Andrew Oxlade, editor of This is Money, says: Yes.

This is the very faint silver lining to the

Food prices are linked to oil prices - that's because you need fertilisers and pesticides, made from
oil, to grow them and you need to burn oil to transport food.

The price of oil has plummeted from a high of around $145 a barrel to $90 in the space of a few
months. In coming months, those falls will begin to filter through to food prices.

The other factor affecting supermarket prices has been rising food demand from the Far East. As
the Chinese become richer they can afford more food and better quality food, such as meat.

That demand will continue to rise, but with a global downturn slump on the cards, it may grow
more slowly.

Contents - Previous - Next

Discussion

Lance Taylor

What I would like to do is discuss, in general terms, the stylized facts about food price policy,
and how they fit into planning and, in fact, make food price planning difficult.

The appropriate place to begin is with discussion of exactly how countries intervene in markets
for food. By food, I mean the staple food or foods, typically a grain that is used to make bread, or
that is eaten directly, as rice is in Asia. Beans also fit into this category if they form part of a
staple diet as, combined with rice, they do in Brazil. In any case, there are one or two foods or
food products that make up very large shares of the diet of poor people. Usually, the government
tends to intervene rather drastically to control what happens in the markets for these food
products, and this kind of intervention raises some problems.

To begin with, one has to think about three kinds of prices for food. Typically, there is a foreign
price at which food is imported or exported; more often than not in an underdeveloped country, it
is imported. There is a consumer price that is maintained at least for consumers in urban areas,
and sometimes for consumers in rural areas as well if the government's writ extends as far as the
rural market-as far as the bazaar, for example. Finally, there is the producer price. Governments
almost always intervene to separate these prices. The form of the intervention is important in
determining, in the final analysis, how much food different groups of people consume. For
example, with the great increase in import prices of food that took place in 1973 - 1974, a
number of food-importing countries protected their consumers by subsidies between the import
price and the internal price of food. As a case in point, Egypt imports on the order of three
million tons of wheat per year. When the external price tripled, the internal price was maintained
constant by subsidy, and consequently the total food subsidy bill went up to about 30 per cent of
the total Government expenditures-a very large share indeed.

Egypt is an extreme case, but nonetheless, a number of other countries have gone in this
direction of subsidizing to keep internal food prices stable, and that sort of intervention in the
market has substantial fiscal implications. There is an article by Jeffrey Davis (1 ) in the
/International Monetary Fund Staff Papers that reviews some of these subsidy interventions,
mostly in Africa and Asia.

On the other side of government accounts, taxes on essential food consumption can also be very
important. There are studies in Sao Paulo, for example, showing that the indirect tax system is
regressive and bears heavily on staple foods. Changing such a tax would have substantial fiscal
impacts on the government, but on the other hand, such a tax strongly constrains the ability of
poor people in Brazil to obtain adequate nutrition. Both subsidy and tax interventions affect
consumer prices.

Another kind of intervention is in producer prices. For example, governments may maintain, by
subsidy, high prices for farmers and producers. A classic case is in Europe under the Common
Agricultural Policy.. Twenty million Frenchmen are kept on the farm by a high internal wheat
price and a variable import tariff (that goes up and down) to separate completely the internal
producer price in France and the rest of the Common Market from the rest of the world. That is a
political reality in France that is unlikely to go away. There are similar political realities in the
United States and Japan, where subsidies keep the prices that farmers receive well above what
they might otherwise be.

Classically, that has not been the case in Latin America, although recent policies in Argentina
and, to a lesser extent, in Chile, are certainly headed that way. On the other side of the coin, of
course, producer prices can be forced down. If the government has some sort of monopolistic
acquisition capacity, it sets the price and goes out into the market and buys, and it can hold the
price low and use various kinds of measures to obtain the market surplus necessary for the city.
That sort of intervention has been typical, for example, in Pakistan. As a consequence, a few
hundred-thousand tons of wheat per year go across the border from Pakistan to India because
prices there have been kept high. There are limits to how long low producer price policies can be
maintained.

Finally, every country separates world prices from internal prices, or rather every country but the
United States and Canada. When world prices shot up in 1973 - 1974, their consumer food prices
went up almost as fast. The reason the World Food Conference was held, after all, was because
there was an odd combination of US housewives on the one hand and underdeveloped importing
countries on the other who were hurt by rising prices. Needless to say, that unusual coalition has
dissolved and some of the current inaction about world food price stabilization has to do with
that.

These price interventions can be found in most countries, and it is important to recognize that
they are a permanent fixture. Given this fact, there are various questions to raise. First, how can
price interventions be tailored to benefit poor people, or some groups of poor people, within a
country? Unfortunately, some problems arise here, beginning with the general observation that in
the short run, the amount of food that people seek to buy in the market and the amount of food
that producers or sellers put on the market do not respond very much to changes in price.

