The 2008 world food price spikes lead to conflict between the World Bank and food exporters. Motivated by the prospect of food shortages, food exporting countries responded to the food price spikes by restricting their exports just at the time when countries already experiencing a shortage were looking to the world market for relief. In a bid to further encourage exports, food importing countries in some cases even responded by implicitly subsidising imports. These interventions amplified the price spikes and harmed consumers in the intervening countries and beyond. Seeing export restrictions as the root of the problem, the World Bank asked the countries concerned to desist from such practices. But with violence erupting on the streets, some governments felt that their hands were tied to the export restrictive measures. There is an active debate in the literature seeking to understand the policy responses that accompanied and exacerbated the food price spikes.
Over the longer term, supply side policies have depressed farmers’ incentives for some time. The governments of many developing countries have taxed agriculture at significantly higher rates than other sectors or have taxed agriculture indirectly by overvaluing their currencies to pursue import-substitution industrialization strategies. These policies clearly introduce price distortions. It is an open questions as to whether these policies have a negative impact on growth and the income distribution. If government interventions do have adverse effects, the question is why they are so prevalent in developing countries. The political economy literature offers two main explanations. One is that policymakers protect consumers in order to indirectly protect their positions in power. The other is that governments are captured by vested interests in industry.
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