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Impacts of Exchange Rate Instability upon the Brazilian Agribusiness1
Geraldo Moreira BittencourtA and Antônio Carvalho CamposB
A
Doctoral student in Applied Economics by the Department of Rural Economy from Federal
University of Viçosa, Brazil. Teacher of the Department of Economy from Federal University of
Juiz de Fora / Campus Governador Valadares, Brazil. E-mail: [email protected]
B
Teacher of the Department of Rural Economy from Federal University of Viçosa, Brazil. E-mail:
[email protected]
Abstract:
Aware of the Brazilian agribusiness participation evolution in the international
commerce and of the exchange rate uncertainty view, this study aims to evaluate how
the exchange rate instability have affected the agricultural exports and imports flows
among Brazil and its main commercial partners (Germany, Argentina, Chile, China,
Japan, Holland and the USA), from 1989 to 2011. In order to answer this question, it
was done some estimative of a gravitational equation for exportations and
importations of the Brazilian agribusiness sector. The results obtained by this
analysis show that agribusiness importations and exportations among Brazil and its
partners were negatively affected not only by their own exchange rate uncertainty, but
also by the exchange rate instability of the partners in analysis. Therefore, economic
stability and the reduction of uncertainty about exchange rate movements are
important measures to be considered, if Brazil wishes to increase the agricultural
trade with the partners analyzed.
Key words: Agribusiness, exchange rate instability, gravitational model.
JEL: F13, F14, Q17
1
The authors thank the contributions of the article reviewers.
1
1. Introduction
The exchange rate is considered one of the most relevant variables of an open economy and
its relationship with the international business. Since the collapse of Bretton Woods system2, in
1971, great part of the developed and industrialized countries started to adopt the regimen of
floating exchange rates, which received a boost with the opening and financial integration of the
market. Whereas in 1990s, this process increased more, reaching the emerging countries.
However, this integration increase in the financial market, the diffusion of the floating
exchange rate system and the wave of commercial liberalization of 1980s and the beginning of
1990s exposed developing and under developing countries to a big oscillation (instability) in the
exchange rates, and consequently, uncertainties in the exchange rate. As a result the effects of this
exchange rate instability3 upon the investment and commerce have become of great interest for
many researches and politics creators.
According to Côté (1994), the exchange rate instability can have a direct negative effect
upon the international commerce because of the uncertainty and the adjustment costs, and
indirectly, through its effect upon resources allocation and governmental politics. Therefore, if the
exchange rate changes are not totally expected, a exchange rate variability increase can lead to
economic agents opposite to risks, to reduce their activities in the world commerce.
However, the empirical evidence in support to the hypothesis of a negative relationship
between the exchange rate instability and commerce is mixed. According to the studies of Dellas
and Zilberfarb (1993) and Broll and Eckwert (1999), the exchange rate instabilities would result in
great risk that instead of intimidating the economic agents indifferent to the risk as they
commercialize, would end up creating opportunities of diversifying their portfolio of risk and
increasing the expectancy of higher profits. According to the authors, this would occur mainly in
developed countries with a highly efficient finance market.
As it was noticed by Maskus (1986), the impact of exchange rate instability can vary among
the economy sectors, because the sectors present different degrees of opening to international
commerce, and/or because of the sectors differ from industry concentration levels and make use of
special contracts of long term which would demand new studies for specific sectors and market.
2
The consecrated system in Bretton Woods established dollar as the international currency and this was the only
currency which would maintain its convertibility compared to the gold. The other national currency were freely
convertible in dollar at a fixed exchange rate; therefore, the dollar had a resemblance to the gold and the other
currencies to the dollar (VASCONCELLOS et. al., 1996).
3
The fact that the instability (volatility) measurements of the real exchange rate be used as proxies of exchange rate
uncertainty, the instabilities expressions, volatility and uncertainty are used to describe the same phenomenon of this
study.
2
In addition, when it is studied the effects of the exchange rate uncertainty, it is important to
distinguish the changes of short, average in long terms in the exchange rates. According to Cho et.
al. (2002), a common argument against the use of the variability of short term is that the risk of the
exchange rate can be easily covered with adequate risk management instruments of short term. The
same way, Perée and Steinherr (1989) suggest that, although in a short term the risk of the exchange
rate be covered successfully in the financial market, the uncertainty beyond a temporal horizon of a
year cannot be covered with low cost, showing this way that the exchange rate of long term is
probably a problem to the international commercial flows.
In Brazil, the interdependent character of the monetary, fiscal and exchange rate policies,
together with the macroeconomic instability, lived in 1980s and the beginning of 1990s, triggered
modifications in the exchange rate policy many times. With the implementation of the Real Plan
and the stability of prices, from 1994, it was introduced the regimen of exchange rate bands, aiming
to give increment to credibility of exchange rate policies through measurements that aimed more
stability of the real exchange rate and the variation standard of the nominal exchange rate.
However, on January, 1999, the maintenance of this regimen became unbearable, causing the
government to adopt a regimen of flexible exchange rates, causing devaluation of real and nominal
exchange rates (KANNEBLEY JÚNIOR, 2002). Since then, it happened phases of exchange rate
stability and a big variability (uncertainty) and a disorder of the exchange rates (SOUZA; HOFF,
2003).
Therefore, the worldwide macro economical instability and several plans and economic
policies of stabilization adopted throughout the time and implemented in Brazil were responsible
for great part of variability of real exchange rate of average and long terms existing in the Brazilian
economy.