Economists have their own special way of trying to quantify this lack of price response. The
appropriate concept, of course, is an elasticity. What an elasticity reveals is the per cent change-
for example, in demand for bread that would take place in response to a certain per cent change
in the price of bread, rice, or some other commodity. When the economist says that the demand
for bread is price-inelastic, he means that if the price of bread goes down by 10 per cent, then
consumption of bread would be expected to go up by much less than 10 per cent.

Another way of putting it is that if the supply of bread goes down by 10 per cent, then the price
has to rise by a lot more than 10 per cent to choke off demand enough so that the market will be
in equilibrium. Therefore, the first stylized fact about food demand is that it is inelastic in the
context described here. When the price of bread goes up by 10 per cent and consumption goes
down by less than 10 per cent, the total value of consumption (price times quality) will go up.
There will be less income left to consumers to spend on other things, and that will lead to less
demand for products in the rest of the economy.

These generalizations about inelasticity hold almost universally, although among very poor
people one does see some price responsiveness because they are spending essentially all of their
income on food, so if the price goes up they simply have no choice but to cut their consumption.
But at slightly higher income levels, such as are observed in most underdeveloped countries, the
price elasticity is certainly less than one. In terms of macro-policy, that is one very important
constraint that must be taken into account. Because staple food consumption also uses a
substantial share of income, its inelastic demand and inelastic supply lead to large spill-over
effects from food markets into other sectors that can be quite significant. It can become a full-
fledged macro-economic problem. This problem is often avoided by desperate moves on the part
of the government-for example, the Egyptians maintaining the internal food price constant when
the external price tripled-but such maneuvers are not always possible.

Let me give some examples to help illustrate these macro-economic problems. I will use again
this simple case of the food price going up by 10 per cent; then, as mentioned above, food intake
will go down by less than 10 per cent. The share of income spent on food will go up, perhaps by
5 per cent, so there is a substantial shift in the share of income that the consumer has left for
other things. When demand for these other things goes down, people are going to lose jobs or
work fewer hours. This reduction in employment will lower incomes throughout the rest of the
economy and there will be a series of successive rounds of this sort of effect. The ultimate
impact can be quite substantial. It will show up, of course, in a poor country in reduced demands
for textiles, clothing, shoes, and other commodities.

With the active urban proletariat that governments in many parts of the world face, the initial cut
in the subsidy on food, or the initial increase in the price of food, coupled with the reduction in
aggregate demand that it will create, can lead to food riots and extreme political unrest.
Governments know this, and this considerable limitation on their freedom for policy maneuver
arises precisely because of the large role of food in the economy.

There are similar examples about other interventions. For instance, most countries subsidize
farmers' fertilizer purchases. If the subsidy is increased, a number of things will occur. In
general, the reduced cost of fertilizer will lead farmers to produce more food, but it will also get
passed along in lower food prices. If this is the case, farmers- especially small, poor farmers-may
see their revenue and income go down. They will consume less food, and the intervention that is
supposed to lead to more food and hence better nutrition may, in fact, lead to poorer nutrition in
the countryside.

Flavio Machicado

I think the answers to that kind of question always depend on the conditions under which the
question is posed. If the price of a basic product rises, its effect will depend heavily on the social
group and income level where the price increase occurs. It is the same with the cost of fertilizers;
it depends on the production structure, and on what kind of producer is affected. In Latin
America, whether the price of fertilizer increases or decreases has not the slightest impact on the
production of a large number of small producers, because they never even have access to
fertilizers at any price. Consequently, I should like to ask Dr. Taylor to put his question into a
well-defined context, otherwise no one can provide an answer.

Lance Taylor

That is a fair request; certainly one has to be more precise about the kind of people whom one is
talking about to answer that kind of question.

Suppose that one distinguishes between large- and small-scale agricultural producers. Small
scale agriculture may be largely detached from the market if it is the subsistence kind of
agriculture that prevails in many Latin American countries. If the agriculture is attached to the
market, and, in fact, some small-scale farmers and large-scale farmers buy fertilizer from the
market, or sell it on the market, then my illustration holds.

To take that example farther-suppose the price of fertilizer is reduced and this does lead to lower
food consumption by the rural poor. Are there policies to avoid that outcome; One way is for the
government to buy up any increments in food pro auction for stock-building or export. But then
the price of food will not fall, and groups within the city who are also poor will get no benefit
from the increased crop. Any policy has various effects, and what these are depends on
institutional circumstances in the country being considered. A move that appears on the surface
to be a satisfactory solution-at least to economists who believe in getting the prices right-can
actually have rather severe and deleterious impacts on groups within the population. That is
another aspect of the difficulty of trying to manipulate prices for staple food in the market.

More examples can be given. Suppose there is an increase in food commercialization. There is a
substantial difference between the value added on the farm and the total value added to the final
price the consumer actually pays, because a good deal of the cost of food goes to the middleman.
Also, commercialization and food-processing comprise a large share of the economic activity in
poor economies, perhaps something on the order of 10 per cent.

