Welfare and Distributional Impacts of Price Shocks in Malawi: A Non-Parametric Approach

This analysis uses measures of Compensating Variation (CV) and Net Benefit Ratios (NBR) to assess the short-run effects of higher prices on different income groups in rural and urban areas of Malawi. Compensating Variation analysis indicates that urban households, particularly the poorest are the most severely affected both in the aggregate consumption and also in terms of food consumption. In rural areas, relatively better off households are more negatively affected by overall price increases, but the poorest are the group that suffers the most with food price shocks. A fifty percent supply response of agricultural production would result in significant positive effects on rural household welfare. A significantly larger response would be required in maize production to yield significant benefits among households. Results are translated into tangible policy and programmatic recommendations to inform the design of interventions aimed at mitigating those effects and promoting economic growth and poverty reduction. This analysis suggest that policies should be oriented towards facilitating a supply response by households resulting in a significant increase in maize, other staple food and non-food production, supporting household livelihoods diversification, while putting in place programs to assist the most vulnerable groups.