Spatial and Vertical price transmission in food staples market chains in Eastern and Southern Africa

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Spatial and Vertical price transmission in food
staples market chains in Eastern and Southern
Africa What is the evidence?

• Awudu Abdulai
• Department of Food Economics and Consumption
  Studies,
• University of Kiel, Germany

FAO Workshop on Trade and Market Policy
Options, Rome, Italy 1-2 March 2007
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Main objective of Study

• To present a review and synthesis of spatial and
  vertical price transmission of commodity markets
  in Eastern and Southern Africa and
• to highlight where major contributions and
  research gaps exist in the empirical literature.

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Structure of presentation

• Conceptual framework for both spatial and
  vertical price transmission
• Discussion on econometric techniques used in
  examining price transmission
• Review and synthesis of the empirical evidence
• Highlight major gaps in the empirical research
• Implications for trade policy

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Significance of spatial and vertical price
transmission analysis

• Given that price transmission integrates markets
  horizontally or vertically
• Studies on price transmission may provide
  information on how shocks in one market are
  transmitted to another, thus reflecting the
• competitiveness of markets
• effectiveness of arbitrage
• efficiency of pricing
• the extent to which domestic markets remain
  insulted

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Information could be useful in Eastern and
Southern Africa

• in understanding the impact of policy changes on
• the transmission of price signals and information
  across spatially separated markets in different
  regions
• the adjustment of domestic prices to changes in
  world market prices
• the actions of market participants at alternative
  market levels (producers, wholesalers and
  retailers)
• Quite important in assessing the effectiveness of
  trade policy reforms (Internal and WTO reforms)
• Also significant for the formulation of
  intervention strategies to prevent food insecurity

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Modeling Price Transmission
price in a given local market
price in the central market.
?t residuals of the cointegrating regression
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Methods used in price transmission analysis

• Initial Approaches
• Correlation coefficients, Ravallions formulation
• First differences specifications (Houck)
• Modern Time Series
• Causality
• Cointegration (Engle-Granger and Johansen)
• Error correction models
• Transaction Costs Based Approaches
• Threshold Autoregression Models (TAR)
• Parity Bound Models (PBM)

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Available Empirical Evidence (1)

• Accumulated evidence of the positive impact of
  market reforms on the extent and speed of price
  transmission between spatially separated markets
  in Eastern and Southern Africa
• The extent of integration varies between
  countries and commodities
• Increased competition and cost-effective private
  sector trading generally resulted in lower
  marketing margins and better integration of
  spatially separated markets

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Available Empirical Evidence (2)

• Low levels of market integration in spite of
  market reforms attributed to poor marketing
  infrastructure such as roads, transportation,
  communication, and other transaction costs
• Transmission of prices from world commodity
  markets to domestic markets have improved
  considerably
• indicating potential benefits from a successful
  outcome of the current WTO round
• Some markets still remain insulated with
  protective policies

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Spatial price transmission
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Price transmission across countries
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Vertical price transmission
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Challenges for future studies

• Relating empirical analysis to theoretical
  foundations
• Analyzing determinants of price transmission and
  causes for asymmetric price transmission
• Will require cross-section analyses
• Adequately capturing the impact of policy changes
• Endogenous determination of breakpoints
• Data frequency to adequately capture transmission
  process
• Overall, stronger policy conclusions require
  supplementing price transmission studies with
  microeconomic studies of market structure and
  traders behavior

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Implications for trade policy

• Market liberalization is necessary, but probably
  not sufficient for achieving a structural change
  in market integration or complete pass-through of
  world prices to domestic prices
• Price transmission between commodity markets can
  be substantially improved by reducing transaction
  costs, in particular, transport and information
  costs
• Quite significant for both domestic reforms and
  WTO outcome