It is, of course, traditional to haggle with the middleman and one may, in some cases, be
successful in reducing food prices that way, but there are limits. For example, most food in
Brazil is delivered in trucks. It doesn't take a lot of money to buy a truck in Brazil. You can get a
loan from a bank and buy a truck. Many people are in the trucking business and they are
probably fairly competitive. Food truckers are not making excess profits that would be easy to
cut back. Moreover, if the truckers' productivity increased markedly, many of them might lose
their jobs. That would lead to political problems and a need for policies to deal with the
unemployment.

There is another example. Suppose food imports are reduced. The International Monetary Fund
steps in and says that 200 million dollars a year is too much to spend on food imports, and lends
only 100 million. How does a country deal with that? Typically, most countries have a
government marketing corporation, and it would go to the world market and buy less food. The
internal effect of that decrease in food importation would be to drive up the price of food sharply,
at least for those who participate in the market, and shift income distribution toward agriculture.

Real income in the rural areas would go up, probably more than the increase in the food prices,
and so food consumption there would go up. Food consumption in the urban areas would, of
course, go down sharply as the price increase rations food away from poor people, and once
again there would be political problems. Given the importance of food, the political price of
import reduction will be high unless something is done to offset it. The obvious remedies like
rationing are hard to enforce, and could lead to problems.

To look at the problem somewhat more dynamically, fluctuations in food prices and supply can
clearly be a serious policy issue, and the distributional impacts and the unanticipated price
changes that occur when there is a short crop or a poor season can be severe. In that case, policy
options that are probably worth pursuing and that, in fact, many countries have pursued, come
into consideration.

For example, stock-piling to maintain prices in consumer real income, a policy more or less
followed by CONASUPO in Mexico, and by similar agencies in other countries, is presumably a
good thing.

Making food markets "thicker" in the economists' sense, that is, with better-financed traders,
large volumes transacted, etc., may make sense in a number of countries that follow that kind of
policy. Or, the problem may be addressed by improving food storage conditions. Losses in some
cases are of vital importance. In India, for example, I am told that very simple technical changes
reduce the loss of grain in family storage bins by as much as a two-week supply. That is, some
simple modifications of existing procedures can save two weeks' worth of grain for family
consumption by preventing deterioration or predation by rats. If that were done, saving a two-
week supply of food at the time just before the harvest comes in could be tremendously
important for a poor family. It can keep them out of the hands of the money lender, for example.
Technical changes of this type can be of considerable use.

Obviously, all these macro-problems really come from the instability of the food market and the
fact that intervention on behalf of one group is almost bound to hurt another group. If both
groups are in need in the nutritional sense, a fairly difficult situation emerges. If it is assumed
that these are issues for economists to deal with, and health professionals are more interested in
micro-problems, some of the solutions presented in the paper by Solimano and Jeria and
elsewhere in these Proceedings must be considered.

To mention a few solutions from the economists' point of view, groups that benefit from a food
price may or may not be those whom the physicians say are nutritionally at risk. If food
distribution within the family is inequitable, it is not clear that any policy, at reasonable cost,
would have much influence, and yet nutritionists put a great deal of emphasis on just this issue.

More generally, in looking at families as families who are at risk in some sense, the problem of
identifying them can be rather difficult. A search procedure has to be instituted, and in
underdeveloped countries this is always very costly. An alternative would be to use income as a
measure of the position of the family that needs help. This causes problems with a means test-
that is, actually finding out how much income people have. If this is done by means of the
bureaucracy, it is almost always both inefficient and demoralizing.

In rich countries like the United States, there are vindictive welfare case-workers; another
example is George Orwell's England before the Second World War when the means test narks
were grossly unfair. With the bureaucracy in many underdeveloped countries, I would not be
very optimistic about any means test they might run.

In fact, the approach most countries have used when they have actually tried to deliver food to
the poor or the malnourished has almost always been a subsidy scheme of some kind.

Some of the macro problems that food subsidies can generate, or are subject to, have already
been discussed. However, various other possibilities exist. For example, in Pakistan they
happened to stumble on the policy of subsidizing a kind of wheat flour that is considered inferior
by most people in the population. Ration cards were distributed that allowed people to go to a
ration shop and buy five kilos a month per person of this flour, even though it was considered to
taste bad and to spoil easily. The only advantage was that it was very cheap.

The characteristic of a system like that, of course, is that poor people select themselves to go into
the ration shops, while rich people prefer, by and large, to buy their wheat elsewhere. From the
nutritional point of view, because the cheap flour is, in fact, quite acceptable, that may be a good
thing. From the social welfare point of view, it may or may not be a good thing; it is not clear
that one should subsidize poor people's food and thus label the people who buy it as poor.
Nevertheless, the policy has worked more or less effectively.

One can think of similar examples, such as inexpensive vegetable protein that rich people tend
not to eat, though poor people do. If vegetable protein is subsidized and meat is taxed, the policy
is likely to use market distribution channels in a way that can benefit poor consumers, at least in
urban areas. Ideally, the food that poor people tend to consume could be subsidised intensively,
because the price elasticity of the poor is high while that of the rich is low.

Shlomo Reutlinger

My first observation is that economists' models illustrate, for those outside the profession, that
economics is really a dismal science. When all sides of a problem are looked at, there seems to
be almost no solution. I hope that this is true only for interventions at the commodity or market
levels. There are many indirect effects from policies, and many of the positive effects achieved
are cancelled by the indirect ones.

