Trade exposure and income volatility in cash-crop exporting developing countries

Abstract

World commodity price volatility generates an aggregate macroeconomic risk for the many developing countries that are dependent on the export of a few agricultural commodities. Usual income indicators should therefore take into account the corresponding risk premium, especially for households close to subsistence level. A risk-augmented income distribution would yield a very different ranking of the policies often used to alleviate the domestic impact of world price volatility. This paper gives illustrative examples using simulations generated by a general equilibrium model with random prices for cash crops. Results show that policies that are similar in terms of expected average income can have quite different effects in terms of income variances. Copyright 2004, Oxford University Press.