high(low)worldfoodprices,buttheoptimalpolicynolongeraimsatfullcompensationofthelosing
constituency.
4 Foodexportpolicyandthemultipliere¤ect
Theprevioussectionestablishedthat,underlossaversion,thegovernmentofasmalleconomymay
have anincentive touseexporttaxes inresponse tohighfoodpricesininternationalmarkets and
export subsidies to o o¤set t low w prices. . As s discussed, , the aim is s essentially toinsulate the domestic
economyfromlargeinternationalpricechanges. Naturally,atrademeasurebyasmalleconomyin
itself has noe¤ect onworld d markets. . However, , if f all exporting economies s face e similar r incentives
to alter their r trade policy in n the e same direction, , an n e¤ect on the e international price of f foodwill
materializewhichmayinduceafurtherpolicyresponse. Thissectionprovidesaformalizationofhow
smallexporters’collectiveactioninteractswiththeinternationalpriceoffood.
Supposethatthereexistsacontinuumofidenticalsmallcountries,withthesamefeaturesasin
theprevioussectionandindexedalongtheinterval[0;1].Sincewearelookingforsymmetricmarket
equilibria,poset
i
=t8i2[0;1]. Theequilibriumconditionintheinternationalfoodmarketcanbe
writtenas
x(p
t)=m(p
)
(8)
wherem(p)istheglobalimportdemandoffood,16 andx(p t)istheworldexportsupplyde…ned
as
x(p
t)=
Z1
0
x
i
(p
t)di:
Expression(8)implicitlyde…nestheworldpriceasafunctionoftheexportpoliciesofallexporting
countries, p
(t). Whent t = 0, the e international price corresponds s to its free e trade e level l (de…ne
p
(0)p
ft
). Itisalsoimmediatetoprovethatp
isanincreasingfunctionoft,andinparticular
thatdp
=dt2(0;1).
17
Uniformtradepolicyresponsesbyallexporterswillalter theworldpriceof
food. Inparticular,asimultaneousimpositionofexporttaxeswillresultinhigherinternationalprices,
whileexportsubsidieswilldepresstheworldpriceoffood.
The above e consideration and the …ndings s of Proposition n 1 highlight an important interaction
betweenexportpolicyandfoodprices. Governmentsrespondtohigh(low)foodpricesbyimposing
export taxes (subsidies)that,ifappliedsymmetrically,increase (decrease) the worldprice of food.
Thismayinducefurtherincreasesinexporttaxes(subsidies). Werefertothisasthemultipliere¤ect
ofexportpolicy. Whetherthismultipliere¤ectwillmaterializeornotdependsontheconditionsin
globalfoodmarkets.Whentheworldpriceoffoodisatintermediatelevels(p
2
p
;
p
),governments
have noincentive to employ anactive export policy and d the e multiplier e¤ect is dormant. . When,
16This section n abstracts s from
changes in import policy. . Subsection n 6.2 discusses how results change when this
assumptionisrelaxed.
17
De…neF(p
;t)x(p
t) m(p
). Bytheimplicitfunctiontheorem,
dp
dt
dF
dt
dF
dp
=
dx
dp
dx
dp
dm
dp
;
whichbelongsto theinterval(0;1),as dx=dp>0anddm=dp
<0.
10
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instead,aworldpricesurge(fall)raisesgovernments’protectionofconsumers(producers)-asinthe
regionsofcompensatingprotection-,amultipliere¤ectwillcharacterizeexportpolicy.
Forillustrativepurposes,wefocusonthepriceescalatione¤ectofexporttaxes(exportsubsidies,
whichdepresstheworldpriceoffood,canbediscussedinasimilarway). Assumethatanexogenous
shocktotheinternationalmarketoffoodbringstheinternationalpriceunderfreetradeto p
ft
>
p.
Thissituationinduceseachpolicy maker inexportingcountries toimposeanexport taxtoshield
consumersbymaintainingthelevelofthedomesticfoodpriceat
p.Butasallexportersfacethesame
incentiveandact similarly,theinternationalpriceoffoodis pushedupbythefallinworldsupply.
The consequence of this price surge is another roundof exporttaxes that, inturn,leadtohigher
international prices s andevenhigher export taxes. . Note, , however, that di¤erently from the initial
exporttax,whichistheresponsetoashockintheworldfoodmarket,subsequentincreasesinexport
restrictionsarethereactiontotaxessetbyallotherexporters.