My next observation is more critical. Taylor's model illustrates that these kinds of models are of
very little use for explaining economic development, and they also are of little use for analyzing
how to intervene to improve nutrition in a country. This is particularly frustrating, because hard
as you try to capture some of the more indirect effects in the economy and trace them to their
causes, there is still so much that is overlooked. On the other hand, if too many details of the
entire economy are analyzed, i.e., what is the right model for the whole economy, then not much
attention can be paid to direct effects of the model on the particular problem to be solved.

In many cases, some of the indirect effects of a policy that can be traced through this model are
not addressing many of the indirect effects that arise from its application. For instance, to cite
one example, there are three classes in Taylor's model, but when it comes to measuring the
nutrition problem or the improvement hoped for in a population, concern is not just with all
workers, or a/t farmers, or all of the rest of the people in the country. The first thing to do is to
find some criteria for discovering who and where the undernourished people are. This requires a
much finer breakdown than offered by these three classes, which cover up the interesting aspects
of the food distribution problem as far as it affects particular groups of people. However, it is too
complicated to consider individuals because policy cannot operate at the level of individuals.
Also, some of these indirect effects can be studied without having a complete macro-economic
model that covers everything. My own view is that much more needs to be known on a macro
level in order to identify the problems and their ramifications and to learn their extent. It is also
necessary to know how well interventions work at the micro-level.

First of all, in many Latin American countries, as much as 30 per cent of the nutrition problem is
in the urban areas, at least in normal years. Particularly with populations migrating to the cities,
there is a food problem that can be affected by changing prices of food and other commodities.

Second, within the rural areas, specifically when studying data from Brazil, most of the
production is not in the hands of farmers who are undernourished, but rather in the hands of
farmers who employ farm workers. It is not at all clear to me that higher farm prices do much to
improve nutrition for most of the world's undernourished population.

My general conclusion is that I concur with Taylor's common-sense approach. There is very
limited scope to policies working through commodities, i.e., changing prices or even improving
the agricultural sector in general, even by improving the technology for production. I believe
there is a much more limited scope for nutrition improvement than we often think. That does not
mean that there is no hope at all, but it is limited because essentially the problem is one of low
income and very uneven income distribution.

Therefore, many policies other than food policies must be considered. It is peculiar that people
always think that a high price for beans would be a good thing for nutrition. They mean that
there are many poor bean producers who would benefit from a higher price, but first of all, are so
many bean producers poor? Second, if income is the problem, why raise the price only for
beans? I am merely taking an example out of the air, but perhaps cotton or coffee production
could create more employment and more income for people than growing beans generates. If
more employment in rural areas is the goal, then a focus on beans or even on agriculture in
general is too narrow. Policies that adversely affect income distribution outside the agricultural
sector, or within industry, or between agriculture and industry, must be changed.

I agree that it is very difficult to identify interventions that are specifically target oriented. It is
hard to implement them, to monitor them, and so on. All of the programmes I have seen-such as
ration shops with lower food prices, feeding workers on the job, food programmes in schools-
may not do anything more than transfer income to people. Politically, it may be more acceptable
to give food to children or to give rationed food, but as far as nutrition goes, there is still the
plague of this low elasticity discussed earlier.

Basically, what rationing does if 50 per cent of the food a family obtains costs nothing, or is sold
at half price, is to save the family money on its food bill. It is not at all clear that the family is
going to buy as much food as it bought before and use this additional food as such. In effect, the
cheap food becomes an income transfer, but what is really needed are programmes that have
more direct nutritional effects than just an income transfer. This is because perhaps 70 or 80 per
cent of the income transfer is not spent for better nutrition; it may partly pay for food, but it may
be spent on very high-cost, status food calories, or on many non-food items. Therefore, these
programmes are likely to be the same in that respect unless ways can be found to make them
work better. Perhaps there is some educational effect if, rather than income, foods or certain
kinds of food are transferred, but this also needs to be studied carefully.

These special, or even target-oriented food programmes, are good to the extent that they produce
income transfers; at least in that sense they are more efficient than are general food price policies
or general food policies.

Eduardo Kertesz

I should like to begin where Taylor stopped, by saying that there is a general lack of opportunity
and vitality in much of what is proposed in the policies and programmes being discussed.
Solutions to the problem of malnutrition have evolved from an initial concern on the part of
physicians and nutritionists with what kinds of food are eaten. If malnutrition resulted from an
insufficient and unbalanced diet, the solution was to find more nourishing foods, but this often
led to a rejection of the staple diet.

Next came the agricultural approach-to increase food production by using more fertilizer and
other techniques that had brought about the Green Revolution This was an overemphasis on
agriculture in a market economy, where people were suddenly expected to grow food for export
instead of for local consumption. It did not transform the economic background of the people or
the capacity for demand, much less income distribution.

