The World Bank Policy Research Working Paper No. 5511, December Kym Anderson and Signe Nelgen (2010)

The paper examines how trade policy responses by both exporters and importers can make government interventions in stabilizing domestic prices and combating international market instability ineffective. The study finds that during periods of price increases and exogenous shock, there is a transfer of welfare from food deficit to food surplus countries. This results in an increase in poverty, contrary to government claims that the interventions are designed to prevent a rise in poverty. The paper further compares recent policy responses with how governments responded to the price shocks of 1973-74 and the fall in food prices in the mid-1980s.

The fluctuations in international food prices have various impacts on countries, with the governments subsequently intervening to stabilize domestic food prices and limiting the pass-through to domestic prices. The rise in food prices during 2007-08 was initiated partly by the news that some developing countries were suspending their grain exports to curb a rise in domestic prices. Major exporting countries like Russia suspended wheat exports while India continued to ban its wheat and rice exports since 2008. As such, sudden export restrictions can contribute to a sharp rise in international food prices and can further exacerbate the cost of exogenous supply or demand shocks to buyers throughout the world.

The paper examines how trade policy responses by both exporters and importers can render government interventions in stabilizing domestic prices and combating international market instability ineffective. Anderson and Nelgen compare the recent policy responses of 2008 with how the governments responded to the price increases in 1973-74 and the downward spike in food prices in the mid-1980s. The authors use estimates of agricultural price distortions of 75 countries. They utilize the World Bank database which provides a set of indicators showing how export restrictions and other price-distorting trade and domestic policies have changed the annual average domestic producer and consumer prices of farm goods; and how these prices have deviated from international prices over the last twenty five years. The key indicator used for the study is the national nominal rate of assistance to agricultural producers (NRA), which shows the extent to which the domestic producer price exceeds the border price, which is defined as the import or export price of a product used to calculate the market price support price gap.

The NRA is negative if the farmers receive less than the price at the border for the same product. The authors state that it is a useful indicator when governments seek to provide more assistance to farmers during periods of falling international prices. Developing countries tend to set the NRAs below zero if they are food-surplus, while the developed nations tend to set their NRAs above zero and thus help their farmers, especially if they are food-deficit nations. Therefore NRAs tend to be higher when the country’s income is higher and its comparative advantage is weak. The researchers estimate the elasticity of the transmission of the international price to the domestic market for some farm products, in order to examine how much of international food prices are transmitted into domestic prices.

A number of key findings have emerged from the study. Firstly, the authors point out that an export tax, which is the equivalent of a consumer subsidy, helps consumers but harms farmers. The poor households benefit from a measure that reduces the price of food products, thus gaining on the expenditure side. However, the households are harmed on the income side if they are sellers of food or suppliers of unskilled labor in farm jobs. Such trade policy instruments could worsen poverty instead of reducing it.

The findings show that the average estimates for the short-run elasticity (a one year measure) range from 0.3 for sugar to 0.5 for rice, wheat and pork and 0.7 for beef, soybean and coffee. The unweighted average across the key products were estimated to be around 0.54, indicating that within one year, a little more than half the movement in international prices of farm produce has been passed on to domestic prices over the past twenty five years. The long-run elasticity measures show the average to be 0.69 for 75 countries in the sample, which is still short of unity.

The authors then focus on another measure known as the annual average nominal assistance coefficient (NAC) during periods of international price increases. They find that the NAC, i.e. the government assistance was lower during periods of high prices, indicating that government assistance is minimal when food prices are already high. The findings also indicate that both exporting and importing countries engage in price interventions when their food prices fluctuate.

The paper further shows that the extent of the annual NAC changes during the upward spike in the 1970s was greater than the changes in the first decade of this millennium, indicating that international food prices rose proportionately less per year in recent years. Between 2005 and 2008 the NAC for rice fell 29 percent for high income countries and 36 percent for developing countries, while the NAC for wheat fell 37 percent for both high-income and low-income countries. The change in the NACs for rice and wheat were faster in 1973 and 1974, which means that price surges were much higher in the 1970s price shock. The percentage change in the NAC was less for low-income countries and higher for high-income countries in the mid-1980s price collapse; indicating that in developing countries, consumers are more likely to be protected from price increases while in developed nations, producers are more likely to be protected instead.  Finally, the paper finds that export restrictions were the primary tools for low income countries to combat the upward spike during 1972-76 and the collapse of food prices in the period 1984-88.

The authors conclude by recommending that the countries alleviate trade restrictions through the new World Trade Organization rules, thereby moderating government responses to price shocks as such responses may further aggravate price shocks.