Port-of-Spain -- Dec. 18, 2008 --One of the major concerns in the world economy over the last few years is the escalation in food prices. This process started in mid-2006 when most food prices initiated a steep hike in international markets. As a consequence, prices of essential products have risen considerably, which has prompted negative impacts worldwide, such as the acceleration of inflation, the reduction of real consumption – especially of the poor – and the rise in inequality, among others.

Inflation is deemed to be the most regressive tax of all because the poor do not have any way of protecting themselves from it, whereas the rich can ameliorate its effects through the acquisition of financial assets that can be either indexed to inflation or be denominated in foreign currency.1 But if inflation is regressive, it is even more detrimental to equity when it is led by food inflation.  Indeed, the population of the lowest quintiles or deciles of the distribution of income is the one that devotes the highest share of their income to purchase food. Thus, the inflation of the poor is much higher than that of the rich.

For the Caribbean countries, the implications arising from the current global food crisis are far reaching. At the macroeconomic level, the impact will be felt through widening trade deficits for most countries as a result of higher food import bills, as well as increasing inflationary pressures. At the social level,
real income and consumption capacity of most households and individuals will suffer accordingly, contributing directly to the increase in
poverty and inequality.

The negative impact of higher food prices could eventually translate into a severe step back in regional achievements of poverty reduction and social development goals. Actually, the World Bank and the Economic and Social Council (ECOSOC) of the United Nations have estimated that seven years of global advances in the fight against poverty have
been already wiped out by the global food crisis, thus severely jeopardizing the achievement of the Millennium Development Goals (MDGs). Moreover, according to the Economic Commission for Latin America and the Caribbean (ECLAC) estimations, a 15% increase in food prices in 2008 relative to 2007 would push more than 200 million people into poverty and some 84 million people into indigence in Latin America and the Caribbean. This would mean an increase in both poverty and indigence rates of near three percentage points.

This report addresses this problem in the Caribbean countries. Section I describes the process of escalation in world food prices during the last years. The next section discusses the causes of these dynamics and evaluates econometrically the relevance of each factor deemed to lie behind this process. The third section then turns to the likely impact of the hike in food prices on the Caribbean, focusing on domestic inflation, trade balances, poverty rates and income distribution. The last section concludes.

DOWNLOAD FULL DOCUMENT BELOW.