ThekeyinsightscanbeinferredbylookingatFigure4. The…guredepicts(i)theoptimalexport
policyfor asmallopeneconomyasafunctionoftheinternationalpriceoffood(t(p
))and(ii)the
international price of foodas s afunctionof the (symmetric) taximposedby exporters (p(t)) -the
latterisdepictedasalinearfunctionforillustrativepurposesonly(seeexample1). Thesolutionto
thesystemmadeupofthesetwofunctions,(p
e
;t
e
),characterizestheequilibriumintheworldmarket
offoodandisrepresentedaspointEinFigure4.
18
INSERTFIGURE4HERE
Theequilibrium canbedescribedas the result ofa process of consecutive tax increases across
exporting countries. . For r the international price p
ft
>
p, the corresponding g export t tax x for each
individualcountryisoptimallysetatlevelt
1
. However,ifallexporterssetataxt
1
,thereisanexcess
demandintheglobalfoodmarketandtheinternationalpriceoffoodincreasestop
1
. Atthisprice,
theinitiallevel of the export tax is ine¢ciently low, andeach policy maker increases restrictions
to t
2
. This s multiplicative e process stops where the international price curve (p
(t)) intersects s the
optimalexportpolicy(t(p
)): atthatpoint,theuncoordinatedbehaviorofexportershascausedthe
equilibriuminternationalpriceoffoodtoincreaserelativetoitsinitiallevelunderfreetrade.
19
WeformallycharacterizetherelationshipbetweenexportpolicyandfoodpricesinProposition2,
inwhichweshowthattheequilibriumreactiontoanexogenousshocktosupplyordemandoffoodis
greaterthanthepartialresponsebyeachexportingcountrytakingthepolicyoftheothersasgiven.
Anyshocktosupplyordemandcanbecapturedbychangesinp
ft
,whichunivocallydeterminesthe
positionoffunctionp
(t)inFigure4.
18
The proof of the uniqueness of this s equilibrium m is s a a straightforward geometric c implication n of the e two o following
generalpropertiesofthemodel: (i)dp=dt2(0;1),(ii)dt=dp =1along theregionsofcompensatingprotectionism.
19
While the focus of f theabovediscussion isonexport taxes, thelogicoftheresultalso appliestoexport subsidies
to foodproducts. Lowpricesinducegovernmentstoo¤ersubsidiestocompensateproducers. However,asallexporters
facesimilarincentivesandenacttheexportpromotionpolicyatthesametime,thee¤ectistoincreasetheexportsupply
offoodinworldmarketsandfurtherdepressprices. Themultipliere¤ectinexportpolicydeterminesanequilibriumof
highsubsidiesandlowfoodpricesrelativeto freetrade.
11
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Proposition2 Alongtheregionsofcompensatingprotectionismidenti…edinProposition1,amulti-
pliere¤ectcharacterizesexportpolicy. Inparticular,itis
dt
dp
ft
=
@t
@p
ft
,
where>1. Thereisnomultipliere¤ectwhentheinternationalpricebelongstotheinterval
p
;
p
.
Intuitively,followingashock tothe priceoffood, amultiplier e¤ectinexport policyispresent
whentheaggregatepolicyresponsetotheshockexceedstheindividualone. Speci…cally,theinitial
export tax (subsidy)imposedbyanindividualexporter inresponsetoahigh(low) priceof foodis
smallerthantheequilibriummeasuresetbythatpolicymakerandbyallotherexportinggovernments.
Example1.Letusprovideasimpleexampleofthismultipliere¤ectforaneconomywithlinear
importdemandandexportsupply. Inparticular,supposex
i
(p t)=+(p t)8i2[0;1]and
m(p
)=  p
,with;; ;2R
+
andwheretisaspeci…cexporttax(orsubsidyiflowerthan
zero).Equilibriumintheworldmarketoffoodimplies
Z1
0
[+(p
t)]di=  p
;
fromwhichweobtaintheworldpriceas
p
=p
ft
+t;
where=(+)andp
ft
(  )=(+)(theuntaxedworldprice).Letusnowanalyzewhat
happenswhenp
ft
>p(thecaseinwhichp
ft
<p
isanalogousandthus omitted). . Alongtheregion
ofcompensatingprotection,eachcountryiposest
i
=p
p. Inasymmetricmarketequilibriumit
holds
(
p =p
ft
+t
t=p p;
fromwhichitresults
t
=
1
1 
p
ft
p
>0:
Thenitis
dt
dp
ft
=
@t
@p
ft
;
where

1
1 
isthelimitofageometricseriesofratio,whichinstandardeconomicterminologyisusuallyreferred
toasthemultiplier.Thismultiplieris…niteandstrictlyhigherthan1as=(+)2(0;1).
