Prices, wages and poverty in rural India: what lessons do the time series data hold for policy?

Looking back over 40 years or so one finds that higher relative prices of f ood in India have typically been associated with higher poverty incidence a nd lower real agricultural wages. This has not gone unnoticed by critics of agricultural policy reform in India, who have argued that reform could per manently increase poverty by permanently raising food prices relative to no n-food prices. However, a number of other observations about the time serie s evidence cast doubt on this interpretation. The correlation with poverty- as it is being measured-is not a distributional effect. Yet it is very unli kely that the rural sector as a whole could be worse off from a higher rela tive price of food. Instead, the correlation with poverty can be explained by shocks to aggregate food output. The correlation between food prices and real wages can be explained by changes in farm yields and inflation. Criti cs of reform appear to have misread the lessons for policy. But these data cannot be used to support the view that higher food prices due to policy re form will, on their own, reduce rural poverty. (C) 2000 Elsevier Science Lt d. All rights reserved.