil prices or domestic policies are also driving up nonfood inflation, then the terms of trade for food may change very little, but domestic consumers might still suf- fer, because even general inflation appears to have a strong adverse effect on poverty (Easterly and Fischer 2001). Another potential weakness is that the CPI may not reflect the consumption bundle of the poor, or of certain groups of the poor.1 An additional problem for the present analysis is that CPI


1 Conversely, in some countries (for example, Mali) governments use the price of one commodity (such as rice) as a proxy for a broader food basket.


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