Chupler 4


The devaluation makes food imports more expensive and induces a rise in domestic price
from p to p' at the new equilibrium point B. The price increase will induce increased
domestic food production (according to the price elasticity of production) from pr to pr'.
while food demand will go down (according to the price elasticity of demand) from s to s'.
Food imports will go down (from s-pr to s'-pr'), with positive implications for the current
account balance but negative effects on total food supplies. In spite of increased domestic
food production, the aggregate supply deficit and the demand deficit will widen from R-s to
R-s'.

The negative impact on total food supplies may be further accentuated by a change in the
production function as the result of a shift from food crop to export crop production. We
have seen that a devaluation brings about the strongest price increase for export crops. The
relative price advantage of export crops is likely to induce farmers to switch to export crop
production at the expense of food production. This effect ,which is not shown in Figure 4.4
is the result of low aggregate and negative cross-price elasticities of agricultural production
(see section 2 of Annex 1). It would lead to a left-upward shift of the production curve, with
a consequent further widening of the supply deficit.

In theory, the higher foreign exchange earnings from increased export crop production (if
they materialise, see effects of collective adjustment) could be used to finance additional
food imports. Such a possibility is, however, often constrained by the fact that a substantial
share of the foreign exchange earned needs to be used for the repayment of foreign debts (see
table 4.1). This points to the important linkage between the need for adjustment, foreign debt
release, and food security.

The brief analysis above leads to the following major conclusion: the incentive effect of a
currency devaluation on domestic food production is difficult to predict, but it is likely to
reduce overall food supplies and aggregate food demand, at least in the short-run. If
this happens, supply and demand deficits will increase and the food security situation
will deteriorate. Much depends on the degree of commercialization in the agricultural
sector and the speed at which export and food crop markets respond to changing price
structures. Unfortunately it is in the poorest countries, where markets tend to operate less
effectively, that food security is most likely to be adversely affected.

These immediate adverse effects on food supply and demand may be offset by positive
effects of other adjustment policies (e.g. agricultural sector adjustment, as discussed in
sections 7 and 8) or, in the long-run and if the adjustment programme is successful, by a
general positive impact of balanced economic growth on food production and demand. Many
small farmers have been adversely affected by the market distortions which have built up as
a result of attempts by government to cope with foreign exchange imbalances and will
benefit from the emphasis on better market operation.

Nevertheless, the critical short-run effects need to be considered, and the question has to be
raised as to the implications of the overall decline in food supply and demand for the food
economy at the micro-level and particularly the food security situation of vulnerable groups.


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