Jump to ContentJump to Main Navigation
Food Price Policy in an Era of Market InstabilityA Political Economy Analysis$

Per Pinstrup-Andersen

Print publication date: 2014

Print ISBN-13: 9780198718574

Published to Oxford Scholarship Online: January 2015

DOI: 10.1093/acprof:oso/9780198718574.001.0001

Show Summary Details
Page of

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2019. All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see www.oxfordscholarship.com/page/privacy-policy).date: 23 April 2019

The Political Economy of Food Price Policy

The Political Economy of Food Price Policy

An Overview

Chapter:
(p.3) 1 The Political Economy of Food Price Policy
Source:
Food Price Policy in an Era of Market Instability
Author(s):

Per Pinstrup-Andersen

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198718574.003.0001

Abstract and Keywords

How do governments respond to abrupt food price changes and why do they respond as they do? Answers to these two questions are important to help us understand policy-making, to predict how policy makers are likely to respond to future food price volatility and to support policy makers as they confront such volatility. Food price volatility since 2007 provides a natural experiment for the research. While much has been written about the nature, content and causes of food price fluctuations, little is known about the political processes that led to the policy responses and the relative power, behaviour, and influence of the participating stakeholder groups. Understanding how and why governments responded as they did will help enhance existing knowledge of the political economy of food price policy and assist governments in their policy-making in the future.

Keywords:   food price, price volatility, policy makers, policy response, political economy of food price policy

1.1 Introduction

How do governments respond to abrupt food price changes and why do they respond as they do? Answers to these two questions are important to help us understand policy-making, to predict how policy makers are likely to respond to future food price volatility and to support policy makers as they confront such volatility. This book, which is based on a three-year research project, provides such answers for fourteen developing countries, the European Union, and the USA. Syntheses across country studies draw lessons expected to be useful among and beyond the study-countries. The project was undertaken by a network of researchers, including the chapter authors, supported by three senior advisors (Philip Abbott, William Lyakurwa, and Robert Paarlberg) and coordinated by Per Pinstrup-Andersen, Cornell University, and Project Director with United Nations University World Institute for Development Economics Research (UNU-WIDER); Derrill Watson, Cornell University; Finn Tarp, UNU-WIDER; Danielle Resnick, previously UNU-WIDER, now International Food Policy Research Institute (IFPRI); and Henrik Hansen, University of Copenhagen. The network researchers, advisors, and collaborators met at three workshops and interacted frequently through reviews and revisions of draft versions of the working papers posted on the UNU-WIDER website. The chapters of this book are based on revised and shortened versions of these working papers.

Food price volatility since 2007 provides a natural experiment for the research. While much has been written about the nature, content, and causes of these food price fluctuations (e.g., Trostle 2008; Abbott, Hurt, and Tyner (p.4) 2009; Abbott 2009; Dawe and Slayton 2010; Headey and Fan 2010; Abbott and Borot de Battisti 2011; FAO et al. 2011; Wright 2011; Martin 2012; de Gorter, Drabik, and Just 2013), little is known about the political processes that led to the policy responses and the relative power, behaviour, and influence of the participating stakeholder groups. Understanding how and why governments responded as they did will help enhance existing knowledge of the political economy of food price policy and assist governments in their policy-making as they confront future food price fluctuations.

Although price fluctuations in the world market may influence expectations and related action at the national level, the response by national governments to world market food price fluctuations will depend largely on the extent to which the prices are transmitted or expected to be transmitted to national markets. Thus, an analysis of the degree of price transmission is an important first step towards understanding the political economy issues at the national level. Such an analysis is undertaken in each country study (Chapters 621) and synthesized by Baltzer in Chapter 2. In addition to price changes transmitted from the world market, domestic food prices are influenced by domestic factors and domestic policies will respond to both. The policy responses are synthesized by Bryan in Chapter 3. The policy process will influence the choice of policy interventions and the interventions will influence the processes. The processes are presented in each country study and synthesized by Babu in Chapter 4. Political economy aspects, the focus of this book, are analysed in each country study and synthesized by Watson in Chapter 5. An overview of the content of the book is presented in this chapter and the last chapter (Chapter 22) draws the main generalizable lessons from the research and suggests policy recommendations in preparation for future food price increases and food price volatility.

