Are policymakers better equipped for the next food price crisis?

José Cuesta 07 August 2009

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It is extremely difficult to predict when a crisis will start or end. Even though there might be a consensus regarding its causes (Abbot et. al. 2009), there is typically less agreement on which one(s) dominate(s) and, consequently, which measures will effectively tackle them. That applies to crises from the global financial panic to swine flu and certainly includes the food price crisis. From a policymaking viewpoint, the critical question is how to balance short- and long-term interventions and how, in practice, to triangulate cautious macroeconomic measures, effective compensatory social policies, and a lasting stimulus without disastrous distortions.

Overly general recommendations from soft evidence

In a recent article, I analyse the formulation of policy recommendations for the food price crisis in a comprehensive sample of (more than thirty) studies by international institutions (Cuesta 2009). In particular, I focus on the depth and merits of the policy discussion and the connection between generated knowledge and specific policy advocacy. Most of the studies either fail to provide any policy discussion or provide “soft” general recommendations such as calls for further analysis or the need to adopt both short- and long-run policies. Recommendations also include policy directions hardly linked specifically to the food crisis but rather to any crisis, long-standing sectoral concerns, and institutional mandates: investing in agriculture, increasing food production, easing assistance to small-scale producers to increase their productivity, and investing in the improvement of existing systems of social protection and security. Even at this broad level of analysis, there is a set of policies receiving less clear support or commitment: elimination of trade barriers, limitations on the production of bio-fuels, and global coordination in the implementation of policies.

Overly specific recommendations from hard evidence

None of the studies mentioned above, however, draw recommendations from a systematic quantitative comparison across policy alternatives. Only a handful – Arndt et al. (2008), IMF (2008) and Valero-Gil and Valero (2008) – conduct more rigorous exercises evaluating policy options in the context of the food price crises. They typically simulate the distributive effects of interventions from the expansion of conditional cash transfer programmes, provision of price subsidies, and elimination of tariffs. Results show that increasing transfers – little is analysed in terms of improving targeting – is most effective way to compensate for consumption loses and expected increases in poverty incidence and depth. These schemes outperform bold but short-ranging tariff reductions and typically regressive food price subsidies. Unfortunately, this hard evidence relates to a tiny sample of countries, Mozambique, Mexico and Nicaragua, leaving us to question their global relevance.

Searching for a systematic yet representative comparison

In response to the shortcomings in such policymaking analyses, some colleagues at the Inter-American Development Bank and I have proposed a systematic way of comparing policy interventions based on their expected consequences across critical policy-making dimensions: degree of targeting and scope of the measures (coverage), fiscal cost (cost), degree of distortion (efficiency), and reversibility (political economy). The outcome is a detailed physiognomy of interventions’ potential effects that might be complemented by specific estimations of orders of magnitude.

Table 1. Physiognomy of crisis interventions

The following table characterises the package of interventions adopted in the Andean Region, a part of the world interesting for its heterogeneous mix of net oil-exporters and food-importers, on the one hand, and economic and political ideologies, on the other. “Desirable” interventions are those that have:

  1. broad coverage or, if targeted, effective transfers to the poorest sectors;
  2. low fiscal costs;
  3. low levels of distortion and even generate positive incentives;
  4. are easily reversible after completing their mission.

Table 2. Balance of crisis policy mix

Conclusions

Since the brunt of the food price crisis drifted out of the spotlight, little has been achieved in terms of a rigorous comparison and ranking of alternative policy responses. This gap calls for a humble reflection on our collective ability to anticipate the emergence and magnitude of crises. We need to work towards analytical toolkits and/or protocols that deal specifically with knowledge generation for crisis prevention. Toolkits of this sort already exist in the analysis of poverty impacts and empowerment, for example. Rather than establishing or relying on a mechanical procedure, such as a database, these protocols should describe analytical techniques, relevant indicators, scopes for analyses, and participatory strategies. With such tools, policymakers will be better equipped to confront the next crisis.

References

Abbot, P., C. Hurt and W. Tyner (2009) What’s Driving Food Prices. March 2009 Update. Farm Foundation Issue Report. Farm Foundation.

Arndt, C., R. Benfica, N. Maximiano, A. Nucifora and J. Thurlow (2008) Higher Fuel and Food Prices: Impacts and Responses for Mozambique. Agricultural Economics, 39, Supplement: 497-511

Cuesta, J. (2009) ‘Knowledge’ or Knowledgeable Banks? International Financial Institutions Generation of Knowledge in Times of Crisis, Development Policy Review, forthcoming

International Monetary Fund, IMF (2008) Elevated Food Prices and Vulnerable Households: Fiscal Policy Options, chapter 4 in 2008 Regional Economic Outlook, Western Hemisphere. Washington DC: IMF.

OECD-FAO (2009) Agricultural Outlook 2009-2018. FAO: Rome

Valero-Gil, J. and M. Valero (2008) The Effects of Rising Food Prices on Poverty in Mexico. Agricultural Economics, 39, Supplement: 485-96

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Topics:  Development Global economy

Tags:  food prices, crisis intervention, food price crisis

Senior Economist, Word Bank; Affiliated Professor, Georgetown Institute of Public Policies, Georgetown University

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