Determinants of High Food Prices the Case of Pakistan

Author:SALMAN AZAM JOIYA and ADNAN ALI SHAHZAD
 
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Abstract. The study aims to analyze the determinants of high food prices in Pakistan by using Autoregressive Distributed Lag approach to cointegration and error correction model for long-run and short-run, respectively. The time series data for the period 1972-73 to 2009-10 has been used. The study has used four determinants named as: GDP, food export, food import and total credit to agriculture sector. The empirical findings of the study show that all the determinants are highly significant in the long-run as well as in the short-run. GDP and food export have been a contributor towards high food prices while food imports and credit to agriculture sector cause the reduction in the food prices. The import prices cause the reduction in the food prices but later on it cause the balance of payment problem through trade deficit which again cause the food price inflation for the next years.

The evidence from the empirical results strongly recommends that both export and import of food items must be reduced and credit to agriculture sector must be increased to control food price inflation in Pakistan.

Keywords: Food inflation, Agriculture economics, GDP

JEL classification: E29, E31, Q1

I. INTRODUCTION

Food price inflation is a supreme problem being faced by developing countries like Pakistan. This variable exerts a great amount of pressure over the economic conditions of any country. There is a common understanding that food is a necessity and an increase in the price of a basic necessity means that the household is getting poor. High food inflation decreases the purchasing power which would result decrease in real income of the consumer. The elasticity of demand for food items is less than one in the developing countries. People spend 70 percent part of their income on basic food items. So it is necessary to find the factors which cause the high food prices in Pakistan.

High Food prices show a greater impact on domestic price level. Inflation as measured by the changes in consumer price index (CPI) has become 14.1 percent in July-April 2010-11 as against 11.5 percent in the last fiscal year and in second last year it has shown a high jump of 20.8 percent. During these periods, food has stayed the major driver of inflation in Pakistan. Food inflation is persistently rising up to 18.4 percent in July-April 2010-11 as against 12.0 percent in the last period. So food inflation causes a big push to overall inflation. The above numerical figures of CPI basket for goods and services shows that food inflation has worked as a substance that stimulates in the index with its 18.4 percent increase. Figure 1 shows the upward and downward trends in overall CPI percentage growth rate and food price inflation percentage growth rates.

FIGURE 1

Trends in CPI Percentage Growth and Food Inflation

Contemporary growth theory examines the food grain prices as an important factor for saving and investment in the developing nations. High prices of food items hamper the growth of saving and as well as investment.

The overall inflation including food-price inflation and non-food price inflation is because of higher monetary expansion caused by massive borrowing from the banking system to finance the fiscal deficit (Khan and Qasim, 1996). The food prices internationally have been stable in the first two quarters of 2010 but showed an increasing trend during the second half of 2010. This increase in the prices of food surely puts a negative effect on the consumers but the poor people of developing nations suffer more than anyone else because food includes the major portion of consumption in the household (IMF, 2011).

Food inflation has emerged a major source of concern in Pakistan. Pakistan’s economy has recorded a very high growth rate in the mid 2000s coupled with the higher food inflation. The recent high prices especially of food and drink items have adversely affect the economy.

FIGURE 2

Average Growth Rates in GDP and Food, Beverages and Tobacco Prices

Figure 2 shows the average growth rate in GDP and food, beverage and tobacco prices in the last four decades. In 1990s, 4.8 percent average GDP growth rate are coupled with 8.6 percent food price growth rate. As GDP growth rate rises in 1980s, food price inflation also rises. In the last two decades average GDP growth rate remains the same but average food prices again show upward trend because of other factors like food imports, food exports etc.

On the one side, as the reliability of macroeconomic indicators like GDP, GNP etc. as measures the health of the economy and on the other side measuring of prices through devices like CPI, WPI, SPI etc. is yet another tool of economics that measures the standard of reporting down the ages. Higher food inflation in the developing countries like Pakistan enforced household to make reduction in some areas of food consumption which lead to poor health. Poor health results in productivity losses of up to 10 percent of life time earnings and GDP losses of 2-3 percent (Alderman, 2005).

Higher food inflation gradually wears away the benefits of growth and leaves the poor worse off (Easterly and Fischer, 2001). So it is too much important to analyze those factors which cause food prices to high in Pakistan. In this study the attempts has been made to explore the major determinants of food price inflation in the short-run as well as in the long-run in Pakistan. The next part of the paper represents the brief review of literature. The third part of the study explains the methodology and data analysis in detail. The fourth part of the study discusses the empirical results and in the last part conclusion and policy recommendations are discussed.

II. REVIEW OF LITERATURE

One of the earlier studies relating to determinants of food prices was conducted by Mellor and Dar (1968) for Indian economy and the sample period was 1949 to 1964. To check the determinants of price level in agriculture sector of the Indian economy they took three explanatory variable excess demand (demand minus supply) in t-1...

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