1.2 The Global Food Market

The global food market entered an era of instability in 2007. Large and abrupt fluctuations in the world market prices of wheat, rice, and maize combined with an increasing food price trend, raised concerns about future food supplies, prices, and household food security. Except for a small upward blip in the middle of the 1990s, real food prices in the world market decreased very significantly from the middle of the 1970s to the end of the 1990s. Beginning in 2000, a very slow real food price increase continued until the middle of 2007, when the world market prices of wheat, rice, and maize began a very rapid increase. The increase lasted for 8–12 months, depending on the cereal, after which they experienced an abrupt fall. Since then, two more price spikes have occurred (2010–11 and 2012). The tripling of rice prices between (p.5) October 2007 and April 2008 is particularly interesting because it was ‘not caused by adverse shocks to rice production or low rice stocks’ (Dawe and Slayton 2010: 17). This is an illustration of the powerful effects of national trade policies and irrational or poorly informed expectations and resulting behaviour by the public and private sector or as stated by Dawe and Slayton (2010: 25) in the case of rice: ‘government policy decisions were decisive in sparking and fuelling the crisis’. Estimates by Headey (2011) and Martin and Anderson (2012) found that 45–50 per cent of the rice price increase during 2007–8 was due to export restrictions.

Several developments contributed to both fluctuations and the increasing price trend.1 As prices continued to fall during the period 1975–2000, agricultural development was all but ignored by governments, international development banks, and bilateral donors. Public investment in developing countries’ agriculture, rural infrastructure, and agricultural research fell and the falling prices made private investment less interesting and feasible. Relatively little new land was brought under cultivation, primarily because the necessary infrastructure investments were not made. A large share of smallholders chose off-farm labour over investments in improved farm productivity and many became net buyers of food. The rate of yield growth for wheat, rice, and maize slowed while population and income growth and the diet transition continued to increase the demand for food and feed. Expansion of the production of biofuel from sugar, maize, oil palm, rapeseed, soybeans, and jatropha competed with food production for land and water, and excess demand reduced cereal stocks. Extreme weather events, which caused drought, floods, and increased production fluctuations in several countries, reduced supplies. Fluctuations in oil prices and the dollar exchange rate further contributed to food price fluctuations. Thus, excess demand, which was covered by stock drawdown, was amplified by decreasing and fluctuating supply during the beginning of the 2000s.

Food prices are very sensitive to changes in the supply–demand balance (both supply and demand are very price inelastic in the short run). Therefore, even small changes in supply and demand, caused by, for example, extreme weather events and expanded biofuel production, respectively, may cause large price changes, particularly if stock levels are low. As international cereal prices began to increase, some of the news media painted various degrees of doomsday scenarios2 and investors became more interested in the futures (p.6) market for cereals, particularly wheat and maize. Irrational expectations by investors who interpreted upward prices as a long-term trend rather than a spike, added to price volatility. Export bans and other restrictions by cereal exporters, reduced import tariffs by importing countries, and removal of VAT on food in several countries placed additional pressures on the supply–demand situation in the world market.

While as mentioned above, much has been written about the causes of the food price volatility and the increasing food prices since 2007, there is no consensus in the literature about the relative importance of each of the factors mentioned above. Attempts to apportion cause to each of the relevant factors are hampered by the interaction among them. However, there seems to be widespread agreement that export restrictions were very important. Sharma (2011) found that one-third of the 105 countries he surveyed used export restrictions for cereals during the period 2007–11. As mentioned above, Headey (2011) and Martin and Anderson (2012) found that 45–50 per cent of the increase in the world market price for rice during 2007–8 was caused by export restrictions. Bouët and Laborde Debucquet (2010) estimated that 30 per cent of the increase in the international price for wheat was caused by export restrictions. Expanded biofuel producton is estimated by Rosegrant et al. (2008) and Abbott, Hurt, and Tynes (2011) to account for 30–40 per cent of the cereal price increase during 2007–8. De Gorter and Just (2007), de Gorter (2008), and Collins (2008) concluded that biofuel policies were the principal cause of the cereal price increases.

Sanders et al. (2008), Wright (2009), and Martin (2012) reason that speculation on the futures market was not a significant contributor to cereal price fluctuations while Ghosh (2010: 72) concludes that ‘The dramatic rise and fall of world food prices in 2007–8 was largely a result of speculative activity in global commodity markets’. Timmer and Dawe (2010: 7) conclude that ‘the sudden spike in wheat and corn prices was due to financial speculation’. They further argue that increasing futures prices affect storage and hoarding behaviour by farmers and traders, which itself would affect supply and prices. Using data from the Chicago Board of Trade, Torero (2011: 4) reports that the volume of commodity index funds traded increased ‘by 157 per cent, 200 per cent, and 169 per cent for maize, soybeans, and soft wheat during the period 2006–11 and that only 2 per cent of these futures contracts has resulted in the delivery of real goods’. He further states that the (p.7) volume of maize futures traded worldwide ‘is more than three times greater than the global production of maize’. Such statistics lends credibility to the argument that speculation had a major influence on the prices of three commodities.

