Maurits(Appeldoorn( Student(number(10001986( Thesis(Political(Science( University(of(Amsterdam( 23(June,(2017( ( ( ( ( ( (
For(better(or(for(worse:(food(imports(to(stabilize(
domestic(food(prices(
(
(
A"research"into"the"effects"of"food"sector"globalization"on"the"domestic"
food"price"volatility"in"developing"countries"
( (Abstract(
(
This" research" will" examine" the" relationship" between" the" globalization" of" domestic" food" sectors,"the"vulnerability"of"domestic"food"markets"and"the"domestic"food"price"volatility" developing"countries"experience."A"multiple"linear"regression"analysis"will"be"executed"for" 120"developing"countries"from"all"over"the"world"for"the"period"between"2000"and"2014."It" will"be"shown"that,"contrary"to"conventional"theories"on"the"positive"effects"of"food"imports" as"an"effective"instrument"to"stabilize"domestic"food"prices,"the"globalization"of"domestic" food"sectors"of"developing"countries"has"increased"the"vulnerability"of"their"domestic"food" market."Interestingly,"the"level"of"vulnerability"of"domestic"food"markets"does"not"correlate" with"the"level"of"domestic"food"price"volatility"that"developing"countries"experience."That" should," nonetheless," not" be" a" reason" to" celebrate" the" globalization" of" food" sectors" in" developing"countries."" " " " " " " " " " " " " " " " " " " " (
Table&of&Contents&
Introduction*...*4! Ch.*2*|*Vulnerability*...*9! Ch.*3*|*Imports*as*a*stabilization*mechanism*...*13! Ch.*4*|*Effective*imports*...*16! Ch.*5*|*Globalization*&*trade*stability*...*19! M1:$domestic$food$production*...*19! M2:$Export$diversity*...*22! Z:$domestic$food$price$volatility*...*24! Ch.*6*|*Conceptual*model*...*25! Ch.*7*|*Research*design*...*26! X1:$food$sector$globalization*...*26! X2:$trade$globalization*...*27! M1:$domestic$agricultural$productivity*...*27! M2(a):$export$portfolio$diversity*...*28! M2(b):$size$of$merchandise$exports*...*29! Y:$domestic$food$market$vulnerability*...*30! Z:$domestic$food$price$volatility*...*30! Descriptive$statistical$results*...*32! Control$variables*...*32! M1:$domestic$food$production!...!32! M2(a):$export$portfolio$diversity!...!33! M2(b):$total$merchandise$export!...!34! Results*&*Discussion*...*35! Models$1$&$2*...*35! Models$3$&$4*...*35! Models$5$&$6*...*36! Models$7,$8$&$9*...*37! Model$10*...*38! Conclusion*...*40! Literature*...*42! ( ( ( ( ( (Introduction(
& On&17&December&2010,&Mohamed&Bouazizi&committed&suicide&by&setting&himself&on&fire& on&the¢ral&square&of&his&hometown&‘Sidi&Bouzid’.&Bouazizi&was&a&26&years&old&merchant& of&fruit&and&vegetables.&Earlier&that&week,&he&had&an&argument&with&a&local&police&officer& (a&woman&called&Fedia&Hamdi)&about&the&place&where&he&was&allowed&to&sell&his&goods.& The&officer,&so&the&story&goes,&slapped&him&in&his&face.&Bouazizi&could¬&longer&stand&the& humiliation& by& the& Tunisian& government& that& he& experienced& on& a& daily& basis& and& committed&suicide.&The&same&day,&hundreds&if¬&thousands&of&people&gathered&on&the& square,&sharing&Bouzaiz’s&frustration&about&the&government’s&humiliation&of&the&citizens.& One&day&later,&dictator&Ben&Ali&send&in&2000&police&officers&to&quell&the&unrest.&Two&citizens& were&killed.&In&the&days,&weeks,&months&and&even&years&that&followed,&the&riots&spread&like& a& wildfire& through& North& Africa& and& the& Arabian& Peninsula.& Only& a& few& weeks& later,& thousands&of&Egyptians&gathered&on&the&infamous&Tahrir&Square,&soon&to&become&a&symbol& of& the& Egyptian& Revolution,& to& call& for& “bread,& dignity& and& social& justice”& (Kinninmont,& 2012:&1).&Bouazizi’s&frustration&literally&and&figuratively&sparked&what&Tunisians&call&the& ‘Jasmine&revolution’&(Day,&2011).&&& Interestingly,& in& Europe& these& revolutions& have& been& called& ‘the& Arab& Spring’.& Conventional& media& framed& the& uprisings& as& a& call& for& more& freedom& and& democracy& (Medzini,&2014).&Although&the&lack&of&political&liberty&under&the&authoritarian®imes&has& contributed&to&the&frustration&among&the&citizens&of&Egypt,&Tunisia,&Libya,&Syria&and&other& countries,&rising&food&prices&have&been&identified&as&a&root&cause&of&the&conflict&(Stenberg,& 2013).& Rising& food& prices& result& in& food& insecurity,& which& directly& impacts& the& lives& of& people.&The&rise&of&the&food&prices&within&those&countries&correlated&with&a&substantial& increase&in&global&food&prices&in&2010.&Moreover,&the&food&price&spike&of&2010&was&the& second&one&in&a&relatively&short&period&of&time.&Only&three&years&earlier,&in&2007,&the&global& food& prices& had& already& increased& dramatically.& Not& coincidentally,& these& global& price& spikes&specifically&and&food&price&volatility&in&general&have,&since&then,&been&the&subject&of& scientific&research&and&political&debate.&& & The&global&food&price&spikes&were&expressions&of&a&more&general&trend&that&has& been&called&‘food&price&volatility’.&One&may&ask&whether&or&to&which&extent&the&global&food& price&spikes&of&2007&and&2010&were&irregular&expressions&of&global&food&price&volatility.& Gilbert&and&Morgan&examined&this&question&and&found&that,&from&a&historical&point&of&view,&
