Regional Trade and Food Price Stabilisation in South Asia: Policy Responses to the 2007-08 World Price Shocks

World price shocks and disruptions in international cereal trade in 2007 and 2008 caused considerable anxiety and hardship for food importing countries throughout the world. In many countries, high international food prices raised import costs, reduced total supplies for consumers and ultimately led to lower real incomes and food consumption for poor households. In South Asia, Pakistan, Afghanistan, Bangladesh and India were all affected by these movements in international prices, though the effects on domestic prices in each case was mitigated or exacerbated by each country’s own trade policies, as well as the trade policies of its neighbours. Prior to 2007, the general consensus among most economists and food policy analysts was that openness to international trade, particularly private sector trade, was the most efficient mechanism for stabilising domestic food prices and supplies. In light of the 2007-08 experience, however, many observers have concluded that international markets cannot be trusted and that countries should rely on their own domestic production to ensure national and household food security. This paper argues that liberalised international trade still provides the best mechanism for stabilising prices and food supplies in most years, but that appropriate contingency policies are needed for years in which international prices are extraordinarily high.1 More explicit commitments to cereal trade liberalisation within South Asia would also promote region-wide food security and help avoid a repetition of supply disruptions that raised food prices sharply in Afghanistan and Bangladesh. Section II of this paper briefly