An ex-ante analysis of the welfare effects of changes in world prices of agricultural commodities: the case of Uruguay

Frankfurt

Congreso; Arnolshain Seminar XIII; 2015

Universidad de Fankfurt.

During most of the past decade, Uruguay benefited greatly from an increase in the world prices of its main commodity exports. However, taking into account that most of the country´s exports are commodities that are used as inputs in the production of staple goods, there exists the potential to hurt a sizable part of the population, especially households at the lower end of the income distribution. Like in Moncarz et al. (2014), we run a Vector Error Correction Model (VECM) to estimate the long run elasticities of consumer prices with respect to world prices of Uruguay´s main commodity exports. Then, following the methodology pioneered by Deaton (1989), we run nonparametric regressions to obtain the welfare impacts on households along the expenditure distribution. The results show that, ex-ante, poorer households are the most negatively affected through the increase in consumer prices, especially of food and beverages. On the other hand, a second channel works through the labour market. Here, we estimate an extended Mincer-type equation to obtain the elasticities of wages to changes in world commodity prices. The results show that poorer households benefit, while there is a reduction of income for those at the upper end of the distribution. Overall, all households are affected negatively, with losses ranging between 10% and 14%, with poorer households suffering the most (see Figure 3).