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Food price shocks, food security and potential policy responses

Will Martin's picture

(Summary of parallel session 10 at the ABCDE, Paris)

This session involved the presentation of three papers. The first looked at the importance of high food prices for poverty in developing countries. The second looked at the optimal policies for an individual country using trade policies to insulate its market from price volatility in the world market. And, the third considered the implications of the policies actually undertaken by developing countries.

The first paper presentation showed that high food prices raise poverty substantially, implying that policy makers in developing countries are right to be concerned. The second showed that—for individual countries—an appropriate response to high food prices appears to be use of export restrictions in exporting countries or reductions in import barriers in importing countries. The third showed that most countries actually respond in this way, but that these actions are collectively ineffective in reducing the volatility of domestic prices. What appears to be needed is to identify policies that can more effectively deal with the problem of food price volatility.

Maros Ivanic’s presentation of “Short run impacts of the 2010-11 food price shock on poverty” (co-authored by myself and Hassan Zaman) highlighted the reason that policy makers in developing countries are, and should be, concerned about high food prices. The basic problem is that staple foods make up a very large share (around 70 percent) of the expenditures of the poorest consumers. While high food prices benefit farmers who are net sellers of food, many poor farmers are actually net buyers of food, so that high food prices may increase poverty—and the depth of poverty—even in rural areas. We examined the impact of the surge in food prices in the second half of 2010 on poverty in twenty-eight developing countries using detailed information on household production and consumption patterns. We began with information on the changes in world food prices, and then use detailed information on actual changes in domestic prices of key staples. A key conclusion is that an additional 44 million people fell below the poverty line as a result of the 2010 food price shocks, with a gross increase in poverty of 68 million, and 24 million escaping by benefitting from higher prices on goods for which they are net sellers. Even short-lived changes may have long-lasting impacts—especially when price effects, as well as income effects on nutrient consumption, are taken into effect—making it clear that the strong aversion of developing country policy makers to such price spikes is well-justified.

Christophe Gouel presented his paper “Optimal food price stabilization in a small, open economy” (co-authored by Sébastien Jean), which examined the optimal combination of storage and trade policies for a small, open economy. A rational expectations infinite-horizon model is used to explain private storage and market outcomes in the presence of competitive storage and trade costs. Gouel and Jean find that trade is important in reducing the volatility of domestic prices. However, free trade is not necessarily optimal. For such a small, open economy, the optimal policy is shown to include a discretionary combination of storage subsidies and trade measures including import subsidies and export restrictions. In this small-open-economy case, storage policies alone are shown to be inferior to combination of storage and trade interventions, while restrictions on export taxes are shown to reduce overall welfare. Whether the trade policies found to be optimal for individual countries are effective in reducing the volatility of domestic prices may depend upon whether just one, or many, countries adopt these policies.

Lastly, I presented my paper “Export Restrictions and Price Insulation During Commodity Price Booms” (co-authored with Kym Anderson), which considered commodity boom cases where many countries sought to reduce the impact of higher prices of staple foods—particularly wheat and rice—on their consumers. They did this by insulating their domestic prices from world prices—raising export barriers and reducing import barriers. This policy is consistent with that suggested by the rational-expectations model considered in the previous paper. The analysis first considers an illustrative case where all countries follow this approach to the same degree, and shows that the policy will be completely ineffective in stabilizing domestic prices, like a situation where everyone in a stadium stands to get a better view. However, this collective-action problem is non-trivial because it leads to an increase in the volatility of world prices, and hence in international income transfers. We estimate that insulating policies contributed 45 percent of the increase in rice prices and 30 percent of the increase in wheat prices.

Overall this session identified some key questions for future research. One is the need to identify and explore the characteristics of potential cooperative solutions to the collective action problems identified in the third paper. Another is to identify rules of thumb for multilateral action that might be easier to implement than discretionary policies, while generating most of the gains of the optimal policy. We plan to move ahead with these research questions in the coming months.
 

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