Chapter 4


Fig. 4.5: Impact of a reduction/elimination of food subsidies

 requirements

 demand
 new production I old production
 /supply at cp /supply at cp


 \ o .production/supply at pp

 new cp [c, p = consumer price
 old cp ... pp = producer price
 ddpp ...................... ........ ...... pcpct

 ------------4 1 4 >volume



 A widening of the margin between the producer prices (pp) and the consumer prices (cp),
 induced by a subsidy reduction, is shown in the graph as an upward shift of the aggregate
 supply curve expressed in consumer prices. (The same effect could be demonstrated by a
 downward shift of the aggregate demand curve related to producer prices. It is important to
 note that the actual supply function which is, in principle, related to the producer price does
 not change, nor does the actual demand function which is, in principle, related to the
 consumer price!). As a result of these shifts, consumer prices rise and producer prices fall
 (unless prices are regulated). Further consequences are a decline in aggregate food
 production and demand, and widening supply and demand deficits (from R-v to R-v').
 The fact that a cut in consumer subsidies affects not only demand but also production (in all
 cases where the prices are not fixed and the subsidized items are not exclusively imported
 but also locally produced) is often overlooked but deserves special attention.

 On the micro-level, a cut in general food subsidies means a reduction in real income for
 consumers and, as shown above, a reduction in income for food producers, too. On the
 consumption side, the implications of a subsidy reduction on household welfare and food
 security mainly depend on who benefits from an existing subsidy and the extent to which
 consumption expenditures are met by the subsidy. Where the subsidized food reaches the
 poor and forms a high proportion of food expenditures in the budgets of low-income
 households (see discussion under par. 3.3.4 above), a subsidy reduction will have a
 substantial impact on the real income and the state of food security of poor and
 vulnerable groups (see Box 4.2). This is often the case for the urban poor.

 In cases where only certain privileged groups had access to general subsidies and/or where
 the poor depended on subsistence production or on parallel and informal markets for their
 basic food supplies, the negative impact on household food security will be minimal. This


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