Trostle (2008) and Wright (2011) conclude that imbalance between supply and demand resulting in stock drawdown to very low levels followed by supply expansions and stock build-up is the key explanation for the recent food price fluctuations. A large share of recent analyses supports the conclusion that market fundamentals, i.e., the supply–demand situation, are the primary cause of the recent food price volatility. However, in a world with poorly integrated food markets, the global supply–demand situation may say little about the situation in particular national and local markets. Enhanced export restrictions and reduced import restrictions reduce supplies and increase demand in the world market with resulting increasing prices, with the opposite effect in the participating countries. Variability in production and policies in a few major cereal exporters may result in large supply changes and associated price volatility in the world market, irrespective of what happens in the rest of the world.3 As illustrated in the chapters to follow, the above mentioned factors are integrated with action by governments and the private sector based on lack of information, poor predictable ability, and irrational expectations. Conflicting goals and relative power among stakeholder groups have played an important role. An understanding of these and related political economy factors are essential to understand the behaviour of both the public and private sector.

Whether resulting from world market price changes or national factors, national governments and the private sector responded to the actual and expected food price changes in the world market in different ways. In some cases policy interventions, particularly trade interventions by large exporters and importers, and private sector action contributed to further price volatility in the world market while in others the effect was to dampen the volatility. Similarly, poorly implemented policy interventions and private sector action increased domestic price volatility in some cases, while they improved price stability in most. An understanding of the constellation, goals, and relative power of stakeholder groups—the political economy issues—and how they vary among countries is important to explain the observed differences in the response to food price volatility by the public and private sector. That is the focus of the rest of the book.

(p.8) In Chapter 2, Baltzer provides a synthesis of the estimates of price transmission in the fourteen study-countries. He concludes that several of the countries are poorly integrated into world cereal markets and domestic food price volatility tends to result primarily from domestic supply shocks caused by extreme weather events, political turmoil, inappropriate macro policy, and mistrust and miscommunication between governments and the private sector. The price transmission from the world market to domestic markets in these countries tended to be low and in some countries the domestic price volatility exceeded the volatility in the world market. Low price transmission was also found in large middle-income countries such as China and India because of trade restrictions to maintain domestic price stability, while other large middle-income countries such as Brazil and South Africa allowed a high degree of pass-through of international prices of some cereals, notably rice and wheat, to the domestic markets. On the basis of an analysis of food price volatility in the world market and in 15 African countries during 2007–10, Minot (2012: p. v) found increased food price volatility in the world market but no evidence that ‘food price volatility has increased in the region’. While high food price volatility in the world market may draw more attention by the news media and decision makers, country-specific factors such as extreme weather events and adverse policy interventions, may have much more serious implications for domestic food prices and household food security.

Most of the study-countries experienced large food price fluctuations during the period 2007–12, whether transmitted from the world market or caused by national factors. As synthesized by Bryan in Chapter 3, their policy responses varied widely. Bryan concludes that the responses were often uncoordinated, sometimes contradictory, poorly targeted, and sometimes mismanaged. The policy outcomes varied among countries but were frequently disappointing. Attempts to manage the supply of cereals on the domestic markets through procurement and release from storage and trade policy were unsuccessful in some countries but successful in others, notably China and India. Export bans and removal of import tariffs were effective in reducing price fluctuations in some countries but contributed to price increases in the world market by reducing supplies and increasing demand. Food and fertilizer subsidies implemented in several countries were difficult to manage and the fiscal costs were high. Where targeting was attempted, leakage was large. Expansions of existing social safety net programmes successfully helped to compensate low-income people for higher food prices in some countries, notably Brazil and South Africa. Bryan draws four lessons from the synthesis: First, consider costs before deciding on policy action; second, consider trade-offs between short-term emergency measures and measures with longer term effects; third, base the crisis responses on evidence (p.9) from experience from past policies; and fourth, spend the time between food price crises to generate the evidence needed to make evidence-based policy decisions.

