By Wickramasinghe, Upali

Introduction
Food price stabilization through government intervention has been a topic of policy debate for a long time. Countries employ a variety of mechanisms to stabilize domestic food prices. Price fixing, food stockpiling and releasing when food prices rise, and running state-owned enterprises such as food marketing boards are among the key strategies. Many governments in Asia began implementing a combination of these measures to avoid the transfer of high international prices to domestic food prices during the 2007/08 global food crisis. This short article reviews policy measures used by governments to insulate their food markets from international prices during this period and their policy implications in a few countries in Asia.

Policy responses in Asia
International food prices can be fully transmitted to domestic prices depending on market integration and exchange rate movements. In many Asian economies, agricultural trade liberalization in the 1980s led to greater market integration, thus allowing international prices to be transmitted to domestic prices. Despite the common perception that food price transmission during the 2007/08 crisis affected much of the food market, studies show that price transmission significantly varied across countries. This may be due to incomplete market integration, the policies that governments pursued during the crisis to insulate their economies or a combination of these two factors. Government policy responses evolved over the crisis as prices continued to rise; in some instances the trend towards closer economic integration was completely reversed (Jayasuriya, 2010), replaced by policies aimed at reaching food self-sufficiency. As global food prices rose, food-exporting nations first removed export incentives, then removed subsidies and finally imposed export bans. The food-importing nations had to deal with a different economic environment altogether. Governments responded initially by lowering import tariffs and other barriers, introduced import subsidy schemes, imposed restrictions on food hoarding and finally introduced programmes to raise domestic food production.

 

This section summarizes the mechanisms employed by some selected countries in Asia. China pursued for the most part an unrestricted cereal trade policy before the onset of the food crisis and even promoted cereal export through the use of futures and forward contracts. However, between late 2007 and mid 2008, as the global food crisis deepened, the policy shifted from being liberal to a complete ban on export, in the following sequence, as identified by Huang and Rozelle (2010):

1. releasing of cereal stocks safeguarded to cover food needs in case of market-driven disasters;
2. removal of subsidies on storage and transport of maize intended for export;
3. removal of value-added tax (VAT) rebates for rice, maize and wheat;
4. imposition of a 5 per cent export levy on all export shipments; and
5. imposition of an export ban on all food and feed commodities (except for soya beans of which China is a major importer; it allowed a complete pass-through).

The policies enabled China to insulate domestic food markets from the higher international food prices in 2007/08. Figure 1 shows that China was clearly able to insulate their domestic rice prices during the whole period.

India, a marginal player in the global market for food and agricultural products, but with a huge domestic market and the biggest regional food exporter in South Asia, behaved almost the same way as China did during the crisis, stabilizing prices up to the point of completely banning cereal exports. Similar to China, India achieved domestic food price stability (Figure 1). But the export ban significantly influenced price increases in two neighbouring countries, Bangladesh and Nepal (Deb, 2010 as cited in Jayasuriya, 2010). The impact of export bans in Bangladesh and Nepal, however, was short lived due to the extensive informal food trade taking place along the long and porous borders between India and these two countries. As Deb shows, food price stability in India also stabilized food prices across Bangladesh and Nepal.

Indonesia was considered the world's largest rice importer until the early 2000s. In order to boost domestic rice production, Indonesia imposed an import ban on rice in 2004, effectively delinking its domestic rice market from international prices (Timmer, 2009). This resulted in rice prices 37 per cent higher than international rice prices by 2006, before the food crisis began. This delinking has neutralized the impact of rising international food prices in the domestic market. Figure 1 shows, however, that Indonesia's current rice prices are higher by a significant margin over international rice prices.1

Sri Lanka, a net importer of both rice and wheat, used several steps to stabilize food prices. The key policies used include:

  • owering of import tariffs for a number of food items critical in the Sri Lankan consumer food baskets, such as rice and edible oil;
  • granting of duty waivers on high-demand food items, such as sugar, dhal, big onion, dried chilli, potatoes, gram and canned fish;
  • imposing food price ceilings; and
  • maintaining lower fertilizer prices. (Weerahewa and Kodituwakku, 2010)

Although policy directions were changed frequently and erratic, as noted by Jayasuriya (2010), the government managed to reduce the transfer of high food prices from international to domestic food prices.

Thailand, the largest rice exporter in the world, neither restricted exports nor implemented other measures to dampen internal prices during the crisis (Nidhiprabha, 2010). The government could have released some 2.1 million metric tons of government-held rice stocks at the time, significantly dampening domestic rice prices. Instead, rice exporters continued to purchase rice to build stockpiles in anticipation of further price increases, pushing domestic prices to rise above export prices. Viet Nam, another rice exporter, imposed an export ban when international prices surged in 2007/08, which delinked domestic prices from international prices. However, domestic prices continued to rise significantly due to rice stockpiling by exporters (Coxhead and Linh, 2010).

