Rice price stabilization : contrasting experiences in the Philippines and Indonesia

Nonetheless, all Asian rice economies stabilize their domestic rice prices. This paper attempts to partially bridge the gap between theory and practice by considering theoretical issues that are typically ignored in the analysis of price stabilization programs. The new assessment of costs and benefits argues that a well implemented price stabilization program may improve the efficiency of resource allocation in the economy and thus spur investment and growth. Case studies of price stabilization programs in the Philippines and Indonesia are presented to relate the theory to actual practice. Chapter 2 is a brief introduction to some of the institutional features of the world rice market. The world rice market is a "thin" market, and this results in prices that are more unstable than those in other grain markets. The thinness of the market also leads to a lack of futures markets for countries to use in hedging operations. These considerations make domestic rice price stabilization programs more necessary than price stabilization programs for other grains. Chapter 3 then discusses the range of benefits of food price stabilization programs in terms of human capital, dynamic investment functions dependent on expectations, and macro stabilization. This is a departure from most of the earlier literature on price stabilization in that up to this point most of the theoretical discussion has been largely couched within an overly restrictive static microeconomic framework. Chapter 4 briefly discusses what types of food price fluctuations are the most harmful, and the respective roles of the government and the private sector in ironing out these fluctuations. It is argued that the role of government is most important in stabilizing interannual price fluctuations, while the role of the private sector is most important in dealing with seasonal price movements. Chapter 5 proceeds to a discussion of the direct and indirect costs of food price stabilization, and shows that these costs may be much less than is commonly supposed. The role of fiscal and monetary policy in both closed and open economies is discussed and it is argued that the destabilizing influence of rice price stabilization programs on the government budget and credit markets can be made negligible if the program is financed properly. It is also argued that direct costs in practice are often due not to price stabilization per se, but rather to unnecessary elements of the program that are more properly analyzed as subsidization. Finally, if the costs of operating a buffer stock are viewed in opportunity cost terms, it is seen that government storage in a world of segmented credit markets may be much less costly than is typically thought. Given the above theoretical discussion of the costs and benefits of food price stabilization in the context of specific market failures, Chapter 6 discusses the actual rice price stabilization programs of the Philippines and Indonesia to shed some light on the issue of "government failures" versus market futures, an issue which can only be addressed by reference to specific experience in the real world. Chapter 7 concludes with a brief discussion of how properly implemented food price stabilization may be an important component of stabilization and structural adjustment programs in lower income economies.