Trade policy and food price volatility in LIFDCs by David Hallam Food and Agriculture Organization Discussion: Paulo Bastos World Bank

Summary A. Public goods provided by FAO 1.GIEWS price tool 2.Food and Agriculture Policy Decision Analysis (FAPDA) 3.Reports, country-case studies B. Trade policy changes in response to the food price crisis and some of their impacts (focus on LIFDCs and cereals)

Trade policy responses to 2007/2008 food price crisis 1. Reduction of import tariffs -Dominant response in the face of price hikes (consistent with Martin and Anderson, 2012 AJAE; Bastos, Straume and Urrego, 2013 JIE) -Frequently led to permanent reductions in import tariffs (liberalizing effect) - interesting finding - would like to see more systematic research on this issue -Likely impacts: - all else equal, reduction of food prices faced by domestic consumers; - if all countries do this at the same time, world price spikes may be exacerbated (Martin and Anderson, 2012) - if permanent and generalized, tariff reductions would be expected to reduce price levels faced by consumers, increase trade volumes, and raise consumer welfare in a permanent way

Trade policy responses to 2007/2008 food price crisis 1. Reduction in import tariffs -If permanent, tariff reductions will cease to become a relevant stabilization instrument - In fact, import tariffs are already low in many LIFDCs

Trade policy responses to 2007/2008 food price crisis

1. Reduction in import tariffs -Need to consider other instruments to address food security -Temporary import subsidies are not targeted to the poor, are difficult to finance, and have collective action problems -Optimal storage policies appear to be difficult to implement in many countries and are also likely to have collective action problems -Food/cash subsidies in the context of social safety nets targeted to the poor appear to be a superior (first best) policy option -But several low income net food importers may lack institutional capacity to implement them effectively? (Needs to be part of longer term policy, not just designed/implemented in times of crises)

Trade policy responses to 2007/2008 food price crisis Methodological point: -A “macro definition” of net food importers hides a lot of within- country heterogeneity -A large share of food imports may be consumed by richer/urban households -Even in net food importing countries, incomes of the poorer households and regions are often directly or indirectly linked with agricultural production/prices (even in the short term?) -This within-country heterogeneity may be behind apparent schizophrenia of trade policies adopted in these countries (e.g. removing import tariffs and imposing import quotas) – warrants more research -Puts additional limits to the use of trade policy (macro instrument) to address issues of food security driven by price volatility

Trade policy responses to 2007/2008 food price crisis 2. Export restrictions -Used less frequently than import tariffs in these countries during crisis -Typically imposed temporarily (unlike reductions in import tariffs) -Often are an ineffective stabilization instruments -Even if apparently effective for domestic price stabilization, they are worrisome in terms of potential effects on world prices due to collective action problems -Negative impacts on local production, wrong signal to longer term supply and export decisions by firms -Firm-level literature trade literature points to high sunk costs of exporting and emphasizes negative role of trade policy uncertainty for export performance (Limao and Handley, 2012, 2013)