This review suggests that country responses to the 2007/08 food crisis have been largely conditioned by the particular circumstances each faced before and during the crisis. Marginal food-exporting as well as food-importing countries have used a number of policy measures to insulate domestic prices from the impact of high international prices. The liberal food-trading regime that had been a cornerstone of development policy was abandoned when the 2007/08 food crisis worsened. Some countries have turned toward a policy of complete self-sufficiency in food production over self-reliance and free markets.

Impact of high food prices on poverty and food security
This review also suggests that many countries were fairly successful in dampening the transmission of international prices to domestic prices, thus insulating domestic prices. Does this ensure food security and reduce poverty? Under what conditions does food security improve? Were these optimal policies? I have attempted in this paper to identify possible outcomes and conditions that can be used as guidance in choosing and implementing policies when faced with similar situations.

Thailand, the largest rice exporter, offers a case of non-intervention by the government to stabilize domestic rice prices. Nidhiprabha (2010) concludes that higher global food prices had a positive impact on poverty in Thailand. This is mainly due to the high positive correlation between high farm incomes and real wages. In other words, real wages rose along with high farm income when rice prices increased. Given that a majority of rural people depends on agriculture, and in particular wage income, rising prices benefited them significantly, leading to a positive outcome on poverty. This lends support to the view that programmes aimed at poverty reduction are largely effective when they also generate more employment opportunities and enhance real incomes of the poor (UNDP, 2005). The case of Viet Nam, another rice exporter, suggests that a long-term increase in rice prices is likely to be poverty reducing, thus enhancing food security in the long run because of the positive impact on incomes of the poor (Coxhead and Linh, 2010). A short-run increase in prices, however, is unlikely to induce higher employment and agricultural wage increase, thus making poorer households worse off.

Indonesia offers a case of attempting to completely insulate from international food prices as a long-term policy objective. In this case, Indonesia effectively delinked its rice market from the influence of international prices, before the food crisis started. Warr and Yusuf (2010) show that import restrictions were akin to a 'quota' on rice imports and that the policy did not necessarily improve food security as much as an alternative policy might have done. Warr and Yusuf suggest an 'equivalent tariff'2 would have raised domestic rice prices during the crisis and exposed a large number of people to food insecurity. However, the import ban on rice permanently increased food insecurity of a population four times larger than the group that would have been exposed under an import tariff. Thus, policies that appear to protect households during periods of high prices may in fact create much worse outcomes in the long run.3

Policies pursued by India, Bangladesh and Nepal offer an interesting insight to food policy making with long and porous borders where significant informal trade also takes place. The export ban imposed by India did affect prices in Bangladesh and Nepal, but only temporarily. While India managed to avoid the transmission of high international prices to domestic prices and avoided the possibility of exposing a much larger population to food insecurity and hunger during the crisis, an analysis of economy wide impact of insulating domestic prices would be needed before drawing conclusions as to whether it was the best policy in a food market as vast as that of India.

The cases of Sri Lanka and Nepal also show that domestic market conditions play a critical role in exacerbating, as well as dampening, the impact of higher international food prices. In the case of Sri Lanka, domestic inflation was found to be the main driver of food price increases and contributing to reduced calorie intake (Weerahewa and Kodithuwakku, 2010). In Nepal, although the Indian food export ban had some impact, food insecurity during the crisis was mostly related to reduced crop production, political instability, poorly integrated markets and anti-competitive behaviour of traders.

Summary
Many countries use trade restrictions of varying degree and tenor to insulate their food markets from international food price volatility. Policies that insulate food markets have enabled countries to thwart the risk of much higher food insecurity if domestic food prices had increased at the same rates as they did in the international markets during the 2007/2008 food crisis. However, higher food prices may also improve long-term food security and assist in the fight against poverty if higher food prices are translated into higher farm incomes and higher real wages.

(References available upon request)

1 Rice prices in Indonesia have been much higher than international prices over several years. Indonesian rice prices were 111 per cent higher than Thai grade B rice in 2009, then increased to 170 times in 2010 and 198 per cent over the first four months of 2011.
2 Equivalent tariff if defined as the rate of tariff that would provide the same protection to producers as the import ban.
3 Given that Indonesia's rice prices have been much higher than world prices since imposing the rice import ban in 2004, further study could shed light on the impact of this rice policy on farm incomes and food security.