Trade Insulation as Social Protection

26 Pages Posted: 20 Apr 2016

See all articles by Quy-Toan Do

Quy-Toan Do

World Bank - Development Research Group (DECRG)

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Martin Ravallion

Georgetown University

Date Written: May 1, 2013

Abstract

In a world with volatile food prices, countries have an incentive to shelter their populations from induced real income shocks. When some agents are net food producers while others are net consumers, there is scope for insurance between the two groups. A domestic social protection scheme would therefore transfer resources away from the former group to the latter in times of high food prices, and do the reverse otherwise. This paper shows that in the presence of consumer preference heterogeneity, implementing the optimal social protection policy can potentially induce higher food price volatility. Such policy indeed generates a counter-cyclical demand shock that amplifies the effects of the underlying food shortage. The results call for a reassessment of food stabilization policies. In particular, the authors urge caution against the systematic condemnation of trade insulation practices.

Keywords: Food & Beverage Industry, Emerging Markets, Economic Theory & Research, Markets and Market Access, Food Security

Suggested Citation

Do, Quy Toan and Levchenko, Andrei A. and Ravallion, Martin, Trade Insulation as Social Protection (May 1, 2013). World Bank Policy Research Working Paper No. 6448. Available at SSRN: https://ssrn.com/abstract=2266294

Quy Toan Do (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

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Andrei A. Levchenko

University of Michigan - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
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HOME PAGE: http://alevchenko.com

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Martin Ravallion

Georgetown University ( email )

Washington, DC 20057
United States

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