the&global&price&spikes&were¬&unique.&Global&food&price&volatility&was,&in&general,&lower& since&the&dawn&of&the&most&recent¢ury&than&before&(Gilbert&&&Morgan,&2010).&Notably,& their&research&has&been&executed&in&2010,&before&the&second&price&spike.&According&to& most&observers,&the&global&price&volatility&has&been&rising&since&2006&(HLPE,&2011).&& & Food&price&volatility&is&an&important&dimension&of&food&security,&which&is&defined& by&the&Food&and&Agricultural&Organization&of&the&United&Nations&(FAO)&as&“a(situation&that& exists&when&all&people,&at&all×,&have&physical,&social&and&economic&access&to&sufficient,& safe&and&nutritious&food&that&meets&their&dietary&needs&and&food&preferences&for&an&active& and& healthy& life”& (FAO,& 2002:& paragraph& 2.2).& Food& security& in& general& and& food& price& volatility&specifically&might¬&be&a&subject&of&debate&or&consideration&anymore&for&most& citizens&in&most&developed&countries.&In&developing&countries,&however,&both&are,&since& they& are& vital& determinants& of& economic& and& social& development& and& the& fight& against& poverty.&&
Food&price&volatility,&which&is&a&metric&of&the&instability&of&food&prices,&is&important& for&lowaincome&countries&in&particular&for&two&reasons.&First&of&all,&most&of&the&citizens&of& those& countries& are& dependent& on& agricultural& production& for& their& income.& If& the& agricultural&prices&vary&heavily,&farmers&cannot&plan&ahead&and&invest&safely,&which&will,& in& the& long& run,& undermine& their& economic& development.& This& also& exacerbates& the& economic&development&gap&between&rich&and&poor&farmers&as&the&former&groups&is&better& able&to&cope&with&volatility&and&its&consequences&than&the&latter&(Ceballos&et&al.,&2017:&305;& Clapp,&2009:&1189).&Secondly,&for&the&urban&population&of&lowaincome&countries,&price& variations&matter&because&they&spend&a&substantial&part&of&their&budget&on&food.&Great& variations& in& price& harms& them.& Not& only& because& it& makes& them& uncertain,& but& also& because&it&undermines&their&chance&of&economic&planning&and&investing&(Gouel&&&Jean,& 2012:&2).&Moreover,&in&contrast&to&developed&countries,&both&consumers&and&producers&in& developing&countries&are¬&insured&for&these&price&variations,&because&of&which&they&are& unable&to&compensate&the&food&price&volatility&(Gouel&&&Jean,&2012:&2).& & Food&price&volatility&matters,&especially&for&the&global&poor.&As&the&subject&gained& international&attention,&the&research&into&it&increased&as&well.&Many&researches&focused&on& either&the&causes&or&the&consequences&of&food&price&volatility.&Numerous&scholars&have& shown& that& export& restrictions& have& contributed& to& the& food& price& spikes.& Due& to& bad& harvests&Russia&and&Vietnam&(among&others)&set&up&export&bans&for&respectively&wheat& and& rice.& Other& exporting& countries,& overreacting,& followed& the& example& and& banned&
exports& as& well.& This& lead& to& a& substantial& decrease& in& global& supply,& which& arguably& increased& the& price.& Importing& countries& experienced& the& adverse& effects& of& those& developments&(Von&Braun,&2008;&Mitra&&&Josling,&2009;&Headey,&2011;&Fader&et&al.,&2013;& Puma&et&al.,&2015).&These&analyses&explain&(partly)&the&increased&volatility&of&international& food&prices.&They&do¬,&however,&necessarily&explain&the&increased&volatility&of&domestic& food&prices.&Moreover,&they&do¬&explain&what&has&determined&the&differences&among& countries&in&the&extent&to&which&they&experienced&a&rise&in&domestic&food&price&volatility.&& ( There&are&multiple&ways&to&examine&domestic&food&price&volatility&in&general,&the& recent&increase&specifically&and&the&differences&in&experiences&among&countries&in&those& regards.& To& get& a& grasp& of& the& subjects& one& has,& first& of& all,& to& determine& the& causes& of& domestic&food&price&volatility.&Within&the&literature&a&lot&of&causes&for&food&price&volatility& (and,&more&precise,&the&increase&in&food&price&volatility&of&the&recent&decade)&have&been& given.&Gilbert&(2010)&argues&that&the&economic&growth&of&India&and&China&has&increased& the&demand&of&food&rapidly.&Another&often&mentioned&and&examined&cause&for&food&price& volatility& is& the& biofuel& industry& (Abbot& et& al.,& 2008;& Mitchell,& 2008;& Chakravorty& et& al.,& 2010).&Thirdly,&oil&prices&determine&food&prices&directly&according&to&Alghalith&(2010).&It& has& been& argued& that& there& are& volatility& spillaovers& from& the& oil& to& the& food& market& (Nazlioglu&et&al.,&2013;&Du&et&al.,&2011).&Fourthly,&speculation&on&financial&markets&may& have&contributed&to&food&price&volatility&(Robles&et&al.,&2009;&Gilbert,&2010;&Shi&&&Arora,& 2012).&There&seems&to&be&no&consensus&about&this&effect,&though&(Wright,&2011;&Kornher& &&Kalkuhl,&2013:&5).&In&general,&one&could&argue&that&supplyaside&factors,&demandaside& factors,& macroeconomic& factors,& as& well& as& transactions& costs,& agricultural& policies& and& international&prices&partly&determine&domestic&food&price&volatility&(Kornher&&&Kalkuhl,& 2013:&9).&
& There&has&been&going&on&a&fractured&and&antagonistic&debate&about&the&relationship& between&trade&and&food&security&in&general.&Most&empirical&studies,&however,&argue&that& trade& liberalization& increases& food& security& as& it& stabilizes& domestic& consumption& (Thomas,& 2006;& McCorriston& et& al.,& 2013).& Some& scholars& have& examined& whether& international&trade&and&the&liberalization&of&trade&as&a&part&of&economic&globalization&have& had&an&effect&on&food&price&volatility&(Schanbacher,&2010;&Oliveira&&&Schneider,&2016).& That&seems&reasonable&to&examine,&if&one&considers&that&24%&of&food&that&is&consumed& (D’Odorico&et&al.,&2014),&24%&of&global&agricultural&land&(Weinzettel&et&al.,&2013)&and&23%&
of& all& fresh& water& used& for& food& production& (D’Odorico& && Rulli,& 2013)& has& directly& or& indirectly&been&the&subject&of&international&trade.&
