ABSTRACT
Just as nutrition is the watchword of food aid supporters, so prices have been a focus for the critics. This is less because of the intrinsic interest of price levels per se than because of the possible adverse impact price changes may have on local agricultural production. Ironically, an early study noted favourably the potential price effect of food aid. An FAO report on India1 argued that there may be a food constraint on growth: development expenditure will create additional demand leading either to inflation or to a balance of payments deficit; food aid can provide extra real resources to stabilise prices or to support the balance of payments. However, there has been a tendency to regard with disfavour the possible impact of food aid on prices since 1960 when Schultz produced a seminal article2 arguing that if food aid were sold on the open market without any countervailing government action, the supply of food would increase relative to demand, the equilibrium price would fall and farmers would respond by reducing production. If food aid displaces commercial imports or is matched by an equivalent increase in consumption, supply will not rise relative to demand and prices will be unaffected. But if it represents a net addition to supply relative to demand, it will tend to depress consumer prices; whether or not this is matched by a fall in producer prices will depend on whether the government takes any steps to insulate one from the other. Even if there is a fall in producer prices, this need not necessarily affect the income of farmers who would be cushioned if, for example, food aid displaced commercial imports of a related commodity or increased consumption of it or if the aid is accompanied by an increase in exports of the same or a related good. The variety of possible permutations underlines the need to establish empirically exactly what does happen in a country which receives food aid. Since the Schultz article there have been numerous attempts to do this, often by reference to India’s experience.3 The issues that have been considered include whether supply is price elastic, the income and growth effects of food aid, market imperfections arising from government action and the strength of the wholesale sector vis à vis farmers, as well as the effect of farmers switching to other crops/activities. A recent literature survey4 has considered 20 empirical studies, 12 of which refer to India. It concludes that ‘It does seem probable that a price disincentive effect on production can be and has mostly been avoided by an appropriate mix of policy tools.’5
