Chapter 4


 As such systems are usually discarded or phased out as part of adjustment programmes,
 different goods will be subjected to different degrees of devaluation. Goods with
 previously preferential rates will be subject to the greatest price increases. This refers, in
 many cases, specifically to basic food commodities, and affects particularly the urban
 poor who depend on the market as their source of food supply.

2) The existence of a parallel market for foreign exchange (see Annex 2B, par. 4):
 In countries with an over-valued official exchange rate, there generally exists a parallel
 or black market for foreign exchange. As access to foreign exchange at the favourable
 official exchange rate is limited, many transactions take place at the (for importers) less
 favourable parallel exchange rate. The same goods may be subject to different exchange
 rates at different markets or at different times. The price of goods traded largely on the
 basis of parallel exchange rate transactions will be little affected by a devaluation of the
 official rate.
 The proportion of transactions taking place at the official rate is likely to be higher after
 devaluation than before. With a reduced differential between official and parallel
 exchange rates, there is less incentive for sellers of foreign exchange to sell on the
 (illegal) parallel market. As a result, more foreign exchange is available on the official
 market and it will be easier for importers to buy foreign exchange at the official rate. If
 the devalued official rate remains above the former parallel rate (the usual case),
 increased transactions at the official rate mean an effective revaluation of the exchange
 rate for those transactions that switch from the parallel to the official market after
 devaluation.

 3) Different degrees of (non-)tradablility and market imperfections:
 While there are certain sectors whose output clearly fall into one of the categories of
 tradables/non-tradables (e.g. cash crops for export under tradables, most government and
 many other services under non-tradables), there is a wide range of goods, including most
 food commodities, which fall somewhere in between the two cases. This means, in
 effect, that the prices of such goods are neither exclusively determined by the world
 market prices (as assumed to apply to tradables) nor exclusively by domestic supply and
 demand factors (as assumed to apply to non-tradables). There exist, furthermore,
 significant market fragmentation, market imperfections, varying degrees of substitution
 between non-tradables and tradable goods, and trade barriers in importing countries as
 well as depressing effects of collective adjustment on the external terms of trade will
 affect export prices and export volumes. All these factors (for details see Annex 2A,
 para. 5) imply that the price effects (and the secondary effects on agricultural production,
 incomes, and employment) will be less pronounced than would be expected in the case
 of tradables and may be different from what would be expected to apply to non-
 tradables.
 Nevertheless, it can be assumed that the food prices will increase on average. The
 highest relative price increase will be recorded in those food commodities which are
 actually imported (or exported). The prices will increase least or even fall in those cases
 where the food commodities are virtually non-tradable and where there are few
 substitution linkages in consumption with tradable commodities. The latter applies


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