What's New in Development and 'Why I don't have a girlfriend': talks from the Warwick Economics Summit

February 24, 2011

How to use research for influence on climate change and Arab meltdown; why aid donors are losing the plot; green growth v degrowth; Darth Vader on youtube: links I liked

February 24, 2011

Food prices: what's happening in local currencies and how are governments responding?

February 24, 2011
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Most of the discussion around the renewed food price spike is conducted in terms of world prices, dollar denominated. But people buy food in local currencies, which may or may not follow the dollar trend. UNICEF has a helpful new (30 page) paper out which looks at local food prices across 58 developing countries in 2010 and fills in some of the gaps in our knowledge. Here are some highlights:

“Our analysis shows that, on average, local food price indices in developing countries trail the global food price index closely, with a lag time of roughly one month in the current price run-up.”

The graph compares local v global food prices and shows both this lag, and more interestingly, the fact that local unicef global v local food pricesprices appear to be stickier – they rose with global prices in the first price spike, but then fell much less, and now are rising less fast as well, at least so far. However, there the good news ends:

“Low-income countries have experienced much larger food price increases than richer, middle-income countries. This trend appears to be consistent over time, becoming magnified during the 2007-08 food crisis and, again, growing pronounced in late 2010. For example, whereas low-income countries were paying an average of 8.3 percent more for foodstuffs in August 2010 compared to middle-income countries, this difference jumped to 12.6 percent as of November 2010.”

The paper examines policy responses to the price spike at both global and national levels using the same three pronged framework: supporting consumers to promote household food security, supporting producers to enhance the food supply and managing/regulating food markets to reduce the volatility of domestic food prices. The global stuff is fairly well known, so I’ll just focus on the national policy responses:

Supporting consumption: Policy responses included food assistance (e.g. direct food transfers, food stamps/vouchers and school feeding programmes), price subsidies and controls, cash transfers, reduced consumption taxes and food-for-work schemes.

 Boosting agricultural production: This mainly focused on providing subsidies and reducing taxes on grain producers, although some countries also offered other types of incentives to spur agricultural output, such as credit programmes for small farmers.

Managing and regulating food markets: Many developing countries tried to lower domestic food prices by encouraging imports and discouraging exports, most commonly by reducing import tariffs and/or introducing different export restrictions. Building up and releasing strategic food reserves was another frequently employed strategy to stabilize local food prices. A number of governments also intervened in food markets by restricting stockholding by private traders, imposing anti-hoarding measures and restricting futures trading of basic foods.

Out of 98 developing country governments, 75 have supported consumers, 57 have promoted agricultural production and 76 have intervened in food markets. Developing countries in Asia appear the most proactive in terms of supporting consumers and managing/regulating food markets when facing higher food prices, while countries in Sub-Saharan Africa are most inclined to foster agricultural production. Using an income lens, poorer countries are, on average, more reactive to higher food prices across all policy categories when compared to wealthier, upper middle-income countries.

Analysis of specific responses to rising commodity prices suggests that food assistance, production subsidies and lower tariffs are the most commonly adopted policies by developing countries… A large proportion of developing countries in our sample have also focused on stocking strategic food reserves in order to stabilize domestic market prices (43 percent).”

See the bar chart for the breakdown.

unicef bar chartThe paper goes into more detail on such responses, finding that low income countries opted for emergency food aid and universal price subsidies, while middle income countries preferred school feeding programmes. Overall, it found that most responses were (understandably) short-term and argues for a longer-term policy framework that acknowledges that price spikes are here to stay. Unsurprisingly (given that it’s UNICEF) it argues for a greater focus on children in the response.

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