Liberalisation of tropical commodity market and adding-up problem: A Bound test approach

The paper examines the effect of commodity market liberalisation on developing countries by taking the case of tropical products. This issue assumes importance in the context of developing countries characterised as they are by heavy dependence on commodity exports. Theoretically, commodity market liberalisation could adversely affect the terms of trade of exporting countries, as the price and income elasticity of demand for the commodities are relatively low. The problem arises as the welfare effects of unilateral liberalisation by an individual country having a small market share differ from the multilateral liberalisation by a group of producing countries who collectively constitute a major share of the market. This collective liberalisation in most of the cases can result in a decline in prices. In this paper we examine this phenomenon the adding up problem- using Bound Test Procedure which is an advanced approach for testing the existence of long run relationship. The major finding of the study is that along with product specificities, export structure of the countries concerned is also an important factor in determining the adding up problem.