Last Friday, the Center for Global Development (CGDev) was hosting an event titled “Enabling Africa’s Next Growth Decade: The G-20’s Role in Supporting Infrastructure Development and Global Food Security.” From the CGDev blog:
“Participants on the second panel similarly identified better information as a critical need for improving food security. Uncertainty about production, consumption, and grain stocks in key countries can encourage speculation and, in the worst cases, panic that exacerbates price spikes. A system for building data-gathering capacity, and improving monitoring and reporting on the global food situation is likely to be one outcome of the G-20 development working group discussions this year. [Will] Martin also discussed his research showing that trade measures in response to food price spikes are not only inefficient but ineffective.”
The link in the quote will take you to the slides for Will Martin’s presentation at the event. I am grateful for this post, as I was not familiar with his research.
Focusing on Food Price Volatility Would Be a Mistake
More importantly, while I completely agree with Martin’s view that national policies to protect a country against rising food prices will tend to exacerbate the problem at the international level, I disagree with his presentation’s seeming assumption that food price volatility is a problem:
- Our empirical findings regarding the welfare impacts of food price volatility actually indicate that the welfare impacts of food price volatility are heterogeneous, with poorer households slightly benefiting from food price volatility (holding the food price level constant, i.e., for mean-preserving spreads) and with wealthier households getting hurt by it.
- I thought those findings might be specific to Ethiopia, but in another piece of research I am currently working on and which I cannot yet disseminate (our intended outlet has a strict policy regarding posting working papers online), my coauthor and I find evidence that, worldwide, while rising food prices decrease welfare, food price volatility (again, holding the food price level constant) actually increases it slightly.
- The reason behind this counterintuitive finding is that food price volatility causes producers to hedge against price uncertainty by producing at a sub-optimal level relative to the profit-maximizing level. Consumers are instead speculators who slightly benefit from price uncertainty, because they can adjust their consumption bundle until the very last minute, so more variable prices means that they are more likely to enjoy price discounts when they make their food purchase decision.
Given the foregoing, it thus looks as though the G-20’s focus on food price volatility is going to benefit producers of food in developing countries, who are relatively wealthier than their consumer counterparts in rural areas. In other words, policies aimed at addressing food price volatility will likely be regressive in that they will hurt the poor and benefit the relatively wealthier.