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Research Roundup on Risk, Uncertainty, and Crisis (April 2012)

Food aid


Research roundup on risk, uncertainty, and crisis

red arrowStrengthening food security

red arrowResilience to financial crisis 

Strengthening food security

Under the right conditions, food stocks buffer domestic prices from international price spikes
A potential solution for food-deficit countries is to hold strategic stores that can be released when international prices spike. How large should strategic stockpiles be? This paper develops a dynamic storage market for wheat set in the Middle East and North Africa region where imported wheat is a big part of the average diet. The storage strategy model sets aside wheat stockpiles that can be used when needed to keep domestic prices below a targeted price. If the target is set high and reserves are adequate, the policy can be effective and robust. Contrary to most interventions, strategic storage policies are also counter-cyclical and, when the importing region is sufficiently large, the policy can smooth global prices, as in the case of this region. However, such a strategy is more expensive than a targeted intervention to assist the poor that directly offsets high prices with a subsidy akin to food stamps.

Larson, Donald F., Julian Lampietti, Christophe Gouel, Carlo Cafiero, and John Roberts. 2012. "Food Security and Storage in Middle East and North Africa." World Bank Policy Research Working Paper 6031, April.

Even if carefully designed, food price stabilization policies can have unintended consequences
Most governments in poor countries seek to stabilize the domestic price of staple foods through a combination of storage and trade policies that insulate the domestic market from the world market. The precise nature of these interventions is important to understand because they can lead to large fiscal costs and increase volatility in world food prices. A closer look at a range of policies in a small developing country confronting shocks to both the crop yield and foreign price shows that the optimal trade policy for a single low-income country is to subsidize imports in periods of low domestic availability and tax exports when world prices are high. This arrangement benefits consumers at the expense of producers, because it reduces the occurrence of high prices. A pure storage policy has the opposite effect: it raises the average domestic price because of the increased stock accumulation, and is detrimental to consumers. To efficiently protect consumers from food price volatility, storage policies need flanking trade policies, which can also be worrisome because it forces partner countries to shoulder a larger share of the market adjustment burden.

Gouel, Christophe, and Jean Sébastien. 2012. "Optimal Food Price Stabilization in a Small Open Developing Country." World Bank Policy Research Working Paper 5943, January.

Transfers, diversification, and household risk strategies
This study looks at the impact of a program that combined a traditional safety net with enhancement of households’ ex-ante risk management though income diversification.The micro-evidence on the impact of a pilot program shows a sustained positive impact on consumption and income at average levels of drought two years after the intervention ended.

Macours, Karen, Patrick Premand, and Renos Vakis. 2011. "Transfers, Diversification and Household Risk Strategies: Experimental Evidence with Lessons for Climate Change Adaptation." Draft, November 2011.

How does rainfall risk management influence production decisions?
Rainfall variability is an important source of risk in much of the developing world. How would provision of insurance against this risk affect investment and production decisions by small- and medium-scale farmers? Randomized provision of rainfall insurance among a sample of landowner farmers in a semi-arid area of India was used to examine this question. Although effects on total expenditures were small, increased insurance induces farmers to substitute production activities toward high-return but higher-risk cash crops, consistent with theoretical predictions. These results support the view that financial innovation may help mitigate costs associated with weather variability and other types of risk.|

Cole, Shawn, Xavier Giné, and James Vickery. 2011. "How Does Risk Management Influence Production Decisions: Evidence from a Field Experiment." Paper to be presented at NBER, Universities Research Conference, Cambridge, Mass., May 11-12.

Surges in global food prices in 2010 pushed more people into poverty
Global food prices have risen substantially since mid-2010, along with food prices in many developing countries. Specifically, poverty rose by an estimated average of 1.1 percentage points in low-income countries and 0.7 percentage points in middle-income countries. Overall, an estimated 44 million more people around the world fell below the $1.25 per day poverty line as a result of the price increases. But the impact varied across countries, partly because higher global prices affected local prices differently, and households had different production and consumption patterns. On balance, the adverse welfare impact on net buyers (of whom 68 million entered poverty) outweighed the benefits to net sellers (of whom 24 million were able to escape poverty). As a result, the spikes in food prices pushed up the number of poor people and poverty levels. This conclusion is reached using detailed household-level information on food production and consumption, as well as changes in domestic prices, for 38 agricultural and food commodities in 28 developing countries.

Ivanic, Maros, Will Martin, and Hassan Zaman. 2011. "Estimating the Short-Run Poverty Impacts of the 2010–11 Surge in Food Prices." World Bank Policy Research Working Paper 5633, April. Food Price Watch, April 2011.

