ACE 551 Lecture 4 Demand Consumption

8/2/2019 ACE 551 Lecture 4 Demand Consumption

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ACE 551 - Lecture 4

Demand and Consumption


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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

Observer13(2) 213-229.


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Other readings

Chung, Kimberly; Haddad, Lawrence James; Ramakrishna, Jayashree;Riely, Frank Z. 1997. Alternative approaches to locating the foodinsecure : qualitative and quantitative evidence from South India.(Discussion Paper) Washington, D.C.: International Food PolicyResearch 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 offood aid in rural Ethiopia: chronic need or inertia? Journal ofDevelopment Economics, 68(2), 247-288.


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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 badharvests or uncertain world markets


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The Food Policy Dilemma (?)

The dual role of food prices - determining food consumptionlevels, especially among poor people, and the adequacy of foodsupplies through incentives to farmers - raises an obviousdilemma for food policy analysts. Indeed, the dilemma runsdeeper than is first apparent. The incomes of the poor depend on

their employment opportunities, many of which are created by ahealthy and dynamic rural sector. Incentive food prices forfarmers are, in the long run, important in generating suchdynamism and the jobs that flow from it. But poor people do notlive in the long run. They must eat in the short run, or theprospect of long run job creation will be a useless promise.(TFP, p 11)


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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 off-

farm 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 societycan intervene to reduce the number of hungry

people


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New Consumption Issues

Micro nutrient availability and consumption Vitamins in particular E

Minerals iron, zinc

Obesity


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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 forthe food-purchasing poor, especially in urban

areas


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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


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Identifying the Hungry

Average food availability

Household food availability

Individual nutritional status


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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 ofaverage diet and average food availability.


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Daily Per Capita Calorie Supply

1965 1988

Low/Middle IncomeCountries

2,122 2,468

Sub-Saharan Africa 2,034 2,011

East Asia 1,943 2,596

South Asia 2,058 2,116

Latin America 2,451 2,724

Mid East 2,668 3,131

High Income Countries 3,100 3,417

U.S. 3,236 3,666

World 2,390 2,669

Source: World Development Report, 1991


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Food Balance SheetNigeria (Average 1979-81)Per capita supply (per day)

Kg/year Grams calories Protein,grams

Fat,grams

Grand Total 2,378 54.6 51.8

Vegetable products 2,271 44.0 46.2

Animal products 107 10.6 5.6

Cereals 119.3 326.8 1004 27.2 8.1

Roots and Tubers 243.6 667.3 604 6.5 1.4

Sugars and Honey 11.4 31.3 107 0 0

Pulses 7.4 20.2 68 4.5 0.3

Oils and Oilseeds 7.7 21.1 79 3.2 5.1

Vegetables 35.9 98.4 27 1.4 0.3

Fruit 27.5 75.5 55 0.5 0.2

Meat and Offals 11.7 32.1 45 4.5 2.8

Fish and Seafood 16.1 44.2 28 4.5 0.9

Milk 11.1 30.5 21 1.1 0.6

Oils and Fats 11.6 31.8 278 0 31.5

Palm Oil 6.7 18.3 162 0 18.3

Alcoholic Beverages 45.7 125.1 51 0.4 0

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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 inAfrica)

Sugar and nuts/pulses much more important

protein sources than livestock products inboth countries.

Role of coconut products in Indonesia
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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 fortargeting)

whether poor are purchasing consumers or producers

need to collect data on both food expenditures and

quantities bought - to allow for price differencescaused by season, region and quality
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Examples of Effects of Income on Daily

Calorie ConsumptionConsumption of Income Group

Group Average Lowest 2nd 3rd 4rd highest

Java, 1963-64 1,600 1,072 1,347 1,572 1,868 1,809

Maharastra, 1958 2,100 1,120 1,560 1,850 2,315 2,935

Sri Lanka, 1969-70 2,264 2,064 2,272 2,474 2,540 2,641

Philippines, rural, 1978 1,769 1,660 1,830 1,976 1,966 2,194

Philippines, urban, 1978 1,872 1,576 1,711 1,909 2,015 2,228
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Effect of Income on Calorie Source;

Bennetts Law
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Summary points

Importance of starchy staples for low income groups; declines asincome rises (Bennetts Law)

In a low-income country, importance of various starchy stapleschanges 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 notreally calorie deficient There are likely to be significant differences in average calorie

consumption with budget survey and FBS.
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Assess individual nutritional status -

nutrition surveys

Collect individual intake data

Measure nutritional status, especially of

children by weight for age and height for age
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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; ameasure of chronic nutritional problems

Weight for height relative to expected; gets away from possible

genetic bias of height for age
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Example Uses of Nutritional Surveys

Intrafamily problems Are children worse off Are girls worse off (e.g., if women and children eat last)

Seasonal problems

Less eaten just before harvest; if combined with intrafamilyproblems often observe higher infant mortality by season

Example: Study of central Indian villages byICRISAT in late 70s found malnourished childrennumbers greater in lean season and greater in

landless than in farmer households, but absolutelevel of severe malnutrition small (


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Food Consumption Analysis

How much will nutritional status change as

incomes grow?

