The Effects of Domestic Currency Depreciation on Import Substitution: New Empirical Evidence from the Ukrainian Pork Industry

ABSTRACT

Economic theory states that currency devaluation reduces imports. However, tradability of inputs makes the effect ambiguous. This paper aims to test the hypothesis that, when the exchange rate pass-through is higher for input than for output prices in a given sector, the depreciation of the local currency can reduce profitability and output, leading to increased imports. We found partial confirmation of this hypothesis using a structural vector autoregression model for data from the Ukrainian pork sector for 2014 to 2020. Policymakers should consider that pork production is vulnerable to a weakening currency due to high dependence on exportable feed grains.

KEYWORDS:

• Import
• currency depreciation
• agriculture
• pork

JEL CLASSIFICATION:

• Q170
• Q110
• F140

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1. With the word “tradable”, we mean the categories of goods that can be either exported or imported without any restrictions; their prices are highly dependent on world market prices. Although most trade surveys pay attention only to importable inputs, exportable resources are also very sensitive to devaluation. The producers of these resources have an opportunity to export them at higher prices after the currency depreciates. Therefore, they can increase domestic prices. In the following, we use this term to encompass the broad category of goods that are more dependent on the exchange rate than non-tradable goods (realized primarily on the domestic market).

2. Trade volumes in Ukraine’s pork sector were low during the observed period. Therefore, we assume for simplicity that Ukrainian pork is a non-tradable product.

3. EXW (Ex Works) is an international trade term that describes when a seller makes a product available at a designated location, and the buyer of the product must cover the transport costs (Incoterms 2010).

4. Ukrainian Classification of Goods for Foreign Economic Activity.

5. Note that although the confidence lines in plots C3 and C4 cross the X-axis, this has little effect on the significance of the results. Given that the projection lines do not cross the X-axis, the intercept rather means that the percentage change in the response variable is small in magnitude.

6. The Producer Nominal Protection Coefficient is an indicator of the nominal rate of protection for producers measuring the ratio between the average price per ton received by producers (at farm gate), including state support and other transfers, and the border price (measured at farm gate level).

Additional information

Notes on contributors

Pavlo Martyshev

Dr. Pavlo Martyshev is a researcher at the Center for Food and Land Use Research at Kyiv School of Economics (KSE). He obtained his PhD degree in economics from the Institute for Economics and Forecasting of the National Academy of Sciences of Ukraine in 2020. His current professional interests include global food security, price risk management on grain markets, policy impact assessment in agriculture.

Sören Prehn

Dr. Sören Prehn works as a research associate in the Department Agricultural Markets at the Leibniz Institute of Agricultural Development in Transition Economies (IAMO). He did his PhD at the Chair of Agricultural Price Analysis at the Georg-August-Universität Göttingen, Germany. Dr. Sören Prehn’s current research focuses on agricultural trade analysis, agricultural futures markets, and econometrics.

Oleksandr Perekhozhuk

Dr. Oleksandr Perekhozhuk works as a research associate in the Department Agricultural Markets at the Leibniz Institute of Agricultural Development in Transition Economies (IAMO). He obtained his PhD from the Martin Luther University Halle-Wittenberg in 2007. His main research is focused on the field of industrial organization, international trade, applied econometrics, microeconomic analysis and new empirical industrial organization (NEIO).

Volodymyr Vakhitov

Dr. Volodymyr Vakhitov is an assistant professor at Kyiv School of Economics. He obtained his PhD degree in economics from the University of Kentucky in 2008. Volodymyr has experience in applied economic and microeconometric research in productivity, foreign trade, large firm-level data sets. He took part in various projects for the World Bank, USAІD, Norwegian Institute of Foreign Affairs (NUPI).