ACE 551 - Lecture 4

Demand and Consumption

Readings

Chapter 2 of QPA TFP, Ch 2 - Analysis of food consumption and nutrition Alderman, H. and K. Lindert (1998). "The Potential and Limitations of Self-Targeted Food Subsidies." World Bank Research Observer 13(2) 213-229.

Other readings

Chung, Kimberly; Haddad, Lawrence James; Ramakrishna, Jayashree; Riely, Frank Z. 1997. Alternative approaches to locating the food insecure : qualitative and quantitative evidence from South India. (Discussion Paper) Washington, D.C.: International Food Policy Research Institute (IFPRI) 103 pages. Teklu, T., 1996: Food demand studies in Sub-Saharan Africa: a survey of empirical evidence. Food Policy, 21(6), 479-496. Eales, James S., The Inverse Lewbel Demand System, Journal of Agricultural and Resource Economics, 19(1): 173-182, 1994. Cranfield, J.A.L., P.V. Preckel, J.S. Eales, and T.W. Hertel, 2002: Estimating consumer demands across the development spectrum: maximum likelihood estimates of an implicit direct additivity model. Journal of Development Economics, 68(2), 289-307. Jayne, T.S., J. Strauss, T. Yamano, and D. Molla, 2002: Targeting of food aid in rural Ethiopia: chronic need or inertia? Journal of Development Economics, 68(2), 247-288.

Complete Ag. Policy has 4 Goals

Efficient growth in food and agriculture sectors Improved income distribution (primarily through employment creation) Satisfactory nutritional status for everyone through provision basic needs Adequate food security to ensure against bad harvests or uncertain world markets

The Food Policy Dilemma (?)

The dual role of food prices - determining food consumption levels, especially among poor people, and the adequacy of food supplies through incentives to farmers - raises an obvious dilemma for food policy analysts. Indeed, the dilemma runs deeper than is first apparent. The incomes of the poor depend on their employment opportunities, many of which are created by a healthy and dynamic rural sector. Incentive food prices for farmers are, in the long run, important in generating such dynamism and the jobs that flow from it. But poor people do not live in the long run. They must eat in the short run, or the prospect of long run job creation will be a useless promise. (TFP, p 11)

Two Reasons to Focus on Consumption Determinants

To understand two-way relationships between consumption and development

E.g., if government invests in agricultural infrastructure, how much of output will be marketed to be consumed offfarm and generate investable surplus, how much consumed on-farm? E.g., does a particular policy that increases GDP growth have a positive or negative effect on consumption?

Identify appropriate approaches by which society can intervene to reduce the number of hungry people

New Consumption Issues

Micro nutrient availability and consumption

Vitamins in particular E Minerals iron, zinc

Obesity

Interventions, the past

Taxation of agriculture

export taxes import subsidies for food grains an overvalued exchange rate

As the costs of such policies became more apparent in the 1980s, many countries have tried to improve ag. incentives. Concern for the food-purchasing poor, especially in urban areas

To intervene effectively, what do we need to know?

Who the hungry are How food intake changes when peoples economic circumstances change

changes in income and income distribution changes in prices of inputs and outputs changes in food availability requires model building

Program interventions that will alter food intake, and what these interventions cost

requires model building

How programs can be linked to policies

Identifying the Hungry

Average food availability Household food availability Individual nutritional status

Average Food Availability - Food Balance Sheets

For each commodity

production plus decreases in stocks plus net imports equals total domestic availability subtract nonfood use (animal feed, seed, industrial use) to get total consumed divide by population to get average consumption.

If done for all foods, then have a picture of average diet and average food availability.

Daily Per Capita Calorie Supply

1965 Low/Middle Income Countries Sub-Saharan Africa East Asia South Asia Latin America Mid East High Income Countries U.S. World 2,122 2,034 1,943 2,058 2,451 2,668 3,100 3,236 2,390 1988 2,468 2,011 2,596 2,116 2,724 3,131 3,417 3,666 2,669

Source: World Development Report, 1991

Food Balance SheetNigeria (Average 1979-81)

