The impact of a large rice price increase on welfare and poverty in Bangladesh

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  The impact of a large rice price increase on welfare and poverty in Bangladesh

  1. 1. The impact of a large rice price increase on welfare and poverty in Bangladesh Syed Abul Hasan∗ ∗ Crawford School of Public Policy The Australian National University Crawford PhD Conference 2013, ANU Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 1 / 25
  2. 2. Outline 1 Motivation Importance Findings and contribution 2 Data 3 Impact on welfare 4 Relation between income and welfare loss 5 Impact on poverty 6 Conclusions Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 2 / 25
  3. 3. WHY THIS RESEARCH IS IMPORTANT Rice is important in Bangladesh 1 High share of rice in total expenditure (national average 17%) 2 Low cross price elasticity of rice demand wrt wheat (≈ 0 in a study) Bangladesh is vulnerable to rice price shocks 1 Dependence on imported rice for fulfilling domestic demand 2 Dependences on the harvest for food security 3 A large proportion of poor households, most of which buy rice Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 3 / 25
  4. 4. EFFECT OF RICE PRICE CHANGE Direct/distributional/first round (order) effect 1 Entitlement of net rice buyers and net rice sellers Indirect/behavioural/second round (order) effect 1 Adjustment of production and consumption 2 Reduce consumption and increase production of rice Second round effect is mportant if price change is large 1 Rice price doubled in Bangladesh between Jan.,07 and Apr.,08 Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 4 / 25
  5. 5. WHAT WE FIND With a 50% rise in rice price 1 Indirect effects of price change is important 2 Quadratic relationship between the welfare loss and income 3 A higher rice price may either increase or decrease poverty HCR 4 Per capita income gap increases with a higher rice price Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 5 / 25
  6. 6. PAST STUDY Estimating welfare loss 1 2 Only consider the first round effect (e.g., Deaton, 1989; Ravallion, 1990; Ivanic and Martin, 2008) Rely on household income, prone to measurement error in surveys (e.g., Mghenyi, Myers and Jayne 2011; Myers, 2006) Studying relationship between welfare loss and household income 1 2 3 Rely on transitory rather than permanent income measures Semiparametric models suffer from endogeneity Use subjective equivalence scale (e.g., Mghenyi et al., 2011) Studying impact on poverty 1 2 Studies on poverty ordering/dominance mostly based on household income (e.g., Mghenyi et al., 2011; Chen and Duclos, 2011) Household expenditure seems appropriate for poverty comparisons Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 6 / 25
  7. 7. DATA: Bangladesh HIES, 2010 Cross section household survey Nationally representative socio-economic information Number of household- 12,240 (rural-7,840 and urban-4,400) Similar findings with the 2005 round of HIES Prefer presenting result with 2010 wave of HIES 1 Questionnaire modification 2 Larger sample size 3 Use of ICT to reduce errors Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 7 / 25
  8. 8. MEASUREMENT ERROR IN HOUSEHOLD DATA Household income suffers more than household expenditure Typically severe in survey data from agrarian economies Significant no. of households in HIES have negative or low income 10% have an income that is 60% lower than their expenditure 25% have an income that is 40% lower than their expenditure 50% have an income that is lower than their expenditure Suggests that household income in HIES may be unreliable Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 8 / 25
  9. 9. EMPIRICAL MODEL Used EV-monetary measures of welfare change Second-order approximation of proportionate welfare loss (mi ) mi ≈ (sis − sid )λ − 0.5[sis ξips − sid ξipd ]λ2 + 0.5{(Ri − ξiyd )[(sid )2 − 2sid sis ] + Ri (sis )2 }λ2 , (1) i denotes household sis (sid ) rice income (expenditure) share λ = (p1 − p0 )/p0 ξips (ξipd ) the price elasticity of rice supply (demand) ξiyd the income elasticity of rice demand Ri the coefficient of relative risk aversion (CRRA) Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 9 / 25
  10. 10. METHODOLOGICAL CHANGES To estimate the welfare loss we Use household expenditure instead of household income Capture the second order welfare effect of a price increase Values for the parameters - from World Bank (2010) Analysis based on a 50% rise in the rice price Sharp rice price change - to show role of second round Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 10 / 25
  11. 11. RESULTS Table: High rice price and households’ proportionate welfare loss (weighted) 1st round (∆1 ) 2nd round (∆2 ) ∆2 /∆1 Mean SD Mean SD (%) Barisal Chittagong Dhaka Khulna Rajshahi Rangpur Sylhet -0.0752 -0.0494 -0.0604 -0.0484 -0.0333 -0.0367 -0.0606 0.0912 0.0782 0.1114 0.1308 0.1957 0.1772 0.1319 0.0024 0.0058 0.0030 -0.0015 -0.0026 -0.0067 -0.0004 0.0137 0.0113 0.0168 0.0190 0.0271 0.0247 0.0198 -10.8849 -16.5463 -14.5099 -10.7546 -9.4643 -8.7385 -10.7081 Bangladesh -0.0514 0.1333 0.0008 0.0195 -12.6046 Note: ∆1 = (sis −sid )λ and ∆2 = −0.5[sis ξips −sid ξipd ]λ2 +0.5{(Ri −ξiyd )[(sid )2 −2sid sis ]+ Ri (sis )2 }λ2 . Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 11 / 25
