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CHRISTOPHER BARRETT: There are really five key issues that one needs to think hard about in trying to design food aid programs in support of poverty reduction objectives. The first of these, and arguably the most important of these, is targeting. The question of targeting is very simple. As the name suggests, the issue is, do the resources reach the people we intend to benefit from the program or do the resources go to unintended beneficiaries?
There are two types of targeting errors one can make. First, one can get resources to people you never wanted to reach, people who don't need the additional food. These are known as errors of inclusion. The problem here is that we've spent resources, scarce resources, on people who didn't really need the food aid or any other sort of aid.
The second kind of error that occurs are errors of exclusion. These are errors that occur when there are people who need the resource but who don't get it for any of a variety of reasons. Commonly, they're hard to reach-- they live in remote places, due to stigma effects or other issues, they don't wish to come to collect assistance provided three agencies. For any of a variety of reasons, we miss people we want to help.
These two types of errors, targeting errors associated with the inclusion or exclusion, lessen the effectiveness of food aid. Inclusion errors lessen the effectiveness because a small budget is partly spent on people who didn't need it. Exclusion errors lessen the effectiveness, because the people we wanted to receive the resource don't get it.
The problem is it's very difficult to target. Imagine yourself sitting in an area where you're not familiar with the individuals, you're not necessarily very familiar with the culture, and you have to be able to figure out quite quickly who's poor and needs food and who isn't. This a very difficult thing to do.
Now, you can wait. You can wait until children start to have distended bellies and other very visible signs of malnutrition. But by then, part of the damage has been done. So by waiting, you can reduce the targeting errors, but at the cost of some irreversible losses.
Conversely, we can try to preempt problems, like malnutrition associated with under-consumption of food. But then we have a very hard time of figuring out who is and who is not needy. And there have been significant advances in targeting methods over the years, especially in the last 10 or 15 years.
Nonetheless, targeting continues to prove terribly difficult in the field. We find, for example, among pastoralists with whom I work in Northern Kenya-- that is, semi-nomadic grazers of livestock in dry lands-- that there is no statistically significant variation whatsoever in the likelihood that a household gets food conditional on how much income it gets. In other words, a rich household is just as likely as a poor household in this environment to get food aid.
Moreover, the volume of food aid they're likely to get is no different depending on whether they're very poor or relatively rich. There just isn't much variation. It's very hard for an outside agency to figure out who most needs the resource. As a result, there are always targeting errors. Minimizing targeting errors is central to being able to make food aid work well for poverty reduction and to keep food aid from creating problems.
So the problems associated with inevitable targeting errors are several. The biggest problems result from errors of inclusion-- that is, food aid that goes to people who didn't really need it. The basic problem here is associated with something known in economics as Engel's law. Engel's law holds that as one increases income, food consumption increases more slowly because food is a basic necessity and extra income typically goes more to non-food things, while the proportion of extra income spent on food is highest among the very poor.
So when we give food aid to people who didn't need it, when we have errors of inclusion among the non-poor, the marginal propensity to consume food out of the extra income they've just gotten is very low. As a result, food aid simply displaces purchases that they would otherwise make in the market. It doesn't displace them completely, but we find that on average something like 30% of the food that would be purchased in the market is displaced by food aid when it goes to relatively poor people, and that increases to 70% to 80% among relatively wealthy people.
As a result, food aid winds of displacing a certain amount of commercial market activity, and this means that local producers or importers are losing part of their market. Targeting errors, therefore, are at root the problem that drives trade disputes related to food aid.
Another problem associated with targeting errors is that food aid that goes to people who are very poor-- think of small farmers in Asia or Africa or Latin America-- who are struggling to feed their families in the period when they're cultivating but before their harvest comes in. Food aid that comes to them at that time allows their families to eat, keeps their energy levels up so that they can work well, it frees up a little bit of cash that they don't have to spend buying food. That cash can be used to hire other laborers, to buy some improved seed, to pay for fertilizer-- any of a variety of things that help their productivity.
But food aid that goes to people who aren't facing those same challenges, who aren't constrained in their ability to buy inputs to production-- food aid that goes to such people can often have an adverse effect. It encourages them to reduce their labor time. It encourages them to not have to work quite as hard. And so the disincentive effects that people believe are created by targeting errors are another important concern, another consideration that people take into account.
Closely related to targeting errors are the second key issue, timing errors. Timing is really a targeting issue, because it's targeting in time. Do we get resources to the right people at the right time, or do we get it to the right people but too late for it to be of particular value for them?
