A Reappraisal of the Prebisch-Singer Hypothesis Using Wavelets Analysis

Hany Fahmy

doi:10.3390/jrfm14070319

Abstract

The Prebisch-Singer (PS) hypothesis, which postulates the presence of a downward secular trend in the price of primary commodities relative to manufacturers, remains at the core of a continuing debate among international trade economists. The reason is that the results of testing the PS hypothesis depend on the starting point of the technical analysis, i.e., stationarity, nonlinearity, and the existence of structural breaks. The objective of this paper is to appraise the PS hypothesis in the short- and long-run by employing a novel multiresolution wavelets decomposition to a unique data set of commodity prices. The paper also seeks to assess the impact of the terms of trade (also known as Incoterms) on the test results. The analysis reveals that the PS hypothesis is not supported in the long run for the aggregate commodity price index and for most of the individual commodity price series forming it. Furthermore, in addition to the starting point of the analysis, the results show that the PS test depends on the term of trade classification of commodity prices. These findings are of particular significance to international trade regulators and policymakers of developing economies that depend mainly on primary commodities in their exports.

Highlights

The hypothesis that the price of primary commodities relative to those of manufacturers presents a downward secular trend (Prebisch 1950; Singer 1950), or the Prebisch-Singer (PS) hypothesis, is central for least developed economies that specialize in producing and exporting primary products while importing manufacturers
As we will demonstrate shortly, the results show that the PS hypothesis is not supported for all nonlinear stationary free on board (FOB) and cost insurance and freight (CIF)
In addition to the statistical properties of the price series and the starting point of the econometric analysis, we argue that various aggregations and classifications of commodity prices could provide further insights regarding the assessment of the PS hypothesis

Summary

Introduction

The hypothesis that the price of primary commodities relative to those of manufacturers presents a downward secular trend (Prebisch 1950; Singer 1950), or the Prebisch-Singer (PS) hypothesis, is central for least developed economies that specialize in producing and exporting primary products while importing manufacturers. The paper makes a significant contribution to the consensus that the assessment of the PS hypothesis depends on the starting point of the analysis This contribution is twofold: First, the paper reaffirms our understanding that the results of testing the PS hypothesis depend on stationarity, nonlinearity, and the existence of structural breaks in the data generating process. As we will demonstrate shortly, the results show that the PS hypothesis is not supported for all nonlinear stationary FOB and CIF prices in the Grilli and Yang commodity prices that are driven by exogenous transition variables This finding is of particular importance to international trade regulators and policymakers of developing economies that depend mainly on primary commodities in their exports.

Literature Review

Data Description

Wavelets Analysis

Empirical Analysis

Conclusions