In Chapter 4, Babu discusses various frameworks for analysing policy processes and concludes that a combination of such frameworks is required to describe the processes and how the various stakeholder groups participate in them. The policy response to the food price fluctuations in a particular country depends on the existing policy process as well as the resources available, experience from past policies, and the policies currently in place. The policy process followed was influenced by the nature and degree of decentralization as well as the size of the country, the existing institutions and the degree of participation in policy-making. On the basis of the country studies, Babu concludes that democratically elected governments are more likely to select policies that benefit or at least do not antagonize powerful stakeholder groups over first-best policies from an efficiency point of view. The news media, the private sector, and non-governmental organizations (NGOs) played an important role in the choice of policies. As might be expected, authoritarian regimes tended to take action to maintain political stability and promote economic growth, taking into account the wishes of non-government stakeholder groups only as needed to achieve those two goals. The policy process tends to be different in a period of crisis than between crises. The capacity by governments and other stakeholder groups to engage in the design and implement interventions to deal with future food price crises should be strengthened. In particular, there is a need for more action-oriented research to enhance the evidence base for future policy interventions.

In Chapter 5, Watson combines the diverse policy responses and processes reported in Chapters 621, and synthesized in Chapters 3 and 4, with political economy theories in order to address the key question of this book: Why did governments take the action they took? Three models of government behaviour underlie the country-level analyses. The first, which Watson calls the ‘naive model’, is based on the assumption that the government is a unitary, benevolent entity that aims to maximize social welfare in the most efficient way. While a large share of economic analysis of government decision-making is based on that assumption, it is rarely found. The second model, which represents the behaviour reported in several of the country studies, deviates from the first by including fragmented government, self-interested government actors, and path dependence. The third model, which is reflected in the behaviour of some of the governments studied, is what is normally referred to as the rent-seeking model. It aims to maximize a weighted social welfare function in which the weights reflect the relative power and goals of the various stakeholder groups. Fragmented government decision-making resulting in contradictory policy interventions; uncertainty and incorrect estimates (p.10) and forecasts; rent-seeking by policy makers and private sector groups; and mutual mistrust between governments and the private sector, contributed to policy failure to varying degrees in most of the countries. Path dependence, i.e., modifying existing policies and institutions rather than designing and implementing new ones, was characteristic of the policy responses to the food price volatility in virtually all the countries. Similarly, even when the evidence showed that the rural poor suffered more than the urban poor from the food price volatility, existing urban bias in policy-making was enhanced. Protection of government legitimacy trumped poverty alleviation. Contrary to the heavy-handed dictates by the international community forcing national governments to take specific action during the period of widespread economic adjustment, policy responses by national governments to the food crisis were rarely dictated, but rather supported, by donors and international organizations.

While the above mentioned syntheses attempt to draw generalizable lessons from the country studies, a more complete understanding of the political economy of food price policy is obtained from in-depth country-specific analyses reported in Chapters 621. The country studies are presented according to the degree to which each country is expected to be integrated with world food markets. Low-income landlocked countries (Chapters 68) are followed by other low-income countries with limited dependence on food import (Chapters 910). Then follow low and middle-income countries heavily dependent on food imports (Chapters 1114). Major food exporters, including Vietnam and four of the five BRICS (Brazil, Russia, India, China, and South Africa) countries are presented in Chapters 1519 and selected political economy issues in the USA and the European Union (EU) expected to affect developing countries are discussed in Chapters 20 and 21.

As reported by Admassie for Ethiopia (Chapter 6), Chinsinga and Chirwa for Malawi (Chapter 7), and Chapoto for Zambia (Chapter 8), the government food policy of these landlocked African countries focused on maize. This is so because of the importance of maize in the diet of people in these countries and because maize availability and prices are key factors in maintaining government legitimacy. The price transmission from the world market was low and weather-related production fluctuations and policy interventions were the primary causes of domestic food price fluctuations. Malawi and Zambia were successful in expanding maize production and storage facilities were stretched to the limit and beyond. However, maize prices did not fall. Malawi introduced price controls, domestic trade restrictions and export bans which all failed because of lack of implementation capacity by the parastatals and opposition by private traders. In Zambia, large farmers and millers benefitted from direct access to high-level policy makers. Chapoto reports that Zambia’s response to increasing maize prices was a clear illustration of path (p.11) dependence void of policy innovation. Policy implementations were delayed and in some cases ineffective because of mutual mistrust between the government and the private sector, adverse behaviour by traders and millers, and opposing self-interests among key stakeholder groups. Rent-seeking behaviour was common.

Admassie (Chapter 6) found that increasing aggregate food demand in excess of supply expansions placed upward pressures on domestic food prices in Ethiopia and made the market more susceptible to abrupt fluctuations caused by adverse weather and policies. Admassie found that the executive branch of the Ethiopian government was all powerful. Neither the opposition parties nor other stakeholder groups, such as the private sector, NGOs, and the news media, appear to have had significant impact on the design and implementation of the policy responses.