Timing issues are critical in food aid for two basic reasons. First, it takes some time to move food from North America to East Africa or South Asia. So where food aid is based on procurement in the donor country-- in Canada, in the United States-- in transoceanic shipment, there are inevitable lags just associated with the logistics of delivering it.
Moreover, in the bureaucratic process of food aid procurement and shipment, we find that there are added lags introduced. When one looks at the data on emergency food aid shipments from the United States under Title II of PL 480, one finds, for example, that the average, the median time from a formal request for food aid to delivery into the port, is four-and-a-half months.
Now, recognize that's an understatement of the true lag between when people informally recognize need and when food is actually handed to intended recipients, because we're just talking about the bureaucratic call forward as it's known and the port delivery dates. And that lag is on average four-and-a-half months. It's a very slow process to move food halfway around the world to hungry people, so it's very easy to miss the windows in which you need it unless you have very effective early warning systems in place.
Secondly, food aid is budgeted on a cash basis. Legislatures appropriate a certain amount of money to buy food. They don't appropriate a certain number of tons to be delivered abroad. The consequence of this is that as prices go up, the budget buys less food. But as prices go up on the international marketplace for food, hungry people and governments and countries that are short of food can't afford to import as much on commercial markets, so their food aid needs are increased. In other words, just as countries and people need the food most because market prices are going up, donors provide less.
Food aid, therefore, moves what we call procyclically, meaning that food aid is flowing the same way food availability in the commercial market flows. And food aid needs to work countercyclically. Food aid needs to be made available more generously precisely when it's less available on the commercial market. But simply because of the ways in which donors budget for food aid, this becomes an impossibility. So delivery lags plus the inevitable countercyclicality of food aid budgeting create timing errors-- food aid that arrives late, food aid that arrives in too meagre of volume when it's needed. And as a result, we don't get it to the people who need it when they need it.
The third key issue related to targeting and timing errors are the disincentive effects that many people allege are associated with food aid. Now, there's a very basic obvious supply effect that comes from bringing food into an economy. One is shifting out the supply curve-- and as anyone who's studied introductory economics knows, if you hold demand constant and you shift the supply curve out, the price has to fall. And if the price has to fall, that reduces the incentive local producers have to grow food.
As a result, the idea is that food aid winds of creating disincentives for local farmers. And this is a concern that has existed for 45 years, since the Nobel Prize winner Ted Schultz wrote about his concerns with American food aid programs in 1960. And these concerns have continued ever since.
Moreover, there are concerns about labor supply disincentives. This is the analog to the classic welfare problem in the United States, where many people perceive that if we provide aid to families, aid to individuals, that will encourage them not to work quite as hard, that they'll somehow reduce their labor supply to the market, and as a result we're creating an incentive for people to be slothful.
Well, these are both empirical questions. They are questions that we can answer with data to see if in fact food aid creates disincentives for farmers, to see if in fact food aid creates a disincentive for recipients to work-- because we don't know. We do know that food aid does push down product prices.
We see, for example, that in Ethiopia in 2000, in response to a major drought, massive food aid shipments going into the southern and southeastern parts of the country up against the border with Somalia had the result of depressing food prices in the neighboring country of Somalia. Households receiving food aid in Ethiopia would resell part of the food that they got so as to get cash to buy medicine, to pay for schools, things like that. Plus, they weren't buying food in the market when they were receiving food. As a result, extra food flowed from Ethiopia into Somalia, there wasn't demand for food coming into Ethiopia from Somalia, and price for sorghum in Somalia crashed, as we document in a graphic.
The other disincentive affect people are concerned about is the disincentive effect for recipient governments. The governments that get food aid don't have to reform policies that systematically tax agriculture. There's the very peculiar paradox that poor countries depend more heavily on agriculture than wealthy countries do, and yet poor countries systematically tax the farm sector while wealthy countries systematically subsidize the farm sector.
We call this the developmental paradox, because it seems paradoxical that the sector on which you depend would be the sector that you tax-- and conversely, that when you don't really depend heavily on agriculture, as is true in the United States today, that you would subsidize it heavily. As a result of this developmental paradox, many low-income countries have policies that discourage agricultural productivity improvements. And one of the concerns people have about food aid is that providing a regular source of food discourages countries from reforming policies that keep them from being able to attend to their own country's nutritional needs through their own domestic production.
This idea that there are government-level disincentive effects has its roots in the persistence of food aid. We find, for example, in studying US food aid patterns that a country that has received food aid in the past is highly likely to continue to receive it in the future. Indeed, the probability of receiving food aid is so high that if I have received food aid in 20 out of the past 20 years every year for two decades, I am at least 85% likely to receive it again the next year. In other words, once you're into the system, it's very unlikely that you'll exit. The concern is that the extraordinary persistence of food aid flows from government to government help to sustain poorly conceived agricultural policy in recipient countries.