& Kornher& and& Kalkuhl& state& that& “the& impact& of& trade& policies& [on& domestic& food& price]&depends&on&the&extent&international&prices&are&transmitted&to&domestic&markets”& (2013:&6).&Basically,&what&they&argue&is&that&trade&policies&may&affect&the&domestic&food& price,&but&only&insofar&as&international&prices&are&transmitted&to&domestic&prices.&The&level& of&transmission&from&international&prices&to&domestic&ones&may&explain&the&difference&in& food&prices&between&countries.&But,&the&fact&that&prices&are&to&some&extent&transmitted& from&international&to&national&markets&does¬&necessarily&imply&that&price"volatility&is& transmitted& as& well& from& international& to& domestic& markets.& Ceballos& et& al.& found& empirical& evidence,& though,& that& international& prices& and& their& volatility& have& been& transmitted&to&domestic&markets&(2017).&This&might&provide&a&useful&insight&to&explain& why&some&countries&(similar&in&relevant&aspects)&experienced&more&price&volatility&than& others.&& Another&way&of&framing&this&question&is&to&try&to&determine&to&which&extent&countries& are&susceptible&to&price&volatility.&Such&a&kind&of&research&does¬&focus&on&the&causes&of& domestic&or&international&food&price&volatility,&nor&how&these&two&relate&to&each&other& (through&transmission),&but&on&how&vulnerable&a&country&is&to&the&causes&of&food&price& volatility.&Resilience&is&one&of&the&determinants&of&a&government’s&economic&vulnerability.& It&concerns&the&ability&to&manage&shocks&and&to&handle&them&adequately&(Guillaumont,& 2009;& De& Gennaro& && Nardone,& 2014:& 242).& The& kind& of& research& that& focusses& on& the& resilience&of&states,&rather&than&the&root&causes&of&domestic&food&price&volatility&has&got& much&less&attention&within&scientific&and&political&debates.&Moreover,&within&the&age&of& globalization&it&seems&reasonable&to&examine&whether&the&globalization&of&domestic&food& markets& has& affected& resilience& to& the& causes& of& domestic& food& price& volatility& of& developing& countries.& Within& the& literature& such& a& research& has,& to& my& knowledge,& not& been&executed.&This&is&the&gap&I&will&fill&with&this&research.&The&main&question&this&research& will&try&to&answer&is:&
(
What" is" the" effect" of" food" sector" globalization" on" the" domestic" food" price" volatility" of" developing"countries?"
This&thesis&is&structured&as&followed.&After&this&introduction,&it&will&explicate&the&general& theory& of& economic& vulnerability.& Subsequently,& in& chapter& three,& this& theory& will& be& related&to&import&and&export&patterns&of&developing&countries.&According&to&most&scholars& on&this&subject,&imports&should&be&used&as&an&instrument&to&stabilize&domestic&food&prices.& In& the& fourth& chapter,& this& research& will& dive& deeper& into& the& mechanisms& of& trade& in& general&and&imports&specifically.&It&will&be&shown&that&the&extent&to&which&countries&are& able& to& effectively& use& imports& as& a& stabilization& instrument& depends& on& their& export& sector.&In&the&fifth&chapter,&it&will&be&argued&that&globalization,&according&to&the&literature,& has& had& dubious& effects& on& both& the& size& of& food& imports,& as& well& as& the& diversity& of& merchandise& exports& of& developing& countries.& Based& on& that& literature& and& empirical& evidence,&six&hypotheses&will&be&drawn:&
&
a! H1:"the"globalization"of"the"food"sector"has"deteriorated"the"local"food"production"in" developing"countries."
a! H2(a):" trade" globalization" has" decreased" the" diversity" of" the" export" portfolio" of" developing"countries."
a! H2(b):" the" diversity" of" the" export" portfolio" has" a" positive" effect" on" the" size" of" the" export"sector"of"developing"countries." a! (H3)"the"domestic"production"of"cereal"has"a"negative"effect"on"the"vulnerability"of" the"domestic"food"markets;" a! (H4)"the"size"of"the"merchandise"exports"has"a"negative"effect"on"the"vulnerability"of" the"food"markets"in"developing"countries;" a! (H5)"cereal"import"tariffs"have"a"negative"effect"on"the"vulnerability"of"food"markets" in"developing"countries." a! (H6):"food"market"vulnerability"has"a"positive"effect"on"domestic"food"price"volatility" within"developing"countries." &
These& hypotheses& will& be& tested& empirically& in& chapter& eight& after& providing& the& conceptual& model& in& chapter& six& and& conceptualizing& the& variables& and& the& control& variables&in&chapter&seven.&In&other&words,&the&results&of&the&multiple&linear®ression& analysis& will& be& provided& and& discussed& in& chapter& eight.& In& chapter& nine& it& will& be& concluded&that&the&globalization&of&food§ors&in&developing&countries&has&increased&the&
economic&vulnerability&of&their&domestic&food&markets.&However,&vulnerability&does¬,& surprisingly,&as&will&be&shown,&correlate&with&domestic&food&price&volatility.&&
&&
Ch.(2(|(Vulnerability(
(
This& chapter& focusses& on& the& concept& of& economic& vulnerability,& which& is& arguably& an& important&determinant&of&domestic&food&price&volatility.&The&chapter&starts&with&a&short& introduction& into& the& causes& and& determinants& of& domestic& food& price& volatility.& Subsequently,& the& inelasticity& of& food& markets& will& be& examined.& The& determinants& of& domestic&food&price&volatility,&as&well&as&the&inelasticity&of&food&supply&and&demand&form& the&basis&on&which&the&concept&of&economic&vulnerability&and&its&relevance&in&relation&to& domestic&food&price&volatility&will&be&founded.& & A&lot&of&authors&have&tried&to&examine&which&factors&affect&domestic&food&price&volatility.& Multiple&factors&have&been&examined&recently:&oil&prices&(Alghalith,&2010;&Nazlioglu&et&al.,& 2013;&Du&et&al.,&2011),&financial&speculation&(Robles&et&al.,&2009;&Gilbert,&2010;&Shi&&&Arora,& 2012;&Wright,&2011;&Kornher&&&Kalkuhl,&2013:&5)&and&the&biofuel&industry&(Abbot&et&al.,& 2008;& Mitchell,& 2008;& Chakravorty& et& al.,& 2010)& among& others.