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The Macroeconomics of Famine

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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A theoretical analysis and a case study suggest that expansionary monetary and fiscal policies may contribute to the rise of famine even when there is no change in per capita food output

Famine is intrinsically an economic phenomenon. Until very recently, however, the tendency has been to view famine as a natural disaster, and economics has not had much to offer beyond the man-on-the-street observation that famines occur “simply because there isn’t enough food to go around.” Although a number of economists have progressed beyond the simple drought-and-locusts view of famines, the primary focus has remained on influences, such as faulty agricultural pricing policies, that reduce the physical output of food.

For a detailed discussion, see “Macroeconomics and Famine,” IMF Working Paper (WP189125), available from the authors.

In an important contribution to the field, Amartya Sen, in his book Poverty and Famines (Oxford: Clarendon Press, 1981), argues that the great famines of the twentieth century were not caused by a decline in per capita food output, but rather by a decline in individuals’ ability to purchase food from income and wealth, or what he terms food entitlement.

This article expands upon the “entitlement approach” to explain how expansionary monetary and fiscal policies may lead to famine, even when there is no economy-wide food shortage. The basic idea being explored is that expansionary macroeconomic policies can lead to sharp increases in the relative price of food. This, in turn, reduces people’s ability to purchase food both directly through the standard price effect and, perhaps more important, indirectly by generating greater unemployment. To understand how macro-economic policies can be a major influence on the prevalence of poverty and hunger, one must begin by asking what determines the level of employment in an underdeveloped economy.

The Bangladesh famine of 1974

The 1974 famine was in many respects a “classic” one, with summer floods giving way to autumn famine. This sequence led a number of commentators to conclude that it was the destruction of the summer and autumn rice crop that was responsible for the death of up to 1 million people. However, the facts about food availability (see Tables 1 and 2) and food entitlement tell a different story.

First, rice production was higher in 1974 than in the years preceding and succeeding the famine. Second, per capita food availability—defined as rice and wheat production plus foodgrain imports—was also higher in 1974 than in the years surrounding the famine. Third, disaggregating these totals, both food output and food availability were considerably higher in four of the five districts most severely affected by the famine. Although food availability did not decline, there is ample evidence that food entitlement, as reflected in the relative price of food, did. Compared with the pre-famine price prevailing at the start of the year, the relative price of food increased by about 20 percent. Corresponding to this increase was a large outflow of workers and peasants from rural areas to relief centers, towns, and cities. Who were these destitutes that, in Mohiuddin Alamgir’s account, “after a few days of wandering around the streets of the city simply collapsed and died”? (See Famine in South Asia: Political Economy of Mass Starvation, Cambridge, MA, Oelgeschlager, Gunn, and Hain, 1980.) Data on the occupation structure of inmates in relief centers confirm that workers in the nonfood sectors—transportation workers, traders, and wage labor—and petty farmers that normally rely on nonfood-producing activities for survival were hardest hit.

But if a contraction in food availability did not cause the increase in the relative price of food and the associated loss in food entitlement, then what did? Chart 1 graphs the explosive growth in money just prior to the famine and a subsequent decline in early 1975 back to the pre-famine level. Chart 2 traces the associated increase in inflation and inflationary expectations, hence contributing to the surge in the relative price of food. Lack of data on private sector holdings of foodgrains makes it difficult to verify the accounts of commentators that stock-building arising from anticipated inflation was the cause of the famine. However, statistical tests for the period surrounding the famine support the view that the rate of money growth was a significant variable explaining the evolution of the relative price of food in Bangladesh.

Chart 1Bangladesh growth of narrow money, 1974-751

Source: Bangladesh Bank Bulletin

1 Graph depicts logarithm of narrow money.

Chart 2Bangladesh price developments, 1974-75

Source: Bangladesh Bank Bulletin

1 Base year 1969/70.

2Base January 1974 = 100.

Famine, generally regarded as a sectoral—rather than monetary—phenomenon, has led to disastrous policy failures in the past. The lessons learnt from these policy failures, however, have not been lost on policymakers in Bangladesh. The 1988 floods would, by all accounts, appear to have been at least as severe as those in 1974. But, whatever the extent of individual loss and deprivation, there was no widespread starvation or famine in the autumn of 1988. Instead, a greatly enlarged food distribution system, developed over the past ten years, allowed the Government to respond quickly by drawing on its ample buffer stocks. Equally important, the budget deficit was kept under control and, as a result, monetary growth remained stable. The increase in the relative price of food was modest and quickly reversed.

Table 1Bangladesh: rice output, 1971-751
YearProduction

of rice

(thousand tons)
Index

of rice

production
Per capita

rice output

(tons)
Index of

per capita

rice output
197110,4451000.133100
19729,706930.12090
197310,4591000.12695
197411,7781130.139105
197511,4801100.13299
Source: Data taken from Table 6.4 of Alamgir (1980).

The three main rice crops are. boro (harvested in April-June) which accounts for 20 percent of annual production, aus (harvested in July-August}, 25 percent: and aman (harvested in November-January). 55 percent. As the peak of the Bangladesh famine coincided with the aus harvest and preceded aman. the production-based supply of rice is obtained by adding the previous year’s aman crop to the current year’s aus and boro crop.

Source: Data taken from Table 6.4 of Alamgir (1980).