But it's important to keep in mind that while these concerns about disincentive effects are very real-- and there's certainly evidence that they are true in some places at some times-- it is equally true that food aid can play an extremely valuable role in addressing real need, and by doing that create incentives for agricultural productivity improvements-- providing incentives for farmers to grow more food, not less.
There are at least three different mechanisms by which this happens. First, as I described previously, a household that is cash-strapped-- they can't afford to buy seed, fertilizer, to hire labor-- that suddenly gets food aid, this is effectively an income transfer. And that income transfer enables them to go out and buy inputs to agricultural production they couldn't otherwise afford. That increases productivity.
Second, there are risk effects. Households that are worried that if they suffer a loss of crops that they won't be able to feed their families tend to behave very conservatively. They're precautionary in their selection of crop varieties and how much land they cultivate, et cetera. As a result, their productivity tends to decline, following a classic risk-return tradeoff like that we're all familiar with in finance. Small farmers are doing the same thing.
If we provide a safety net-- when farmers have the assurance that, even if things go poorly this season, their families will have enough food available to them that they'll make it to the following season-- farmers can afford to take a little bit more risk. And in taking a little bit more risk, they also enjoy higher expected returns. And as those higher expected returns compound one year after the next, we begin to see economies that develop, that enjoy increasing yield growth to the point where food availability in the economy is ample to ensure that this economy no longer needs outside assistance.
Third, the idea that food aid somehow creates disincentives to work is countered by the argument that insofar as food aid reaches people who otherwise don't eat enough, it helps to keep them healthy and able to work. And people who are well fed and fall ill less often therefore work more, so there's a countervailing positive effect on labor supply that offsets whatever negative effect might be induced by creating a disincentive effect, by encouraging people to take time off work because they know they're getting income.
The question then becomes, how do these things net out? How do the positive effects of food aid that's well targeted net out versus the negative effects that are primarily associated with targeting errors? We don't yet have a very solid database on this. There have been a number of studies that look at this question in only one or another domain.
The evidence on balance seems to suggest that concerns about disincentive effects are a bit overblown-- that where food aid is well managed well targeted, food aid can be a very effective instrument for promoting agricultural productivity, for promoting nutritional improvements, especially among children, and that it can be actually used as an instrument to help move governments to reform agricultural policies in a direction one would want. There are certainly cases were problems exist, but these don't send seem to be generalizable. And the problems associated with disincentive effects are closely caught up with the targeting errors we talked about earlier.
The fourth key issue is where one buys the food, what is known as procurement modalities-- how and where one buys the food to be distributed to poor people. Most food aid, 90% of food aid on average in recent years, is bought in donor countries-- that is, in the United States, in Canada, in the European community. But increasingly over the last 20 years, donors and operational agencies have begun to buy food in developing countries through what are known as local or regional purchases.
Now, this isn't buying up food in the same town in which one intends to distribute it. That typically wouldn't make much sense. But in many poor countries, markets don't work very well, and as a result, you'll have a surplus zone several hundred kilometers from a deficit zone.
And an agency with cash to be able to go buy food and hire trucks or rent rail space to be able to buy grain in a surplus area and bring it into a deficit area can be able to get food to targeted populations much faster and much cheaper than it could otherwise. Moreover, by buying food in a surplus zone, it helps to bolster demand there and helps to create incentives for local producers to invest in improving agricultural productivity by improving the profitability of their agriculture.
So the idea is that when well-managed local and regional purchases can be a very effective tool not just for reducing these timing problems, not just for reducing the disincentive effects-- or better yet, creating incentives for agricultural production-- but also, as I'll explain in a moment, for reducing costs.
Now, one of the concerns here has been that many people have this somewhat inaccurate vision that countries rise and fall together-- that all of South Asia does well or all of South Asia does poorly, that all of East Africa suffers a drought or all of East Africa has a bumper crop-- and as a result, there's really not the capacity to buy food locally, because they're all in deficit or surplus together.
Well, that too is a simple empirical question of how tight is the correlation between countries in their agricultural productivity per capita. And what we find when we look at the data carefully are that in fact, very few countries are strongly positively correlated with their neighbors and their food availability per capita.
