Effects of the agricultural commodity and the food price volatility on economic integration: an empirical assessment

In here, it is referred to the definitions of the income groups of the World Bank.

International trade theory has still not been able to explain the relationship between the level of economic integration and uncertainty shocks. The findings generally differ (Montalbano 2011). For example, Novy and Taylor (2014) find that uncertainty shocks directly cause a loss in welfare by reducing the level of international trade.

It is important to note that government expenditure is one of the main determinants of the trade openness (see, e.g., Alesina and Wacziarg 1998; Ram 2009; Rodrik 1998).

The food security is related to the extent of the rapid hike in food prices that would cause poor people living in the low- and the middle-income countries to experience a nutritional deficiency. The food security mainly depends on the food deficit of the country; in other words, it depends on whether a country is a net exporter or a net importer of food products (Berazneva and Lee 2013).

At this point, from 2004 to 2008, the agricultural commodity prices in global markets increased more than 50% on average. The world agricultural commodity prices rapidly declined at the end of 2008 but rose again from early 2011 until the end of 2012. However, this accelerating rise was followed by a slowed upward trend since the middle of 2013 (Anderson 2013). Agricultural commodity prices once again experienced a moderate decline until the end of 2015.

For instance, Berazneva and Lee (2013) demonstrate that a rapid spike in food prices (levels) increases the percentage of the population living in poverty in many low-income countries and this leads to political and economic instability. Furthermore, Bellemare (2015) also observes that the food prices (levels) raise the social unrest, but the food price volatility does not. He finds that there is no significant relationship (there may even be a negative relationship) between the food price volatility and the food-related social unrest.

Indeed, agricultural products remain crucial in developing countries because approximately 75% of the total population in these economies live in rural areas, and their livelihoods remain dependent on agricultural products (Anderson 2013).

Before the period of the great global recession (2003–2007), commodity prices soared, and this was in favor of the commodity exporter countries since it caused a rapid economic growth. Because of the sudden decline in commodity prices during the great global recession of 2008–2009, the price volatility occurred and some commodity exporters implemented protectionist policies. Some of the commodity exporters kept free trade policies, but all experienced a noticeable distortion from the recession (Cespedes and Velasco 2012).

Liberal or protectionist policies related to international trade and agricultural products are at the center of the World Trade Organization (WTO) negotiations, known as the Doha Development Round (DDR), which was started in November 2001. The most important and controversial issues in the DDR is to ensure the emergence of lower tariffs and a broader hidden-barrier identification of agricultural products (WTO 2010). At this stage, developing countries are highly dependent on agricultural trade in their trade regime, developed countries are mainly a net importer of commodities, and this leads to a conflict of interest.

Protectionism in trade is one of the main explanations of the global trade collapse of 2008–2009 (Kee et al. 2013). See Bems et al. (2013) for a detailed review of the global trade collapse of 2008–2009.

Therefore, it can be suggested that the commodity price volatility is somehow exogenous to economic integration, rather than vice versa or the two processes being simultaneously determined.

At this stage, it is referred to the KOF Index of Globalization, which considers the economic, political and social dimensions of globalization. This index is robust to different measures of international trade (Gozgor 2017). The details of the KOF index of economic globalization are provided in Online Appendix Table I.

At this stage, the variance inflation factor (VIF) values are also checked. The results indicate that there is no collinearity problem in the regressions due to the joint occurrence of the period-specific variables and the inclusion of a full set of the period effect.

The data for these variables are obtained from the Penn World Table (version 8.1) of Feenstra et al. (2015).

Since a lower value of the original Theil Index indicates a higher diversification, it is considered 1/Theil Index to get rid of confusion. Therefore, a higher value of the diversification index indicates a higher level of product diversification of exports in the regressions. For details, see Papageorgiou and Spatafora (2012).

The regressions for five or ten years’ averaged data are not considered because this type of frequency is not suitable for capturing the effects of the price volatility. The best measure is to use the lowest frequency data available, which is annually in our cases. The annualized price volatility is calculated from the agricultural commodity price and the food price data, which is available in the original monthly frequency.

Therefore, the beginning date of the empirical examination is 1970. Since the data for the diversification of exports are available until 2010, the empirical analysis covers the period from 1970 to 2010 for these regressions.

The similar methodology is implemented for calculating the food price volatility.

The estimation procedure of Roodman (2009) is followed in the system-GMM estimations.

See the fifth paragraph in the introduction for the motivation of this empirical analysis.

These countries are: (i) the level of economic globalization: Luxembourg, Singapore, Ireland, and Belgium, (ii) the international trade and capital account restrictions: Singapore, Estonia, the United Arab Emirates, Gabon, and the Bahamas, (iii) the level of the actual flows index: Luxembourg and Singapore.

These countries are: (i) 9 agricultural raw materials exporters: Chad, Mali, Laos, Burkina Faso, Benin, Sudan, the Central African Republic, Myanmar, and Solomon Islands, (ii) 10 agricultural raw materials importers: Djibouti, Korea Republic, Japan, Bangladesh, the Central African Republic, Italy, Egypt, Morocco, China, and Somalia. (iii) 11 agriculture value added countries: Somalia, Burundi, Myanmar, Ethiopia, Nepal, Liberia, Guinea-Bissau, Uganda, the Central African Republic, Mali, and Laos, (iv) 10 food exporters: Timor–Leste, Sao Tome and Principe, Guinea-Bissau, Faroe Islands, the Seychelles, Somalia, Malawi, Gambia, the, Saint Vincent and the Grenadines, and Burundi, (v) 7 food importers: Guinea-Bissau, Comoros, Eritrea, Kiribati, Sao Tome and Principe, the Gambia and Cape Verde, (vi) 7 food, beverages, tobacco value added countries: Burundi, Congo Republic, Rwanda, Swaziland, Sierra Leone, the Central African Republic, and Sudan.

The benchmark regressions for economic integration are reported in Columns 3A and 3B in Table 5, the regressions for economic globalization policy are reported in Columns 4A and 4B in Table 6, and the regressions for economic globalization are reported in Columns 3A and 3B in Table 7. These benchmark results are mainly discussed in this subsection.

The related short-term coefficients in the low-, the lower-middle-, and the upper-middle-income countries vary from \(-\,0.233\) to \(-\,0.271\) for the agricultural commodity price volatility and vary from \(-\,0.207\) to \(-\,0.215\) for the food price volatility, respectively. The related long-term coefficients vary from \(-\,4.381\) to \(-\,9.033\) for the agricultural commodity price volatility and vary from \(-\,3.763\) to \(-\,7.166\) for the food price volatility, respectively. In the high-income economies, the short-term coefficients are \(-\,0.131\) and \(-\,0.107\) and the long-term coefficients are \(-\,2.183\) and \(-\,1.783\) for the agricultural commodity price volatility and the food price volatility, respectively.