So, as it is analyzed the evolution of the international commerce and the moments of
stability and instability of economies participating in the worldwide macroeconomic view, it can be
affirmed that the different measures of stability (that is, the economic decisions not coordinated)
adopted by the countries in a long term are responsible for great part of the instability of the real
exchange rate in average and long terms, existing in the commerce among the nations.
Therefore, according to Kafle (2011), the uncertain nature of the exchange rate became a
relevant problem in the range of estimative of the commercial behavior and the commercial volume
existing between exportation and importation countries, showing that the dimension matter of
exchange rate instability effect upon the commerce is a theme which requires an important
empirical investigation.
3
In the case of Brazil, for example, the external commerce reached record numbers of
exportation and importation, considering China the biggest importer of national products, followed
by the United States of America (EUA), Argentina, Holland, Japan, Germany and Chile. As for the
domestic importations, the USA, China, Argentina and Germany were the most important origem
countries of Brazilian importations (FOREIGN COMMERCE ASSOCIATION OF BRAZIL,
2012).
According to statistic data from UNCOMTRADE (2012) and according to the Uniform
Classification for the International Commerce (CUCI), it is important to mention that the seven
countries (Germany, Argentina, Chile, China, Japan, Holland and the USA) fit the group of the
most important commercial partners of Brazil in the aggregate and by sector, highlighting that in the
past 20 years, they represented an expressive participation in the commercial flow (exportations and
importations) of the Brazilian faming sector. This participation was over 45% of commercial flows
of Brazil in this sector.
In addition, it is important to mention the relevance of the agricultural sector for the
Brazilian economy, in which the recovery of the commercial balance had an expressive contribution
from the agribusiness, with a commercial balance of this sector, since 2000, breaking many records
and becoming one of the most important generators of foreign capital, in liquid net worth, the
commercial balance of the country. According to the data from the National Library of Agriculture
(BINAGRI, 2012), during the period from 1994 to 1999, the Brazilian agricultural exportations
increased below the world agricultural commerce, due to disfavored international affair after 1997
and the deep devaluation of the Real in the beginning of 1999. Whereas during 2000 and 2004, the
exportations of the sector showed an excellent development, surpassing US$15,4 billion to US$30,8
billion, recording a annual growth rate of 18,8%, compared to a rate of 9,1% of the worldwide
agricultural commerce, increasing a double more.
On the other hand, it is important to mention that the commercial partners had undergone
moments of economical instability, and consequently, floating of prices and exchange rates, which
affects the commerce and the investment allocation. It can be mentioned the situation of the
currency crisis of Europe from 1992 to 1993 and the recent crisis of the public debt of EURO, the
currency crisis in Argentina in 2001, the year in which the Argentinean government decided to end
the parity to the North American dollar, the politics of Chinese currency devaluation, which has
been an object of controversy among the countries, the global financial crisis of 2008, among others
that ended up showing the necessity of an impact analysis of the exchange rate instability in the
important agricultural commerce in Brazil with the most important partners considered.
4
Considering a view of exchange rate uncertainties and the evolution of participation of the
Brazilian agribusiness in the international commerce, this study aims to answer the question: how
has the instability of the real exchange rate in the medium and long terms has affected the flow of
trade in the agricultural sector in Brazil with its most important commercial partners, such as:
China, the USA, Argentina, Germany, Holland, Japan and Chile? Another question: the commercial
flows of the Brazilian agribusiness sector with its main partners have received significant and
important impacts compared to the exchange rate uncertainty, commercial tariffs, distances
(transportation costs) and income levels?
The hypothesis that permeates this study is that the variability of the exchange rate in the
average and long terms have influenced negatively the commercial flows of the Brazilian
agribusiness sector compared to its main partners. According to De Grauwe e De Bellefroid (1987),
the risks associated to the exchange rates in short term can be mitigated as instruments of risk
management, as the credit coverage and opportunities offered by central banks. But on the other
hand, in the long term, the currency market goes through a "sustainable misaligned " (that is,
uncertainty creating uncertainty in the memory of agents), which cannot be easily protected and it is
very expensive to be covered. This way, if the changes of the exchange rates are not entirely
expected, an increase in the exchange rate uncertainty in a long term can lead the economic agents
opposite to risk, to reduce their activities in the worldwide commerce.
Therefore, considering that the commerce is one of the variables that contributed the most to
the Brazilian growth for the past years, to study the impacts upon the exchange rate instability and
on other determiners of commerce, such as: tariffs, distances between countries, GNI and the
uncertainty of the exchange rate of a third country (third country effect)4 upon the international
commerce of Brazil shows itself as extremely important for providing more precise information to
economic agents involved. Such information also allows a better performance of these agents in the
market as for the exchange rate instability, which permits avoiding the variable impacts which
contribute negatively to the growth of the Brazilian commerce. Besides, it helps in the formation of
more balanced economies, searching a higher macroeconomic coordination between Brazil and its
main business partners.
The contribution of this study is different from the rest, compared to previous literature,
because it analysis the influence of exchange rate instability upon the commerce (exportations and
importations) of an important sector of an emerging country, considering that most of the studies in
the literature are concentrated in determining the effects of exchange rate uncertainty upon the
aggregate commercial flows (total: importation + exportation) for developed countries.
