Shocks to the international prices of agricultural commodities and the effects on welfare and poverty: A simulation of the ex ante long-run effects for Uruguay

Abstract

In countries with a large share of low- and medium–low-income households, an increase in agricultural commodity prices may have a damaging and widespread effect on the population through the rise in the cost of the consumption basket. A less obvious channel, changes in labor income, would be more beneficial to middle-income households. The simulations show that ex ante all households would experience losses of up to 7.5% of their initial expenditure, with poorer households being the most affected. Poverty would increase by 25% (7.2 p.p.), while indigence would increase even more by 35% (2.25 p.p.). The results also show that, on average, both poor and indigent households would move further away from the threshold lines, meaning that, within each category, poor and indigent households would become more homogeneous. Finally, since Uruguay has a comparative advantage in agricultural commodities, the improvement in the terms of trade is likely to increase the tax revenues, which could be used to compensate those who are negatively affected.