12
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5 Foodexportpolicywithlargeexporters
Consideraneconomycomposedofnlarge identicalexporters,eachcharacterizedbythesametech-
nologyandpreferencesas thesmalleconomiesdescribedinSection2. . Theonlycrucialdi¤erenceis
thatlargeexportersdonottaketheworldpriceoffoodasgiven: indecidingtheirtradepolicy,these
countriestakeintoaccountthee¤ectoftheirmeasuresontheworldprice.
Asseenbefore,theequilibriumvalueoftheworldpriceoffoodistheonewhichequalizesimport
demandandexportsupplyoffood. Denotebym(p
)theglobalimportdemandandbyx
i
(p
t
i
)
theexport supply of foodincountry i. . Since e the n countries share thesame fundamentals, it is
x
i
()=x()8i=1;::;n.Equilibriumintheworldmarketimplies
Xn
i=1
x(p
t
i
)=m(p
)
(9)
Theexpressionaboveimplicitlyde…nestheworldpriceasafunctionoftradepolicyofallexporting
countries,p
(t),wheretft
1
;::;t
i
;::;t
n
g. Ift=0,thenp
(0)=p
ft
.
Nowconsideragenericcountryi. Itsoptimalunilateralpolicyistheonewhichmaximizes
G
i
(t
i
;p
(t))=W
i
(t
i
;p
(t))+H
i
(t
i
;p
(t));
(10)
where,asbefore,standardsocialwelfare(i.e. netoflossaversion)isthesumoflaborincome,revenue
fromthespeci…cfactor,consumersurplusandgovernmentrevenue:
W
i
(t
i
;p
(t))=(1 )+(t
i
;p
(t))+CS(t
i
;p
(t))+GR(t
i
;p
(t));
(11)
whilethelossaversiontermisde…nedas
H
i
(t
i
;p
(t)) =
(1 )I
l
h
V
l
(
p) 1 CS(t
i
;p
(t)) GR(t
i
;p
(t))
I
L
h
V
L
(p
(t
i
;p
(t))
CS(t
i
;p
(t)) GR(t
i
;p
(t))
:
Parameters p
and
pare tobe interpretedas follows. . Whenthe e domestic c price e lies inside interval
p
;
p
, theloss s aversiontermis null, , andeachgovernment maximizesfunction(11). . Wheninstead
p>
p(p<p
),thenI
l
=1(I
L
=1),andeachgovernmentmaximizesfunction(10).
Theoptimalpolicychosenbycountryidirectlydependsonthepolicieschosenbyallotherexport-
ingcountries. Thestrategicinteractionofthesecountriescanbedescribedasasimultaneousgame
withnplayers,eachdecidingthetradepolicywhichmaximizesitsownwelfare.Giventhesymmetric
structureofthisgame,welookforsymmetricNashequilibria. Inanalogytothepreviouscaseofsmall
exportingcountries,di¤erentscenariosmustbeconsidereddependingonwhetherornotlossaversion
playsaroleintheproblemofwelfaremaximization.
Ifloss aversiondoes not t playanyrole,thebestresponsefunctionofeachcountryicomes s from
themaximizationof (11), andacandidatesymmetric Nashequilibrium is givenbythesolutionto
thesystem madeupofthen bestresponse functions (onefor eachcountry): : callit
^
t
^
t;::;
^
t
 
.
20
Denoteby^pp
^
t
^
tthedomesticpriceresultingfromalllargeexportersimplementingpolicy
^
t.
If^p2
p
;p
,thenthecandidatesolution
^
t
^
t;::;
^
t
 
isindeedaNashequilibriumofthegame.