4
The third country effect is a measurement that takes into consideration the uncertainty of the real exchange rate for all
the other commercial partners, except the two countries involved in this analysis.
5
The analysis interval of this study comprehends the period from 1989 and 2011. Therefore,
the study comprehends the period in which there was the beginning of the biggest opening of
Brazilian economy to the international commerce, changes in exchange rate and monetary policies
of Brazil and its partners, moments of growth and recession of the worldwide economy between
other cases that ended up causing more instability of exchange rates of the countries considered.
The article consisted of four sections, besides this introduction. In the following section, it is
showed a theoretical discussion that found the research. In the third, it is described the methodology
and the data used. In the fourth, it is exposed the results, and finally, the last section contains the
conclusion of the article.
2. Theoretical Reference
2.1. Theory of international commerce and exchange rate uncertainty
There is a wide literature which discusses how the exchange rate uncertainty affects the
international commerce. The general argument is that a higher variability of the exchange rates (real
and nominal) is harmful to commerce between countries. This negative impact of exchange rate
instability upon the international commerce happens from the theory of choice upon uncertainty.
This theory highlights that under conditions of uncertainty, the economic agents choose which
offers less risk. Therefore, in situations where the variability of exchange rates makes the market
activities more uncertain, the agents end up choosing activities which have less risk. Besides this,
the literature informs that the commerce will be more harmed as well as those agents continue to be
opposite to risks, that is, if the hedging opportunities against the exchange risk is little, and the
income parcel and expenses in the external currency is higher (CHO et. al., 2002).
On the other hand, the hypothesis support to a negative relationship between exchange rate
instability and commerce is mixed. According to the studies made by Dellas e Zilberfarb (1993) and
Broll and Eckwert (1999), the exchange rate instabilities would result in great risk that instead of
restraining the economic agents indifferent to risk as they make business would end up in creating
opportunities of diversifying its risk portfolio and increase the expectancy for profits.
Côté (1994) compares the previous approach to the derivative market, in which the
commerce is identified as an option that becomes more appreciated as the exchange rate instability
increases. This would occur mainly in developed countries with a highly efficient financial market.
This way, according to Kandilov (2008), the exporters and importers of developed countries have
better access to credit and coverage opportunities, which generates more reduction of exportation
and importation.
According to Hooper and Kohlhagen (1978), when it comes to exportation, exchange rate
instability leads to a contraction in the offered quantity, for affecting the profit proportion which is
6
not secured (hedged) by the firm. As for the importation, it is treated as a factor used in the goods
production sold in the domestic market. This way, an increase in the exchange rate uncertainty
increases the profit variance and changes the demand curve of the firm to the left, leading to a
decline of prices and quantity. The dimension of the answer increases with the magnitude of the
price elasticity of the demand curve and with the aversion level and risk exposition.
Many empirical studies have tried to establish a position about this matter of exchange rate
uncertainty and commercial flows. Recently, these studies are being done based on the gravitational
model of commerce and by using data in panel. However, econometric evidence has showed itself
ambiguous. For example, De Grauwe and Skudenly (2000) used a gravitational model to study the
impact of the exchange rate instability upon the commerce among the countries of the European
Unit and the results found showed the existence of a negative relationship between the exchange
rate uncertainty and the commerce. On the other hand, when it is analyzed the agricultural
commerce between Hungary and its commercial partners, Jozsef (2011) identifies a significant
positive effect of the exchange rate instability upon the commercial flows of this sector. Whereas
Rose (2000), evaluated the bilateral commerce for a panel of 186 countries, during the period from
1970 1990, and found a small but significant statistically negative effect of the exchange rate
volatility upon the commerce.
The studies previously mentioned have found evidence of existence of a mixed and
significant relationship between the exchange rate instability and the commercial flow between the
countries. However, the improvements done by Anderson and Van Wincoop (2003) showed that the
commercial relationships of two countries are not affected only by the variables of the countries to
which they commercialized with, but also by the variable of their commercial partners. Therefore, it
is not only the exchange rate which affects the commerce between country i and country j, but also
the exchange rate instability of countries to which the country i and/or the country j commercialized
with. This effect of exchange rate uncertainty of partners upon the commerce is called third country
effect. According to Bittencourt (2004), the third country effect is the impact of instability of the
real exchange rate of a third country in the bilateral commerce in analysis.
According to the results of studies that used the gravitational model, variables such as:
distance, tariffs and third country effect have also served as an important contribution for the
reduction of commerce between the countries. Samuelson (1962) tested the hypothesis of what
happened when countries commercialized with those that were geographically more distant from
their frontier. The results obtained by him showed that the more distant, the higher the input costs
on the products will be, considering that the more distant mean more costs. Baier and Bergstrand
(2001), used the model derived by Krugman, studied the impact of the reduction of tariffs upon the
7
commercial growth for 16 countries of OCDE. According to this study, the authors found out that
26% of the commerce growth are explained by the reduction of the tariffs. Bittencourt (2004)
estimated that the third country effect upon the commerce between the countries of MERCOSUL
and the estimated coefficients for this variable show a negative sign as expected, considering that
the increase of the exchange rate uncertainty on a third country affects negatively the bilateral
commerce.
