A Perfect Storm or an Opportunity for Latin America: High World Commodity Prices

The current food price crisis could have an important effect of the poorest in Latin America. Although the region is fairly immune to external shocks the food price crisis have severely affect all the LA countries in terms of inflation, especially food inflation and its impact is even higher in net importing countries and on poor consumers in peri‐urban and rural areas. In this paper we review the modeling options to measure these effects and we propose to separate the analyses in two steps. First, one should try to understand how shocks in international prices are transmitted to domestic prices; and second for a given change in prices analyze the welfare impact among households. In this paper we discuss the empirical modeling options to account for price transmission and welfare effects and we also provide our own empirical estimates for welfare effects at the household level, using a quadratic AIDS estimation, for two Latin American countries: Honduras and Peru. Our empirical estimations for the welfare effects due to high food prices reveal that in Honduras national poverty might potentially be reduced in 3.5 percent points. In the case of Peru our evidence shows that national poverty is increased by 0.3 percent points. However these figures hinder important differences across different groups and therefore that there is a need for transfer‐based strategy for the extreme poor but this can only be a stop‐gap solution, and only a targeted investment approach will be able to permanently reduce the vulnerability of the poor to the food price crisis.