The three main rice crops are. boro (harvested in April-June) which accounts for 20 percent of annual production, aus (harvested in July-August}, 25 percent: and aman (harvested in November-January). 55 percent. As the peak of the Bangladesh famine coincided with the aus harvest and preceded aman. the production-based supply of rice is obtained by adding the previous year’s aman crop to the current year’s aus and boro crop.

Table 2Bangladesh food grains availability, 1971–75
YearTotal available

foodgrains for

consumption

(million tons)
Population

(millions)
Per capita

availability

(oz./day)
Index of

per capita

availability
197110.74070.67914.9100
197211.27172.53515.3103
197311.57274.44115.3103
197412.35576.39815.9107
197512.02278.40514.9100
Source: Data taken from Table 6.23 of Alamgir (1980).
Source: Data taken from Table 6.23 of Alamgir (1980).

Employment and food entitlement

In countries still susceptible to outbreaks of famine, the effect of a highly skewed distribution of wealth and a virtually nonexistent social “safety net” is such as to make the ability to purchase food of the vast majority depend on the sale of labor power (i.e., employment). However, employment is not a straightforward matter and involuntary unemployment is a pervasive fact of life in developing countries.

The standard argument is that involuntary unemployment is caused by microeconomic and social factors that make workers unwilling or slow to accept cuts in nominal wages. In the context of a developing country, these arguments are not very convincing. But one could ask: What prevents an unemployed laborer, especially a hungry one, from offering to work for less than the going wage? According to one view, involuntary unemployment, and hence a diminished access to food, is not caused by the unwillingness of workers to accept lower wages but rather by the unwillingness of employers to hire them at lower wages.

This view begins by recognizing that it is the “effort” with which one works any given hour that determines output, and that such effort varies with nutrition: an undernourished worker simply lacks the physical ability and psychological motivation that a well-nourished worker commands. But if nutrition is derived principally from wage income, then worker effort—and hence output—will vary with the real wage that is paid to labor. Firms and employers would then compare the benefits of lower real wages with the cost of reduced effort on the part of workers—a trade-off that determines a unique real wage called the “efficiency wage.” For each level of demand, the profit-maximizing firm would employ a given number of workers and pay them the efficiency wage. The remainder of the labor force is not only unemployed but also unemployable, even if they offered to work for less than the going wage.

In normal times, a society may be able to carry forward a considerable stock of such involuntarily unemployed workers who subsist at a low level of nutrition by begging, scavenging or, at best, performing menial tasks for the well-to-do. If the relative price of food were to increase, however, it is this class of people subsisting at the fringes that would be hardest hit. Further, an increase in the relative price of food can be shown to lead to an increase in unemployment: this arises when a contraction of the nonfood producing sector is not matched by a commensurate expansion of the food sector when relative prices change since the “efficiency wage” is determined in units of food. This obviously aggravates the problem of inadequate food entitlement by creating an expanded class of destitutes. Thus, because of its effects on unemployment and on purchasing power over food, the relative price of food may be regarded as the key variable determining the extent of poverty and hunger in the economy.

Macroeconomic policies and famine

How do monetary and fiscal policies affect the relative price of food and hence poverty and hunger? Consider what might happen if monetary growth were to accelerate sharply. In a situation where available hedges against inflation are limited (arguably the case in most developing economies), the anticipation of higher inflation results in a shift away from holding cash balances to physical assets such as foodgrains. This process inevitably results in a sharp, but temporary, increase in the relative price of food, because of the increase in the demand for food for stock holdings. Once wealth-holders in the economy acquire the desired level of food stocks, the relative price of food falls back to normal. During this time, however, if the ability to purchase food is severely restricted for large numbers of people because of the increase in its relative price, the adjustment process would be characterized by increased hunger. And if this situation were to persist, hunger would quickly give way to famine. The case of the 1974 Bangladesh famine (see box) supports this thesis.

Implications for famine policy

The principal implication for famine policy is that when a government is faced with reports of emerging famine, the best response would be to increase food entitlement without causing increases in the relative price of food. Specifically, domestic procurement of food should be limited as it puts pressure on prices at precisely the time when society is most vulnerable to further deterioration in food entitlement. Instead, food could be made available to the affected population from existing buffer stocks (built up in “good years” through temporary higher government purchases). Alternatively, if foreign financing is available, additional food could be imported without raising domestic food prices.

In cases where the famine has been preceded by rapid monetary expansion, the appropriate policy response might require a reduction in monetary growth rates. Generally speaking, the monetary authorities should resist “accommodating” perceived shocks to food supply, unless it has strong reasons to believe that lack of credit for working capital would be severely recessionary. In any case, given the evidence that it is the narrower monetary aggregates that determine the price level, monetary restraint should focus on the control of the monetary base rather than on measures affecting commercial bank credit (such as increases in the reserve ratio).

The points raised in this article are obviously ones that need to be interpreted with caution and common sense. Not every monetary or fiscal expansion necessarily leads to starvation and famine, and whether hunger is exacerbated will depend on a number of variables, such as the magnitude of price changes, the public’s perception of future policies, the availability of safeguards against inflation, the trends in growth of food supply, and so on. But the key point remains that macroeconomic policies hold the potential for creating famines. Thus, while the availability of food has no doubt an impact on poverty and hunger, it is by no means its sole—or even main—cause.

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