How much will nutritional status respond to

relative price changes?


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Food Demand Analysis

Basic demand equations for n goods

The solution is a set of n demand equations

Results are n income elasticities

n2 price elasticities (own and cross-price)

( ) ( ),

max , 'q

u q z y p q

+

( ), ,i iq q p y z =
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Some terminology

From income elasticities Normal good

Neutral good

Inferior good From price elasticities

Own price elasticity categorizations

Non-Giffen good Eii < 0 (Eii < -1 elastic; -1 < Eii < 0 ; inelastic)

Giffen good Eii > 0 Cross price elasticity categorizations

Gross substitutes: Eij > 0

Gross complements: Eij < 0

( )0 1 ; 0 1i i iluxury necessity > > < < 0i =

0i 1

1n

i

i

b=

=

1

n

i i i i i j j

j

p q c p b y c p=

= +
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Problems with linear expenditure system

there can be no inferior goods because bs

are greater than 0

implies linear Engel functions;

constant

estimation is difficult because b and c enter

multiplicatively

Best used with large categories ofexpenditures, rather than individual goods

( )i ii

p q by

=
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AIDS almost ideal demand system

wi= budget share

P special price index; makes very nonlinear

Parameter restrictions

Linear approximation of P is

ln lni i

i i ij j i

j

p q y

w a b p cy P = + +

0 1ln ln ln ln2

k k k j

k j k

P a a p p p= + +

1ii

a = 0iji

b = 0ii

c = 0ijj

b = ij jib b=

*ln lni i

i

P w p=

Note: AIDs implies a money flexibility of minus one.
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Lewbell Demand System Derived from logarithmic utility function

Where

This formulation nests the indirect translog and

AIDS systems.
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Time Series vs Cross Section

Time series can allow estimates of short term

response

Cross section results tend to reflect long-run

adjustment process


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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
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Links between the Problem

Categories Addressing problem no. 1 (food) is necessary

prerequisite for addressing problem no. 2

(nutrition).

Become linked with increased targeting
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Intervention categories

Targeted available only to poor

Nontargeted available generally but

designed so only poor will use
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Targeted - TableFood Nutrition

Food stamps w/ means test Maternal and child health clinics with meanstest or geographic targeting

Fair-price shops with means test andgeographic or commoditytargeting

Targeted nutrition education

Targeted ration programs Targeted weaning foods

Supplementary feeding programs forwomen, children, or othervulnerable groups

Vitamin and mineral supplements for deficitpopulations

Price subsidies for inferior foodcommodities

Malnutrition wards in hospitals for severe cases

Food-for-work programs
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Non-targeted - TableDirect (program)

General food ration schemes Nutrition education on radio and television andthrough other general media

Fair-price shops for primary foodstuffs andunrestricted access

Iodized salt

Indirect (policy)

Basic policies encouraging breast feeding ordiscouraging infant formula

Overvalued exchange rate for imported food Public health interventions (water, sanitation,inoculations)

General food price policy or subsidy

Food production input subsidies (e.g. Fertilizer,water, etc.)
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Targeted Notes

Means test Expensive to administer, fraud likely, creates work disincentive

Geographic Need to have good idea of location of hungry, only effective when hungry are

in limited number of places Sex and age targeting

eg. school lunches, but effect is diluted if e.g., consumption at home isreduced as a result. Becomes =>

Roundabout carrier 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 poorhouseholds.

Commodity targeting 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 itdoesnt become animal feed.
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Nontargeted

Direct e.g., general food ration schemes -can become effectively targeted if opportunitycost 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
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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 andraising 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
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Nontargeted food subsidies are

Costly

Transfer much more per capita to rich/urban
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Egypt and Sri Lanka

In Egypt, only about 20 cents of every dollar spent onsubsidies 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 targetintervention to the poorest households.

Egypt Sri Lanka

Amount Transferred (Egyptian ) (Rupees)

Poorest 15.4 4.3Richest 18.1 7.8

Transfer as % of Household Income

Poorest 8.7 7.6

Richest 3.4 3.8
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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 incentivefor rich to go there or for traders to buy large quantities and sell elsewhere.

Philippines 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 riceout of area. Bangladesh

Through ration shops offer choice of small amount of wheat or larger amount ofsorghum. Poorer households choose latter which improves targeting. Examples fromother countries include subsidizing coarser flour instead of fine flour or subsidizingflour instead of bread/tortillas.

Jamaica Targeted food stamps by issuing through govt. primary health care clinics to pregnant

or lactating women and children under 5. System encouraged preventive health careand screened out wealthier households who use private clinics. Delivering foodsupplements through existing health care systems has also been successful in Chile,China, Costa Rica, Cuba, Korea, and Sri Lanka.
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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. Theyprovide 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.
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ACE 551 Lecture 4 Demand Consumption

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