20
As is well-known from thetheoryand supportedby y recent t evidence (in particular, Broda etal. . 2008), , countries
thathavepowerininternationalmarketshaveanincentivetosettradepolicyinordertoobtaina terms-of-tradegain
13
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If instead d ^p < p
or ^p > > p, , then H
i
() > > 0 0 8i, loss aversion does play arole, andthe n best
responsefunctionsaredeterminedviathemaximizationof(10)foranycountry i. . Inthis s case,the
equilibriumpolicyof thewholeexportingregionmaybeone of compensating protectionism, where
thepolicymakerofeachcountrychoosesitsexporttax(subsidy)tomaintainthedomesticpriceat
thereservationlevelofconsumers(producers).
Togainanintuitionofthisstatement,supposethat^p>p,anddenoteby
t
t;::;
t
 
thesolution
tothesystemmadeupofthenbestresponsefunctionsobtainedfromthemaximizationof(10)with
I
L
=0andI
l
=1.
21
Ifthecorrespondingdomesticprice(pp
t
t)ishigherthanp,thentax
t
isanequilibriumresultingfromaninterior solution. Ifinsteadpislowerthanp,theequilibriumtax
resultsfromacornersolutioninwhichtisthetaxthatkeepsthedomesticpriceconstantatlevelp.
Ananalogousreasoningholdswhen ^p< < p. . Inthenextpropositionweformallyprovethisstatement
and,inparticular,weshowthat,inanalogytothesmallcountrycase,twointervalsofvaluesforthe
-exogenouslygiven-freetradeworldpriceoffood(p
ft
)exist,forwhichtheequilibriumpolicyofthe
exportingregionisoneofcompensatingprotectionism.
Proposition3 (i)Foranyp
ft
2
p
ft
;
p
c
ft
,theequilibriumpolicyforlargeexportersisataxt(t;:::;t)
such that p
t;p
ft
t = = p p (i.e. . full l consumer compensation). . (ii) ) For any p
ft
2
p
c
ft
;p
ft
,
the equilibrium m policy for large e exporters is a subsidy y s s   (s;:::;s) ) (or a tax if s<0) such h that
p
s;p
ft
+s=p
(i.e. fullproducercompensation).
Asinthesmallcountrycase,alongthetworegionsofcompensatingprotectionism,thelossaversion
e¤ect is so strong that all l governments s set export t policy y tomaintain n their r domestic price at t the
reservationlevel of land owners/producers or workers/consumers. . In n what follows we e show that,
whenthisisthecase,exportpolicyisstillcharacterizedbyamultipliere¤ect.Wecannowenunciate
thefollowing
Proposition4 Alongtheregionsofcompensatingprotectionismidenti…edinProposition3: : (i)coun-
tries’exportpoliciesarestrategiccomplements,thatisdt
i
=dt
i
2(0;1)fori=1;:::;n;(ii)amultiplier
e¤ectcharacterizesexportpolicy,thatis
dt
i
dp
ft
=
@t
i
@p
ft
8i=1;::;n,
where>1.
(theoptimaltari¤argument). It t can beeasilyshownthattheequilibriumpolicyintheabsence of loss aversionisan
exporttax. Speci…cally,welfaremaximizing governmentsset
^
t=
1
[n+(n 1)e]
;
where1=nis the shareof eachcountry’s exportsontotalexports,and is theforeignimport demandelasticity. . The
equilibriumtaxgoestozeroasn!1(asinSection3),anditreachesthestandardoptimalexporttaxlevelforn=1.
Whenever n>2,welfareof exporting countries wouldincrease if they y could coordinate on a a higher export tax(see,
Limao andSaggi,2011,fora formaldiscussionofthispointinthecaseof multiplesymmetricimporters).
21
Thefactthat
t>
^
tisformallyprovenintheproofofProposition3. Itis,however,ratherintuitivethattheoptimal
taxpolicywhenconsumers’loss aversionmatters isstrictlyhigherthantheoptimaltaxwhenit doesnotmatter.
