Integration and Equilibrium in the Maize Markets in Southern Africa

For most countries in southern Africa, food security has been addressed through self-sufficiency, traditionally attained through widespread government involvement in the input and output markets for major food commodities. Food policies through the 1980's have been characterized by input subsidies for farmers; fixed, pan-seasonal and pan-territorial farm level pricing systems, mainly implemented through parastatal marketing boards; as well as subsidies and price controls at the wholesale and retail levels. Under Structural Adjustment Programs of the 1990's, most of those policies were abandoned for more market oriented policies. During the same period, many countries in the region joined the multilateral trading system, and on a regional level, two regional free trade agreements were ratified and bilateral preferential trading agreements continue to be negotiated. Those policy shifts have left in their wake a region characterized by a blend of food policies, with greater openness and a market-led economy in some countries, while substantial government involvement persists in others. In this policy environment, food supply volatility, price instability and weak coordination of trade policies remain fundamental problems. As the southern Africa region grapples with recurrent food shortages, reference is often made to increased intra-regional trade as an important integral component of a comprehensive food strategy. The assumption is that as countries reduce tariff and non-tariff barriers to trade, they become more integrated and more efficient, facilitating commodity movement at lower transfer costs, hence lower prices to the final consumer. In the southern Africa region, research efforts have focused on analyzing market integration at an intra-country level (Abdula 2005, Tostão and Brorsen 2005, Alemu and Baucuana 2006, Penzhorn and Arndt 2002, Traub et al 2004, Mabaya 2003, Mutambatsere 2002, Barrett 1997) . Limited work has evaluated how well integrated or efficient the food markets are at the regional level, to ascertain if in fact trade is a viable food security strategy given existing market systems. In this paper, we evaluate the extent to which maize market systems in the region have become integrated and efficient, and identify the nature of inefficiency where it exists. The analysis employs the Parity Bounds (Baulch 1997) and Barrett-Li (Barrett and Li 2002) models, in collaboration with comprehensive non-parametric descriptions of market pairs, to provide a holistic assessment of pair-wise market interaction, in the process also providing a comparison of the methods as measures of integration and efficiency. Specifically, this paper investigates pair wise spatial integration and efficiency for five central markets in southern Africa: Gaborone in Botswana, Gauteng in South Africa, Blantyre in Malawi, and Maputo and Mocuba in Mozambique. The analyses use monthly retail level data on commodity prices, trade flows, and transfer costs, for the period June 1994 to December 2004. The study seeks to evaluate the nature of price and trade relations, establish the level of regional spatial integration, and evaluate the level of efficiency in these markets. Results reveal significant frequency of market integration, indicating tradability of commodities and contestability of markets. Efficiency holds less frequently, although non-trivially; we observe that for those markets characterized by near continuous trade, returns to arbitrage are exhausted about 25% of the time. Often however, when trade is observed, efficiency appears to be weakened by insufficient arbitrage. For those markets, positive trade is occasionally observed when arbitrage returns are negative. Where trade is not observed, efficiency holds with a slightly higher frequency, so that the lack of trade is often justified by the lack of positive arbitrage returns. Here again, efficiency is occasionally compromised by insufficient arbitrage, whereby trade sometimes fails to occur even when arbitrage incentives appear favorable. In order of frequency, we observe a high occurrence of positive returns imperfect integration (regime 3 in the Barrett-Li Model) and segmented equilibrium (regime 6), followed by a regular occurrence of perfect integration (regimes 1 and 2), and irregular segmented disequilibrium (regimes 4) and the negative returns type of imperfect integration (regime 5). Our results suggest a need for public policy in the areas of improved production to take advantage of unexploited arbitrage opportunities, as well as addressing structural barriers to trade that prevent market entry especially where positive returns are currently observed. Results highlight an important contribution to the trade food policy debate for the southern Africa region: that although restrictive transfer costs are observed in enough cases, the dominant form of inefficiency in regional markets is insufficient arbitrage, likely resulting more from supply side constraints, non-cost barriers to trade (infrastructural or regulatory) and imperfect information, than from restrictive tariffs. In some cases however, the lack of trade is an efficient outcome (indicating limited or negative arbitrage profits) that probably requires no immediate policy response