Per capita supply (per day) Kg/year Grand Total Vegetable products Animal products Cereals Roots and Tubers Sugars and Honey Pulses Oils and Oilseeds Vegetables Fruit Meat and Offals Fish and Seafood Milk Oils and Fats Palm Oil Alcoholic Beverages 119.3 243.6 11.4 7.4 7.7 35.9 27.5 11.7 16.1 11.1 11.6 6.7 45.7 326.8 667.3 31.3 20.2 21.1 98.4 75.5 32.1 44.2 30.5 31.8 18.3 125.1 Grams calories 2,378 2,271 107 1004 604 107 68 79 27 55 45 28 21 278 162 51 Protein, grams 54.6 44.0 10.6 27.2 6.5 0 4.5 3.2 1.4 0.5 4.5 4.5 1.1 0 0 0.4 Fat, grams 51.8 46.2 5.6 8.1 1.4 0 0.3 5.1 0.3 0.2 2.8 0.9 0.6 31.5 18.3 0

http://faostat.fao.org/site/

Comparing Indonesia and Nigeria

See TFP Figure 2.1 for Indonesia Cereals account for most of calories and protein. In Indonesia, rice accounts for over 50%. In Nigeria, multi-staple diet (common in Africa) Sugar and nuts/pulses much more important protein sources than livestock products in both countries. Role of coconut products in Indonesia

Household Food Availability Household Budget Surveys

Provide disaggregated data to look at:

adequacy by income level geographic variation in diets and food intake levels commodity consumption by income group (important for targeting) whether poor are purchasing consumers or producers

need to collect data on both food expenditures and quantities bought - to allow for price differences caused by season, region and quality

Examples of Effects of Income on Daily Calorie Consumption

Consumption of Income Group Group Average Lowest 2nd 3rd 4rd highest

Java, 1963-64 Maharastra, 1958 Sri Lanka, 1969-70 Philippines, rural, 1978 Philippines, urban, 1978

1,600 2,100 2,264 1,769 1,872

1,072 1,120 2,064 1,660 1,576

1,347 1,560 2,272 1,830 1,711

1,572 1,850 2,474 1,976 1,909

1,868 2,315 2,540 1,966 2,015

1,809 2,935 2,641 2,194 2,228

Effect of Income on Calorie Source; Bennetts Law

Summary points

Importance of starchy staples for low income groups; declines as income rises (Bennetts Law) In a low-income country, importance of various starchy staples changes as incomes rise. Indonesian consumers switch from corn and cassava to rice as income grows. This quality effect is very common and provides an alternate means of assessing adequacy If a good is inferior for most of population, but normal for lowest income segment, then this group is calorie deficient. If the poor are not substituting into inferior staples when price of preferred staple rises, then it can be argued that they are not really calorie deficient There are likely to be significant differences in average calorie consumption with budget survey and FBS.

Assess individual nutritional status nutrition surveys

Collect individual intake data Measure nutritional status, especially of children by weight for age and height for age

Three important summary statistics

Weight for age - relative to expected weight a measure of current nutritional status

< 60% - 3rd degree malnutrition 60-75% - 2nd degree 75-90% - 1st degree

Height for age - relative to expected height; a measure of chronic nutritional problems Weight for height

relative to expected; gets away from possible genetic bias of height for age

Example Uses of Nutritional Surveys

Intrafamily problems

Are children worse off Are girls worse off (e.g., if women and children eat last) Less eaten just before harvest; if combined with intrafamily problems often observe higher infant mortality by season

Seasonal problems

Example: Study of central Indian villages by ICRISAT in late 70s found malnourished children numbers greater in lean season and greater in landless than in farmer households, but absolute level of severe malnutrition small (<6%). Nutrition also not perfectly correlated with income (a common finding at this very micro level).

Food Consumption Analysis

How much will nutritional status change as incomes grow? How much will nutritional status respond to relative price changes?

Food Demand Analysis

Basic demand equations for n goods

max u ( q, z ) + ( y p ' q )
q ,

The solution is a set of n demand equations

qi = qi ( p, y, z )

Results are

n income elasticities n2 price elasticities (own and cross-price)

Some terminology

From income elasticities Normal good i > 0 ( i > 1 luxury;0 < i < 1 necessity ) Neutral good i = 0 Inferior good i < 0 From price elasticities

Own price elasticity categorizations

Non-Giffen good Eii < 0 (Eii < -1 elastic; -1 < Eii < 0 ; inelastic) Giffen good Eii > 0 Gross substitutes: Eij > 0 Gross complements: Eij < 0