Many of the political economy issues found in the two countries characterized as low-income countries with limited dependence on food import (Kenya and Mozambique) are similar to those found in the three landlocked countries discussed above. Although they imported significant amounts of cereals, they experienced low levels of price transmission from the world markets to domestic markets. Both of them experienced large food price fluctuations caused primarily by weather events and policy interventions. Ethiopia and Kenya (Nzuma, Chapter 9) followed a similar set of policy responses, which included export bans and reduced import tariffs for cereals, release of cereal stocks, subsidies for agricultural inputs, and social safety nets for urban consumers in Kenya and the rural poor in Ethiopia. Avoiding social unrest and maintaining legitimacy appear to have been important goals. According to Nzuma, the policy responses in Kenya suffered from several policy reversals, ineffective export restrictions and post-election political turmoil. Kenya experienced massive production shortfalls due to drought and political turmoil. Uneven distribution of power with the Kenyan government and a weak policy-making process contributed to the reversals and inefficiencies. Both countries pursued policy interventions to increase agricultural productivity, with emphasis on subsidies for fertilizers and other inputs. While, as mentioned above, such policies resulted in large production increases in Malawi and Zambia, the impact is less clear in Ethiopia and Kenya and, according to Nhate, Massingarela, and Salvucci, they failed to increase productivity in Mozambique (Chapter 10).

Four of the study-countries (Bangladesh, Egypt, Nigeria, and Senegal) depend heavily on rice and wheat import. The food price transmission from the world market to domestic markets would be expected to be high but, as discussed by Baltzer in Chapter 2, the degree of transmission varied among the countries due to differences in foreign trade policy. While self-sufficiency in rice has long been a national objective in Bangladesh, domestic production (p.12) has fluctuated widely because of weather-related calamities and policy interventions causing large fluctuations in import demand (Raihan, Chapter 11). During the period 2007–8, the country was run by an unelected caretaker government backed by the military and the role of other stakeholder groups, including the private sector and NGOs, was very limited. Similar to the case of Kenya, the distribution of power in the Bangladeshi government was very uneven, with the Ministry of Finance having overall decision-making power over food and agricultural policy initiatives. This, together with extortions and unofficial payments in the supply chain caused delays and inefficiencies. The government undertook several initiatives to promote agricultural development such as fertilizer and fuel subsidies as well as expanded funding of agricultural research and agricultural credit. The impact of these measures is yet to be measured.

Ghoneim (Chapter 12) estimates that 30–40 per cent of the price fluctuations in the world market were transmitted to Egypt’s food market. This is less than what might be expected in view of the country’s heavy dependence on food imports and is a result of the Egyptian government’s heavy intervention in the food sector along with fragmented markets, anti-competitive behaviour, and inefficiencies in the subsidy system. Declining real wages, increasing poverty, inefficiencies in the social safety net, and increasing media attention, together with increasing and fluctuating food prices have placed pressures on the government to focus on food policy. By reducing import tariffs on various food commodities and banning rice exports while maintaining large fuel and food subsidies without effective targeting, the action by the Egyptian government illustrates the path dependence discussed by Watson in Chapter 5. Although the fiscal costs of these policies are very high and possibly unsustainable in the longer run, Ghoneim concludes that the current political leadership favours the status quo to avoid negative social and political repercussions from any reform, particularly because of the political uncertainties following the recent revolution.

In Chapter 13, Olomola reports that, contrary to Ethiopia, Vietnam, China, and other countries with a highly centralized policy-making arrangement, Nigeria’s policy response was heavily influenced by several stakeholder groups including the federal government, politicians, the news media, and producer associations. Because of the conflicting stakeholder goals and desires, the development of a policy agenda was slow and difficult, although the output from a meeting of the state governors and the president resulted in a set of policy interventions (release of cereals from reserves, import of half a million tons of rice for distribution at subsidized prices, and suspension of import tariffs on rice) that were approved and implemented within a short period of time. Producer associations, the news media, and millers played important roles in the design and implementation of the policy responses. Although the (p.13) influence by consumers is unclear, they benefitted from the policy interventions, such as expanded rice import and the import tariff waiver, because they were successful in reversing food price increases. A guaranteed minimum price aimed to compensate farmers for the potential income loss from that reversal.