14
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Theintuitionfortheseresultsisstraightforward.Ifcountry iraisesitsexporttax,itcontributes
toincreasetheworldpriceoffood,whichinturnleadscountryitoraiseitsownexporttaxtokeep
itsdomesticpriceconstant(result(i)). This s strategiccomplementarityofthelargeexporters’trade
policiesisasourceofthemultipliere¤ectthat,asdiscussedintheIntroduction,severalpractitioners
have observed d infood markets during the recent crises. . It t magni…es the e¤ects of anexogenous
(common)shocktoexportsupplyorimportdemandoffood(asembodiedinachangeoftheuntaxed
worldpriceoffood)(result(ii)). Agraphicalrepresentationofthemultipliere¤ectforlargeexporters
isprovidedinFigure5inthesimplestcaseoftwoexportingcountriesandlinearimportdemandand
exportsupply(aformalanalysisofthiscaseisdevelopedinExample2below). Theupwardsloping
reactionfunctionsofthetwofoodexporters capturethestrategiccomplementarityofexportpolicy
intheregionoffullconsumercompensation.
22
Anyincreaseinexportrestrictionsbyexporteri will
leadexporter i i tomoveitspolicyinthe samedirection. . If f the worldmarketoffoodishit bya
shock whichdrives upthe (untaxed) international price, the tworeactionfunctions shift outward.
Eachexporterhasanincentivetorestrictitspolicystancetoo¤setconsumers’losses,whichcausesa
multipliere¤ect. Inthenewequilibrium(EinFigure5),thetotalpolicyresponse(fromtheinitial
taxt
e
tot0
e
)isstrictlylargerthantheinitialresponsetotheshock(fromt
e
tot0).
INSERTFIGURE5
Example2. Weprovideanexampleofaworldeconomycharacterizedbylinearimportdemand
andexportsupply. Assumethattwoidenticalexportingcountriesexist,whicharecharacterizedby
exportsupplyx
i
(p
t
i
)=a=2+b=2(p
t
i
)8i=1;2,witha;b2R
+
andwheret
i
isthecountry
i’sspeci…cexporttax(orsubsidyiflowerthanzero). Theimportdemandoftheimportingregionis
insteadgivenbym(p
)=c dp
,withc;d2R
+
. Theworldmarketoffoodisinequilibriumwhen
a=2+b=2(p
t
1
)+a=2+b=2(p
t
2
)=c dp
;
fromwhichweobtaintheworldpriceas
p
=p
ft
+v(t
1
+t
2
);
(12)
wherevb=[2(b+d)]andp
ft
(c a)=(b+d)(asitistheworldpriceobtainedbyposingt
1
=
t
2
=0).
Eachcountryimplementstheexportpolicywhichmaximizesitsownwelfare. Lossaversiondoes
notmatterwheneverthedomesticpriceis"intermediate"(p2
p
;
p
),whileitmatterswhentheprice
is"toohigh"(p>
p)or"toolow"(p<p
).
Firstsupposethatthedomesticpriceisintermediate. Inthis s case,thelossaversiontermisnull
(H
i
= 0), , andeach government maximizes s expression(11). . Under r the linear assumptions of this
example,solvingtheFOCgivesrise(aftersomeelementaryalgebra)tothefollowingtaxasafunction
oftheinternationalprice:
t
i
=
a
b
+p
v:
22
Despitethestrategiccomplementarity,theuniquenessofequilibriuminthispolicygameisensuredbythefactthat,
ingeneral,itholdsdt
i
=dt
i
2(0;1)8i=1;:::;n.
15
Thereactionfunctionofcountry icanthenbesimplyfoundbysubstitutingfor (12) intothislast
equation,thusobtaining
t
i
=
v
1 v2
a
b
+p
ft
+vt
i
.
Posingt
i
=t
i
=
^
t,thesymmetricequilibriumtaxpolicyis
^
t=
v
1 2v2
a
b
+p
ft
:
Tocharacterizetheupper regionofcompensatingprotection,weneedto…ndthevaluesof
p
ft
and
p
c
ft
.Thevalueof
p
ft
is,byde…nition,theonesuchthatthedomesticpriceresultingfrompolicy
^
tbe
equalto
p,thatistosay,
p
^
t;
p
ft
^
t=
p:
Exploitingour linearprice functionin(12)andsubstitutingforthevalueof
^
tfoundabove,wecan
solvefor
p
ft
toobtain
p
ft
=
(1 2v)
a
b
+
p
1 2v
2
1 v
Iftheworldeconomyfundamentalsaresuchthatp
ft
<
p
ft
,thentheequilibriumtaxis
^
t.