2.2. Theoretical foundation of the gravitational model
The theoretical foundation of this study is also found in the theory of the gravitational
model. The creation of such model was stimulated by the gravitational theory of Physics (Universal
Gravitational Law of Newton), in which was highlighted the ideas that the flows between two
bodies resulted in forces of attraction and repulsion. The gravitational equation of Newton is
represented in the following formula:
FG  G
m1 m2
r2
(1)
in which FG = attraction force; m1 e m2 = objects; G = universal gravitational constant; and r = the
distance between the objects. The theory of Newton postulates that the gravitational force between
two objects is proportional to the result of their mass divided by the square of their distances
(BALDWIN; TAGLIOLI, 2006). This way, the main matter of the model is in the attraction model
compared to the mass and distance between objects, considering that the commerce adaptation
happened from the point that the commerce flow is directed influenced by the result of income of
countries and reserved by the geographical distance between them.
The basic model for commerce can be represented in the logarithmic form as:
ln Tij   0  1 ln YiY j   2 ln Distij  ij
(2)
in which Tij represents the commerce flow from i to j; Yi Y j refers to the multiplication of Gross
Domestic Product (GDP) of countries i and j, respectively; and Distij represents the distance
between the capitals. According to the gravitational model, the commerce volume between two
commercial partners is a crescent function of their incomes, used as proxies for the market size in
each country and measurements by the GDP, and decreasing in comparison to the distance between
them, usually interpreted as proxy of transportation costs between the countries (AFRICANO;
MAGALHÃES, 2005).
Therefore, according to Kume and Piani (2000), the theoretical explanation more
widespread for the usage of this model dates back to the commerce developed by Krugman (1980),
which refers to the existence of crescent income and transportation costs, which act as an incentive
8
to the concentration of production near a great market. As a result of this concentration, there are
the scale economies and minimizations of transportation costs.
The first microeconomic foundations applied to the gravitational model started from the
studies made by Anderson (1979). His proposal was basically a theoretical explanation for the
gravitational equation that had as a context the analysis of commodities commerce. Therefore,
considering the assumption as the great variety of goods, factors that move through the regional and
national frontiers under different circumstances (differentiation by origem) and commercializable
demand by preferences Cobb-Douglas or Constant Elasticity Substitution (CES) in all of the
countries, the author calculated a gravitational equation under presence and absence of restrictions
to commerce.
Later, an extension proposed by Anderson and Van Wincoop (2003) and Anderson and Van
Wincoop (2004) became a theoretical approach that has been used to support the gravitational
model. According to Shepherd and Wilson (2008), this model proposed by Anderson and Van
Wincoop can be considered as a pattern. Besides, for it being a model of analysis ex-post, it has
been used to verify the magnitude and effects of diverse variables upon the commercial flows, such
as the exchange rate uncertainty (volatility), the impact of the application of tariffs, many
transportation costs, etc.
According to Mendonça et. al. (2011), the inclusion of multilateral resistance rates was the
main contribution of the study made by Anderson and Van Wincoop (2003) to the gravitational
model. According to them, the commerce between two countries is impacted, among other
variables, by the commerce among all the countries to which each country commercializes with,
therefore, there is the necessity of controlling the impact of rates of multilateral resistance so that
the results found are not biased.
The rates of multilateral resistance synthetizes the average resistance to commerce between
one country and its commercial partners. In this case, for a given bilateral barrier between two
countries, i and j, if the barriers are higher between j and its other commercial partners, the relative
prices of the goods in country i will be reduced, increasing the importation originating from i,
considering that country i has a bilateral resistance lower when compared to the other commercial
partners of j. so, more elevated barriers confronted by an exporter reduced the demand for its
products, and then, its offer price (ANDERSON; VAN WINCOOP, 2003).
3. Methodology
3.1. Specifications of variables and empirical model
Some studies try to add other structural elements in the gravitational model to better reflect
the reality conditions. In the present study, considering study goals and the theoretical foundation of
9
the gravitational model, exposed in the previous section, it was chosen to estimate the basic model
(which consists by the variables: the product from GDP and the geographical distance between the
countries) with the inclusion of tariffs, exchange rate uncertainty (instability) and the third country
effect, which the methodologies are presented in this section.
The exchange rate instability results from the uncertainty, for the economic agents, it relates
their variations. In order to calculate this variability, several instability measurements5 or
uncertainty about the real exchange rate can be used. Therefore, by following the studies made by
Cho et. al. (2002), Bittencourt (2004) and Chit et. al. (2010), this study will use the moving
standard deviation (MSD) as a measure of exchange rate instability6.
This method to measure the instability of exchange rate is the most indicated by previous
literature. For example, Dell'Ariccia (1999), Rose (2000) and Jozsef (2011) also used the moving
standard deviation of the differences of the natural logarithm and the real bilateral exchange rate
between the countries i and j as a proxy for the exchange rate uncertainty. The differential of this
method is its property of being zero if the exchange rate is following a constant tendency during the
specified time. This means that if the exchange rate follows a constant rate, there will not be
instability and the exchange rate for a certain period of time becomes perfectly predictable
(KAFLE, 2011). Besides, this measure of the exchange rate instability attributes more to the
external observations. This way, the more extreme observations, more adequate the behavior of
business people who are opposite to risk will be (DELL'ARICCIA, 1999).
In addition, it is important to mention that the exchange rate used in this study will be the
real exchange rate. According to Farrell et. al. (1983), the use of the real exchange rate is the most
indicated one, because serious consequences can be verified when the nominal exchange rate is
used, this happens because the variations in the nominal rates can be overcome by variation in the
price level nationally. This way, the real bilateral exchange rate for each flow can be obtained by
the ratio between the real exchange rate of each partner and the Brazilian real exchange rate.
