Coping with Rising Food Prices: Policy Dilemmas in the Developing World
This paper examines the policy dilemmas and challenges faced by developing country governments when confronted with rising food prices, especially when it comes to the prices of basic foods such as rice and corn. One option for governments is to let domestic prices adjust to reflect the full change in international prices. However, this generates inflationary pressures, and if poor households lack savings or access to credit and social safety nets are inadequate, high food prices can cause severe hardship.Countries with large international reserves could mitigate these effects by appreciating their currency. But an exchange rate appreciation hurts the tradable sector and may cause macroeconomic imbalances down the road. Alternatively, governments can use food subsidies or export restrictions to stabilize domestic prices, shifting the burden of adjustment back on to international markets. The former measures exacerbate global food price fluctuations, hence are a beggar-thy-neighbor policy response which undermines a rules-based trading system and reduces welfare particularly in food importing countries. Without a multilateral solution to food price volatility in international markets, however, it is not surprising that developing countries pursue what is perceived as best for them even if the rest of the world is made worse off. With the introduction of biofuels, food commodity prices are likely to behave more like industrial commodity prices, so episodes of rapidly rising food commodity prices are bound to happen more frequently in the future. Biofuels not only lead to a rise in the long-term price of food staples but will also make food prices much more sensitive to the business-cycle much more than in the past. Beggar-thy- neighbor policies will become a common practice every time nonrenewable energy prices go up.
|Date of creation:||Feb 2009|
|Date of revision:|
|Publication status:||Published in Center for Global Development|
|Contact details of provider:|| Web page: http://www.gwu.edu/~iiep/|
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