Ifp
ft
>
p
ft
instead,lossaversionmatters,andeachgovernmentmaximizesexpression(10). The
stepsnecessarytocharacterize
p
c
ft
areanalogoustothosejusttakentocharacterize
p
ft
.
23
Sincethey
donotaddanyadditionalinsight,weomitthemandstudythestrategicinteractionalongthisupper
regionofcompensatingprotection.
Weknowthat,whenp
ft
2
p
ft
;
p
c
ft
,eachcountryiwantstokeepitsdomesticpriceconstantat
p
i
= p. . Thusitposes s t
i
=p
p. Thereactionfunctionofcountry y icanthenbesimplyfoundby
substitutingfor(12)intothislastequation,thusobtaining
t
i
=
p
ft
p
1 v
+
v
1 v
t
i
:
Giventhatv2(0;1=2),itisimmediatetoprovethatexporttaxesarestrategiccomplements,thatis
dt
i
dt
i
=
v
1 v
>0:
Inasymmetricequilibriumitholds
(
t
i
=
p
ft
p
1 v
+
v
1 v
t
i
t
i
=t
i
fromwhichweobtaintheequilibriumtaxas
t
=
1
1 2v
p
ft
p
>0:
Thenitis
dt
dp
ft
=
@t
@p
ft
;
23Themaximization of (10)givesrisetoanexport tax
t,whichis strictlyhigher than
^
t. This s allows us to …nd the
value of f the e freetrade world price such that the domestic price resulting g from the e equilibrium policy be equal to
p,
that isto say,thatvalueof
p
c
ft
suchthat p
t;
p
c
ft
t=
p. To o …ndtheexplicitvaluefor
p
c
ft
asa functionofallthe
parameters of themodelhowever, wewould further needtospecifyafunctionalformfor both h()andfor theutility
functionu().
16
wherethemultiplierisgivenby

1
1 2v
>1asv<
1
2
:
Ofcourse,ananalogousreasoningcanbecarriedouttoidentifythelowerregionofcompensating
protectionism,andtoshowthestrategiccomplementarityofexportpoliciesandtheexistenceofa
multipliere¤ect.
6 Discussion
The analysis s so far r is based d ontwo mainsimplifying assumptions. . First, , governments s maximize
nationalwelfare. Second,importers s donotaltertheir tradepolicy. . This s sectiondiscusseshowour
centralresultofamultipliere¤ectinfoodexportpolicywillbea¤ectedasweremoveeachofthese
assumptions.Thegoalhereistoguidetheempiricalanalysisofthenextsectionratherthanproviding
acompleteanalyticaldiscussion.
6.1 Politicaleconomy
Alarge bodyoftradeliterature assumesthatowners of speci…cfactors arepolitically organizedto
lobbythegovernment,astheyaregenerallymoreeasilycoalisedintoaninterestgroup. Inapolitical
economycontext,itcanbeshownthatgovernmentsweighmoreheavilyorganizedintereststhat,as
aresult,receivefavorablepoliciesintheformoftari¤protectionorexportsubsidies(Grossmanand
Helpman, 1994). . The e recentworks by FreundandOzden(2008) andTovar (2009) showthat this
resultcarriesovertoasituationwhereproducersfacelossaversion. Similarly,withinthecontextof
ourmodel,itisimmediatetorealizethat,whenthedomesticpriceis "intermediate"(p2
p
;
p
),a
politically motivatedgovernmentwouldsetanexportsubsidy y rather r thanfree tradeinresponseto
lobbyingpressures bylandowners. . Inaddition, , it canbe shownthat thereis s a…rstregionoffull
producercompensationwhenthepriceislow(belowp
),wherethegovernmentsetsanexportsubsidy
givenbycondition(6).
24
Whenthedomestic price is high(p>
p), apolitically motivatedgovernment faces s a a trade o¤
betweenpoliticaleconomyconsiderationsandthelossaversioncausedbyhighfoodprices.However,
itiseasytoprovethatthereisaregionoffullconsumercompensationwherethelossaversione¤ect
isstrong,andthegovernmentwantstokeepthedomesticpriceconstantat
p.
25
Hence,whilepolitical
economyconsiderationsbiastradepolicytowardsthegrantingofexportsubsidies,amultipliere¤ect
ofexportpolicywouldstillresultwhenthefoodpricefallswithintheregionsoffullcompensation.
