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Trade insulation as social protection

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Author Info

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

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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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6448.

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Date of creation: 01 May 2013
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Handle: RePEc:wbk:wbrwps:6448

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Keywords: Food&Beverage Industry; Emerging Markets; Economic Theory&Research; Markets and Market Access; Food Security;

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  1. Leblebicioglu, AslI, 2009. "Financial integration, credit market imperfections and consumption smoothing," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(2), pages 377-393, February.
  2. Broner, Fernando A & Ventura, Jaume, 2006. "Globalization and Risk Sharing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5820, C.E.P.R. Discussion Papers.
  3. Anderson, Kym & Martin, Will, 2011. "Export Restrictions and Price Insulation During Commodity Price Booms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8494, C.E.P.R. Discussion Papers.
  4. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, Elsevier, vol. 23(3-4), pages 201-220, November.
  5. Gouel, Christophe & Jean, Sebastien, 2012. "Optimal food price stabilization in a small open developing country," Policy Research Working Paper Series 5943, The World Bank.
  6. Andrei A. Levchenko, 2005. "Financial Liberalization and Consumption Volatility in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 237-259, September.
  7. 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.
  8. 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, International Food Policy Research Institute (IFPRI) 1A, International Food Policy Research Institute (IFPRI).
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Cited by:
  1. Martin, William J., 2012. "Managing High and Volatile Food Prices," Trade Policy Issues Papers, International Agricultural Trade Research Consortium 142732, International Agricultural Trade Research Consortium.
  2. Christophe Gouel, 2013. "Food Price Volatility and Domestic Stabilization Policies in Developing Countries," NBER Chapters, in: The Economics of Food Price Volatility National Bureau of Economic Research, Inc.

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