Food Price Changes, Domestic Price Insulation, and Poverty (When All Policy Makers Want to be Above Average)

This chapter reviews some of the findings from earlier work by looking at the way in which governments intervene to reduce the volatility of domestic food prices. It shows that the type of insulation both is widespread and takes the form of seeking to insulate domestic markets from short-term price changes while passing through longer-term changes in world prices. The chapter examines what implications the reaction might have for poor households, taking into account what people have learned about the impacts of food price changes on poverty. It focuses on the implications of temporary price insulation for domestic and international prices in the short run, seeking to clarify some concepts that may not have been brought out sufficiently clearly in author work. The chapter shows that the widespread practice of price insulation can stabilize domestic prices in countries that insulate to a greater than average degree; it destabilizes domestic prices in those countries that insulate less than the average.