& These& factors& partly& determine&domestic&food&price&volatility&because&they&affect&the&supply&or&demand&side&of& the&domestic&food&market.&The&biofuel&industry,&for&example,&might&have&an&effect&on&the& global&supply&of&food&commodities.&If&the&price&of&biofuels&rises,&it&becomes&interesting&for& farmers&to&change&the&crops&they&produce&from&food&commodities&to&crops&that&are&used& to&produce&biofuels.&If&that&is&correct,&then&the&supply&of&food&commodities&decrease,&which& will&lead&to&a&food&price&increase.&& & As&the&example&above&shows,&the&proposed&factors&could&affect&domestic&food&price& volatility.&They&could&either&affect&the&domestic&food&price&volatility&because&they&affect& the&domestic&food&supply&and&demand&directly&or&indirectly.&If&the&farmer&in&the&example& above,& who& switches& from& food& to& biofuel& crops,& would& only& produce& for& the& domestic& market,&the&change&would&directly&affect&the&amount&of&domestic&food&supply.&But,&it&could& also&be&the&case&that&the&farmer&affects&the&food&supply&of&another&country.&If&the&farmer& would&export&(a&part&of)&its&products,&the&switch&would&decrease&the&global&food&supply.& This&will&harm&the&food&price&stability&of&countries&that&import&food:&as&the&international& price&of&food&will&increase&due&to&a&decrease&of&supply,&given&that&international&demand&
will&remain&stable,&the&price&of&imports&will&increase&and,&thus,&the&domestic&food&price& will& increase& as& well.& The& farmer’s& switch& could,& therefore,& affect& domestic& food& price& volatility& directly& through& the& domestic& market,& as& well& as& indirectly& through& the& international&market.&In&other&words,&domestic&food&price&volatility&can&either&result&from& shocks&in&domestic&or&international&food&supply&and&demand&(Kornher&&&Kalkuhl,&2013:& 9;&Gilbert,&2010;&Christiaensen,&2009).&& & According&to&conventional&economic&theory,&supply&and&demand&interact&with&each&other.& This&implies&that&changes&in&the&former&lead&to&changes&in&the&latter&and&vice&versa.&If&the& food&supply&decreases,&the&food&price&increases&and&the&food&demand&will&decrease.&This& will&reastabilize&the&food&price.&If&the&food&demand&increases,&the&food&price&increases&and& the& food& supply& increases,& which& will& again& reastabilize& the& food& price.& Conventional& economic&theory&presupposes&that&in&a&perfect&market&prices&will&continuously&reach&an& equilibrium& as& supply& and& demand& mutually& adjust& to& each& other.& However,& a& perfect& market&presupposes&that&supply&and&demand&are&elastic,&which&entails&that&they&would& adjust&in&accordance&with&price&changes.&For&example,&that&supply&would&increase&if&the& price&would&increase&and&that&demand&would&decrease&if&the&price&would&increase.&& & Food& markets& are,& however,& not& perfect& in& that& sense.& Both& food& supply& and& demand& are& inelastic.& Food& supply& is& inelastic& because& the& production& of& food& takes& a& relatively&long&period&of&time.&The&production&chain,&which&runs&from&planting&the&seed&to& selling&it&in&a&store,&may&take&months.&Farmers&cannot&or&will¬&adjust&the&amount&of& food&commodities&they&produce&due&to&price&changes.&They&cannot&instantly&produce&more& if&the&price&rises&and&they&will¬&produce&less&if&the&price&drops.&The&demand&side&is,& arguably,&a&little&bit&more&elastic.&Food&is&a&primary&commodity,&which&entails&that&people& demand&a&certain&minimum&whatever&the&price&is.&Even&if&people&cannot&afford&it&due&to& extreme&price&increases,&they&will&still&demand&food.&The&demand&for&food,&however,&does& not&grow&extensively&if&food&prices&decrease.&At&some&point,&people&simply&are&saturated& in&the&sense&that&they&have&had&enough.&As&the&purchasing&power&of&people&increases,&the& demand& for& luxury& food& commodities& may& increase.& But& even& for& those& commodities,& demand&has&a&certain&threshold.&This&especially&holds&for&staple&foods&(Gilbert&&&Morgan,& 2010:&3025a3026).&Due&to&the&inelasticity&of&food&supply&and&demand,&domestic&food&price& volatility&looms.&
Shocks&in&international&and&domestic&food&supply&and&demand&may&be&considered&to&be& the& direct& causes& of& domestic& food& price& volatility.& They& are,& however,& not& the& only& determinants&of&domestic&food&price&volatility.&In&general,&one&could&argue&that&domestic& food& price& volatility& is& determined& by& the& extent& to& which& states& are& vulnerable& to& it.& Economic&vulnerability&entails&three&aspects:& & 1.! Shocks"in"international"and"domestic"supply"and"demand" 2.! A"state’s"exposure"to"those"shocks" 3.! A"state’s"resilience"against"those"shocks" & Shocks&in&international&and&domestic&supply&and&demand&can&either&be&endogenous&or& exogenous.&The&former&(1a)&refers&to&supply&and&demand&shocks&that&are&the&direct&result& of& governmental& policies.& For& example,& export& bans& and& import& tariffs.& The& latter& (1b)& refers&to&shocks&that&are&beyond&the&reasonable&control&of&governments.&For&example:& supply&shocks&due&to&extreme&weather&conditions.&One&could,&moreover,÷&shocks& into& internal& and& external& ones.& Internal& shocks& (1c)& arise& from& changes& in& domestic& patterns& of& production& and& consumption.& External& shocks& (1d)& arise& from& changes& in& international&processes&of&supply&and&demand.&Shocks&can&be&exogenous,&while&internal.& An&example&would&be&if&harvests&would&fail&due&to&bad&weather&conditions.&Shocks&can& also&be&endogenous&while&external.&For&example,&if&a&sudden&increase&in&import&tariffs& would&decrease&the&amount&of&goods&imported.&