Resnick (Chapter 14) reports that Senegal was particularly vulnerable to food price increase in the world market because of its heavy dependence on imports coupled with two seasons of poor cereal production. The price transmission from the world market to the Senegalese market was particularly high for rice but also significant for other food commodities such as wheat and dairy products. A lack of an agricultural strategy to expand domestic food production and the urban population’s preference for imported food added to the severity of the impact of the global food price fluctuations. In response to demands and pressures from various stakeholder groups including consumer groups, trade unions, the news media, and five major street demonstrations, the government introduced an array of policy interventions such as consumer subsidies, social protection schemes, and suspension of import duties and value added taxes at very high fiscal costs. The government also launched a high-profile agricultural initiative which, according to Resnick, was too focused on achieving short-term goals rather than long-term structural changes to the agricultural sector needed to achieve the stated goal of food self-sufficiency. In an attempt to satisfy the broad range of well-organized stakeholder groups that advocated for specific interventions, Resnick concludes that the government failed to properly target and implement the many policy interventions and forfeited the opportunity to devise a financially viable, social protection programme and a long-term agricultural strategy.

The policy response to the global food price volatility differed among the five major food exporting developing countries included in this book (Vietnam and the four BRICS countries). Three of the countries (China, India, and Vietnam) protected domestic food markets from the price fluctuations in the world market through trade policies (primarily export restrictions) that reduced price transmission. By keeping domestic food prices lower than they would have been with full pass-through, consumers gained while producers lost. In all three countries, rapidly increasing prices of the main staples (particularly rice and wheat) might lead to political instability and the main goal of the policies to reduce price transmission was undoubtedly related to political legitimacy, dressed formally as a food security goal. The other two major exporters (Brazil and South Africa) continued exports and permitted international prices to reach domestic markets, thus benefitting farmers while expanding existing subsidy schemes and other social safety nets to compensate low-income consumers. Both Brazil and South Africa have strong farmer (p.14) associations with direct access to the policy-making process. Brazilian consumers were partially protected by a strong currency appreciation.

Although the political power in Vietnam is relatively centralized, Nguyen and Talbot (Chapter 15) report that there is political space for other stakeholder groups, including civil society, international organizations, research institutes, and the news media. Although the central government sets quantity goals for rice export, several government entities are involved in policy implementation and Nguyen and Talbot found a mismatch between policy instruments implemented by two distinct sets of actors with two distinct objectives: to insulate consumers from increasing rice prices and to ensure profits for rice farmers. Such mismatch may result from the government’s attempt to balance the competing interests of consumers and producers. Lack of information and deficient forecasting for rice production led to policy reversals.

India’s export bans for wheat, common rice and large stocks of cereals basically de-linked world market prices and domestic prices for rice and wheat during 2007–8 (Ganguly and Gulati, Chapter 16) and added significantly to price volatility in the world market. Domestic prices remained stable until mid-2009 when severe droughts caused production shortfalls and rapidly increasing prices. Ganguly and Gulati conclude that the Indian government’s heavy emphasis on policy interventions, such as food subsidies and rural employment guarantee programmes, expected to have short-run impact, diverts public funds away from investments in agriculture and rural infrastructure, which would have a much greater impact on poverty alleviation and economic growth in the longer term.

In response to the rapidly increasing world market prices for cereals, the Chinese government decided to stabilize domestic food prices and did so very successfully (Huang, Yang, and Rozelle, Chapter 17). A set of policy interventions consisting of the release of government cereal stocks, long-term futures contracts with exporting countries, increasing agricultural subsidies, support of farmers’ risk management, higher food subsidies and enhancement of the social safety net for urban consumers, the suspension of any expansion of biofuel production which competed with food production and increased investment in agricultural technology, and water availability, served both the rural and urban populations well while strengthening the government’s legitimacy. The highly centralized governance system, amply supported by relevant evidence of expected impact of alternative policy interventions, was able to respond rapidly and effectively to the emerging food crisis. Together with the Indian trade policies mentioned above, the Chinese policy interventions amplified the food price increase and volatility in the world market. To avoid such beggar-thy-neighbour policies Huang, Yang, and Rozelle suggest that a new global (p.15) governance system is needed to coordinate actions among major food importers and exporters.

According to Mueller and Mueller (Chapter 18), past inequalities and hyperinflation have guided the Brazilian government to prioritize fiscally sound social inclusion. The international food price increases in 2007–8 might therefore be expected to cause concern because they might undermine both social inclusion and price stability. Yet, the policy response and the reaction by society were very limited. Domestic cereal prices did increase during 2007–8, but much less than the increase in the world market. Rather than restricting cereal exports to control domestic prices, as done in China, India, and Vietnam, exports were continued at the higher world market prices. Farm incomes increased and increasing wages of the rural labour force largely compensated for the higher food prices. The existing extensive system of social protection targeting transfers to low-income people was expanded to compensate for higher food prices and no new policies or programmes were designed. According to Mueller and Mueller, the global food price volatility caused very limited disagreements among the various stakeholder groups.