That is, if the availability of food in one market is falling, it's highly unlikely that the availability of food in neighboring markets is falling as well. Typically, there's no movement whatsoever, or the movement is going in the other direction. What this means is that it is often going to be possible to buy food much closer to the distribution destination then we presently do. It doesn't seem that the basic agronomy and basic economics of food aid procurement mandate 90% of food aid being brought up in Europe or North America and shipped long distances, taking a long time and at high cost.
The problem is that food aid procured in donor countries can be very expensive indeed. A recent 2005 study by the Organization for Economic Cooperation and Development, the OECD, finds that tied food aid, food aid that donors require recipients import from the donor country-- food aid procured in North America to ship to Africa or to Asia-- costs on average at least 50% more than food aid bought locally, bought in a recipient country's surplus zones.
In the United States, the data that we've been able to obtain show that on average, it costs American taxpayers more than $2 for every $1 worth of value of food delivered in a developing country. A small portion of that, something like 5%, is lost in the excess cost of procurement. When I spoke earlier about the procurement premium enjoyed by a very small number of vendors into the system, that's where that nickel on the dollar is lost.
The remainder, something on the order of $0.47 on the dollar, is going to transport costs. It's very expensive to move grain long distances. Grain is a low value-to-weight commodity. And we want to transport high value-to-weight commodities so that the freight costs are a relatively small proportion of the value of the aid delivered. Basic grains are very low value to weight, so it's very expensive to ship from long distance. Moreover, the cost of shipment is almost doubled by these restrictions put on the way in which US food aid can be shipped. Cargo preference adds something like $0.20 of every food aid dollar to the bill the American taxpayer must incur.
This is not to say that all food aid shipments are inefficient. Many are efficient. We find, using detailed data from Ethiopia, Kenya, and Tanzania for example, that something on the order of 30% to 35% of individual food aid shipments are delivered for a total cost, including freight, less than the cost of procuring the same food locally. So one can design and manage food aid procurements from donor countries that are very efficient.
Most, however, are not. Most food aid shipments, as I've just mentioned, wind up costing a lot more than the value of the food delivered. And so the trick becomes managing when you procure food locally and when you bring food in from halfway around the world.
The fifth key issue surrounding food aid management today is monetization. Recall that monetization is the means by which an NGO takes food resources provided by the US government, cashes them out in local markets, and uses the cash for other purposes. Those other purposes are typically very worthwhile. They're things like school programs, health programs, reforestation, or small business development programs.
But in essence, what food aid monetization is doing is taking cash from the US government's budget, using that cash to buy food at a bit of a premium in the US market, then adding expenses associated with shipment to deliver it to a developing country, then selling it in a local market-- typically at a discount, because NGOs aren't grain traders, so they typically can't get quite as good a deal as professional commercial grain traders can-- and thereby, we're taking cash and converting it into cash by first turning it into food and paying for its transport. This is obviously a fairly inefficient mechanism for generating cash for developing countries' development programs. It's a very inefficient way by which we can provide the resources needed for development programming.
So the problem is that food is a relatively inefficient means to deliver cash to NGOs pursuing quite important development programming in low-income communities. It costs us something like $2.50 to generate $1 of cash for an NGO to pursue development operations. This is a very inefficient means of doing it. Moreover, it costs NGOs staff time and expertise, hassle, that we can't account for in these sorts of computations.
Its inefficiency is hard to dispute. The real disputes over monetization are whether one should discontinue it, as some people would like, or whether it's the least bad form of resources available, as many NGO officials will tell you. The real problem here, then, is that monetization debates reflect a misplaced argument over the form and level of development assistance donors provide for funding critical long-term development interventions in poor countries. When there's no cash available, donors will use whatever resources available, even an inefficient one, because an inefficient resource is better than no resource at all.
The issue over monetization, therefore, really boils down to whether or not we will provide cash to pursue development objectives in low-income countries or whether the only form in which donors will provide assistance is this funny form of grain, commodities provided as food aid.
So as long as we lack the political will to appropriate enough cash to enable NGOs, multilateral agencies like the World Food Program or UNICEF, and developing country governments to pursue legitimate effective development operations, we'll continue to have a lot of pressure for food resources that aren't distributed as food but are instead cashed out, very inefficiently converted into cash to pursue those objectives.
This issue of monetization is a very sensitive one, therefore, for NGOs that believe that much of what they're doing with monetized cash resources is very valuable. And there's much evidence that that's true. And yet, agribusinesses, for example, don't like the idea that NGOs are their competitors in a developing country market, that NGOs are selling the food that the US government has shipped there, and thereby potentially competing with US commercial interests selling into the same markets.
