Let’s start with a pop quiz. The previous speaker, Chris Barrett, spoke on “Assisting the Escape from Persistent Ultra-Poverty in Rural Africa.” His key “entry points” for assisting the ultra-poor were (1) Build and protect the ultra-poor’s productive assets, (2) Improve the ultra-poor’s asset productivity, (3) Improve risk management options for the ultra-poor, by (a) Risk reduction (improve crops and livestock; better water control; diversification; peace; and disease control) and (b) risk transfer (improve markets; index-based risk finance; global humanitarian response. What’s missing in this list? An use of stabilization instruments to reduce risks from volatile prices. Why? Because most economists think that stabilizing food prices is neither desirable nor feasible. I want to argue otherwise…
Getting Prices Right was published a quarter of a century ago—in 1986. The first paragraph reads as follows: “What is the “right” price for an agricultural commodity? Economists have an easy answer to the question, but only in a world of perfect information, with competitive markets, without other government interventions into the economy, and without political concerns for the impact on income distribution. In such a world, any deviation of the domestic price from the international border price of a commodity, as either an import or export, reduces total economic welfare in the country because of dead-weight efficiency losses in production and consumption.” In fact, in a world where the border price paradigm holds, price instability adds to consumer and producer welfare. For basic foods, that cannot be “right…”
One conclusion from those 4 slides is that the international donors, research centers and NGOs don’t know what they’re talking about, so whatever the price is at the moment, it’s “wrong.” But I think a better conclusion is that food prices are too high at some times and too low at other times. Food security can be threatened at either end. So we need to go in search of the “right” price and figure out how to keep it stable. This framework helps us understand why that is important, and it provides a starting point in our search…I should note that this talk is not about the causes of unstable food prices, but rather about their impact. “Causes” are an entirely separate talk—related to this one, but much more technical. Understanding impact is a motivation for reducing instability of food prices, and understanding causes will be a key ingredient in knowing how.
We start in the upper left box, the “here and now” of policy makers. We want to end up in the lower right box, where all households are food secure on a sustainable and regular basis. It would be nice to move directly from upper left to lower right via the diagonal arrow (which points both directions because policymakers receive political support when food security is achieved), but market economies do not work that way. We need to move from the short run to the long run at the macro level by generating inclusive economic growth, and from the macro level to the micro level, in the short run, by keeping the poor out of poverty traps. When the global economy is reasonably stable, and when food prices are well behaved, policy makers can concentrate their political and financial capital on the process of long-run, inclusive growth. Keeping the poor from falling into irreversible poverty traps is easier and less costly in a world of stable food prices, and the poor are able to use their own resources and entrepreneurial abilities to connect (via the small horizontal arrow) to long-run, sustainable food security for themselves. If the food economy is highly unstable, constantly in crisis, policymakers spend all of their time and budget resources in the “upper left” box, trying to stabilize food prices and provide safety nets for the poor. During food crises, vulnerable households often deplete their human and financial capital just to stay alive. This is the world of poverty traps and enduring food insecurity. We are also trapped in short-run crisis management, both macro and humanitarian. Donors such as USAID can be trapped in crisis mode as well as governments, and end up spending their human and financial resources on emergency relief rather than longer-run development strategies and investments.With success in achieving the objectives in the upper right and lower left boxes, market forces gradually—over decades—bring the poor above a threshold of vulnerability and into sustained food security (connecting macro to micro and short-run to long run). Theyget to the “lower right” box where households have sustainable access to food in the long run. That is, they are food secure.
Franck Galtier has categorized the different instruments to manage price instability into a neat, 2 by 2 matrix. Under “objective” of the instrument (the horizontal axis), we can either stabilize prices or reduce the impact of instability. The “governance” of approaches for each possible objective is basically the distinction between private and public, between market-based instruments and those provided by governments. Galtier labels the cells A, B, C and D. “A” instruments seek to use market-based investments to reduce price instability: storage and transportation investments can reduce seasonal and geographical price variations. For the price instability that remains, “B” instruments help market participants reduce the impact of that instability, mostly through financial risk management techniques using insurance and varieties of futures markets (and their derivatives). When a food crisis erupts despite the market-based instruments, then governments step in with “D” instruments in the form of safety nets, often with direct food distributions or subsidies. The “ABD” approach is now accepted as “best practice” by all the donor agencies, with a clear rejection of “C” instruments because they interfere with the efficiency and information content of price signals. Still, as the four slides on “high” and “low” prices indicated, the ABD approach does not seem to have worked very well in either price environment. The price spikes in 2007/08 and again in 2010/11, with their sharp uptick in the numbers of hungry, suggest it might be desirable to re-think the “C” approach.It turns out there is some history on how to do this…
If we want to think seriously about stabilizing food prices using government initiatives (“C” approach) rather than just mitigating the effects (“B” and “D” approaches), we have 5 basic questions to be answered.
Any scope for reducing the “financialization” of staple food commodities? Need to go back to understanding the causes of the instability. Much research needs to be done here…
I’m actually quite serious…
Managing Food Price Volatility<br />C. Peter Timmer<br />Thomas D. Cabot Professor of <br />Development Studies, Emeritus<br />Harvard University<br />email@example.com<br />Presented at IFPRI<br />June 14, 2011<br />Image: SuraNualpradid<br />
What is the right price of food?<br />Quotation collected by <br />Johan Swinnenand Scott Rozelle<br />
What is the right price of food?<br />IFPRI:<br />In 2003: <br />“The combination of agricultural protectionism and subsidies in industrialized countries [and the resulting low agricultural prices] has limited agricultural growth in the developing world, increasing poverty and weakening food security in vulnerable countries.”<br />In 2008:<br />“In 2007, rapidly rising food prices began to further threaten the food security of poor people around the world. … The current food-price crisis can have long-term, detrimental effects on peoples’ health and livelihoods, and can contribute to the further impoverishment of many of the world’s poorest people.”<br />