Distributional Impacts of Food Price Changes on Consumer Welfare in Hungary and Romania following EU Accession

Abstract

This paper focuses on the estimation of changes in economic welfare (real income) on different groups (income deciles) of Hungarian and Romanian consumers following food price changes as a result of accession to the European Union (EU) in 2004 and 2007. It identifies in both countries those consumer groups most vulnerable to food price changes using the most recent, official, post accession data. Slutsky Compensating Variation, based on Laspeyres indexes is employed for a food basket of 16 products. The results show that real food prices have changed with some going up and others falling. However, overall both Hungary and Romania have experienced a rise in real food prices by 9 per cent and 20 per cent, respectively. The rise in food prices has resulted in a welfare loss for all income deciles, particularly for those in the lower income groups. Although, in absolute terms, Romanian food consumers seem to be more affected (the decrease in their real income varies between 4 per cent for decile 10 and 12 per cent for decile 1) than Hungarian consumers (0.4 per cent for decile 10 and 2.2 per cent for decile 1), the distribution of the impact is higher in Hungary, a five-fold difference between decile 1 and decile 10 as opposed to a three-fold difference in Romania. This paper focuses on the estimation of changes in economic welfare (real income) on different groups (income deciles) of Hungarian and Romanian consumers following food price changes as a result of accession to the European Union (EU) in 2004 and 2007. It identifies in both countries those consumer groups most vulnerable to food price changes using the most recent, official, post accession data. Slutsky Compensating Variation, based on Laspeyres indexes is employed for a food basket of 16 products. The results show that real food prices have changed with some going up and others falling. However, overall both Hungary and Romania have experienced a rise in real food prices by 9 per cent and 20 per cent, respectively. The rise in food prices has resulted in a welfare loss for all income deciles, particularly for those in the lower income groups. Although, in absolute terms, Romanian food consumers seem to be more affected (the decrease in their real income varies between 4 per cent for decile 10 and 12 per cent for decile 1) than Hungarian consumers (0.4 per cent for decile 10 and 2.2 per cent for decile 1), the distribution of the impact is higher in Hungary, a five-fold difference between decile 1 and decile 10 as opposed to a three-fold difference in Romania.