The& extent& to& which& shocks& in& international& and& domestic& supply& and& demand& arise,& depends,& as& has& been& shown& previously,& partly& on& the& elasticity& of& supply& and& demand&patterns.&In&other&words,&it&depends&on&the&extent&to&which&supply&and&demand& patterns&could&mitigate&shocks&to&reach&price&equilibria&through&the&interaction&among& each&other.&If&supply&and&demand&are&elastic,&shocks&in&the&former&will&be&compensated&by& the& latter& and& vice& versa.& As& has& been& argued& previously,& however,& food& supply& and& demand&are¬&elastic,&which&hinders&this&process.&This&makes&food&markets&susceptible& to&shocks&in&international&and&domestic&supply&and&demand.&Whether&this&susceptibility& also&leads&to&actual&domestic&food&price&volatility&depends&on&two&other&determinants&as& well:&a&state’s&exposure&to&economic&shocks&and&a&state’s&resilience&to&economic&shocks.& Together,&they&comprise&the¬ion&of&economic&vulnerability.&&
Exposure&refers&to&the&extent&to&which&a&state&could"be"affected&by&shocks&in&supply& and& demand.& In& other& words,& if& a& shock& in& either& domestic& or& international& supply& or& demand&would&arise,&to&which&extent&would&this&affect&the&domestic&food&price&volatility& if&one&does¬&take&other&mitigating&factors&into&consideration.&This&depends&on,&among& others,&the&state’s&location,&the&structure&of&its&economy&and&the&extent&to&which&it&trades& internationally& (Guillaumont,& 2009;& De& Gennaro& && Nardone,& 2014:& 242;& Seekell& et& al.,& 2017:&3).&&
The&resilience&of&a&state&can&be&described&as&the&extent&to&which&the&state&is&able&to& respond,& manage& and& adapt& to& changes& in& the& equilibrium& of& supply& and& demand.& The& resilience&of&a&state&does¬&necessarily&refers&to&its&capability&to&prevent&disequilibria&in& food&supply&and&demand&from&arising.&That&would&be&impossible&due&to&production&and& consumption&variability&and&unintended&in&free&markets,&even&if&no&international&trade& takes&place.&So,&the&resilience&of&a&state&can&be&understood&as&the&extent&to&which&a&state&is& capable&of&withstanding&and&recovering&from&disequilibria&in&food&supply&and&demand& (Guillaumont,&2009;&De&Gennaro&&&Nardone,&2014:&242;&Seekell&et&al.,&2017:&3).&& & Resilience&can&be&ascribed&to&multiple&dimensions&of&the&economy.&A&state&could&be& resilient,& which& refers& to& the& macroeconomic& dimension.& Mesoeconomic& resilience& is& a& determinant&of&the&ability&of&a&particular§or&or&industry&within&a&state&to&withstand& and& recover& from& disequilibria.& And,& at& the& household& level,& microeconomic& resilience& entails&the&capacity&of&individuals&to&manage&disequilibria&effectively.&Moreover,&resilience& has&a&static&and&a&dynamic&component.&The&former&refers&to&the&ability&of&a&system&(states,& sectors& or& households)& to& remain& functional& when& a& disequilibrium& arises.& The& latter& refers&to&the&speed&of&recovery&of&a&system.&The&static&resilience&of&a&system&is&determined& by&its&capacity&to&effectively&use&the&resources&that&already&exist&and&contribute&to&the& resilience&of&a&system.&One&might&think&of&savings&that&states,&companies&or&individuals& have& to& spend& whenever& the& price& is& high& due& to& a& sudden& change& in& the& supply& and& demand&equilibrium.&The&dynamic&resilience&of&a&system&is&determined&by&its&capacity&to& enhance& the& already& existing& resilience& resources.& That& could,& for& example,& entail& the& optimization&of&the&amount&of&savings&one&has&(Rose&&&Krausmann,&2013:&74).&&&
&
In& this& chapter,& it& has& been& argued& that& domestic& food& price& volatility& has& four& main& sources:& international& or& domestic& shocks& in& supply& or& demand.& These& can& arise& from& multiple&factors,&like&the&development&of&biofuel&production.&In&perfect&markets,&changes&
in& supply& will& be& compensated& by& adjustments& in& demand& and& vice& versa.& Due& to& its& inelasticity,& however,& the& food& market& does& not& necessarily& or& directly& meet& that& expectation.&That&is&why&food&markets,&in&general,&are&susceptible&to&price&volatility.&The& extent&to&which&domestic&food&markets&experience&food&price&volatility&is&dependent&on& the&extent&to&which&they&are&economically&vulnerable&to&it.&A&state&is&vulnerable&if&shocks& arise,&the&state&is&exposed&to&them&and&it&is¬&resilient&against&them.&The&extent&to&which& a& country& trades& in& food& commodities& affects& all& three& dimensions& of& economic& vulnerability.&Trade&might&impose&shocks&on&the&international&market&if&a&large&exporting& state& decides& to& stop& exporting.& Secondly,& an& increase& in& imports& may& make& countries& more&exposed&to&shocks&in&international&supply&and&demand.&And&thirdly,&trade&may&be&a& source& of& resilience:& imports& may& make& countries& more& resilient& against& shocks& in& domestic&supply&and&demand.&Whether&or&to&which&extent&these&assumptions&are&correct& according&to&the&literature,&will&be&discussed&in&the&next&chapter.&& &
Ch.(3(|(Imports(as(a(stabilization(mechanism(
( Domestic&food&price&volatility&has&four&main&sources:&shocks&in&domestic&or&international& food& supply& and& demand& (Kornher& && Kalkuhl,& 2013:& 9;& Gilbert,& 2010;& Christiaensen,& 2009).& The& extent& to& which& states& actually& experience& domestic& food& price& volatility,& however,&is&partly&determined&by&its&exposure&to&and&resilience&against&those&shocks.&As& has&been&argued,&trade&is&or&at&least&could&influence&food&price&shocks,&states’&exposure& and&their&resilience.&This&chapter&will&focus&on&the&arguments&that&trade&globalization,&and& more&specifically&imports,&stabilizes&domestic&food&prices&because&it&would&promote&the& resilience&of&states.& &Food& production& is,& especially& in& developing& countries,& unstable& due& to& a& number& of& conditions,& most& importantly& unpredictable& weather& conditions.& Food& consumption& varies&as&well&due&to&changing&income&patterns&(Van&Dijk,&2011).&This&results&in&unstable& domestic&supply&and&demand.&Moreover,&as&has&been&argued&in&the&previous&chapter,&food& supply&and&demand&are&inelastic,&which&means&that&shocks&in&either&supply&or&demand& will¬&(completely)&be&mitigated&by&changes&in&supply&or&demand.&&