Similar to Brazil, South Africa (Kirsten, Chapter 19) did not implement any major policy change in response to the international food price volatility beginning in 2007. Existing trade policy for food and agricultural commodities (basically undistorted) were not changed. The comprehensive social welfare programme that had been in place since 1998 was expanded to compensate for the negative effects of price increases, but no new policies were designed. Lobbying by farmers may have been instrumental in maintaining an unfettered trade regime for agricultural commodities and lobbying by trade unions and consumer groups probably contributed to the expansion of the transfer programmes. Although the news media was actively engaged in the debate about the food price volatility, Kirsten concludes that it had very little or no policy impact.

As in the case of Brazil and South Africa, the USA’s direct response to the international food price increase and volatility was very limited, but the impact of US policies, particularly the biofuel policies, on international food prices, was very significant (Rausser and de Gorter, Chapter 20). Although the direct effect was on maize and soybean prices, spill-overs to wheat and rice were large. Several stakeholder groups within the USA including growers’ associations, fuel transporters, biofuel producers, and some environmentalists, and the energy security community supported the promotion of biofuel while others, including livestock producers and food processors, opposed. Rausser and de Gorter suggest that US macroeconomic policies as well as energy and sugar policies also contributed to global food price volatility.

The common agricultural policy of the EU had little or no impact on food price volatility in the world market since 2007 and the potential for (p.16) influencing the world market prices is very limited. Food prices in the EU followed the changes in world market prices, but the scale of change was much smaller (Swinnen, Knops, and van Herck, Chapter 21). Average prices for EU producers increased by less than 20 per cent in real terms during the first price spike and less during the second spike. Real consumer prices for food increased by only 5 per cent during 2005–12, with very little volatility. Food price changes triggered several policy initiatives within the EU, including increased social spending to protect poor consumers and revisions of the EU biofuel policies to reduce the use of food crops for biofuel. Instead of expanding food aid to developing countries, the EU established a €1 billion food facility and supported initiatives by G20 to reduce price volatility and improve market information.

In Chapter 22, Pinstrup-Andersen presents a brief summary of the major policy lessons from the work reported in the book. The objective is to complement rather than repeat the many lessons reported in the synthesis chapters by Baltzer, Bryan, Babu, and Watson. Recommendations about specific policy interventions and their political feasibility are likely to be most successful if made within the specific political economy context. However, on the basis of the findings reported in this book, some policy recommendations are likely to be relevant for many countries. Eight such recommendations are presented in Chapter 22. They are: the strengthening of the policy-relevant evidence base; the appropriate use of trade policy and limiting the interference in price signals; the reduction in fiscal costs of short-term interventions; investments to increase the food supply elasticity; facilitating effective risk management tools; improving the management of public sector grain stocks; making the demand for raw materials for biofuel price-related; and improving the collaboration between the public and private sectors.

References

Bibliography references:

Abbott, P. C. (2009). ‘Development Dimensions of High Food Prices’. OECD Food, Agriculture and Fisheries Working Paper No. 18. Paris: OECD Publishing.

Abbott, P., and A. Borot de Battisti (2011). ‘Recent Global Food price Shocks: Causes, Consequences and Lessons for African Governments and Donors’. Journal of African Economies 20 (AERC Supplement 1): i12–i62.

Abbott, P. C., C. Hurt, and W. Tyner (2009). ‘What’s Driving Food Prices?’ Farm Foundation Issue Report. Minneapolis, MN: University of Minnesota.

Bouët, A., and D. Laborde Debucquet (2010). ‘Economics of Export Taxation in a Context of Food Crisis: A Theoretical and CGE Approach Contribution’. IFPRI Discussion Paper No. 00994. Washington, DC: IFPRI.

(p.17) Collins, K. J. (2008). ‘The role of biofuels and other factors in increasing farm and food prices: a review of recent developments with a focus on feed grain markets and market prospects’. Supporting material for a review conducted by Kraft Foods Global, Inc.

Dawe, D., and T. Slayton (2010). ‘The World Rice Market Crisis of 2007–08’. In D. Dawe (ed.), The Rice Crisis: Markets, Policies and Food Security. London: FAO and Earthscan.

de Gorter, H. (2008). ‘Explaining Agricultural Commodity Price Increases: The Role of Biofuel Policies’. Paper presented at the Rising Food and Energy Prices: US Food Policy at a Crossroads conference, Oregon State University, Corvallis. 2 October. Available at <http://arec.oregonstate.edu/sites/default/files/faculty/perry/degorter.pdf>. Accessed 1 March 2013.

de Gorter, H., and D. R. Just (2007). ‘“Water” in the US Ethanol Tax Credit and Mandate: Implications for Rectangular Deadweight Costs and the Corn–Oil Price Relationship’. Paper prepared for the Allied Social Science Association annual meeting, New Orleans, 4–6 January 2008. Available at <http://papers.ssrn.com/sol3/papers.cfm?abstract>. Accessed 1 March 2013.