  12. 12. RESULTS (Contd.) 2nd round effect –a significant proportion of 1st round (9-17%) In rice importing (exporting) regions –2nd round partly offsets (intensifies) 1st round welfare loss Ignoring 2nd round –underestimates (overestimates) welfare loss in the rice exporting (importing) regions Households associated with rice production suffer least Using household income provides higher 2nd round impact Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 12 / 25
  13. 13. EMPIRICAL MODEL Semiparametric (SP) model used to analyse relationship between household permanent income and welfare loss (mi ) mi = F (xi ) + Zi β + ui , (2) xi -(log of) adult equivalent permanent income Zi -demographic and socioeconomic variables that enter linearly β is a vector of parameters F is an unknown function the error term ui ∼ NID(0, σ 2 ) Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 13 / 25
  14. 14. METHODOLOGICAL CHANGES Household expenditure proxys permanent household income Welfare loss and expenditure –may be jointly determined Endogeneity of household expenditure –controlled by using non-farm household income as an instrument Generate residuals through NP regression of endogenous variable on instruments These residuals are used as a covariate in the SP model Employed a recent SP estimate of ES for Bangladesh SP estimation employ local linear regression using Kernel method Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 14 / 25
  15. 15. SEMIPARAMETRIC REGRESSION Figure: SP regression of welfare loss Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 15 / 25
  16. 16. RESULTS Table: Hardle and Mammen test results: p-value With HH exp. Barisal Chittagong Dhaka Khulna Rajshahi Rangpur Sylhet Bangladesh 0.05 0.02 0.14 0.60 0.35 0.00 0.85 0.00 With PC Exp 0.61 0.62 0.21 0.14 0.86 0.38 0.79 0.00 With equivalent exp. SP OECD SRFS scale scale scale 0.74 0.14 0.12 0.17 0.32 0.02 0.07 0.00 0.55 0.25 0.13 0.11 0.18 0.07 0.02 0.05 0.52 0.03 0.68 0.22 0.11 0.17 0.05 0.00 Note: H0 : Nonparametric fit can be approximated by a parametric adjustment of order 2, H1 : Nonparametric fit cannot be approximated by a parametric adjustment of order 2. A low p-value rejects the quadratic fit and vice-versa. Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 16 / 25
  17. 17. RESULTS Relationship between welfare loss and permanent household income –appears quadratic Specification test – if a quadratic fit can approximate the SP fit Cannot reject in 5/7 regions but for the whole country Cannot reject when we use the per capita expenditure Two possible explanations Rich agricultural households benefits from higher rice price Rich non-agri households –low expenditure share –lose marginally Need income support for the poor in the face of a food price shock Use of household expenditure and including 2nd round effect provides expected results Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 17 / 25
  18. 18. POVERTY DOMINANCE Employed FGT poverty measures P1 is the poverty HCR P2 is the per capita income gap (normalized poverty gap) For two distributions F and G with the same population Plot of HCR at all poverty lines gives the poverty incidence curve If poverty incidence curve for F lies below G, then F FOPD G Area under poverty incidence curve gives the poverty deficit curve If poverty deficit curve of F is below G then F SOPD G SOPD ranks distributions in terms of PC income gap Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 18 / 25
  19. 19. METHODOLOGICAL CHANGES Replace household income with household expenditure Generate a new distribution by incorporating welfare loss New distribution represent income distribution with high rice price Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 19 / 25
  20. 20. RESULTS Figure: First order poverty dominance Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 20 / 25
  21. 21. RESULTS (Contd.) Figure: Second order poverty dominance Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 21 / 25
  22. 22. RESULTS (Contd.) No evidence of first order poverty dominance Rice price increase unambiguously increases PC income gap Exclusive use of the first round impact or household income –results are not in line with our expectations Poverty policies that rely on expenditure provide better outcomes Use of poverty lines shows dependency of HCR on poverty line Poverty lines may provide wrong assessment of poverty Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 22 / 25
  23. 23. CONTRIBUTION Improved way of estimating the welfare loss Improved modelling of welfare loss on income Confirms usefulness of poverty ranking Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 23 / 25
  24. 24. SUMMARY This paper improves methodology to estimate of welfare loss Suggest a quadratic relationship between welfare change and household income Confirms that changes in HCR depends on poverty line used Syed Hasan (Crawford School) The impact of a large rice price increase 4 November, 2013 24 / 25

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