Cross price elasticity categorizations

Constraints

Engel equation: wii = 1 pi qi - budget share wi = n y n Cournot equations: wi Ei = w j i =1 n(n-1)/2 Slutsky equations (symmetry in substitution effects): wj Eij = E ji + w j ( j i ) i j These constraints reduce the number of 1 2 2 independent parameters from n + n to ( n + n 2) 2 E.g. suppose you had 10 goods. Instead of 110 parameters you only have 54 independent parameters. This is still A LOT.
wi

Two Approaches to Estimating Demand Parameters

Single equation Demand systems based on theory of demand

Single equation

qi = f ( pi , p j , y , z )

E.g.
y ln q = ai + Eij ln + i ln + bik ln zk P P k j pj

Advantage - homogeneous of degree 0 in prices and income Disadvantage - arbitrary functional form, constant elasticities

Example from Indonesian rice

Budget Group Share Income Elasticity Own-Price Elasticity

Low

.38

.78

-1.28

Mid

.33

.49

-0.45

High

.24

.16

0.00

Demand Systems

Advantage - theoretically consistent, allows varying elasticities Disadvantage - LOTS of parameters to estimate Use separability to reduce parameter count further

Group goods that interact closely together (in US, chicken, pork, beef) and keep goods that interact weakly in separate groups (in US, meat versus clothing) Think of it as stepwise budgeting

Step 1: allocate budget across large budget groups - food, clothing, housing, etc. Step 2: allocate budget with groups to specific items

Example with additive utility (Frisch)

Own and cross price elasticities are:

wj 1 Eii = i ( j w ji ) wii Eij = i j w ji y - the flexibility of money = y u* - the marginal utility of money = y u * ( p, y ) = u ( q ( p, y ) ) - indirect utility

u = u1 ( q1 ) + ... + un ( qn )

So it is possible to estimate price elasticities, if we know and income elasticities

Continued, money flexibility

Can get from

i ( 1 wii ) w= Eii + wii

if we know own-price elasticity and budget share from somewhere else for one group. Or use (outdated) Bieri and de Janvry regression, or update estimates
y ln ( ) = 1.87 0.60 ln P

Continued, income elasticities

Get income elasticities from Engel curves (when have cross-section data and no variation in prices) Relationship between Engel curve and income elasticity
Name Linear Double log Semilog Logarithmic reciprocal Equation
q = a + by ln q = a + b ln y ln q = a + b ln y

Elasticity expression

qa by = q a + by

=b

b b = q a + b ln y b = a ln q y

ln q = a b

1 y

Complete Demand Systems

Linear expenditure system AIDS almost ideal demand system Lewbell Demand System

Linear expenditure system

Derives from Stone-Geary utility function, point-wise separable b n u = ( qi ci ) i =1 cs - minimum subsistence consumption n 0 < bi < 1 ( qi ci ) > 0 bi = 1
i

Demand functions are

i =1

n pi qi = ci pi + bi y c j p j j =1

Problems with linear expenditure system

there can be no inferior goods because bs are greater than 0 implies linear Engel functions; ( pi qi ) constant = bi y estimation is difficult because b and c enter multiplicatively Best used with large categories of expenditures, rather than individual goods

AIDS almost ideal demand system

pi qi y wi = ai + bij ln p j + ci ln y P j

wi = budget share P special price index; makes very nonlinear

1 ln P = a0 + ak ln pk + ln pk ln p j 2 j k k

a
i

Parameter restrictions
i

=1

b
i

ij

=0

c
i

=0

b
j

ij

=0

bij = b ji

ln P* = wi ln pi
i

Linear approximation of P is

Note: AIDs implies a money flexibility of minus one.

Lewbell Demand System

Derived from logarithmic utility function

Where

This formulation nests the indirect translog and AIDS systems.

