Description:
In poor countries, most governments
implement policies aiming to stabilize the prices of staple
foods, which often include storage and trade measures
insulating their domestic market from the world market. It
is of crucial importance to understand the precise
motivations and efficiency of those interventions, because
they can have consequences worldwide. This paper addresses
those issues by analyzing the case of a small, open
developing country confronted by shocks to both the crop
yield and foreign price. In this model, government
interventions may be justified by the lack of an insurance
market for food prices. Considering this market
imperfection, the authors design optimal public
interventions through trade and storage policies. They show
that an optimal trade policy largely consists of subsidizing
imports and taxing exports, which benefits consumers at the
expense of producers. Import subsidies alleviate the
non-negativity of food storage. In other words, when stocks
are exhausted, subsidizing imports prevents domestic price
spikes. One striking result: an optimal storage policy on
its own is detrimental to consumers, since its stabilizing
benefits leak into the world market and it raises the
average domestic price. By contrast, an optimal combination
of storage and trade policies results in a powerful
stabilizing effect for domestic food prices.