The Political Economy of Food Policy During Price Spikes

A large political economy literature has focused on what Kym Anderson (2009) refers to as “distortions to agricultural incentives”. Governments are regularly under pressure from agricultural producers and food consumers to intervene in agricultural and food markets. In the longer run, this has led to a series of “patterns” of policy distortions.However in recent years, much of the discussion on global agricultural and food prices has focused on the volatility of these prices and the associated policy interventions. While economists and advisors point at the importance of reducing price volatility based on efficiency gains, economists and policy advisors have often been critical of these policy interventions, criticizing governments for (a) being ineffective, (b) causing distortions in the economy, and (c) reinforcing price fluctuations, etc. (e.g. Anderson et al., 2013).The basic economic model with static supply and demand equations and perfect markets is not very adequate to capture and measure distortions and inefficiencies in such conditions of market imperfections and volatility. In this perspective, Pieters and Swinnen (2015) develop a model to analyze to what extent governments have traded off price distortions for reduced volatility in intervening in agricultural markets. They analyze how much distortions a welfare maximizing government would introduce when it cares about stability. They find that several countries have been able to reduce price volatility in the domestic markets while at the same time allowing structural price changes to pass through. However, they also conclude that even when explicitly taking into account this trade-off (and the benefits of reducing volatility), many policy distortions do not seem to be consistent with minimizing volatility on domestic markets and that there is, thus, much room for policy improvement.

Pieters H. and Swinnen J. 2015. "The Political Economy of Food Policy During Price Spikes" Ferdi Policy Brief  B142, December 2015