Effects of Food Prices on Poverty: The Case of Paraguay, a Food Exporter and a Non-Fully Urbanized Country

A vast proportion of households in developing countries like Paraguay are both consumers and producers of food, and thus the effects of food price fluctuations on well-being are not obvious. Historically, the agricultural... [ view full abstract ]

A vast proportion of households in developing countries like Paraguay are both consumers and producers of food, and thus the effects of food price fluctuations on well-being are not obvious. Historically, the agricultural sector in Paraguay has played a fundamental role in economic development and has contributed significantly and increasingly to economic growth. In recent years, the sharp movements in commodity prices had added to the inherent volatility of the sector related to climate conditions. This work uses the 2011/12 expenditure and income survey as well as monthly price data at item level for 2007-15 that allows tracking 127 food items to simulate the effect of a potential hike in food prices on welfare. Our main results suggest that the expenditure effect is negative and regressive everywhere, but larger in rural than urban areas. The income effect is positive and progressive in rural areas and negligible in urban areas. Therefore, we find that the potential overall impact of an unexpected increase in food prices in Paraguay is a very flat U-shaped curve. We conclude with a simple simulation exercise of the potential effects of the introduction of a policy response to help those affected by an increase in food prices.