Food Prices and Rural Poverty-Liberalisation without Pain

Liberalisation without Pain?
J Mohan Rao WHOLESALE liberalisation of Indian agriculture is not yet a reality. Zeal for the presumed economic panacea of integrating domestic food markets with global markets seems to have been tempered at least for reasons of political expediency. The rise in prices of publicly distributed food and an associated risein poverty during the years following 1991 provided a highpoint in the Indian skirmishes over the wisdom of the Washington Consensus, Apart from this recent episode, the idea that a food price increase hurts a large part, perhaps a majority, of the rural population who buy some or all of their food in the market has not been seriously challenged as a key stylised fact about the Indian economy, Martin Ravallion's recent piece 'Reform, Food Prices and Poverty in India' (EPW, January 10-16) serves as reminder that the stylisation bears unstylised empirical testing. Contrary to the prevalent view and to the results of previous investigations, Ravallion reaches the startling conclusion that the positive correlation between food prices and poverty is a statistical artefact without any causal significance. Ravallion forcefully states that "[the positive correlation] is not an income-distribution effect. Rather it appears to be due to covariate fluctuations between average consumption and food prices due to other variables, including food supply; bad agricultural years simultaneously lower rural living standards and increase food prices" (p 29; emphasis added). In other* words, rural poverty increases when food prices rise not because rural income distribution worsens but because rural average income declines. Given the general expectation that liberalised trade in agricultural commodities will raise prices and the liberal faith that this will increase allocative efficiency and output, Ravallion's negation of distribution and affirmation of mean consumption as the transmission mechanism for changes in poverty seems to reassure would-be liberalisers that freeing up food prices will be painless, His conclusion appears to remove a major roadblock on the way to agricultural liberalisation.