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Trade Insulation as Social Protection

In: The Economics of Food Price Volatility

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  • Quy-Toan Do
  • Andrei A. Levchenko
  • Martin Ravallion

Abstract

In a world with volatile food prices, countries have an incentive to shelter their populations from induced real income shocks. When some agents are net food producers while others are net consumers, there is scope for insurance between the two groups. A domestic social protection scheme would therefore transfer resources away from the former group to the latter in times of high food prices, and do the reverse otherwise. This paper shows that in the presence of consumer preference heterogeneity, implementing the optimal social protection policy can potentially induce higher food price volatility. Such policy indeed generates a counter-cyclical demand shock that amplifies the effects of the underlying food shortage. The results call for a reassessment of food stabilization policies. In particular, the authors urge caution against the systematic condemnation of trade insulation practices.

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This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12820.

Handle: RePEc:nbr:nberch:12820

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  1. Jaume Ventura & Fernando A. Broner, 2006. "Globalization and Risk Sharing," NBER Working Papers 12482, National Bureau of Economic Research, Inc.
  2. Asli Leblebicioglu, 2006. "Financial Integration, Credit Market Imperfections and Consumption Smoothing," 2006 Meeting Papers 651, Society for Economic Dynamics.
  3. Anderson, Kym & Martin, Will, 2011. "Export Restrictions and Price Insulation During Commodity Price Booms," CEPR Discussion Papers 8494, C.E.P.R. Discussion Papers.
  4. Ivanic, Maros & Martin, Will & Zaman, Hassan, 2011. "Estimating the short-run poverty impacts of the 2010-11 surge in food prices," Policy Research Working Paper Series 5633, The World Bank.
  5. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, vol. 23(3-4), pages 201-220, November.
  6. Christophe Gouel & Sébastien Jean, 2012. "Optimal Food Price Stabilization in a Small Open Developing Country," Working Papers 2012-01, CEPII research center.
  7. von Braun, Joachim & Ahmed, Akhter & Asenso-Okyere, Kwadwo & Fan, Shenggen & Gulati, Ashok & Hoddinott, John & Pandya-Lorch, Rajul & Rosegrant, Mark W. & Ruel, Marie & Torero, Maximo & van Rheenen, Te, 2008. "High food prices: The what, who, and how of proposed policy actions," Policy briefs 1A, International Food Policy Research Institute (IFPRI).
  8. Andrei A. Levchenko, 2005. "Financial Liberalization and Consumption Volatility in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 237-259, September.
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Cited by:
  1. Martin, William J., 2012. "Managing High and Volatile Food Prices," Trade Policy Issues Papers 142732, International Agricultural Trade Research Consortium.
  2. Christophe Gouel, 2013. "Food Price Volatility and Domestic Stabilization Policies in Developing Countries," NBER Working Papers 18934, National Bureau of Economic Research, Inc.

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