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  • Publication | 2022

Poverty and Shared Prosperity 2022

Global Food and Nutrition Security

COVID-19, along with surging relative hikes in food and energy prices, have affected every economy around the world. Yet the impact has not been uniform across countries. In fact, it has been a function of the policy choices made during the crisis. Similarly, a range of policies and actions today will be critical to a resilient recovery tomorrow. This report focuses on fiscal policy: how governments raise revenue and spend public resources.

This report offers new analysis of how fiscal policy was used during the first year of the pandemic. It also sheds light on the impact of taxes, transfers, and subsidies on poverty and inequality in 94 countries before 2020, providing important new insights into the impacts of fiscal policy not only during crises but also under normal conditions.

The analysis shows that the ability of fiscal policy to protect welfare during crises is limited in poorer countries. Fiscal policies fully offset the impact of COVID-19 on poverty in high-income countries (HICs), but they offset barely a quarter of the impact in low-income countries (LICs) and lower-middle-income countries (LMICs). Improving support to households as crises continue will require reorienting protective spending away from generally regressive and inefficient subsidies and toward a direct transfer support system—a first key priority.

Reorienting fiscal spending toward supporting growth should be a second key priority. Some of the highest-value public spending—such as investments in the human capital of young citizens or investments in infrastructure and research and development (R&D)—often pays out decades later. Amid crises, it is difficult to protect such investments, but it is essential to do so.

Finally, it is not enough just to spend wisely—when additional revenue does need to be mobilized, it must be done in a way that minimizes reductions in poor people’s incomes. Exploring underused forms of progressive taxation (such as property, health, or carbon taxes) and increasing the efficiency of tax collection can help in this regard.

Extract - The impacts of rising global food and energy prices on poverty (taken from box 1.4 p.82-83)

Food prices rose by 5 percentage points more than core inflation (estimated as the median of country inflation data) in the two years prior to March 2022 (Ha, Kose, and Ohnsorge 2021). Energy prices rose by 11 percentage points more than core inflation in this period, but they are expected to rise 50 percent in 2022 (Ha, Kose, and Ohnsorge 2021; World Bank 2022a). The increases observed so far are very similar to those during the 2008 food price crisis. The prices of agricultural inputs such as fertilizer also rose dramatically in both periods, increasing 266 percent in the two years prior to June 2008 and 217 percent in the two years prior to March 2022. In 2022, prices of wheat and corn spiked, but rice prices remained relatively unaffected. By contrast, rice prices doubled in 2007, alongside wheat and corn price increases.

Immediate and long-run impacts of higher food prices

The immediate impacts of rising food prices are likely to hit the poor the hardest.

However, simulations that focus only on the immediate impacts of higher prices are unlikely to capture the full nature of the price impacts in the long run because they do not consider several factors that may dampen the immediate impact of the food price shock (Minot and Dewina 2015).

Consumers seek substitutes for the foods whose relative prices are increasing (Andreyeva, Long, and Brownell 2010; Friedman and Levinsohn 2002), food producers benefit from higher prices in their next sale, wages adjust, and agricultural investment and production increase (Ivanic and Martin 2014; Jacoby 2016; Van Campenhout, Pauw, and Minot 2018). These changes occur within a matter of months, reducing any immediate impact quite quickly.

Analysis of 300 different poverty episodes drawn from the World Bank’s global poverty data finds that increases in international food prices are correlated with reductions in poverty over the next one to five years (Headey 2018). The reductions are attributed to the agricultural supply response and, to a lesser extent, to the wage response to higher food prices.

A look back at periods of high food prices and effects on poverty The remainder of this box looks at poverty assessments that considered the drivers of poverty trends during the periods of high food prices from 2008 to 2011, with examples from Uganda, Cambodia, Bangladesh and Ethiopia.