20 Minutes of Realization from the UP Economics Professor

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Inflation won’t hurt PH economy — Metrobank

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MANILA, Philippines — Metrobank has expressed confidence inflation, although likely to accelerate further, will remain manageable and will not reach levels that could stall recovery.

In its latest research note, Metrobank said various emerging economies have already implemented measures to temper inflation in their jurisdictions. These measures are led by interest-rate hikes, which some economists feared could dampen consumer demand and drag overall economic growth.

It said that despite the increase in interest rates in many emerging markets, the move by the policymakers did not lead to substantial slowdown in the growth rates of economies.

Given this backdrop, accelerated increase in consumer prices as well as efforts to curb the increase, such as interest-rate hikes, could be very well absorbed by the Philippine economy. The bank said faster inflation would remain within tolerable levels and would not cause the economy to significantly slow down.

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Brief Review of Philippine Food Demand Studies

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There have been few food demand studies done using the Philippine household demand data employing AIDS model. Recently, Balisacan (1994) used LA-AIDS model to explained the consumer behavior of urban and rural areas towards the changes on price and income using average expenditure shares for each region and by area ( urban and rural). The study was focused on the aggregated commodities (i.e. cereal, meat beverages, fuel, house and clothing) and not  mainly on food commodities in specific, as this paper is aiming to estimate. The expenditure elasticities, however, suggested that in the commodity group such as cereal, meat, beverages, clothing and miscellaneous groups were inelastic with the expenditure elasticities of 0.382, 0.805, 0.990, 0.967 and 0.25 respectively. Further, the own price elasticities of identified food commodities were not found significant. On the other hand, the uncompensated price elasticities showed a strong evidence between the food groups and non food groups. The price of cereal, for example, has a significant positive effect on the demand for fuel and house with the estimated coefficients of 0.161 and 0.431 respectively.

The result also showed the substantial difference in the demand response  by various population groups to changes in income. In case of cereal, the expenditure elasticity was considerably lower for urban areas than for rural areas, especially in 5^th  income quantiles with estimated expenditure elasticity of -0.463 compared to 0.179 for rural area. Further, there were little variation in price elasticities across population groups. This result, however, was not unexpected since the data set used in the study did not contain information found among households in different circumstances (Balisacan, 1994).

Llanto et.al. (1996), however, made used of QUAIDS model specification by Blundell et.al. (1993) using a cross-sectional household data of Food Expenditure Survey in year 1991. The analysis was focused mainly on the food groups such as cereal, fruits and vegetables, meat and fish products, dairy products and other food items across different population groups. The demand elasticities for cereal was inelastic to its own price for various household classification of urban households, farm households and deficit households with the calculated elasticities of 0.87, 0.89 and 0.90 respectively. Cereal products however, was found elastic, among rural households, at varying household sizes, agricultural households and surpluses households. On the other hand, the result further showed that fruits and vegetables , meat and fish products and dairy products, irrespective to various  household groups, cereal is positive. This implied that cereals was served as substitute good for those  who cannot afford those food groups mentioned at the prevailing prices. Further, the studies showed that the estimated income elasticity were all positive in all population groups, this means that all food groups were all normal goods.

A more recent study applying Philippine household data was conducted by Orbeta et.al. (1998) in simulating the impact of macroeconomic changes on the nutrition status of Filipino households using the LA-AIDS. Using the Tariff Reform Program implemented between 1988-1992 as policy change, the study showed a more progressive impact on nutrition compared to the impact of income. The result of LA-AIDS demand parameters were used to simulate the effect of policy change across income distribution.

Source of basic data: FIES-NSO, various years

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Philippine Food Price Increase: How would it affect the Poor?

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Rising food prices intensify food insecurity in developing countries (US Department of Agriculture Economic Research Service, 2008). Trostle (2008) noted that for a high-income country, a 50 percent increase on staple food prices causes retail food expenditure to rise to 6 percent and results to less than one percentage income spent on food. For consumers in a typical low-income, food- deficit country, however, a 50 percent increase on staple food prices leads to 21 percent increase in total food expenditures. Furthermore, this increase means that the percentage income spent on food in a developing country climbs from 50 to more than 60 percent.

           

Indeed, the rapid increase of food commodity prices negatively affects the lower-income consumers of developing country. USDA (2008) argued that: (1) lower-income consumers spend a larger share of income on food; (2) staple food commodities such as corn, wheat, rice and soybeans account for a larger share of food expenditure in low-income families; (3) consumers in low-income, food-deficit countries are vulnerable because they must rely on imported supplies, usually purchased at higher world prices.

           

The Asian Development Bank agreed that the effects of rising food prices differ across households. Ascending food prices may lead to income gains for net producers. However, many urban and rural poor who are not necessarily producers will suffer the most from food price increase. Son (2008) reported a 16.8% rise in the severity of poverty and 1.0% declines  on Filipino’s standard of living between 2003-2006 due to increase on food prices. He estimated the price elasticity of poverty by commodity and suggested that a 10% increase in food prices will drive 1.7 million people into poverty. Separating the impact of specific commodity price increase, a 10% increase on rice and fuel will force an additional 660,000 and 160,000 poor Filipino people. In his study, he emphasized that the effect of increasing food prices was particularly greater to the poorest of the poor.

           

Given the explicit adverse effect of rising food prices, the effectiveness of policy adjustments may depend, however, on the complete understanding of expenditure patterns across income groups and different geographic regions. For example, the expenditure of Metro Manila populace may vary significantly from the residents’ outside the metropolitan. Consequently, the increasing income inequalities among Philippine households (ADB, 2003) aggravate the differences between high and low income households in terms of food demand.