FAO, IFAD, IMF, OECD, UNCTAD, WFP, the World Bank, the WTO, IFPRI, and the UN HLTF (2011). ‘Price Volatility in Food and Agricultural Markets: Policy Responses’. Policy Report prepared for the G20 summit meeting in November 2010.

FAOSTAT (2013). Accessed 24 June 2013. Available at: <http://faostat.fao.org/>.

Ghosh, J. (2010). ‘The Unnatural Coupling: Food and Global Finance’. Journal of Agrarian Change 10(1): 72–86.

Headey, D. (2011). ‘Rethinking the Global Food Crisis: The Role of Trade Shocks’. Food Policy 36: 136–46.

Headey, D., and S. Fan (2010). ‘Reflections on the Global Food Crisis: How did it Happen? How has it Hurt? And How can we Prevent the Next One?’ Research Monograph 165. International Food Policy Research Institute. Washington, DC: IFPRI.

Martin, W. (2012). ‘Managing High and Volatile Food Prices’. Trade Policy Issues Paper, IATRC TPI #2012-6. St. Paul, MN: International Agricultural Trade Research Consortium.

Martin, W., and K. Anderson (2012). ‘Export Restrictions and Price Insulation during Commodity Price Booms’. American Journal of Agricultural Economics 94(2): 422–7.

Minot, N. (2012). ‘Food Price Volatility in Africa: Has it Really Increased?’ IFPRI Discussion Paper No. 01239. Washington, DC: International Food Policy Research Institute.

Rosegrant, M. W., T. Zhu, S. Msangi, and T. Sulser (2008). The Impact of Biofuel Production on World Cereal Prices. Washington, DC: International Food Policy Research Institute.

Sanders, D. R., S. H. Irwin, and R. P. Merrin (2008). ‘The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?’ Marketing and Outlook Research Reports. Urbana-Champaign, IL: University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.

(p.18) Sharma, R. (2011). ‘Food Export Restrictions: Review of the 2007–10 Experience and Considerations for Disciplining Restrictive Measures’. FAO Commodity and Trade Policy Research Working Paper No. 32. Rome: FAO.

Timmer, D., and D. Dawe (2010). ‘Food Crises Past, Present (and Future?): Will We Ever Learn?’ In D. Dawe (ed.), The Rice Crisis: Markets, Policies and Food Security. London: FAO and Earthscan.

Torero, M. (2011). ‘Food Prices: Riding the Rollercoaster’. 2011 Global Food Policy Report. Washington, DC: IFPRI.

Trostle, R. (2008). ‘Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices’. Economic Research Service, Outlook Report WRS-0801 (2008). Washington, DC: USDA.

Wright, B. D. (2009). Speculators, Storage, and the Price of Rice. Berkeley, CA: University of California, Giannini Foundation of Agricultural Economics.

Wright, B. D. (2011). ‘The Economics of Grain Price Volatility’. Applied Economic Perspectives and Policy 33(1): 32–58.

Notes:

(1) The importance of differentiating between food price increase and price volatility for the choice of policy interventions is discussed in Chapter 22.

(2) While the news media can be extremely useful in promoting transparency in the action by both the public and the private sector, a large share of the media reporting during the food price increases in the world market from the middle of 2007 to the middle of 2008, and again in the subsequent food price spikes, exaggerated the expected consequences by failing to differentiate between a price spike and a long-term price increase. When prices fell during the second half of 2008, the media was very quiet. Predictions of continued rapid food price increases leading to a situation of absolute global food scarcity and an implicit assumption of perfect price transmission of international cereal prices to low-income people in low-income countries lead much of the media and unfortunately also some international organizations to conclude that global food price fluctuations resulted in widespread increases in poverty, food insecurity, and malnutrition, developments that, in fact, did not happen.

(3) According to Food and Agriculture Organization Statistics Division (FAOSTAT) (accessed 24 June 2013) the USA accounted for 50 per cent of worldwide maize export in 2010; the USA and Canada accounted for one-third of all wheat export; and Thailand and Vietnam accounted for about 50 per cent of all rice export (on a milled equivalent basis).