Later, economic variables became the centre of attention. Problems of income generation and
inequitable distribution of wealth began to be discussed. Unfortunately, this type of focus is still
limited because the solutions proposed are presented as though they could be implemented in the
existing social and political structure, accepting all the givens of the system as it is. If
programmes are begun in this framework, there is the danger that the bureaucratic manipulations
of the administration would be imitated; i.e., as one benefit is offered, another is taken away. In
other words, the status quo would be maintained, and nothing suggesting any radical change in
the political structure would be forthcoming.

The economic approach for solving malnutrition, while it represents an advance, is still very
limited. Underlying the economic scene is the political structure, the question of class struggle,
and of various sectors of the population that are excluded from social development. Most of the
current analyses concentrate on manipulating existing methods without considering the political
realities that support the status quo. The results of these analyses may prove useful to the multi
nationals that produce food, helpful to us who are studying the problem, and to industrial
research, but I doubt whether anything that has been proposed so far would have any real
beneficial effect on the majority of the population.

To comment specifically on Taylor's paper, his is, first of all, an approach that does not consider
changing the political system. What is emphasized is the search for the ideal intervention model,
not better foods. Both economists and nutritionists recognize that under-nutrition is closely
related to poverty and lack of buying power, which, in turn, reflects lack of any other kind of
power.

Intervention models are often devised to be so abstract that they will apply to any country. In my
opinion, the history and social conditions of a country at one point in time must always be
considered in intervention programmes. Abstract models may make interesting mathematical
exercises and theses, but I doubt that they help to explain the reality behind a country's food and
nutrition problems.

I also think basic budgets should be emphasized. For example, fertilizer use by small producers
requires money or credit. As Machicado pointed out, these producers use hardly any fertilizer;
therefore, the importance of the latter in producing basic foods in Latin American and other
developing countries is a fundamental issue that does not pose a problem in the United States.
Budget is the determining factor in food consumption, and price instability obviously affects the
budget.

I do not know whether the food-producing system in Brazil is similar to that in Jamaica. The
latter depends wholly on food exports, but Brazil should be able to feed its own population and
export food as well. However, in Brazil there is a modern, dynamic industrial sector that is
entirely separate from basic food production, which has become isolated from the mainstream
except for export crops. There is more than enough manpower; indeed, that is part of the
problem. The poverty in the rural sector means high mortality rates, but this has no repercussion
on the economy in the industrial sector. There is a staggering army of unemployed people in
Brazil and throughout Latin America, and this is characteristic of all Third World countries
undergoing rapid industrialization. Replacement of manpower by machines in these countries
means that the labour force need not be large, therefore a large sector of the population is left out
of the system.

Those who produce basic food crops have very little influence on the rest of the economy. These
very low-income groups are locked into their poverty, and what is worse, their exposure to
advertisements for cars, television sets, and processed convenience foods creates a desire for
goods that are not affordable without going into debt. Food habits also change, to the detriment
of nutritional status. This is apparently of no concern to the rest of the country.

Lance Taylor

I would like to avoid getting hung up with models. In response to both Reutlinger and Kertesz, it
is fair to say that certain economists find it useful to communicate with each other in terms of
strong, simple models that give straightforward conclusions. Everybody is perfectly aware that
the world is much more complicated than the model. Nonetheless, it sometimes helps to clear
away cobwebs in thinking and make a point strongly, which is the reason why I developed this
one.

I think that the more interesting question, if we are really concerned about making policy in a
given country, is how much of the model exercise will carry over. In particular, how would a
model be useful in analyzing that set of issues discussed at this Workshop? The main point of my
paper and my discussion is that staple food consumption has its own characteristic market
features and comprises so large a share of economic activity that it represents an important
restriction on thinking about policy in poor countries, especially if an active, as opposed to a
passive, food policy is desired. If an active policy is to be pursued, I think that the only way to
design it would be through use of a model like the one I suggested. Or better, through a model of
the "general family" that takes into account your own perception of the reality of the country that
concerns you.

It is fairly clear in the paper that I was not dealing with any specific country, but there are
features in the model that would carry over into a given country exercise, while others would not.
But in any country, it is unfortunately true that economic scarcity applies in the sense that, if a
policy of redistribution is being considered, there is only a certain amount of surplus generated in
the system that can be distributed. For example, Kertesz indicated that there are large numbers of
workers and that food production is isolated from the mainstream of development, but he did not
provide numbers. Unfortunately, the only way to make a sensible judgment about these issues is
to try to quantify them, and in that case one has to work with the model, preferably a simple,
understandable model. Certainly, a model that includes cotton growers, fruit growers, and bean
growers would not do because the morass of details would be overwhelming and the macro-
issues important for any real income redistribution would be blurred.