24
Theproofsofthesestatementsareomittedas theyfollowdirectlyfromFreundandOzden(2008).
25
Weonly sketchtheargumenthere,whilea a detailed proofisavailablefromtheauthors upon request. . De…nethe
politicalwelfareofgovernmentas J= +H,whereH isde…nedasinSection3,while =b+CS+GR,withb>1
representingthepoliticalbias. Thiscanbeinterpretedasthereduced-formofatwostagelobbyinggame,asinGrossman
andHelpman(1994). Denotebys(p
)thepoliticallyoptimalsubsidywhenthedomesticpriceisintermediate,thatis,
when p=p
+s(p
)2
h
p
;
p
i
. This s domesticpriceistheonefor whichG
0
=
0
=0. When-as s aresult of an increase
in theworld pricep-thedomesticpricegrows slightlyabovethe upperthreshold,saywhenp=
p+,wehavethat
G
0
=
0
+H
0
>0, as 
0
=0butH
0
>0. For r a range of smallenough,thesolution to thismaximizationproblem
isa corner r solution inwhichthegovernment t utilizesexportpolicytokeepthedomesticpriceconstantatp=
p. This
policy consistsof f graduallyreducing thesubsidys(p
)as p
growslarge. When n p
growshigherthan
p,theoptimal
policybecomesanexporttax.
17
6.2 Importpolicy
The model presentedinthis paper focuses on n foodexporters. . However, , importing g countries may
respondtochanges in n international prices, whichis s likely toexacerbate situations of stress s inin-
ternationalfoodmarkets. First,amultipliere¤ect t mayariseinimportas wellas inexport policy.
Assumingthat preferencesinimportingcountriesare de…nedas incondition(1)andthat thereis
acontinuum ofidenticalsmallimporters, it is possible toshowthat,similarly totheexporters in
ourmodel,importinggovernmentsfaceincentivestousetradepolicytoinsulatetheirdomesticfood
market. Speci…cally,foragivenexportpolicy,thereareregionsoffullcompensationwheretheob-
jectiveoftradepolicyistopreservethelevelofthedomesticprice of food. . Whenpricesarehigh,
importersprovidefoodimportsubsidiesorlowertradebarriers;whiletheresponsetoalowpriceis
theimpositionoftari¤sonfoodproductsorlowersubsidiestoimports.Asallimportersfaceexactly
thesameincentivesandactsimultaneously,theirtradepolicya¤ectstheinternationalpriceoffood,
creatingamultipliere¤ectsimilartotheonediscussedearlierforexporters.
Second,andmoreimportantly,asdiscussedinAndersonandMartin(2011)andBouetandLaborde
(2011),theinteractionbetweenexporters onthe onehandandimporters ontheothermagnifysit-
uations of stress inworldfoodmarkets. . Speci…cally,if f worldfoodpricesare high, bothexporters
andimporterssettradepolicytoshieldthedomesticmarketfromdevelopmentsintheinternational
market. However, , the joint impositionof higher r export taxes andlower r import t tari¤s s (or r higher
import subsidies)contractsworldsupplyandexpands worlddemand,thusresultinginevenhigher
internationalfoodprices.
26
7 Exportpolicyandthe2008-10foodcrisis
Inthissection,wetestempirically thevalidity of themodel. . Speci…cally, , weexaminewhether r the
patternof exportpoliciesthatcountriesimplementduringperiodsinwhichpricesmoveawayfrom
their referencepointis consistentwithour theoreticalpredictions. . As s a…rst step, , wetest whether
export measures s are relatedwithchanges s in internationalfoodprices. . Wethenexamine e whether
exportingcountriesusetradeinterventionasaresponsetopoliciesimplementedbyothergovernments.
As seeninSections 4and5, , thisbehavior r givesrise toanexportpolicy multipliere¤ectandthus
determinesanequilibriumwhereworldfoodpricesarepushedfurtherawayfromtheirfreetradelevel.
Wethentackletheissueofendogeneityofourtwokeyvariables(exportpoliciesandprices)toverify
therobustnessofourempirical…ndings. Inthe…nalpartofthissection,weevaluatetheimpactof
overallexportpolicychangesoninternationalprices.Giventhetwo-wayrelationshipbetweenexport
policiesandworldprices,wedothisbyestimatingasystemofsimultaneousequations.
