Is the Threat of Food Crisis Over?: Implications of Rising Food Prices on Central America

Based on the very recent episode of the global food crisis, this paper evaluates the impact of rising food prices on poverty and inequality in Central America, where poverty is chronic and historically high, hindered by inequitable and inflexible distribution of income. Although food prices sharply declined by a third from their record highs reached in the middle of 2008, they are still high for many developing countries, and the threat of another food crisis persists as several agencies warn in their projections and evaluations in the long-term food security standpoints. The study applies the two-stage, top-down CGE-microsimlation approach, imposing the exogenous price shocks from 2006 to mid-2008 on food products. The study finds that the immediate price shocks have devastating impact on poverty. More than 2 million people will be pushed into poverty, equivalent to 6.4 percent of the region’s population. The supply response slightly reduces the negative impact, but is not strong enough to offset the adverse effects. This is due to two factors. First, Central America is a complete importer of staple agricultural products so that the region cannot benefit from rising food prices. Second, adverse effects limit the gains, largely because the vast majority of households are net consumers of foods products and has larger share of food consumption expenditures. Nevertheless, the supply response will lift 182,000 people out of poverty. Finally, the elimination of tariffs has limited effects in mitigating the adverse effects. Since applied tariffs on food products are already low due to large trade openness. Yet tariff elimination contributes to save 217,000 people out of poverty and 176,000 people from indigent poverty. This suggests that Central America needs to formulate well designed combination of policy measures, targeting consumers, producers and trade. The impact on income inequality is marginal, but positive in all experiments narrowing the income gaps.