Kenneth Leslie

There is a hidden assumption in Taylor's paper. While it seems to imply that it is dealing with an
open economy, much of the discussion is about a closed economy. Nowhere does it take special
consideration of the fact that there is international trade. As Kertesz pointed out, in many of the
developing countries a considerable proportion of the food consumed is imported. The price paid
for this food is not directly set locally; external market determines the price. A closed economy
model seems to be extremely inappropriate in light of this, particularly in the developing
countries where, in many instances, they are highly dependent on imported food supplies.
Because of this, they are left in a position where the only thing they can do is to subsidize food
because they cannot control the prices of food coming into the country. Unless this problem of
terms of trade for commodities is addressed (and this is not just a domestic eco nomic problem),
a more deeply rooted problem is ignored. This is what most of the Third World has in mind
when talking about the New Economic Order, which I would think should have caught on by
now.

Lance Taylor

I agree that this is fundamental for the whole issue. It must be recognized that subsidy
programmes are, in a sense, palliatives that governments are forced into because of the very
limited power they have over the prices of commodities they import.

Flavio Machicado

I should like to return to the subject and scope of Taylor's model. I think it is good to have
models, but sometimes they are dangerous if not used correctly. I think it is wrong to set up a
model to explain a policy such as prices. I believe it is essential first to propose an interpretation
of the rationale behind the economic systems in Third World countries, and it is my belief that
here one can generalize somewhat.

It is my impression that the subject of price policy has not been touched, at least from my
perspective, because I understand there will be a price policy only when it is possible to fix a
price. The rest is simply the interplay of supply and demand, not a price policy. When Taylor
considers a subsidy or taxes, in my opinion he is not talking about a price policy, but rather a tax
policy that has to do with fixing prices. Prices can be lowered only by means of taxes.

Right now in the Dominican Republic, corn is being imported, which will affect a tremendous
number of corn producers for whom the nutritional policy has to be applied. Consequently, I
believe still another element must be added. A policy of price fixing is used in order to promote a
massive increase in food consumption. In the Dominican Republic, 75 per cent of the population
is undernourished, and 50 per cent of these are in a critical state of malnutrition. Their average
daily intake is 1,500 calories. Where is this population located? In the agricultural sector,
especially farmers and rural workers, who represent 50 per cent of the population. Other
undernourished people belong to the marginal urban population, who are outside the market
system. All this must be explained to understand what agricultural dynamic is needed to solve an
apparently contradictory problem.

The dual economy is one further problem. For instance, in Chile, during the last two years under
the Popular Unity, a price-fixing policy could not be applied. This was actually not a price-fixing
policy, but consisted of estimation of costs and price levels based on the rate of inflation. The
time came when fixing the price of wheat had to be considered at the planning office. This price
fixing, with a 19 per cent rate of profit, was of the order of 500 escudos per 100 kg. (These may
not be the exact figures, but they are close enough.) When the producers were asked if this
seemed feasible, they agreed at first, but when the time came for them to sell their wheat at that
price, they could not do it. Why? Because within the dual economy, they could get from 1,200 to
1,500 escudos per 100 kg due to speculation on the market. There could thus be no price-fixing
policy because of the nature of the system for fixing prices.

In the case of the Dominican Republic, what has been called a price policy has consisted simply
of the Government's intervening in order to stabilize prices through setting a price on certain
agricultural products. But it is impossible to propose such a policy for another important reason.
When prices are fixed, we are unfortunately still faced with a non-homogeneous production
structure, which is by its nature inequitable. The fact is that, in the Dominican Republic, 60 per
cent of the milk produced comes from small producers, and 40 per cent from large ones. Prices
are set because of the pressure brought to bear by the large producers and are calculated on the
basis of the cost of an agricultural economy that represents only 40 per cent of all milk
production. The situation is further complicated because large producers want to recover their
investments in only two or three years. Therefore, one would think that by fixing prices, the
small producer might receive excess profits. However, the commercialization system is designed
so that small producers cannot receive this excess. This is because of the absence of a basic
commercial infrastructure for daily products. The Government is thus faced with the choice of
being fair to the large producers and unfair to the whole of society; if it chooses the latter, it must
fix a price at the behest of large producers that the economy cannot afford.

Alberto Carvalho da Silva

A point I would like to make is that it is important to consider the number of food commodities
for which interventions should be made. Ideally, interventions should be restricted to one or two
food commodities, but this is difficult for both biological and social reasons. The biological ones
are that some foods are consumed at practically the highest levels the human organism can
tolerate. This is the case, for example, with manioc in rural northeastern Brazil. The same is true
for beans in certain areas where the bean is an important source of protein.

Another comment relates to the idea of switching food-producing farmers to other, more
profitable, crops in the agricultural sector, and importing foods. This would be practically
impossible because the income, and hence the purchasing capacity, of the food producers is so
low that they could not possibly afford to buy food for their own consumption. Also, they could
probably not establish themselves or be accepted in the capitalist agricultural sector. It would not
be possible to raise food costs above certain limits because low food cost is the very mechanism
by which the poor sectors of society survive at all. In fact, and I imagine this is true for all poor
Latin American countries, it is the poor in the rural society who support the poor in the urban
sector, another reason why it would not be possible to raise the prices of food.

David Lehmann

I would like to separate and identify some of the issues discussed because there is a whole series
of different issues in different frameworks whose purposes are not always clear. First, Taylor did
not kill the model question, and perhaps I can help to do so. It is impossible to make any kind of
analysis of any social process without having an implicit model in mind, not to mention certain
kinds of implicit value judgments.