& The&situation&in&which&domestic&food&production&and&consumption&patterns&are& unstable,& while& domestic& food& supply& and& demand& are& inelastic,& amplifies& the& risk& of&
domestic& food& price& volatility.& Due& to& the& inelasticity& of& food& supply,& it& cannot& absorb,& mitigate&or&compensate&the&instability&of&food&consumption&patterns.&If&the&domestic&food& consumption& increases,& due& to& increased& economic& prosperity& for& example,& domestic& suppliers&cannot&directly&produce&more&to&meet&the&increased&demand.&This&will&lead&to&a& spike& in& domestic& food& prices& as& the& demand& grows,& but& the& supply& does& not.& If& the& domestic& food& production& falls& short,& due& to& bad& weather& conditions& for& example,& the& domestic&food&demand&will¬&directly&decrease&substantively&as&people&still&need&to&feed& themselves.&This&will,&too,&lead&to&a&price&spike.&& & Trade&patterns&could&be&a&source&of&shocks&in&domestic&and&international&food&supply&and& demand.&Exports&determine&the&total&supply&on&the&world&market.&If&an&exporting&country& decides&to&cut&exports,&the&international&supply&decreases&and&the&international&prices&will& rise.& This& would& have& indirect& consequences& for& domestic& food& prices& of& importing& countries.&Simultaneously,&though,&cuts&in&exports&by&a&particular&state&affect&their&own& domestic& food& supply& directly.& In& short,& changing& ima& and& export& patterns& may& cause& shocks&in&both&international&as&well&as&domestic&food&supply&and&demand.&&
& Trade& patterns& are& also& a& source& of& exposure& to& the& shocks& they& might& cause& themselves.&Countries&that&import&a&lot&of&food&commodities&arguable&are&more&exposed& to& international& shocks& in& supply& and& demand.& Simultaneously,& those& food& importa dependent&countries&might&be&less&exposed&to&domestic&shocks&in&supply&and&demand.& The&same&reasoning&applies&to&exporting&countries:&one&might&become&less&exposed&to& domestic&shocks&in&supply&and&demand,&but&more&to&international&shocks&in&supply&and& demand.&If&that&is&correct,&then&it&seems&that&food&trade&might&have&ambiguous&effects&on& shocks&and&countries’&exposure&to&them.&& However,&food&trade&globalization&has&been&promoted&by&international&institutions& like&the&International&Monetary&Fund&(IMF)&in&recent&decades.&Their&main&argument&to&do& so&was&based&on&the&idea&that&trade&globalization&decreases&a&country’s&exposure&to&and& subsequently&promotes&a&country’s&resilience&against&domestic&shocks&in&food&supply&and& demand.&The&general&idea&of&these&institutions&was&that&domestic&food&production&and& consumption&patterns&are&unstable.&That&leads,&especially&in&closed&economies,&to&extreme& price& volatility.& Trade& could& mitigate& the& risks& of& domestic& price& volatility.& Especially& imports& could,& if& executed& properly,& be& an" effective" instrument" to" compensate" domestic" shocks"in"supply"and"demand.&In&a&particular&year,&it&may&be&that&area&X&has&a&food&deficit&
and&area&Y&has&a&food&surplus.&A&year&later,&it&may&be&the&other&way&around.&Area&X&would,& in&year&one,&experience&food&insecurity&if&food&cannot&or&will¬&be&transferred&from&area& Y&to&them.&The&next&year,&area&Y&would&experience&food&insecurity&if&area&X&cannot&transfer& food& to& them.& Trade& liberalization& (for& example:& cuts& in& import& tariffs& or& export& restrictions)&stimulates&the&efficient&allocation&of&food&by&transferring&food&from&surplus& to&deficit&areas&(Baulch,&1997:&1;&Zant,&2013:&2).&
If&a&state&experiences&a&food&deficit&due&to&an&increase&in&domestic&consumption&or& a&shortafall&of&domestic&production,&food&imports&could&complement&the&deficit.&This&will& prevent&food&prices&from&increasing&(heavily)&in×&of&food&deficits.&Simultaneously,&it& also& protects& farmers& in& food& surplus& areas& as& it& prevents& food& prices& from& dropping& (heavily).&The&process&of&mitigating&price&risks&through&the&transfer&of&food&from&surplus& to& deficit& areas,& presupposes& that& the& surplus& area& has& a& financial& incentive& to& export,& while&the&deficit&area&has&a&financial&incentive&to&import.&This&financial&incentive&will&be& provided&by&the&transmission&of&price&signals&between&the&two&areas.&Trade,&promoted&by& trade& liberalization& policies,& therefore,& allocates& food& in& a& more& efficient& way& through& spatial&price&signal&transmission&and&reduces&domestic&food&price&volatility&(Baulch,&1997:& 1;&Zant,&2013:&2).&&
&
The&point&of&this&analysis&is&that&trade,&and&especially&imports,&should&be&considered&as&an& effective& and& vital& instrument& for& (especially& developing)& countries& to& compensate& domestic&shocks&in&supply&and&demand.&Imports,&in&other&words,&do¬&only,&according& to& this& line& of& theory,& make& countries& less& exposed& to& shocks& in& domestic& supply& and& demand.&They&also&make&countries&more&resilient&against&domestic&shocks&in&supply&and& demand.& It& is& therefore& no& coincidence& that& global& institutions& like& the& World& Trade& Organization& (WTO)& have& encouraged& developing& countries& to& implement& trade& liberalization& policies& to& stimulate& trade.& The& objective& of& the& WTO& was& to& “build& an& integrated&world&market&that&was&big&enough&to&absorb,&with&limited&price&variations,&any& localized&supply&or&demand&shock”&(HLPE,&2011:&24).&Due&to&the&implementation&of&the& trade& liberalization& policies& by& developing& and& developed& countries,& the& international& trade&in&food&has&increased&substantially&over&the&past&decades&(De&Silva&et&al.,&2013).&& & An& increase& in& trade,& however,& may& also& increase& countries’& exposure& to& international& shocks& in& supply& and& demand.& That& would& be& important& to& take& into& consideration,&especially&if&the&international&food&prices&become&more&volatile.&Then,&a&
