The effect of food price shocks on poverty in South Africa

Abstract

Poverty alleviation, inequality and unemployment have been focal points of South African government policy since 1994 through multiple programmes such as the New Development Plan (NDP) and Reconstruction and Development Programme (RDP). An important area of intervention in the fight against poverty is addressing food prices, which have a major impact on overall poverty and across households. In South Africa, poverty and unemployment levels have been increasing, together with food prices. There are only a few studies that assess the impact that food prices have on the welfare of the people in South Africa, which creates a gap in the literature. Closing this gap could assist policy makers in South Africa to (1) quantify the extent to which food price shocks affect the poverty levels and (2) formulate policies that address the intermediate and long-term food price shocks. The most recent study on this topic looked at the data for the period ranging between 1990- 2015 (van Wyk and Dlamini, 2018). The current study extents this period and looks at the data for the period between 1990 – 2022, adding seven years which include the crucial COVID-19 era. The current study used both descriptive and econometric analyses to address its objectives. The study employed trend analysis to analyse food prices in South Africa during periods of rapid food price inflation that occurred between 2015 – 2022 and employed the Vector Error Correction Modelling (VECM) technique to estimate a regression model which shows the relationship between food prices and poverty in the long run and short run for the period 1990 - 2022. The trend analysis was done using graphic illustration whereby a comparison was made between the retail food prices for a selected food basket of a household in the urban areas and the selected food basket of a household in the rural areas. . The analysis also included the trend for four main food groups, namely: bread, maize meal, poultry and sugar. The vector error correction model techniques used in this study made use of six variables to determine the short-run and long-run relationship between food prices and poverty: the independent variable being Household Disposable Income (HDI) as a proxy for poverty and the dependent variable unemployment, Population growth, Consumer Price Index(CPI), Gross Domestic Product (GDP) and the dummy variables that capture the effect in the years where there is a spike in food prices. When looking at the price trends for staple foods in South Africa between the periods 2015 - 2022, prices trended upward between the period of 2015 and 2018 and between 2020 and 2021, but downwards in 2022. The upward trend between the period 2015 – 2022 coincided with the period of drought and COVID-19 in South Africa which negatively impacted food supply systems and ultimate food prices. The results of the VECM estimation reveal that there is a short-run and long-run relationship between food prices and poverty levels in South Africa. The results indicated a negative long-run relationship between food prices and unemployment, CPI and household disposable income and a positive relationship between GDP and population growth. The negative relationship implies that a 1% increase would decrease household disposable income (HDI) by 1.18% (unemployment), 18% (food prices), 1.97% (CPI), 2.08% (GDP) and 0.52% (population growth). Food prices had the highest negative impact on poverty levels in South Africa. Further, in the years when there were food price spikes, poverty increased by 3.61%. Short-run implications of the study revealed that an increase in food prices resulted in reduced household welfare in South Africa. The results of the study confirmed the views of other studies regarding the negative relationship between food prices and poverty. Policy options that the government has implemented to address the impact of food price shocks in the short run include providing food parcels to the needy and social grants and employee relief schemes targeted at cushioning household income. With regards to addressing the impact in the long-run, the Government can consider partnering with the private sector to bring about job creation and development finance institutions could provide access to finance and credit through food banks and feeding schemes.