Machicado's comments were right on target when he said that the question that must be asked is:
"What is the rationale behind an economic system?" I do not know what kind of a model lies
behind his concept-perhaps he will clarify it in the manner that Taylor enlightened us on his. The
trouble is, of course, that in discussing models in a more technical sense, it was not sufficiently
emphasized that what comes out of a model depends on what goes into it. It is not a question of
right or wrong, but I think it should be recognized that we have been treading, epistemologically,
in very muddy waters.

Second, I think trouble arises when models really try to deal with the feed-back effects
mentioned earlier. The models then become so complex that it is hard to understand why they
produce the results they do. Therefore, either a model is clear enough to discern what is
happening inside it, but it turns out not to be realistic, or a model is so complex that it is
impossible to understand the results it produces.

Moving on to the main issues, I think we are dealing with different areas. The first is a fairly
technical area in which more information, perhaps just an account of existing results, would be
very useful. I am asking that commentaries follow in the steps of Machicado and Carvalho da
Silva and discuss the results they have had with first-hand experience. Otherwise, the discussion
will be completely up in the air. (By this I do not mean that I am against either abstractions or
generalizations, but it is good to have solid information to support them.) For example, there is
the question Reutlinger mentioned briefly that seems to me very fundamental, namely, the
relationship between incomes and food consumption. Specifically, John Wells showed that in
Brazil urban incomes are going down and food consumption is also decreasing.

Lance Taylor

The as yet unpublished research by John Wells at Cambridge University complements similar
work by Paulo Singer and others at CEBRAP in Sao Paulo. Both investigations are based on past
consumer budget surveys in Brazil, and seem to show that, over time, real income and also the
food consumption level of the urban poor have fallen. Also, additional "necessary" expenditures
on items other than food, such as transport to and from work, have grown enormously as a share
of family expenditure in places like Rio and Sao Paulo, and this has pushed down real food
purchases.

David Lehmann

My impression from these papers is somewhat different. I infer that people were actually
reducing their food intake but increasing their consumption of durables. This is the classic
behaviour of the typical Third World man. Instead of being seduced by televisions and
refrigerators, why aren't they buying more food? In fact, of course, if you think about it, it is not
so stupid because, especially in inflationary situations, refrigerators, televisions, and motorcars
keep their value. It is a way of saving, and if very unstable times are expected, or incomes are
marginal, then actually this is a means to ensure future income by buying a television that can be
resold later. It is not the individual who is irrational, but the economic system.

This relationship is a complicated one that should be dealt with in more depth. It is often
assumed in this discussion, though Leslie pointed to the problem, that agricultural production
and food production are the same, which they are not, and this is one of the main problems.
Much agricultural production is devoted, not to food for domestic consumption, but to coffee or
sugar for export. In connection with that, I would like to know if any work has been done on the
relationship between agrarian structure and agriculture (and, as part of that, food production) and
the distribution of income in terms of the different types of foods that different income groups
consume.

For example, my guess is that large commercial farms often produce relatively expensive
nutrients, especially proteins. Cattle and wheat are produced on large farms using capital-
intensive technologies, and are consumed by middle and upper income groups in poor countries.
Smaller farms use labour-intensive technologies to produce cheap proteins like beans, which are
consumed, on the whole, by the poorest income groups in agriculture and industry. This kind of
issue needs verification, as does, of course, the issue of whether producers and consumers are the
same kind of people. Sometimes people who produce food also buy it for two reasons: 1. They
may have to buy certain foods they don't produce in order to balance their diets, and 2.,they are
forced to sell food at some time during the year because they are in debt or short on income, and
then later in the year, have to buy it back. These are added complications in our implicit models
of what is actually happening.

Another technical issue that needs to be addressed is the scope for what I call limited
intervention, because the discussion has covered largely global types of intervention such as
price policy, etc. For example, I have recently been reading about iodine deficiency and thyroid
disease and, as I understand it, prevention does not involve large-scale price policies. This is
really a specific deficiency that could be remedied by a simple, targeted intervention, i.e.,
iodizing salt. It seems that severe iodine deficiency in the very early years leads to irreversible
deficiencies in neuromotor functioning.

There is a whole series of other issues that I call food systems issues because they are very
interconnected. For instance, the role of food as a wage-good in the whole industrialization
process is quite complex, especially under different economic and social systems with the
different types of interventions they bring about. Also, of course, there are conflicts of interest
among different social groups and the way they act politically over food price policy. Although
we can tell, to some extent, what these phenomena do to different social groups, we cannot easily
forecast how those social groups will organize to do something about them. The more powerful
they are, the better they are at organizing, although history shows that this is not always the case.

Finally, there is the whole question of agrarian structures that I referred to just briefly when I
discussed the different types and sizes of farms and the possibility of changing them to improve
food production. The experience of land reform in Latin America has not been very heartening.