Given the real bilateral exchange rate, it is done the calculation of the moving standard
deviation (MSD) of the differences of the natural logarithm of the real bilateral exchange rate
between the countries i and j during the year t ( U ij ,t ), which can be described as:
5
The fact that the measurements of instability (volatility) of the real exchange rate be used as proxies of exchange rate
uncertainty, the instability expressions, volatility and uncertainty are used to describe the same phenomenon in this
study.
6
For better details about measurements of uncertainty of the exchange rate, see Brodsky (1984).
10
 x
k
U ij ,t 
in which
X ij ,t
n 1
ij ,t  n
 x ij ,t

2
(3)
k 1
is the real bilateral exchange rate between the countries i and j;
xij ,t  ln( X ij ,t )  ln( X ij ,t 1 ) , considering used k gap in years7 (k = 2, 4, 6, 8 or 10). Whereas the
term x ij ,t is the average of past values (that is, for the last k years) of the variable xij ,t .
As it was seen previously, the exchange rate uncertainty which affects the commerce flow
between two countries is not a result only of the volatility of the exchange rate of these countries, in
which the variations of the exchange rates of other commercial partners also affects such flow of the
bilateral commerce. Soon, the third country effect, which is the measurement that takes into
consideration the volatility between these exchange rates for all the other countries of a certain data
base, except those of the countries i and j involved in the flow of the bilateral commerce in analysis,
should also be included in the model.
The third country effect, as it is called in the international literature, was investigated by
Dell’Ariccia (1999), and Cho et al. (2002), using a certain measurement that takes into
consideration the instability of the real exchange rate for all other countries, except the two
countries involved in the commerce in analysis. The studies of these authors used the participation
of countries in the entire commerce as pondering to obtain the measurement of the third country
effect. However, the present study will follow the example of Bittencourt (2004), who proposes a
differentiation in the pondering by economy sectors, that is, it takes into consideration the
participations in the commerce specific for each sector as pondering for all the combinations of
bilateral commerce between the 8 countries considered, including Brazil, for each year of the
sample.
This way, according to Bittencourt (2004), the volatility calculation of the real exchange rate
of a third country is given by:
U 3ijg ,t   uij ,t wijg,t   u ji ,t w gji ,t
i j
j i
(4)
g
in which U 3ij ,t is the measurement for sector g8, of the real exchange rate instability of a third
country, considering all the countries of a sample, except the countries i and j involved in the
7
The period of time is randomly chosen to investigate the strength of the results. Consider k gaps as a measurement of
“agent memories”.
11
commercial flow under analysis;
uij ,t and u ji ,t are the measurements of the real bilateral
exchange rate instability between the other countries (except the countries of the flow under
analysis), calculated by the method of moving standard deviation (MSD), as described before; and
wijg,t and w gji ,t are the pondering, the participations in the commerce specific for each sector (g) of
the other commercial partners, that is, that represents the participation of exportation of country i in
the total of importation of the country j originating from all the countries is the data sample, in the
year t and sector g; or the participation of exportations of country j in the total of importations of
country i originating from all the countries of the data sample during the year t and sector g.
Finally, the instability of the real bilateral exchange rate instability, the third country effect
and the tariff equivalent are included as explicative variables in the basic gravitational equation.
Therefore, the empirical gravitational equation to be estimated separately for the exportation and
importation flows of the Brazilian agricultural sector, is represented by:
ln( X ij ,t )   i   j   t  1 ln y jt yit    2 ln( d ij )   3 ln(1  Tij ,t ) 
 4 (U ij ,t )   5 (U 31ij ,t )   ij ,t
(5)
in which X ij ,t is the commerce flow (exportation and importation) of the agricultural sector
between the countries i and j during the period t;  i and  j represent the fixed effects for the
countries;  t represents the fixed effects for the years in the sample; ( y jt yit ) is the product of the
incomes (GDP) of the countries i and j during the period t (participation in the income of the
countries i and j in the worldwide income); d ij is the distance between the countries i and j; ( 1 Tij ,t
) equal one plus the simple average of the tariffs effectively applied in the agricultural commerce
between the country i and the partner j, during the year t;
U ij ,t is the measurement of the real
bilateral exchange rate instability between the countries i and j during the year t, measured by the
1
equation (3); U 3ij ,t is the measurement of the é third country effect for the agricultural sector (g =
1), during the year t, calculated by the equation (4); and  ij,t = which corresponds to the term of
random error.
As in the basic gravitational equation, it is expected that the variable used for the size of
market of other countries (product of incomes) has a positive signal, because the bigger the market
is (income level) of each country, the bigger the attraction power will be. The coefficient of the
8
g = 1, … , n sectors. In this study it will be analyzed only the agricultural sector. Therefore, g = 1, in which 1 is the
agricultural sector.
12
distance variables should present a negative signal, because it is expected that countries that have
more distance between one another commercialize less, because the increase of the distance
increases the costs, reducing the commerce between them. As for the representative variables of
exchange rate uncertainties, it is expected that the exchange rate instability be the country in
analysis, be the other partners (third country effect), by what was exposed in the previous sections,
present a negative or positive sign depending on the sector and flow of the commerce under
analysis. Whereas the tariffs, as they increase the commerce costs, as well as distance, will
negatively impact the volume commercialized between the countries.
