Food Price Volatility and Domestic Stabilization Policies in Developing Countries
When food prices spike in countries with large numbers of poor people, hunger and malnutrition are very likely to result in the absence of public intervention. For governments, this is also a case of political survival. Government actions often take the form of direct interventions in the market to stabilize food prices, which goes against most international advice to rely on safety nets and world trade. Despite the limitations of food price stabilization policies, they are widespread in developing countries. This paper attempts to untangle the elements of this policy conundrum. Price stabilization policies arise as a result of international and domestic coordination problems. At the individual country level, it is in the national interest of many countries to adjust trade policies to take advantage of the world market in order to achieve domestic price stability. When countercyclical trade policies become widespread, the result is a thinner and less reliable world market, which further decreases the appeal of laissez-faire. A similar vicious circle operates in the domestic market: without effective policies to protect the poor, such as safety nets, food market liberalization lacks credibility and makes private actors reluctant to intervene, which in turn forces government to step in. The current policy challenge lies in designing policies that will build trust in world markets and increase trust between public and private agents.
This research was generously supported by the Knowledge for Change Program (KCP), and by the FOODSECURE project funded under the 7th Framework Programme for Research and Development, DG-Research, European Commission. Much of this work was done while the author was working as a consultant for the World Bank. I would like to thank Mathilde Douillet, Franck Galtier, Will Martin, and participants at the NBER conference on The Economics of Food Price Volatility for helpful comments The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Food Price Volatility and Domestic Stabilization Policies in Developing Countries, Christophe Gouel. in The Economics of Food Price Volatility, Chavas, Hummels, and Wright. 2014