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Written by The Financial Express | Updated: Jan 30 2010, 03:25am hrs
This paper* examines the policy dilemmas and challenges faced by developing country governments when confronted with volatile food prices:

When prices were rising, developing countries faced significant policy dilemmas. Confronted with inflationary pressures, increasing poverty and social unrest, the vast majority of governments introduced beggar-thy-neighbour policies that reduced the welfare of particularly food-importing countries and undermined a rules-based trading system. This elicited substantial criticism from multilateral organisations and mainstream economists. Rather than trying to insulate domestic prices, governments should let prices adjust to reflect the change in international prices and use targeted safety nets to compensate the poor. However, safety nets in many developing countries are inadequate. If they are to be used in future episodes of rising food prices, they need to be put in place now. In particular, multilateral organisations should work with governments to implement cash transfer programmes so that the poor can quickly and efficiently be compensated for the loss in purchasing power when food prices rise. It is essential that the new or existing programmes are designed in such a way that they can increase (decrease) the size of the transfer and the number of beneficiaries when the shock occurs (unwinds). That is, they should include an insurance component; this is not a feature that current programmes have. In addition, governments should have mechanisms in place to ensure that when cash transfers need to be expanded, they will have the required fiscal space.

* Nora Lustig, Coping with Rising Food Prices: Policy Dilemmas in the Developing World, Working Paper 0907, Tulane University, 2009