| Summary: | For individual countries, variable trade
barriers can be used to reduce the volatility of domestic
relative to world prices. If this is done by countries
accounting for a large share of the market, its effect is
offset by increases in world price volatility. This study
shows the nature of the resulting collective action problem,
with the policy being ineffective on average in stabilizing
domestic prices while increasing the volatility of the
income transfers from terms-of-trade changes. A simple
approach to assessing the contribution of insulation to the
price increases is developed and used with new estimates of
agricultural distortions to assess its contribution to the
price spikes in 1972-74 and 2006-08 for rice and wheat. The
analysis suggests that 45 percent of the increase in rice
prices in 2006-08, and 30 percent of the increase in wheat
prices, was due to insulating behavior. One sign of progress
since 1972-74 was a substantial reduction in the extent of
price-insulating behavior by the industrial countries. This
provides little stabilizing benefit in the rice market
because countries not classifying themselves at the World
Trade Organization as developing account for only 3 percent
of world rice consumption. But it does offer some benefit
for the wheat market where non-developing countries account
for 27 percent of consumption.
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