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IFPRI ReportVolume 18, Number 3
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Report Reviews Price Stabilization Policies in Five Asian Countries
As countries abandon trade restrictions and protectionist policies in the wake of recent pressures for market reform and liberalization, the question remains of whether food prices will fluctuate more or less without stabilization interventions.
In "Foodgrain Price Stabilization in Developing Countries: Issues and Experiences in Asia," Food Policy Review 3, Nurul Islam and Saji Thomas first review current price stabilization theory. They find that under the restrictive methodology commonly used to evaluate price stabilization and various assumptions about risk aversion, the benefits of price stabilization are generally modest. To assess the true benefits of price stabilization, they advocate extending the analytical framework to include macro-economic and developmental aspects.
Among the frequently used interventions are buffer stocks held by the government. Many countries use a price band to signal when stocks should be released: when prices rise above a designated point, stocks are released to meet the demand, so that prices will not rise higher. The lower limit of a price band protects farmers by keeping prices from falling below a floor price. Other ways to stabilize prices include varying the quantities of foods exported and imported and taxing or subsidizing imports and exports.
In the second part of the review, Islam and Thomas evaluate the causes and consequences of instability in rice and wheat prices in five Asian developing countries--Bangladesh, Indonesia, Pakistan, the Philippines, and Thailand. The authors find that all five countries saw stabilization policies as a way to meet additional objectives besides price stabilization: often to protect producers from very low prices and falling incomes and consumers (especially in urban areas) from high prices and deprivation. The importing countries, Bangladesh, Pakistan, and the Philippines, wanted to increase self-sufficiency. The rice- exporting countries, Thailand and Pakistan, wanted to maintain high, stable export prices.
To be successful, the review finds, a program combining buffer stocks with trade policy must have adequate access to financial resources, must time its purchases and sales accurately, must be expertly managed to avoid having stocks spoil in storage, and must prevent traders from speculating. If policies do not encourage private stockholding, the costs to the government will be higher.
Theoretically, the reduction of protectionist policies should help stabilize world prices, but the authors note that a reduction in domestic price support and subsidy programs would reduce domestic surplus and public stocks, particularly in developed countries where a major part of world cereal stocks are generally held. In the past these stocks have prevented severe fluctuations in world prices due to drought or other disasters. According to Islam and Thomas, private traders, who can react more quickly than governments, should be encouraged to take up the slack. This does not eliminate the need for public stocks altogether--enough should be held to act as a safety net for the poorest people--but the public stocks held can be much smaller.
