Food prices tend to be volatile, with relatively long periods in the doldrums punctuated by short but intense price peaks. These periods of high prices pose a serious threat to the food security of the poor, who spend a large share of their incomes on food. When the prices of staple foods surge, as they did in 2007 and 2010, the real incomes of net food buyers decline, with large numbers of net buyers of food forced into poverty as a result. But these short-run impacts may not be the complete story. If higher prices are sustained, farmers increase their output, the wages of unskilled workers rise in response to higher output prices, and poverty rates are likely to fall.
In his talk, Will Martin will discuss the effects of price insulation, a policy instrument that developing countries frequently use to protect their markets from short-run price changes. Price insulation creates a collective action problem by putting upward pressure on world prices, which makes it difficult for other countries not to respond and results in a beggar-thy-neighbor effect. Using household models based on data from expenditure and agricultural producers, he will demonstrate that this policy was ineffective in blunting the poverty-increasing impacts of the original shocks to world market prices, and that subsequent increases in domestic prices seem to have helped reduce poverty. Ultimately, his findings will highlight the need for policy measures—such as social safety nets, rational stockholding, and improvements in market efficiency—that can alleviate the impact of food price volatility.