This suggests that LIC central banks have not been able to secure low and stable medium-term inflation rates on their own, and their improved inflation performance may therefore have been largely imported. Therefore, if global inflation were to rise, LICs would face the risk of their own inflation rising in tandem, unless steps can be taken to improve their homegrown anti-inflation credibility.

The next chapter extends the examination of the sensitivity of LIC inflation to global shocks by considering the effects of global food prices on domestic food prices and poverty.

# 7. Poverty Impacts of Food Price Shocks and Policies

In August 2011, international food prices hit an all-time high. This followed the 2007-08 food price spike, which pushed an estimated 105 million people into extreme poverty and prompted widespread concerns about the food security of the poorest. Although food prices have been lower in recent years, they are still significantly above their lows in 2000 (Figure 8). In Chapter 7, Laborde, Lakatos and Martin ask three questions:

- How do food price shocks affect EMDEs and LICs?

- How do countries intervene to reduce the impact of food price shocks?

- What was the impact of the 2010-11 food price shock on poverty?

The study adds to the literature by quantifying the degree to which countries intervened during this episode. The chapter also estimates the impact of the 2010-11 food price spike and associated trade policy interventions on poverty using a general equilibrium model complemented with data from household surveys (Laborde, Robichaud, and Tokgoz 2013).

In some respects, the last two food price spikes (2007-08 and 2010-11) resembled earlier, similar episodes: world prices rose rapidly, whereas domestic prices increased only gradually. In other respects, however, the 2010-11 spike was different from previous episodes. The 2007-08 increase in food prices came after a long period of stability in food prices (Ivanic and Martin 2008). In 2007-08, world prices of all staple foods increased steeply, led by a strong increase in the world price of rice. Most countries reacted strongly, by introducing insulating policies.<sup>14</sup> In contrast, the 2010-11 episode occurred when world markets and policies were still normalizing after the 200708 episode. Government interventions differed considerably across countries and commodities, and insulating policies actually dampened the increase in world rice prices.<sup>15</sup> The analysis by Laborde, Lakatos, and Martin yields several major findings. First, food prices can affect poverty through multiple channels, and the effects depend on country characteristics.

> 14 During the 2007-08 food price spike, close to three-quarters of EMDEs took policy action to insulate their domestic markets from the sharp increase in world prices (World Bank 2009).

> 15 Important net rice exporters, such as India, Pakistan, and the Republic of Yemen, implemented policy interventions that raised domestic rice prices more than the increase in the world price. In India, for example, the abolition of export quotas in September 2011 (in place since 2007) coincided with the agricultural marketing season and resulted in a surge of exports and a rise in domestic prices.

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