Front Matter Page

Asian Department and Research Department

Contents

• Summary

• I. Introduction

• II. Entitlement, Employment, and Hunger

• III. A Simple Macro Model

• IV. Analysis of a Monetary Disturbance

• V. Fiscal Policy

• VI. The Open Economy

• VII. Bangladesh, 1974: An Example

• VIII. Concluding Remarks

• Text Tables

• 1. Bangladesh: Rice Output, 1971-75

• 2. Bangladesh: Foodgrains Availability, 1971-75

• 3. Bangladesh: Occupational Distribution of Destitution in 1974

• 4. Bangladesh: Occupation-specific Mortality Rates in Selected Villages, August-October 1974

• Figures

• 1. Determination of the Efficiency Wage

• 2. Equilibrium in the Labor Market

• 3. Dynamic Equilibrium of the Economy

• 4. Effect of an Increase in Monetary Growth

• 5. Effect of a Tax-Financed Increase in Food Expenditure

• 6. Effect of an Increase in World Food Prices/Devaluation

• 7. Bangladesh: Price Developments, 1974-75

• 8. Bangladesh: Growth of Currency, 1974-75

• 9. Bangladesh: Growth of Narrow Money, 1974-75

• 10. Bangladesh: Growth of Broad Money, 1974-75

• References

Summary

In an important contribution to the theory of famines, Sen (1981) has argued 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. This paper utilizes such an “entitlements approach” to develop a model that explains how loose monetary and fiscal policies may cause famines even when there is no decline in food output. The basic idea is that expansionary macroeconomic policies can lead to sharp increases in the relative price of food—which reduces people’s ability to purchase food both directly through the standard price effect and indirectly by generating greater unemployment.

The typical underdeveloped economy susceptible to famines is modelled using efficiency wage theory, an analytical device that yields chronic unemployment. The chronically unemployed form a group of destitutes that survive mainly by begging, scavenging, or performing menial tasks. They obviously have the smallest food entitlement and are most vulnerable to any increase in the relative price of food. Further, an increase in the relative price of food is shown to lead to greater unemployment arising from the contraction of the nonfood sector—which only serves to aggravate the problem.

The transmission mechanism from macroeconomic policy to higher relative food prices, and thence to famine, is now easily traced. For example, in a situation where available hedges against inflation are limited, higher monetary growth results in a portfolio shift away from real money balances toward the holding of physical assets such as foodgrains—a process that results in a sharp, but temporary, increase in the relative price of food (because food consumption must be squeezed in order to make room for greater stock holding). If the ensuing loss in food entitlement is sufficiently severe, and correspondingly prolonged, the result is famine.

This framework is applied to reexamine the events leading up to the Bangladesh famine of 1974. In contrast to the view that the famine was caused by floods, the paper argues that an explanation along the lines sketched above is, if not conclusive, at least plausible.

The main practical point emerging from our model is that an effective response to famine requires macroeconomic policies that reduce the relative price of food. If the famine has been preceded by rapid monetary expansion, the appropriate policy response may require some reduction in monetary growth rates. The best government intervention is the direct provision of food from buffer stocks. Alternatively, if foreign grants or concessional foreign borrowing are available, imported food could be distributed to the affected population. In contrast, fiscal operations to procure foodgrains domestically when a famine is already in place tend to drive up the relative price of food and exacerbate the problem of inadequate food entitlement.