Price stabilization, international trade and national cereal stocks: world price shocks and policy response in South Asia

The sharp rise in international cereal prices in 2007 and 2008 had a profound impact on food security at national levels for net importing countries, sharply raising the cost of imports. Domestic trade policies and government market interventions in a set of South Asian countries have been critical, however, in determining the effects of the international price shocks on domestic markets. While these price shocks are a sober reminder that reliance on international markets will not guarantee price stability, it is important that governments do not over-react to recent events and adopt policies that ultimately result in large costs in terms of slower economic growth and less poverty reduction. Instead, national policies should involve some combination of (1) national stocks to prevent very large price increases, (2) reliance on international trade to limit the need for government interventions in most years, (3) promotion of domestic production through investments in irrigation, research and extension that is economically efficient when evaluated at medium-term border prices, and (4) targeted (ideally cash-based) safety net programs to address the food security needs of poor households. The appropriate design and implementation of these broad food policy guidelines will necessarily vary according to individual country conditions; the need to avoid government interventions that ultimately have very high costs is universal.