Last updated on June 5, 2023
That is the title of a new working paper by Bernhard Dalheimer (currently a postdoc in our department, but headed to Purdue, where he will start in the fall as an assistant professor), Sunghun Lim (Louisiana State), and me.
We ask a simple question: How does the extent of a country’s participation in global agri-food value chains (GAVCs, or “GA-vicks”) translate in terms of food price levels and food price volatility?
While there is an extensive literature in international trade showing that trade between countries leads to lower prices for the commodities traded, whether trade leads to prices that are more or less volatile is an empirical question, and trade could in theory lead to more or less price volatility. So we use data on participation in GAVCs at the country-year level for 138 countries for the period 2000-2015 combined with a Bartik shift-share IV design to look at the relationship between participation in GAVCs on the one hand and consumer food prices or food price volatility on the other hand.
We find that greater participation in GAVCs is associated with lower food prices on average, which supports the standard gains-from-trade result of international trade. More interestingly from my perspective, we find that greater participation in GAVCs is associated with increased food price volatility on average. We explore treatment heterogeneity, looking at results by region and by income group (e.g., lower-, middle-, and high-income countries), then show that this is likely the result of trading only with a handful of partners as a result of greater participation in GAVCs.
After presenting and discussing our results, we discuss the political economy of agricultural trade policy by developing a theoretical framework discussing what drives a country’s government’s choice to open the country up to international agricultural trade.
A key insight is that while low prices are good for consumers and bad for producers, food price volatility does not hurt consumers, but it hurts producers. So if trade is associated with lower, more volatile prices, it stands to reason that the countries most interested in trading agricultural commodities and food are those countries that have a lot more consumers than producers thereof. That is, it stands to reason that high-income countries would push for trade liberalization whereas low-income countries would be reticent to opening themselves up to the international trade of agricultural commodities and food. This is all the more so since high-income countries are in a much better position to tax their citizens to pay for policies that support and protect agricultural producers.
(In fact, in light of these results, the stylized fact whereby a country protects its agricultural sector increasingly as the average income of its citizens increases is not surprising.)
Here is the abstract:
We study the relationship between global agricultural value chains (GAVCs) and food prices. Using longitudinal data on a sample of 138 countries for the period 2000 to 2015 and a Bartik shift-share instrumental-variable design, we study how participation in GAVCs at the country level relates to consumer food price levels and volatility. We find that participation in GAVCs is associated with a decrease in consumer food price levels and an increase in food price volatility, suggesting that participation in GAVCs involves a mean-variance trade-off. This trade-off is more pronounced among low-income countries, especially sub-Saharan African countries. We show that association between participation in GAVCs and food price volatility is likely due to a lack of diversification among suppliers, which can be expressed as an externality from the profit-maximization behavior of individual firms. Decomposing participation in GAVCs into upstream and downstream linkages, we find that food price volatility is associated more strongly with downstream participation than with upstream participation. We explore some policy options aimed at increasing the resilience of GAVCs.
As always, reader comments would be most welcome and are eagerly solicited.