Coping with Rising Food Prices: Policy Dilemmas in the Developing World - Working Paper 164

Rising food prices cause considerable policy dilemmas for developing country governments. Letting domestic prices adjust to reflect the full change in international prices generates inflationary pressures and causes severe hardship for poor households lacking access to social safety nets. Alternatively, governments can use food subsidies or export restrictions to stabilize domestic prices, yet this exacerbates global food price increases and undermines a rules-based trading system. The recent episode shows that many countries chose to shift the burden of adjustment back to international markets. The use of corn and oilseed for the production of biofuel will result in a recurrence of such episodes in the foreseeable future.