country&might&end&up&importing&food&price&volatility&rather&than&compensating&it&through& imports.&Firstly,&one&might&question&if&that&has&been&the&case.&According&to&the&High&Level& Panel& of& Experts,& international& food& prices& have& become& more& volatile& since& 2000& in& comparison&with&the&1990’s,&but¬&in&comparison&to&the&1970’s&(HLPE,&2011:&23).&One& might& also& question& whether& or& to& which& extent& global& food& price& volatility& would& be& transmitted& to& domestic& markets& if& the& international& food& price& would& become& more& volatile.& According& to& an& empirical& research& executed& by& Ceballos& et& al.& (2015),& price& volatility&is&transmitted&from&global&to&domestic&markets.&They&have&shown,&moreover,& that& the& level& of& transmission& is& higher& in& importadependent& countries& than& in& other& countries&(Ceballos&et&al.,&2015).&&
&
Imports&could&be&considered&to&decrease&a&country’s&exposure&to&and&increase&a&country’s& resilience&against&domestic&shocks&in&supply&and&demand,&but&also&to&increase&a&country’s& exposure&to&international&shocks&in&supply&and&demand.&The&obvious&subsequent&question& would& be& whether& and& to& which& extent& food& trade& globalization& affects& a& country’s& resilience& against& international& shocks& in& supply& and& demand.& This& question& will& be& discussed&in&the&next&chapter.&&
&
Ch.(4(|(Effective(imports(
(
Trade& could,& if& executed& properly,& be& an& effective& instrument& to& reduce& a& country’s& exposure&to&domestic&shocks&in&food&supply&and&demand.&It&could&also&improve&a&country’s& resilience&against&domestic&shocks&in&food&supply&and&demand.&However,&using&trade&in& an& effective& way& seems& easier& said& than& done.& Changes& in& trade& patterns& affect& the& exchange&rate&of&a&state.&The&exchange&rate&of&a&state&determines&whether&a&state&is&able& to&effectively&import&food&commodities.&If&the&exchange&rate&drops,&the&relative&value&of& the&domestic¤cy&drops&and&the&food&import&bill,&i.e.&the&total&costs&of&food&imports,& increases.& That& would& make& food& imports& relatively& unaffordable& and& deteriorates& the& effectivity& of& the& function& of& food& imports& as& compensational& instrument& for& shocks& in& domestic&supply&and&demand.&If&this&analysis&is&correct,&then&that&would&imply&that&states& should& trade& in& such& a& way& that& it& will& not& devaluate& their& currency.& This& chapter& will& examine&how&countries&would&be&able&to&do&so.&&
When&food&imports&increase,&the&supply&of&the&local¤cy&on&the&international&market& increases& and& the& value& of& the& currency& drops.& This& makes& it& relatively& expensive& to& import.&Unless,&such&a&change&in&the&trade&equilibrium&would&be&compensated&by&(1)&a& decrease&in&imports,&(2)&an&increase&in&domestic&production&or&(3)&an&increase&in&exports.& (1)&and&(2)&will,&due&to&the&inelasticity&of&food&supply&and&demand,¬&be&likely&to&occur& instantly.&In&other&words,&consumption&and&production&patterns&are¬&elastic&enough&to& directly& compensate& changes& in& supply& and& demand& patterns& (DiazaBonilla,& 2015).& According&to&economic&theory,&(3)&will&occur&automatically:&as&the&value&of&the&domestic& currency&decreases,&the&products&produced&within&the&state&become&cheaper,&which&will& stimulate&exports&and&stabilize&the&equilibrium&of&the&value&of&the¤cy.&However,&the& extent& to& which& the& equilibrium& will& stabilize& itself& through& the& interaction& between& exchange&rates&and&trade,&depends&on&numerous&other&factors.&&
The& literature& suggests& that& the" diversity" of" a" country’s" export" portfolio& is& an& important& determinant& of& a& country’s& ability& to& compensate& increases& in& imports.& If& a& substantial&part&of&a&country’s&export&portfolio&consists&of&one&to&three&products&or&if&a& substantial&part&of&the&goods&will&be&exported&to&one&to&three&trading&partners,&then&the& country’s&export&position&is&concentrated.&This&makes&the&country&in&question&dependent& on&a&small&number&of&markets&or&a&small&number&of&trading&partners.&Countries&that&export& a& greater& variety& of& products& to& a& greater& variety& of& countries,& are& less& dependent& on& particular&markets,&industries&or&trading&partners.&This&will&also&help&them&to&increase& their&exports&if&that&is&needed&(or,&when&the&value&of&their¤cy&decreases):&as&their& market&is&bigger,&the&likelihood&of&their&domestically&produced&goods&being&sold&on&the& international&market&increases&(Read,&2010:&5;&UNDP,&2011:&20;&Seth&&&Ragab,&2012:&6;& Briguglio&et&al.,&2006:&5).&& The&general&point&is&that&countries&need&trade"stability&to&some&extent&to&stabilize& the&exchange&rate&of&their&domestic¤cy.&If&a&system&has&a&trade&deficit,&which&entails& that&one&imports&more&than&one&exports,&then&the&soacalled&importabill&will¬&only&be& high&because&of&the&relatively&big&size&of&imports&over&exports,&but&also&because&the&value& of&the&importabill&will&be&exacerbated&through&a&depreciation&of&the&domestic¤cy& (DiazaBonilla,& 2015).& If& that& would& happen,& it& would& undermine& a& state’s& ability& to& effectively&import&food&to&stabilize&disequilibria&within&the&domestic&food&chain.&In&other& words,&to&keep&imports&affordable,&it&needs&to&be&able&to&create&trade&stability&through&an& increase&in&exports&(DiazaBonilla,&2015:&30).&If&a&country&is¬&able&to&stabilize&its&trade&
