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Trade Insulation as Social Protection

In: The Economics of Food Price Volatility

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

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 chapter was published in:
  • Jean-Paul Chavas & David Hummels & Brian D. Wright, 2014. "The Economics of Food Price Volatility," NBER Books, National Bureau of Economic Research, Inc, number chav12-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12820.
    Handle: RePEc:nbr:nberch:12820
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
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    1. Fernando Broner & Jaume Ventura, 2005. "Globalization and risk sharing," Economics Working Papers 837, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2009.
    2. Leblebicioglu, AslI, 2009. "Financial integration, credit market imperfections and consumption smoothing," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 377-393, February.
    3. Andrei A. Levchenko, 2005. "Financial Liberalization and Consumption Volatility in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 237-259, September.
    4. Will Martin & Kym Anderson, 2012. "Export Restrictions and Price Insulation During Commodity Price Booms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(2), pages 422-427.
    5. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, vol. 23(3-4), pages 201-220, November.
    6. Gouel, Christophe & Jean, Sebastien, 2012. "Optimal food price stabilization in a small open developing country," Policy Research Working Paper Series 5943, The World Bank.
    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 1A, International Food Policy Research Institute (IFPRI).
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