3.2. Prediction methods
The choice of the estimation method is of great relevance to measure the effect of the
variables studied about the commerce flows. This way, the way the variables are added to the model
depends on the effect to be studied. According to Anderson and Van Wincoop (2004), the
estimation of a gravitational equation can be done through a model of fixed effects by Ordinary
Least Square (OLS) by using specific dummies variables by country to represent the terms of
multilateral resistance.
Grenee (2008) claims that the presence of non observed factors, in this case the multilateral
resistance terms, correlated to the other explanatory variables shows the estimation by fixed effects
as the most suitable one. This is due to the estimation of fixed effect models that permit the
inclusion of terms of multilateral resistance as non observed factors in the empirical equation
avoiding the bias caused by the omission of these variables. The problem that occurs when these
terms are omitted is related to their correlation with the term that represents the transaction costs.
Other relevant aspects in the estimation of the gravitational model refer to the presence of
different commercial flows due to a high heterogeneity of commerce patterns between the countries
and the presence of commercial flows which are null (when there is no commercialization of a
certain product or absence of data about it). The resulting problems of these data characteristics are
a probable occurrence of heterocedasticity and the bias of the sample selection which can put at risk
the quality of the estimative.
Considering the data characteristics, it is found in the literature a big discussion about the
best methods of estimation of the gravitational model. Santos Silva and Tenreyro (2006) points out
that a convenient way to overcome the problem of the heterocedasticity, besides including the zero
flows in the sample, would be the estimation through a non linear method Poisson PseudoMaximum-Likelihood (PPML).
Therefore, according to the suggestions given by Anderson and Van Wincoop (2004) and
Santos Silva and Tenreyro (2006), in order to evaluate the relationship between the variables of the
13
proposed method for the Brazilian sectorial commerce flows and their main partners, it is used a
model of fixed effects by Ordinary Least Square (OLS) and later, the estimation of a model of fixed
effects by using the method PPML by Santos Silva and Tenreyro. The analysis between them is
given by the coherence of signals and by statistic indicators of coefficient significance, allowing a
comparison between the results of the models, besides creating a higher answer to the analysis
proposed.
3.3. Data base
It was used in this study a data panel referring to the agricultural commercial flow
(exportation and importation) between Brazil and its main commercial partners (China, the USA,
Argentina, Germany, Japan, Holland and Chile), during the period from 1989 to 2011. The data
panel was built following the methodology SITC (Standard International Trade Classification) of
two digits, obtained by TRAINS (Trade Analysis and Information System) from WITS (World
Integrated Trade Solution) of UNCTAD (United Nations Conference on Trade and Development).
From this data base were extracted the commerce and tariffs data.
As for the GDP and real exchange rate data, they were obtained through IFS (International
Financial Statistics) from IMF (International Monetary Fund). Whereas the distance variable used
referred to the distance in kilometers between the most populous cities for each pair of countries,
this variable was obtained through the Centre D’Estudes Prospectives et d’Informations
Internationales (CEPII). As for the tariff, it was used the average tariff effectively applied to the
agricultural sector for each country. As for the measurement unit, the data are expressed in current
dollars.
4. Results and Discussion
First, it is important to evaluate the representative measurements of the exchange rate
uncertainty (that is, the instability of the real bilateral exchange rate in the average/long term (Uij,t)
and the third country effect (U3ij,t)) together with a commercial flow variable and verify the
behavior of Brazilian agricultural trade flows on relative exchange rate instability evidenced
throughout the period analyzed.
Therefore, in order to illustrate this relationship, Figure 1 shows the behavior of the
instability measurement of the real bilateral exchange rate between Brazil and the USA (measured
by the method of moving standard deviation – MSD – with k = 4), of the third country effect
between the USA and Brazil (calculated for the agricultural sector and with k = 4) and the series of
Brazilian agricultural exports to the USA.
FIGURE 1 ABOUT HERE
14
As it can be verified in Figure 1, the relationship between the Brazilian agricultural exports
to the USA and the variables representing the exchange rate uncertainty was negative. This reversed
relationship happens mainly during the first five years of the sample, in which the exportation fall
confronts the increase of the exchange rate instability (Uij,t) and the third country effect, as well as
in the past years before 2005, when the reduction of the instability level of the two exchange rate
uncertainty measurements oppose the high growth of the Brazilian agricultural exports destined to
the North American market. Besides, after making a general analysis of the two representative
measurements of the exchange rate uncertainty, it is observed that the third country effect was the
measurement that showed higher levels of instability during the period analyzed.
Therefore, when it is observed the relationship between the commerce and the exchange rate
uncertainty, showed in Figure 1, it cannot be denied the existence of a negative relationship.
However, with this simple graphic analysis of the exportation flow between two countries, it is not
possible to say that this reversed relationship or a possible positive relationship is true for all the
commercial flows and the countries analyzed in this study. So, the analysis of the commercial flows
with the variables Uij,t and U3ij,t needs more investigation by using estimations with other variables
which affect the commerce and an appropriate method which includes all partners.
In addition, the analysis of agricultural commerce between Brazil and its main partners starts
to be done through an econometric approach, which is possible to empirically infer that the
instability of the real bilateral exchange rate and the third country effect, besides the traditional
gravitational variables, such as: income, distance and tariffs have caused great impact upon the
exportation and importation of Brazilian agricultural toward its main commercial partners
considered from 1989 to 2011.
