Transcript Slide 1 - Arsip UII

ditions force cereal production / consumption to falter as is often the case in
Somalia. The average price of cereals at the international grain market serves to '
define a useful functional relationship with quantity of imports. The causal effects of
drought are, again, expected to be captured via the dummy variables.
2.3.8 Prices have dual roles depending on the nature of model specification. The
formulation that the market determines the equilibrium supply-demand conditions
may be far fetched in this special environment. A dis-equilibrium model where prices
are responsive to changes in the cereal supply and demand in Somalia, on the
other hand, would require that an excess demand relationship be specified such that
it is a function of farmgate prices or alternatively as function of excess demand. This
formulation will be discussed formally in model II.
2.3.9 If prices are exogenously determined, then their inclusion into the model as
explained variables have no justification. In such circumstances, only domestic
production, imports and total cereal requirement equations can be specified as
dependent variables. Prices specified as explanatory variables may be considered
wherever feasible. Model I is specified as such.
2.3.10 On the other hand, the reality of price regulation cannot totally be subdued.
In this study we consider the alternative formulation that non-clearing markets are
real-world phenomena in Somalia. Where prices are controlled, the effect will lie on
the excess demand. The hypothesis is then tested that total cereal requirements are
greater than the sum of domestic production and imports (or total availability). Given
the persistence of shortages in Somalia and the state of administered prices, the
total cereal requirement equation, the production equation and the imports equation
could only be explained as is done in Model II.
2.3.11 Only when total cereal requirement is equal to total cereal supply (or
availability) is the market cleared. Prices at the farm and retail would then become
strong candidates for inclusion into the model formulation. We consider this
hypothesis as the target goal for the cereal sector to achieve in the future. Prices at
the farmgate, assuming these conditions hold, would then be a function of - lagged
own price(s) and the level of domestic production of cereals. Retail prices, 'on the
other hand, would be a function of lagged own price(s) and imports. This defines the
specification considered in Model Ill.
2.3.11 The preceding methodological discussions are algebraically summarized
in Appendix Ill.
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