Are Price Changes in the World Market Transmitted to Markets in Less Developed Countries?
The absence of monthly price data at producer level for products such as sugar, cotton, wheat and rice in most developing countries does not permit a detailed examination of the relationship between farmgate prices and either border prices or world market prices.
Price transmission
However, the qualitative discussion suggests that the extent of price transmission is likely to be imperfect.
These results have implications for the interpretation of simulation results modelling the potential impact of trade policy changes on developing nations' producers and consumers
They also underline the need for concerted efforts by policy makers to reduce the extent of monopoly power in these marketing chains and to improve the degree of price transmission
Subsidies
Most industrialized countries have supported agriculture using domestic subsidies (e.g. producer subsidies), export subsidies, and restrictions on market access. Attempts are now being made to discipline these trade policies through round-table negotiations in the World Trade Organization (WTO) Doha Development Round.
Their objective is the reduction and removal of the distortionary price and trade policies of WTO member countries by moving domestic prices closer to international prices. The thrust behind these changes is that free trade would allow countries to compete fairly in the world market. The anticipated impact of the trade reforms on Least Developing Countries (LDCs) is greater access to rich country markets.
The extent of price transmission from world to domestic prices is a critical parameter in empirical trade models which attempt to assess the impact on prices, output, consumption and welfare in one country of trade policy reform in another country. For example, a study by Giblin and Matthews (2005) attempted to capture the impact of European Union (EU) unilateral trade liberalization on Tanzania, Uganda and other Sub-Saharan African (SSA) countries, on one hand, and on the EU, on the other hand. The study found that Sub-Saharan African producers would benefit from the higher world market prices resulting from EU reform, while consumers would be made worse off. This conclusion is based on the assumption that there is a flexible pass-through of price signals across the markets. However, the realism of this assumption remains to be verified.