American law has particular provisions to try to guard against direct competition between US NGOs monetizing food aid and US commercial interests exporting into the same markets. Indeed, it's supposed to guard against any sort of adverse market effect. It's terribly difficult, however, to sell food in any volume on a market and not have some sort of impact on a very small market that is not well integrated across the global marketplace, as is true of many poor countries' food markets.
As a result, food aid that is monetized is the sort of food aid that has, in many cases, the biggest distortionary effects in markets. And it's food aid that necessarily can't be targeted, because one's not delivering it to hungry households. By definition, one is just putting it into a market. So open monetization of food on the marketplace is a very contentious issue where the Europeans, who don't practice monetization, tend to criticize the US government, which is the primary practitioner of monetization, quite heavily.
So just to sum up, there are really five key issues on which attention needs to focus today in order to improve the use of food aid as a tool within a broader strategy for reducing hunger and poverty.
These five key issues are targeting, getting it to the right people; timing, getting it to the right people at the right time; disincentive or incentive effects, getting it to the right people at the right time in a way that encourages them to invest in increasing their own productivity going forward; procurement modalities, where we get the food in order to provide it at lowest cost to the right people at the right time in a way that encourages productivity improvements; and monetization, this question of whether there's enough cash resources provided alongside food to enable developing countries and to enable NGOs to pursue important investments in development without having to manipulate food resources, and thereby potentially create market disincentives, targeting errors, et cetera.
So these five issues are really the key today in trying to design an improved food aid system that can attend to these poverty reduction and hunger reduction goals.
Because food aid helps immeasurably in some places and yet causes damage in others, it's very contentious. It's a subject of trade disputes between especially European donors that perceive food aid as an American export subsidy to its agricultural sector and between the United States government and many NGOs that see food aid as a critical tool in its arsenal of instruments to combat poverty and under-nutrition.
Food aid is an arena for disagreement over genetically modified foods. United States provides corn, for example, that is genetically modified when it responds to emergencies around the world. And yet, in some of these recipient countries, they've not yet decided really whether they want to accept genetically modified food, whether they consider it a health risk for their populations or whether they're worried about biosafety if, for example, households receive whole grain maize and plant some of that seed, thereby putting genetically modified maize seed into an agricultural ecosystem.
Therefore, food aid winds up being the nexus in which there's lots of conflict over a variety of issues, although it's a relatively small resource-- although it's only 2% of international aid flows, although it's only about 1% of international flows of food in the marketplace more broadly. And as a result, food aid is really a hot-button issue among development professionals, among trade negotiators, among foreign policy professionals, and among the agricultural sector concerns.
The use of food aid to pursue donor's self-interests, the continued use of food aid to pursue objectives that prevailed in the mid-1950s but that have changed over time, is really at the root of most of these issues today. It's really at the root of the problems that we confront in using food aid to attend to its primary objective in which it's manifestly effective-- keeping people alive, helping them to be able to sustain their families through brief periods of difficulty, and enabling improvements in agricultural productivity among small farmers when they face food shortages. Food aid has proved effective at these sorts of objectives, but it is too easily distorted in the pursuit of other, now outdated objectives for which there remain political constituencies.
In the 50 years since modern food aid began, it has accomplished a great deal. It's saved or improved hundreds of millions of lives around the world, and we should celebrate these accomplishments. It's established partnerships between private agribusinesses, private shippers, public sector agencies, and charitable nongovernmental nonprofit organizations that didn't exist in many places. And these new partnerships create opportunities that are important in reducing poverty and hunger.
Nonetheless, food aid continues to under-perform its potential, largely because it serves too many masters. Untethering food aid from the objectives to which it is presently wedded because it has historically been tied to objectives of farm promotion, of trade promotion, of surplus disposal-- untethering food aid from those outdated objectives that it can't really succeed in fulfilling anymore is central to enabling food aid to be a useful instrument again in attending to humanitarian and development concerns. Put differently, just because we've done and are doing good doesn't mean we can't do better with this resource.
Please go to the discussion section of this study room if you want to post comments, if you want to ask questions. We can have a dialogue on these issues. And please, check out the various resources available through the web links and the references. Thank you for your time and your interest. Have a great day.
The US, Canada, and other developed countries have a decades-long tradition of sending food abroad to less-fortunate people. We think of this primarily as a humanitarian practice. But it originated with and has evolved to serve other economic, political and strategic aims as well. Professor Barrett examines how food aid has evolved, to what extent it fulfills its humanitarian and economic development and other, donor-oriented objectives today, and what challenges it now faces.
This video is part 6 of 6 in the International Food Aid After 50 Years series.
