When food prices shoot over import parity, this often leads to social and political unrest
and even the toppling of governments. If markets behaved efficiently and in the absence
of trade barriers, food prices should not exceed the price in world markets plus the cost of
importing it to domestic markets (i.e., import parity). However, food prices routinely soar
above import parity in several countries of East and Southern Africa, causing widespread
hunger and asset depletion among the poor.
Policy makers have two good reasons for seeking to understand why domestic food
prices sometimes exceed import parity: first, to develop strategies to protect the welfare of
the urban and rural poor in response to national food production shortfalls, and second, to
promote political and social stability. This study is motivated by the need to avoid such food
crises, to understand why they occur with such regularity in the region, and to consider
policy options for avoiding them in the future.
At the heart of this issue are the interactions between governments and traders in food
markets. Traditional development economics typically analyses the performance of food
markets as the impact of shifting demand and supply functions. This approach can be
usefully complemented by an investigation of the strategic interactions between public and
private marketing actors and how their behaviour responds to one another. We conclude
that a better understanding of these strategic interactions is necessary to put in place
appropriate strategies for ensuring that domestic food prices do not exceed import parity
and thus reduce the potential for extreme upside price shocks.
The following section explores the political economy interactions between the state and
private sector in grain markets. We then lay out a theory that explains how government
reliance on discretionary trade policy instruments leads to strategic interactions that
can precipitate food crises. We then examine the details of two specific cases from the
recent 2008/09 year in which domestic food prices greatly exceeded import parity prices
for extended periods: (1) the case of Kenya from late 2008 into August 2009; and (2)
the case of Malawi from late 2008 to April 2009. The concluding section summarizes the
main findings, considers the potential effectiveness of alterative policy responses under
consideration to ensure against upside food price risk.