Resilience to financial crisis

Bank competition promotes systemic stability
Using bank-level measures of competition and co-dependence, this research shows a robust positive relationship between bank competition and systemic stability. Much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, but this work examines the correlation in the risk-taking behavior of banks (systemic risk). The results suggest that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, with generous deposit insurance and greater government ownership of banks, and public policies that restrict competition.  Furthermore, lack of competition has a greater adverse effect on systemic stability in countries with generous safety nets and weak supervision.

Anginer, Deniz, Asli Demirguc-Kunt, and Min Zhu. 2012. "How Does Bank Competition Affect Systemic Stability?" World Bank Policy Research Working Paper 5981, February.

Subsidiaries of multinationals fared better than local firms during the global financial crisis
Evidence that foreign ownership affected the responses of establishments to negative economic shocks is based on a cross-country panel dataset with detailed information on operation, location, and industry for more than 12 million establishments from 2005–2008. It shows that multinational subsidiaries on average fared better than local firms with similar economic characteristics. Among multinational subsidiaries, enterprises with stronger production and financial links with parent companies showed greater resilience. Finally, in contrast to the crisis period, the impact of foreign ownership and parent-company links on an establishment's performance was insignificant in non-crisis years.

Alfaro, Laura, and Maggie Xiaoyang Chen. 2012. "Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance." World Bank Policy Research Working Paper 5946, January.

Performance incentives in commercial lending affect risk-taking and lending decisions
This paper describes experiments on the behavior of commercial bank loan officers under different underwriting processes and performance pay incentives on loans to small-business entrepreneurs in India. Incentives that penalize bad lending decisions cause loan officers to exert significantly greater screening effort and lead to more profitable lending decisions. Loan officers facing high-powered incentives are more likely to outperform a statistical credit-scoring model and provide risk assessments that are more predictive of their lending decision and the probability of default. Deferring performance pay significantly reduces the ability of high-powered incentives to encourage screening effort. The effect of performance pay on loan officer behavior also varies with experience: more experienced loan officers exert greater screening effort, irrespective of the incentive scheme in place. These results suggest a range of staff incentives to reduce bias and default risk in lending.

Cole, Shawn, Martin Kanz, and Leora Klapper. 2011. "Incentivizing Calculated Risk-Taking: Evidence from a Series of Experiments with Commercial Bank Loan Officers." Paper presented at NBER Corporate Finance meetings, November 2011.

Emerging economies recovered more quickly from the financial crisis
A cross-country incidence study of the 2008-2009 global crisis documents a structural break from the past in the way emerging economies responded to this global shock. Contrary to popular perceptions, emerging market economies suffered growth collapses comparable to, or even larger than, those in advanced economies during the crisis. In response to such a large financial and real shock, most of the world economy came to a halt when the crisis hit, with most countries resuming their pre-crisis growth rates afterward. While emerging economies were not able to avoid the fallout from the economic collapse, they grew at a higher rate during the post-crisis period, relative to before and, as usual, relative to advanced countries. Moreover, emerging economies recovered sooner. This time, emerging economies implemented countercyclical policies and became more like developed countries in their ability to soften the impact of the crisis and pursue expansionary policies.

Didier, Tatiana, Constantino Hevia, and Sergio L. Schmukler. 2011. "How Resilient Were Emerging Economies to the Global Crisis?" World Bank Policy Research Working Paper 5637, April.

Does the fiscal stance of governments before natural catastrophes affect economic recovery afterward?
This research on geological, climatic, and other natural disasters focuses on annual government expenditures and revenues in high and middle-income countries (1975-2008) to determine how governments respond to different types of disasters. Country characteristics proxy for the ability to borrow, and capture whether the availability of non-governmental funds for reconstruction relates to different fiscal behaviors and macroeconomic costs of disasters. On average, budget deficits increase only after climatic disasters, but for lower-middle-income countries, the deficit increase is widespread across all events. The output loss for financially less-developed countries appears to be 2 to 10 percent of GDP, with no significant loss for financially more-developed countries. Disasters do not lead to larger deficit increases or output declines in countries with higher initial government debt, indicating that in this group of countries debt levels seem to proxy for good access to credit rather than tighter credit constraints. Countries with higher financial development suffer smaller real consequences from disasters, but deficits expand further in these countries. Disasters in countries with high insurance penetration also have smaller real consequences, but do not result in deficit expansions. Insurance shows promise as a mitigation approach.

Melecky, Martin, and Claudio Raddatz. 2011. "How Do Governments Respond after Catastrophes? Natural-Disaster Shocks and the Fiscal Stance." World Bank Policy Research Working Paper 5564, February. 

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