The Poverty and Welfare Effects of the 2008 Food Price Crisis in Vietnam: A Decomposition Analysis

• Author: Tung Duc Phung,Hermann Waibel
• Published date: 01 September 2014
• Date: 01 September 2014
• DOI: http://doi.org/10.18278/wfp.1.2.4

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World Food Policy - Volume 1, Number 2 - Fall 2014

Introduction

From September 2006 to June 2008 the

international prices of food commodi-

ties increased dramatically, driving the

food price index to a much higher peak than

that reached during the food price crisis of

1995 (see Figure 1). During this same period,

the food price index increased by about 80%,

driven mainly by increasing cereal prices,

which increased by 230% while meat prices

increased by only 12%. e main reasons for

these price increases include both supply-side

and demand-side factors: (i) an agriculture

production shortfall due to bad weather; (ii)

an increase in agricultural production costs

because of high energy and fertilizer prices as

well as high transportation costs; (iii) export

bans and speculative activities by India and

Vietnam; (iv) the recent increasing demand

from India and China due to their economic

booms; (v) the panic of the Philippines gov-

ernment and individuals stockpiling food

(Ivanic and Martin 2008); (vi) soaring pe-

troleum prices which increased the demand

for biofuels produced from food grains and

oilseeds (Collins 2008); and (vii) the weak

U.S. dollars compared to other major curren-

cies and lower interest rates by Federal Re-

serve (Frankel 2006; Calvo 2008). Derek and

Shenggen (2008) conclude that traders’ reac-

tions, hoarding by key rice exporters, the low

stocks of the four main staple foods (corn,

wheat, rice, and soybeans), and the large in-

crease in production of biofuels are the main

factors driving the increase in food prices.

e sharp increase in food prices

during this time was a major concern of gov-

ernments and international organizations

because of fear it could lead to social and

political instability in developing countries,

especially in poor net-food-importing coun-

tries. Ivanic and Martin (2008) estimated

that an additional 100 million people could

fall into poverty. e World Bank (World

Bank 2008a, 2008b) expected an increase in

the number of malnourished people by 4.8%.

erefore, at a meeting in Rome (June 2008)

Using panel data from the Vietnam Household Living Standard Surveys (VHLSS),

this paper examines the impacts of food price increases on welfare and poverty in Viet-

nam. It is found that on average the rise in food prices increased household welfare

by 7.5 percentage points. However, the percentage of households who gained from the

increase in food prices is much smaller than of those who lost. e absolute number of

people living in poverty increased by about 2.5 percentage points and the poverty gap

deepened, but these eects varied greatly across regions. Producers’ supply reactions

were moderate and on the demand side only poor consumers showed strong reactions.

JEL classications: D12, I32

Keywords: food price crisis, welfare, poverty, Vietnam

Tung Duc Phung,1 Hermann Waibel2

1 Mekong Development Research Institute, Hanoi-Vietnam.

2 Leibniz University Hannover, Faculty of Economics and Management, Institute of Development and Agri-

cultural Economics, Hannover, Germany.

e Poverty and Welfare Eects of the 2008 Food Price

Crisis in Vietnam: A Decomposition Analysis

68

e Poverty and Welfare Eects of the 2008 Food Price Crisis in Vietnam

the representatives of 180 countries urged

the international community “to take urgent

and coordinated action to combat the neg-

ative impacts of soaring food prices on the

world’s most vulnerable countries and popu-

lations” (Food and Agriculture Organization

2008).

Rising food prices have macro- and

micro-economic impacts. While the mac-

roeconmic impacts are fairly clear, less is

known about the impacts at the household

level (Derek and Shenggen 2008). Most cur-

rent papers (Zezza et al. 2008; Dessus, Herre-

ra, and Hoyos 2008; Wodon et al. 2008; Arndt

et al. 2008) use simulation methods that are

based on Deaton’s (1987) approach. ese

papers show that rising food prices generally

lead to higher poverty because net negative

impacts on poor consumers dominate net

positive impacts on poor producers. ese

papers are instrumental for identifying vul-

nerabilies to price changes across countries

and sub-national groups like urban/rural or

poor/nonpoor.

Several studies have examined the ef-

fects of food price and poverty in Vietnam.

e study of Minot and Goletti (2000), us-

ing data from the Vietnam Household Liv-

ing Standard Survey (VHLSS), showed that a

rise in rice prices would increase the average

real income of households in Vietnam albe-

it with a negative distributional impact, i.e.,

poverty would increase. In constrast, Ivanic

and Martin (2008) used Vietnam Household

Living Standard Survey collected in 1998 and

2004, and found that increasing rice prices

would reduce poverty in Vietnam. Using

2006 VHLSS data, Vu and Glewwe (2011)

found that rising food prices increased over-

all welfare of Vietnamese households be-

cause the welfare gain of net sellers exceed-

ed those of the net buyers. But the majority

of people were worse o because there net

buyers outnumber net sellers and threrefore

the poverty rate increased by 1.1 percentage

points.

Figure 1: e food price index 1990–2008