Welfare and Price Impacts of Price-Insulating Policies

The impacts on welfare and poverty of policies that insulate domestic food prices from international prices are considered in this paper. Varying protection rates in order to insulate domestic prices from movements in international prices is a very common approach to attempting to stabilize domestic prices. When prices rise, this involves exporters introducing or raising export barriers. For importers, reductions in import duties are common, with gains in economic efficiency, but potential terms-of-trade losses. When all countries follow this type of policy, the stabilizing impact on domestic prices is, on average, eliminated, although countries that insulate more than others may experience reductions in price volatility, while those who insulate less may experience increases in price volatility. This paper provides estimates of the impacts of changes in price distortions in major economies for domestic prices and for national economic welfare, taking into account the impacts of changes in countries‘ own policies and those of their trading partners during key periods of price instability in world commodity markets. Our methodology uses the GTAP model and the set of detailed estimates of distortions to agricultural incentives from the global agricultural distortions project. By aggregating these individual impacts, we are able to evaluate whether domestic prices in each country or region were stabilized or destabilized by price insulating policies, and to assess the impacts on economic welfare of these policies.