Bo Wickstrom

It seems we are all eager to make one comment about the model presented by Taylor. I think it is
a beautiful model, with much internal logic in it, because of the data in it. What is a model like
this used for? It can serve as a pedagogic model for a meeting like this to generate discussions,
and it has been very successful in doing so at this Workshop. It can also be an instrument for
decision-making, which is the real purpose of a model. I am not quite sure about the validity of
this particular model, because it was not discussed in the paper. I think we should discuss the
circumstances under which the model is valid. Perhaps it would be good for decision-makers in
some countries but not in others. I feel that one should include individual food items with their
costs, demand elasticities, etc., in a model. It would be much better to look at the whole
assortment of foods and observe what happens in terms of price and consumption. If the price of
only one food item is changed and people consume another in its place, the effect is nil if the
food consumed is nutritionally adequate. That fact should be taken into account.

I do not know whether food price elasticities are always less than one in low-income countries. I
recall seeing some data from a cross-sectional study in Tunisia where both calorie and protein
demand were normally elastic in lowincome groups.

The delivery system should also be taken into account in determining the practicality of a model.
If the delivery system for farm inputs like fertilizer is satisfactory, there is no need for a large
extension service to reach small farmers. Similarly, a good delivery system for farm products
will have a favourable effect on prices, and price policies can have more impact.

My field is marketing, and i have noticed a growing interest in what is called "social marketing."
As Lehmann said, if you want to change people's consumption habits, price elasticities have to
be changed to make people switch from one product to another. Industry has a great
responsibility in this, because very active marketing techniques will influence people, sometimes
adversely if they substitute a less nutritious item for a good food product. In this case, whatever
they pay, they are not getting their money's worth.

Eduardo Kertesz

To return briefly to models, I would like to emphasize that my earlier criticism was not of all
models, but to call attention to the fact that the model to seek should not be like the current
search for a blanket cure for all kinds of cancer. No model can offer a magic solution, because
behind all models and socio-economic questions are the political ones. A model developed for
the purpose of intervention should first analyze the political variables.

Good intervention models are developed to solve nutrition problems on the presumption that
strong political will exists to decide for improving nutritional status. It must be remembered that
in underdeveloped countries, the proportion of the population requiring assistance amounts to 50
to 60 per cent of the total. Neither a subsidy policy nor a direct intervention policy can solve
problems of this magnitude on a sustained basis. The case is very different in developed
countries, where a smaller percentage of people needs this kind of assistance.

Taylor was surprised to learn that the food-producing sector has such a strong influence on other
sectors that the latter must adjust to it. I do not believe this is, in fact, true in many countries or
among individual families. A family's budget is based on consideration of their fixed expenses,
such as maintaining their home, their means of transportation, etc. Money for food consumption
is apt to be whatever is left after fixed expenses are met.

Lance Taylor

To summarize, I would first like to return to the points Leslie raised regarding the importance of
foreign trade. It is certainly true that many food-importing countries -Jamaica is a very obvious
example-have really been hurt by the change in the terms of trade against them, the rise in the
cost of food. One can deal with this in a policy (and a policy model) in much the same way as
described in the paper. Suppose the terms of trade go against a country's balance of payments At
the same time, purchasing power is lost to the trade deficit forced upon the country. Purchasing
power has to be generated internally by running at a bigger fiscal deficit. What better way to run
a government deficit than by maintaining the price of food? That is precisely what many
countries have done. But it is a difficult course to follow because of another kind of outside
pressure, basically from the International Monetary Fund and other agencies that try to push
countries into lower deficits. That can lead to serious political problems, as for example the food
riots in Egypt in January, 1977. I suppose I can claim that part of the power of thinking in simple
macro-economic terms is that I used a model similar to the one in my paper in June, 1976 to say
that cutting the food subsidy in Egypt would be foolish. I was the only economist to say that, so
maybe models can help one to be right at least some of the time.

On the issue of consumption patterns, it appeared from several of the discussions that very poor
people, because they devote a very high proportion of their budget to food, will have a more
elastic response to price changes than will people who are somewhat better off. If, as is typical at
the very bottom of the income distribution, 75 or 80 per cent of a family's income is devoted to
food, and the price of food goes up, the real income loss is so strong that food consumption
necessarily has to fall substantially. Price inelasticities appear on average, however, across the
whole population. But that makes food price policies even more important because the people
who are really hurt by food price increases are not the ones whose price elasticity is .2 or .3, but
the ones whose price elasticity is .7 or .8. If the average elasticity is .5, this raises macro
problems. The .8 elasticity at the bottom of the income scale raises real social problems. A
poorly used macro-modei may lead you to forget that sort of issue, but in fact, it is very
important.

One last comment on Lehmann's point that in thinking about any real country, the class and
political structures must be considered. That will vary from country to country, and certainly the
historical dominance relationships will vary among the classes. In some sense that provides
another set of variables requiring detailed information that has to be taken into account in the
analysis. The fact that a political structure exists does not mean that asking macroquestions about
macro-problems is wrong. What is needed is to ask the macro-questions in terms of the class
structure of the country, and in a generalized paper, that is impossible to do.