balance&or&to&stabilize&the&exchange&rate&of&their¤cy&in&another&way1,&then&it&looses& food&imports&as&an&effective&instrument&against&shocks&in&domestic&in&food&supply&and& demand.&The&country,&in&other&words,&would&then&loose&its&resilience&against&domestic& shocks.&&& & Imports&of&food&commodities&make&countries&less&vulnerable&to&shocks&in&domestic&food& supply&and&demand&in&the&sense&that&it&decreases&their&exposure&to&and&it&increases&their& resilience&against&those&shocks.&Imports&are,&in&that&sense,&an&instrument&to&compensate.& The&effectivity&of&the&instrument,&however,&is&according&to&the&analysis&above&dependent& on&the&export&position&of&a&country.&A&country&with&a&highly&concentrated&export§or&is& less&able&to&compensate&increases&in&food&imports&through&increases&in&exports,&which&will& lead&to&a&devaluation&of&the&value&of&the¤cy&in&comparison&to&the&value&of&the&US& Dollar2.& This& will,& therefore,& undermine& the& effectivity& of& imports& as& an& instrument& to& compensate&shocks&in&domestic&food&supply&and&demand.&The&resilience&of&a&state&against& shocks& in& domestic& food& supply& and& demand& is,& according& to& this& line& of& reasoning,& dependent&on&the&diversity&of&its&export&portfolio.&&
It& is& for& this& reason& that& the& Food& and& Agricultural& Organization& of& the& United& Nations&(FAO)&has&developed&a&vulnerability&metric&that&is&determined&by&the&ratio&of&food& imports&over&total&merchandise&exports&of&a&state&(De&Gennaro&&&Nardonne,&2014:&248;& Jambor&&&Babu,&2016:&87).&The&higher&the&ratio&is&(i.e.&the&higher&the&level&of&food&imports& is&relative&to&the&total&exports&of&a&state),&the&more&vulnerable&a&state&is&to&domestic&shocks& in&supply&and&demand&(FAO,&2013:&16a28).&Arguably,&it&also&implies&that&the&more&likely&it& is& that& a& state& experiences& volatile& food& prices.& The& metric& of& the& FAO& consists& of& two& metrics&that&are&related&to&(food§or)&globalization.&The&next&chapter&will&focus&on&the& empirical& evidence& within& the& literature& on& the& relationship& between& food& sector& globalization&and&developing&countries’&economic&vulnerability.&& & 1&If&a&country&experiences&a&trade&deficit,&it&may&be&able&to&compensate&the&downward&pressure&on&the&value& of&its¤cy&by&using&their&foreign¤cy&reserves.&If&a&country&has&reserved&US&Dollars,&it&could&use& that&reserve&to&buy&food&on&the&international&market,&while&it&does¬&invoke&an&increase&in&supply&of&its& domestic¤cy.&In&other&words,&it&does¬&decrease&the&value&of&the&its&domestic¤cy&(DiazaBonilla,& 2015).& 2&Almost&all&food&commodities&on&the&international&market&are&being&traded&in&US&Dollar.&Thus,&the&exchange& rate&of&domestic¤cies&should&always&be&related&to&the&US&Dollar&(Gilbert&&&Morgan,&2010).&&
Ch.(5(|(Globalization(&(trade(stability(
&
In&the&previous&chapters,&it&has&been&argued&that&domestic&food&price&volatility&is&caused& by& either& international& or& domestic& shocks& in& food& supply& and& demand.& The& extent& to& which&a&country&experiences&food&price&volatility,&is&a&little&bit&more&complex&though.&It& has& been& argued& that& this& depends& on& the& vulnerability& of& a& country.& Vulnerability& is& determined& by& the& shocks,& the& country’s& exposure& to& the& shocks& and& the& country’s& resilience&to&them.&From&a&theoretical&standpoint,&it&has&been&argued&that&globalization& would&decrease&a&country’s&vulnerability&as&imports&would&decrease&its&exposure&to&and& increase&its&resilience&against&shocks&in&domestic&supply&and&demand.&And&because&the& globalization& of& the& food& sector& would& decrease& developing& countries’& vulnerability,& it& would&also&decrease&their&domestic&food&price&volatility.&&
& This&chapter&will&focus&on&the&empirical&evidence&found&within&the&literature&on&the& relationship& between& (X1)& food& sector& globalization& and& (Y)& domestic& food& market& vulnerability.&(Y),&domestic&food&market&vulnerability,&is&based&on&the&vulnerability&metric& of& the& FAO,& which& consists& of& two& metrics:& the& size& of& food& imports& and& the& size& of& merchandise&exports&(FAO,&2013).&The&size&of&food&imports&is&dependent&on&(M1)&the&size& of& the& domestic& food& production.& It& will& therefore& be& examined& what,& according& to& the& literature,&the&effect&of&(X1)&food§or&globalization&on&(M1)&the&size&of&the&domestic&food& production& in& developing& countries& has& been.& The& size& of& the& merchandise& exports& is& determined& by& (M2)& the& diversity& of& a& state’s& export& portfolio.& Therefore,& it& will& be& examined&what,&according&to&the&literature,&the&effect&of&(X2)&trade&globalization&on&(M2)& the&diversity&of&the&export&portfolio&of&developing&countries&has&been.&& What&is&important&to¬ice&here&is&that&there&has&been&made&a&distinction&between& two&types&of&globalization.&(X1)&entails&the&globalization&of&the&food§or&because&that& seems&relevant&in&determining&the&size&of&the&food&imports&of&developing&countries.&(X2)& entails&trade&globalization&in&general&because&that&seems&more&relevant&in&determining& the&size&of&the&total"merchandise&export&of&developing&countries.&& & M1:&domestic&food&production& & Developed&countries&heavily&subsidize&their&agricultural&industries.&In&2009&they&spend& more&than&300&billion&dollars&on&their&domestic&food&production.&Simultaneously,&they&
