Last week on the blog we talked briefly about 2011's record high world food prices and why the United States didn't feel the effects of those food price increases. The FAO reports that high food prices disproportionately affect the world's poorest who spend 60%-80% of their income on food. In order to combat high food prices many countries such as Egypt offer as much as 1% of their GDP in consumer food price subsidies. This type of assistance is politically more palatable than a direct cash transfer as food subsidies are justified by the idea that they are improving the nutrition of the very poorest. In the article Do Consumer Price Subsidies Really Improve Nutrition?, published in the November 2011 issue of The Review of Economics and Statistics, Robert Jensen and Nolan Miller attempt to answer this fundamental question.
Miller and Jensen set up a field experiment in 2 provinces of China to explore food price subsidies. Random households in Gansu and Hunan provinces were given vouchers to help pay for their province-specific dietary staple. The 1300 households selected were part of China's urban poor, living on $0.41 to $0.82 per person per day. This amount is well below the World Bank's extreme poverty line of $1 a day. They were also malnourished, consuming far fewer kilocalories per day than international standards recommend. Participants were asked to complete a diary of what they ate in a 24-hour period before, during, and after the survey in order to estimate how diets were changing. There were 4 groups in the survey, ranging from the control group receiving no subsidies to some recipients receiving almost a 30% discount.
What Miller and Jensen found was that in this experiment there was no evidence that food price subsidies increase nutrition. In fact, in some cases the subsidies reduced caloric intake. This is because in Hunan province they found that the increased wealth effect of the subsidy encouraged substitution away from the staple food towards fish, the cheapest meat. However, while the effect of the subsidy on nutrition was very low and for most nutrients statistically insignificant, the welfare effects were not. Consumers who received the subsidies were able to change their food purchasing behavior to maximize their utility. Meaning with food price subsidies consumers were better off, just not nutrition-wise. The authors state that "a number of other policy instruments such as in-kind transfers also improve welfare for the poor, and price subsidies or controls are generally held to have a number of disadvantages relative to these other instruments."