Abstract
From the 1980s until the early 2000s, many developing governments adopted market liberalization policies due to relatively low agricultural prices and the implementation of structural programs by the IMF. Yet, a paradigm shift occurred with the emergence of the 2008 food crisis, which directed food-deficit governmental bodies to protectionist regimes supporting higher food self-sufficiency. Despite the importance of food autarky to shield domestic food markets, its effects have never been fully discussed in a formalized econometric framework. This article analyses wheat price volatility transmissions from global to local markets in 10 wheat importing countries, identifying the causality with conditional correlation functions (CCF), the degree of volatility transmissions using generalized autoregressive conditional heteroskedasticity (GARCH) models with the dynamic conditional correlation (DCC) specification and potential determinants with a panel analysis. The main findings reveal that a significant unidirectional Granger causality runs from international wheat price to local retail flour prices for wheat importing countries with an approximate five-month lag, the volatility correlations from international to local markets were strengthened around the period of the 2007–08 food crisis and a higher self-sufficiency rate plays a role in alleviating volatility passthroughs from international markets. This evidence that increasing the SSR of an agricultural commodity is effective in isolating the domestic market is valuable for policymakers in food importing countries. The primary beneficiaries of implementing the policy measure are risk-averse producers and consumers because their utility or welfare improves as the price volatility of foodstuffs declines.
Highlights
Between 2006 and 2014, global food price volatilities reduced national food security, in the developing world (Ivanic and Martin, 2008), which caused social and political instability in developing regions, including Africa, Asia and South America (Bellemare, 2014
The analysis found a significant unidirectional Granger causality of wheat price running from international to local markets with approximately five months of lag length as the countries analyzed in this article are small wheat producers that cannot influence international prices
It is concluded that the international wheat price considerably affects the local price in wheat-importing countries
Summary
Between 2006 and 2014, global food price volatilities reduced national food security, in the developing world (Ivanic and Martin, 2008), which caused social and political instability in developing regions, including Africa, Asia and South America (Bellemare, 2014). Many economists who espouse modern economic theories argue that agricultural autarky policies distort markets and create resource allocation inefficiencies (Naylor and Falcon, 2010) They advise that subsidizing farmers or imposing additional import tariffs to hike food self-sufficiency undermine food security in the long term, precluding opportunities for gains in market efficiency (Cramer et al, 1999; Tanaka and Hosoe, 2011)
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