Time Series vs Cross Section

Time series can allow estimates of short term response Cross section results tend to reflect long-run adjustment process

Targeted Interventions to Reach the Poor A Typology

Two types of problems faced by poor households 1. Inadequate level of food 2. Inadequate nutrition

for vulnerable groups within household due to micronutrient deficiencies due to health problems from poor sanitation interaction of all three

Food policy analysis focuses on problem no. 1 Nutrition/public health policy focuses on no. 2

Links between the Problem Categories

Addressing problem no. 1 (food) is necessary prerequisite for addressing problem no. 2 (nutrition). Become linked with increased targeting

Intervention categories

Targeted available only to poor Nontargeted available generally but designed so only poor will use

Targeted - Table
Food Food stamps w/ means test Fair-price shops with means test and geographic or commodity targeting Targeted ration programs Supplementary feeding programs for women, children, or other vulnerable groups Price subsidies for inferior food commodities Food-for-work programs Nutrition Maternal and child health clinics with means test or geographic targeting Targeted nutrition education

Targeted weaning foods Vitamin and mineral supplements for deficit populations Malnutrition wards in hospitals for severe cases

Non-targeted - Table
Direct (program) General food ration schemes Fair-price shops for primary foodstuffs and unrestricted access Indirect (policy) Basic policies encouraging breast feeding or discouraging infant formula Overvalued exchange rate for imported food Public health interventions (water, sanitation, inoculations) Nutrition education on radio and television and through other general media Iodized salt

General food price policy or subsidy Food production input subsidies (e.g. Fertilizer, water, etc.)

Targeted Notes

Means test

Expensive to administer, fraud likely, creates work disincentive Need to have good idea of location of hungry, only effective when hungry are in limited number of places eg. school lunches, but effect is diluted if e.g., consumption at home is reduced as a result. Becomes => e.g., if kerosene consumed mostly by poor, a kerosene subsidy increases income of poor disproportionately, and increases food consumption. Kerosene subsidy in Indonesia worth 40 kg. of rice per year to poor households. subsidize food only consumed by the poor (see TFP Figure 2.10 or Alderman); identify from food balance sheet by income; need to make sure it doesnt become animal feed.

Geographic

Sex and age targeting

Roundabout carrier

Commodity targeting

Nontargeted

Direct e.g., general food ration schemes can become effectively targeted if opportunity cost of taking advantage is too high for rich Indirect - policy - alters food prices

Overvalued exchange rate - keeps food prices down Food price policy - govt. purchase, sale, import or export taxes Food production input subsidies Investment in agricultural research by government

Chinese program example

UNICEF program to reach over 90 percent of China's 1.3 billion population with iodized salt In 2002, 14 million newborns benefited, safeguarding them from brain damage and raising their IQ by 10 to 15 points Iron deficiency - 20 percent of Chinese children between six and 24 months Vitamin A - 12 percent of children are deficient

Nontargeted food subsidies are

Costly Transfer much more per capita to rich/urban

Egypt and Sri Lanka

In Egypt, only about 20 cents of every dollar spent on subsidies went to lowest quarter of population. Such costs also seen in similar programs in Jamaica, Mexico, Bangladesh, and Pakistan. So part of 1980s restructuring is to do away with general subsidies and turn to more difficult issue of how to target intervention to the poorest households.
Egypt Amount Transferred Poorest Richest Poorest Richest (Egyptian ) 15.4 18.1 8.7 3.4 4.3 7.8 7.6 3.8 Sri Lanka (Rupees)

Transfer as % of Household Income

How can programs be effectively targeted? Examples

Many success stories combine two or more kinds of targeting: Brazil

Low food price shops in poor neighborhoods; limited quantities sold so little incentive for rich to go there or for traders to buy large quantities and sell elsewhere. National Nutrition Survey identified villages with high rates of child malnutrition. Seven villages in remote areas selected to receive subsidized rice and cooking oil. The program improved nutritional status and leakage limited due to cost of transporting rice out of area. Through ration shops offer choice of small amount of wheat or larger amount of sorghum. Poorer households choose latter which improves targeting. Examples from other countries include subsidizing coarser flour instead of fine flour or subsidizing flour instead of bread/tortillas. Targeted food stamps by issuing through govt. primary health care clinics to pregnant or lactating women and children under 5. System encouraged preventive health care and screened out wealthier households who use private clinics. Delivering food supplements through existing health care systems has also been successful in Chile, China, Costa Rica, Cuba, Korea, and Sri Lanka.

Philippines

Bangladesh

Jamaica

Public works

Can also be an effective means of targeting

Public works programs that provide employment in return for wages less than other unskilled opportunities are used in South Asia. They provide a self-targeting means of transferring income to the poor, and the type of work can contribute to their long run welfare by improving rural infrastructure.