Thefocus ofour analysisisthetimeperiod2008-2010,whichischaracterizedbyhighfoodand
othercommodityprices.
27
Duringthisperiod,foodpriceswerealmost60percenthigherthanaverage
26
In terms of Figure4, changes in import t policy can n be captured by shifts s to o the e right of f theinternational price
linep
(t). Clearly,increases s onthe internationalpriceoffoodarea terms-of-tradegainforexporting countriesanda
terms-of-tradelossforimportingcountries. Thissimpleobservationsupportstheviewthatinafoodcrisisnetimporters
havemoretolosecomparedtonet exportersoffood.
27
Whenthedatawerecollected,detailedinformationonexportpolicy,ourmainvariableofinterest,wasonlyavailable
forthesethreeyears(seeSection7.1).
18
pricesduringtheperiod1990-2006. Thissurgeinpriceshasbeenparticularlystronginsomesectors,
namelystaplefoodssuchascereals,wheretheincreaseinaveragepriceswashigherthan90percent.
Alsopricevolatilityhasbeensigni…cantlyhighduringthelastthreeyearscomparedwith1990-2006
(seeTable1). These…guresallowustoassumethatduring2008-2010,priceswereabovetheirreference
level
pforthesetoffoodproductsconsideredinthestudy. Thisisaconvenientsimpli…cation,sinceit
allowsustoundertaketheanalysiswithouthavingtoidentifytheprecisereferencepricefordi¤erent
products,whichisnotalwaysaneasytask. Finally,wefocusontheuniverseofexport t restrictions
ratherthanexportsubsidies.
28
Thisisbecause,consistentlywiththetheory,duringperiodsofhigh
internationalfoodpricescountriestendtouseexportrestrictionstoinsulatethedomesticmarket.
INSERTTABLE1
7.1 Data
Dataonexportandimportpolicyimplementationcomesfromtwodi¤erentsources:theWTOTrade
MonitoringReports(TMR)andfromtheGlobalTradeAlert(GTA)database.Themainobjectiveof
theWTOmonitoringreportsistoincreasethetransparencyandunderstandingofthetradepolicies
andpractices ofmember countriesa¤ectingthe multilateraltradingsystem. . Speci…cally, , the mon-
itoringreports of October 2009, , November r 2010andMarch2011provide informationonthe type
andthestatusoftrade-relatedmeasuresthathavebeenimplementedbygovernmentsafterthe2008
global…nancialcrisis. Thesemeasureshavebeennoti…edby y WTO membersandobserver govern-
mentstothesecretariatoftheWTO.Oursecondsource,theGlobalTradeAlert,isanindependent
monitoringexerciseofpoliciesthata¤ectglobaltrade.TheGTAdatabasenotonlyincludesinforma-
tionondiscriminatorymeasuresprovidedbygovernments,butitalsocontainsinformationcollected
fromexporters,themediaandtradeanalysts. Anevaluationgroupcomposedbyexpertanalystsis
responsibleforassessingthisinformationanddecidingwhethertopublishitonthewebsite.
Atotalof85exportrestrictionshavebeenrecordedinfoodproductsduringthetimeperiod2008-
2010.
29
Theshareoftradethatiscoveredbytheserestrictionssigni…cantlyvariesacrossproducts. For
commodities suchaspalmoilandcocoa,theamountoftradecoveredbyexportrestrictivepolicies
is equalto o 50 and47per r cent respectively. . Inthe e caseof staple products suchas cereals, which
constituteadominantpartofconsumers’dietespeciallyinlowincomecountries,theshareoftrade
coveredbyexportrestrictionsisalsosigni…cant,rangingfrom14percentinthecaseofwheat and
meslintoalmost35percentinthecaseofrice.DetailsareprovidedinTable2.
INSERTTABLE2
28
Asimilarexercisecould,inprinciple,bedonewithexportsubsidiesforperiodswhereinternationalfoodpriceswere
historicallylowandpresentedadownwardtrend,suchasinthesecondhalf ofthe1980s.
29
This …gure is likelyto underestimatethee¤ectivenumber of export measures that have been implemented. . The
reason is that export restrictions recordedin each month often include more than a single measure. . Our r data a sets,
however,donotallowus topreciselydiscernthisinformation.
19
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