Food Price Stabilization Policies in a Globalizing World
Case Study #6-8 of the Program: ''Food Policy For Developing Countries: The Role Of Government In The Global Food System''
This case examines various aspects of food price instability. It focuses on (1) the sources of price instability, (2) various policy options and the conditions under which they are viable, and (3) experiences with both market-based and nonmarket- based policy responses to price instability. All sources of price instability—such as inadequate infrastructure, asymmetric information, and incomplete or missing institutions—qualify as market failure. One could therefore argue that an appropriate policy response would be to invest in the critical determinants of well-functioning markets and create enabling market conditions, which in turn improve price stability. But the proponents of direct government interventions have argued that it takes time to develop infrastructure, improve information flow, and build institutions, and hence direct intervention for price stabilization is a legitimate short-run policy response. This is the idea most developing countries adopted when they embarked on food price stabilization policies in the 1960s and 1970s. Over the years, however, it became clear that such policies are expensive, may be dictated by special interests, and can distort agricultural incentives. These problems were particularly relevant for marketing board–led price controls in centrally planned economies. In Asian countries, most of which adopted dual pricing policies, interventions did produce beneficial results during the early years of the Green Revolution. But recent studies suggest that Asian food price stabilization is plagued by the very problems that the opponents had predicted with their theoretical models. These programs are becoming increasingly expensive, being captured by special interests, and hindering the process of diversification and commercialization. Furthermore, some countries in the region have demonstrated that reductions in public intervention can be beneficial. The Asian countries that adopted liberalization have been able to reduce food subsidy bills, strengthen markets, and allocate more resources to poverty alleviation programs—all without jeopardizing food price stability. Given the policy vacuum created by liberalization and the increasing affordability of information and communication technologies, recent years have seen many initiatives in developing countries to set up market-based institutions, such as commodity exchanges, for managing price instability and risks. Some countries have also used international futures markets to protect their domestic market against global market volatility. In most cases, however, these initiatives have not produced the desired results, and addressing price instability continues to be a challenge for many developing countries. This case provides an overview of these challenges with the hope of stimulating critical thinking about policy solutions that can ensure an acceptable level of price stability, especially in low-income countries in Africa. Your assignment is to consider a low-income, landlocked country in Africa with poor infrastructure and to recommend a set of policies to the government that would ensure an acceptable level of price stability for agricultural commodities. For decades, the country controlled agricultural prices through its marketing boards, which heavily distorted agricultural production incentives. Beginning in 1999 the country started dismantling its marketing boards and liberalizing agricultural markets. With liberalization, however, prices have become more volatile, and there has been increasing pressure on the government to undertake stabilization policies.
13 pp.©Cornell University, Ithaca, New York. All rights reserved. This case study may be reproduced for educational purposes without express permission but must include acknowledgment to Cornell University. No commercial use is permitted without permission.
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Previously Published As
Shahidur Rashid (2007). Case Study #6-8, ''Food Price Stabilization Policies in a Globalizing World''. In: Per Pinstrup-Andersen and Fuzhi Cheng (editors), ''Food Policy for Developing Countries: Case Studies.''13 pp.