The results showed in Table 1 is based on the estimation of the empirical gravitational
equation coefficients (5) through the model of Fixed Effects (dummies for all the countries and
time) by Ordinary Least Square (MQO) and by the estimation by using the method Poisson PseudoMaximum-Likelihood (PPML) with Fixed Effects (FE). This procedure was done by using the
estimation methods of MQO and PPML, which allows to compare the results between the models,
besides generating a higher solution to the proposed analysis.
The estimative of the variable coefficients dummies for countries and time were not
presented in Table 1, considering that they do not have a better interpretation and their results are
not relevant to the conclusions, they serve only to avoid that their effects affect the coefficient of the
other variables. The adjustment and the strength of the results are measured by different statistics.
The significance of the coefficients of the fixed effect model by MQO is examined through the Test
15
F by Chow and the Test by Wald verifies the joint significance of the estimation variables when it is
used the method PPML.
TABLE 1 ABOUT HERE
In Table 1, the values of Brazilian agricultural exports and importations compared to its
seven commercial partners considered in this study are composed of dependent variables by MQO
and PPML were good, with the majority of the estimated coefficients showed statistic significance
were very similar when it comes to signals expected for all the explanatory variables estimated by
both methods. Besides, through Test F and Test Wald, the hypothesis that all the coefficients do not
explain the Brazilian sectorial exportations and importations was rejected to 1% of significance of
the estimations for both types of commercial flows, that is, it can be concluded that the variables are
altogether significant.
According to the results for the agricultural exports, all the variables showed the signals
expected for both methods of estimation used, considering that the variables Tariffs did not show
statistic significance through MQO, but on the other hand, the estimation done through PPML
proved the sensibility of this sector under a negative impact imposed by the tariffs on the Brazilian
agricultural exports. The product from GDP (size of the market) was significant to 1% and the
signal found, as an expected signal shows that an increase in the level of income of the countries
increases the quantity exported by Brazil, therefore, an increase of 10% in the income level of
Brazil and its partners tends to increase the exportations in this sector at 13,85%, when considering
the estimative through the methods of MQO with fixed effects. The distance variable had a statistic
significance of 1% and the expected signal, but its low magnitude shows the low impact upon the
national agricultural exports.
As for the exchange rate instability variables9 and the third country effect, it was observed
that both showed a reversed relationship and was significant statistically with the flows of the
Brazilian agricultural exports. However, it is important to mention the magnitude of the third
country effect was relatively higher than the exchange rate instability between Brazil and its
partners. This result indicates that higher exchange rate instability of a third country can lead to a
higher reduction in the agricultural exports of Brazil to any partner with the seven countries
analyzed.
As for the results of the agricultural imports, the variable distance had a statistic significance
of 1% and the expected negative signal, but on the other hand, showed a superior magnitude to the
9
In this section, the variable that represents the Instability of the real bilateral exchange rate in average and long terms
between Brazil and its partners (Uij,t) will be referred to as “instability” or “exchange rate uncertainty”.
16
result of this variable for the exportation analysis, showing that the more distant the countries, less
the value of the Brazilian agricultural imports is, considering that a higher distance increases the
cost with transportation. It can be noticed, for example, that an increase of 1% in the distance (in
kilometers), for the model MQO of the agricultural imports, generates a reduction of 2,14% in the
imported volume of this sector. The product logarithm of GDPs showed an expected positive
influence, however, its low magnitude shows the reduced impact of the levels of income upon the
importations of this sector. As for the tariffs, the estimation by MQO (FE), this variable did not
show coefficient statistically different from zero in the level of significance and the maximum of
10%, however, it showed statistically significant and with a reversed signal than it was expected, as
for the importations of the agricultural sector by using the model PPML.
As for the third country effect and the impact of the exchange rate instability upon the
importations of the Brazilian agricultural sector, both showed significant coefficients for both
methods of estimation. These coefficients affect negatively the Brazilian agricultural importations,
suggesting that the lack of stable macroeconomic policies of Brazil and its partners, can reduce the
commerce of this sector. It is important to mention the magnitude of the third country effect for the
agricultural importations was lower than the result obtained in the analysis of the exportations.
A probable explanation for a higher magnitude of the third country effect for the
exportations of the agricultural sector is that for the past years, this sector has been characterized by
the high entering of foreign investments, this way, the exchange rate variations of the other partners
have negatively affected the investment in this sector, considering that the foreign capital can be
more expensive or better to be used in another country, which can cause a production reduction and
a higher negative impact upon the Brazilian agricultural exportations.
This way, the estimative found confirms that the third country effect is a present effect in the
Brazilian agribusiness, because the results were negative and significant for all the estimations
(Table 1). According to Côté (1994), as most of the available empirical studies do not incorporate
the exchange rate instability of a third country, this can be one of the reasons why some studies
show positive effects of the exchange rate instability upon the commerce. In the results obtained in
this study, the coefficients for the third country effect showed considerable magnitude which allows
to say that the exchange rate instability between the Brazilian partners can be a problem to the
national agribusiness.
In addition, it is important to mention that other studies have also found negative impact of
the exchange rate instability and the third country effect upon the Brazilian agribusiness.
