Monday, April 9, 2012

Optimal food price stabilization policy in a small open developing country

Gouel and Sebastien recommend an activist policy to stabilize the impact of high food prices. They argue that the optimal trade policy for a single low-income country is to subsidize imports when domestic availability is low and tax exports when world prices are high, which will benefit consumers at the expense of producers, because it reduces the likelihood of high prices. Meanwhile, a pure storage policy might have an opposite effect: it raises the average domestic price because of the increased stock accumulation, and is detrimental to consumers. They argue that to protect consumers from food price volatility in an efficient way, storage policies need to be complemented by trade policies, which would provide some isolation from the world market.

Here is the abstract of the paper:

In poor countries, most governments implement policies aiming to stabilize the prices of staple foods, which often include storage and trade measures insulating their domestic market from the world market. It is of crucial importance to understand the precise motivations and efficiency of those interventions, because they can have consequences worldwide. This paper addresses those issues by analyzing the case of a small, open developing country confronted by shocks to both the crop yield and foreign price. In this model, government interventions may be justified by the lack of an insurance market for food prices. Considering this market imperfection, the authors design optimal public interventions through trade and storage policies. They show that an optimal trade policy largely consists of subsidizing imports and taxing exports, which benefits consumers at the expense of producers. Import subsidies alleviate the non-negativity of food storage. In other words, when stocks are exhausted, subsidizing imports prevents domestic price spikes. One striking result: an optimal storage policy on its own is detrimental to consumers, since its stabilizing benefits leak into the world market and it raises the average domestic price. By contrast, an optimal combination of storage and trade policies results in a powerful stabilizing effect for domestic food prices.

Interview: Inflationary dynamics in Nepal

Here is a snapshot of an interview published in Annapurna Post on April 9, 2012. For more on the same issue, see Creeping prices.