Tuesday, July 16, 2013

16/7/2013: Doing Good By Altering Trade Flows & Incentives? Not so fast...

An interesting paper on commodities prices and policy responses to these based on actual experience with food prices inflation in 2008.

CEPR DP9555, titled "Food Price Spikes, Price Insulation, and Poverty" by Kym Anderson, Maros Ivanic, and Will Martin, published this month "considers the impact on world food prices of the changes in restrictions on trade in staple foods during the 2008 world food price crisis".

Those changes ranged from reductions in import protection (allowing for more imports to flow into the countries heavily dependent on imports of food) to increases in export restraints (aimed at reducing exports of food from the countries experiencing rising domestic prices).

The changes "were meant to partially insulate domestic markets from the spike in international prices. We find that this insulation added substantially to the spike in international prices for rice, wheat, maize and oilseeds". In other words, domestic measures to ease prices by distorting international trade flows resulted in higher international prices for these foodstuffs.

"As a result, while domestic prices rose less than they would have without insulation in some developing countries, in many other countries they rose more than in the absence of such insulation." Thus, domestic measures to combat food inflation have been beggar-thy-neighbour in their effect on other markets.

The study also estimates "the combined impact of such insulating behavior on poverty in various developing countries and globally." The study found "that the actual poverty-reducing impact of insulation is much less than its apparent impact, and that its net effect was to increase global poverty in 2008 by8 million, although this increase was not significantly different from zero." Doing good, it turns out, can cause harm. Or alternatively, you might think global trade regime in food is evil, but try telling that to 8 million people impoverished by altering that regime to superficially re-direct flows of food away from established trade patterns in just one (single and short-lived) episode.

Authors point of view on policies? "Since there are domestic policy instruments such as conditional cash transfers that could now provide social protection for the poor far more efficiently and equitably than variations in border restrictions, we suggest it is time to seek a multilateral agreement to desist from changing restrictions on trade when international food prices spike." No knee-jerk reactions, please...

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