Food Price Spikes And Strategic Interactions Between The Public And Private Sectors: Market Failures Or Governance Failures?

Author: T.S. Jayne and David Tschirley

Year: 2010

Category: Corporate Reports

Abstract

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.

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