Bittencourt (2004) analyzed the effects of the real exchange rate volatility and the third country
effect in the sectorial commerce between Brazil and country of MERCOSUL. As for the results
17
obtained in the agricultural sector, the author identified a high elevated negative impact of the
exchange rate uncertainty upon the commerce of this Brazilian sector. Besides this result, the author
concludes that the lack of coordination of macroeconomic policies adopted mainly by Argentina
and Brazil have been considered a threat to the future of this economic bloc. So, the policies that are
failed to meet, can be one of the causes of higher exchange rate variability and the prices, this
brings adverse impacts to the bilateral commerce due to the behavior of economic agents opposite
to risks.
As analyzing the results obtained by the estimative of the empirical gravitational equation
for the agricultural exportations and importations between Brazil and its main commercial partners,
during the years from 1989 to 2011, it can be mentioned that most of the coefficients estimated for
the analyzed variables showed expected signs and were significant statistically. This fact makes
clear that the income of countries, the costs related to distance, the tariff barriers, the exchange rate
instability between Brazil and a certain partner and the exchange rate uncertainty of a third country
are shown as important determiners of exportation and importation flows between Brazil and the
seven partners analyzed.
Another important matter in this general analysis is the differential impact of each variable
upon the exportations and importations of the sector being analyzed, which shows the importance of
studies such as this one, with a separated analysis for sectors and kinds of commercial flows.
5. Conclusions
Considering the evolution of the Brazilian agribusiness participation in the international
commerce and the view of exchange rate uncertainties, this study aims to evaluate how the
exchange rate instability of average/long terms have affected the flows of agricultural exportations
and importations between Brazil and its main commercial partners, during the years from 1989 to
2011. The results obtained by this analysis show that for both agricultural exportations and
importations between Brazil and its main partners are negatively affected not only by the exchange
rate uncertainty, but also by the exchange rate of the partners in analysis. Therefore, it can be
mentioned that it was accepted the hypothesis that the instability of the real bilateral exchange rate
of average/long terms have negatively influenced the agricultural trade flows between Brazil and its
main partners considered.
That is, the movement of the exchange rate are not totally unexpected, so an increase on the
exchange rate uncertainty in a long term have led economic agents opposite to risks to reduce their
activities in the Brazilian agribusiness and possibly reduce the investments in sectors which they
have better understanding of the market and less risks, or simply leading them to priories the
domestic market, because the exchange rate instability of average/long terms cannot be easily
18
protected and it is expensive to be covered. Besides, the Brazilian financial market is still under
development and needs better credit access and higher possibilities of coverage and insurance.
Therefore, the economy stability and the decisions made that aim to reduce the uncertainties
of the movements of exchange rates are important variables to be considered in case Brazil wants to
increase the agribusiness with these countries. On the other hand, this study also includes as a result
of estimative that it is not only exchange rate instability that affects the agricultural commerce
between Brazil and its main commercial partners, but also the exchange rate instability of these
countries. So, in case Brazil intends to increase its amount that is commercialized in the
agribusiness, it should consider that the other countries should make decisions in order to reduce the
uncertainties about the changes of their exchange rates.
In the previous years to the international crisis of 2008, there was some discussion about
economic debates concentrated in the tensions about the devaluation of national currency, a
situation called as “currency battle”, which happened between the USA and China, this
phenomenon reverberated strongly on the other countries, because the devaluation of the Chinese
currency was object to controversy between the countries, especially due to its effects upon the
worldwide commerce.
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21
Figures and tables
1,6
1,4
1,2
1
0,8
0,6
0,4
0,2
0
Exports in US$ 4 billion
Third country effect
Uij (EUA/BraZil)
Source: Research data.
Figure 1 – Relationship between the Brazilian agricultural exports to the USA, the exchange rate
instability (Uij,t) USA/Brazil and the third country effect between Brazil and the USA for
the agricultural sector during 1989-2011.
Table 1 – Estimatives MQO and PPML Fixed Effects (FE) of the empirical gravitational equation
(5) for the Brazilian agricultural exports and imports, during 1989 - 2011
Explanatory
variables
lnGDPiGDPj,t
lnDistij,t
lnTariffsij,t
Uij,t
U3ij,t
cosnt.
R2
Test F
Agricultural Exports
MQO (FE)
PPML (FE)
***
1.385
1.200***
(0.121)
(0.060)
***
-0.546
-0.214***
(0.111)
(0.080)
ns
-0.112
-1.233*
(1.080)
(0.727)
***
-1.432
-0.938**
(0.339)
(0.389)
***
-3.658
-3.464***
(0.611)
(0.681)
Agricultural Imports
MQO (FE)
PPML (FE)
***
0.748
0.580***
(0.125)
(0.099)
***
-2.143
-1.722***
(0.111)
(0.080)
ns
-1.618
9.597**
(2.682)
(3.960)
***
-1.207
-0.577***
(0.375)
(0.203)
***
-1.515
-2.211***
(0.457)
(0.498)
1.728**
(0.739)
1.189***
(0.421)
22.831***
(1.025)
17.828***
(1.614)
0.95
0.98
0.98
0.98
100.38***
Test Wald
226.26***
1605.85***
724.16***
Source: Results of the Research.
Note: strength standard error presented in parentheses, simple star (*), double (**) and triple (***) shows significance
to 10%, 5% and 1%, respectively, whereas ns means absence of significance. N = 161 (number of observations for each
sector).
22