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Abstract
This paper investigates the spatial integration and efficiency between five central markets in southern Africa.
The study uses data on commodity prices, trade flows, and transfer costs from central maize markets in
Botswana, Malawi, and South Africa, and two in Mozambique, analyzed using the Parity Bounds Model, the
Barrett-Li Model and some level 1 and non-parametric assessments. The study seeks to (1) evaluate the nature
of price and trade relations, (2) establish the level of regional spatial integration, and (3) evaluate the level of
efficiency in these markets.
Results from the analysis indicate various forms of integration and efficiency outcomes for the sample markets.
The central markets in South Africa and Botswana are characterized by significant levels of perfect integration,
with higher frequency of imperfect integration with positive returns observed on the South Africa to Botswana
trade route, and some occurrence of imperfect integration with negative returns observed in the opposite trade
direction. For South Africa and Mozambique, trade is bidirectional and discontinuous, with very low frequency
of perfect integration. Trade between South Africa and Mozambique’s Southern region generally fails to
exhaust arbitrage profits, and though integrated, the market pair appears largely inefficient. South Africa and
Malawi follow similar trends, although in this case perfect integration holds with higher frequency, and
imperfect integration with negative return is occasionally observed from trade in the Malawi to South Africa
trade route. Malawi and Mozambique’s Northern region exhibit perfect integration of a relatively high
frequency, although imperfect integration with positive returns appears dominant on the Mozambique to
Malawi route. Trade is bidirectional and discontinuous, predominantly in the Mozambique to Malawi direction.
The market interactions between Botswana and Mozambique’s Southern region or Malawi follow a related
trend exhibiting market segmentation as evidenced by the lack of trade. Efficiency holds with a fairly high
frequency mostly in the form of segmented equilibrium, although significant segmented disequilibrium on the
Botswana to Mozambique/Malawi route is also observed.
Overall, the southern Africa maize markets considered in the sample seem to exhibit significant frequency of
market integration, indicating tradability 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 for about 25% of the time. Often however, when trade is observed, efficiency
appears to be weakened by insufficient arbitrage, possibly a result of non-cost barriers to trade (infrastructural
or regulatory), imperfect information, or supply side constraints. For these markets, positive trade is also
occasionally observed when arbitrage returns are negative, possibly due to contracting lags, and exchange rate
fluctuations. Where trade is not observed, efficiency appears to hold with a slightly higher frequency (up to
45%), so that the lack of trade is often justified by the lack of positive arbitrage returns. Significant segmented
equilibrium also seems to characterize these markets, where again the lack of trade is consistent with expected
arbitrage returns. For these markets, efficiency is also occasionally compromised by insufficient arbitrage,
whereby trade sometime fails to occur even when the returns to arbitrage incentives appear favorable
(segmented disequilibrium). Therefore in order of frequency, we observe a high frequency of imperfect
integration (regimes 3) and segmented equilibrium (regime 6), a fairly regular occurrence of perfect integration
(regimes 1 and 2), and irregular occurrence of segmented disequilibrium (regimes 4) and the negative returns
type of imperfect integration (regime 5). In specific markets, import prices consistently exceed domestic market
prices, an inefficient outcome that appears to result from the involvement of the state in grain trade, where
market conduct often is driven by non-profit objectives. These results suggest a need for policy intervention in
the areas of improved productivity and access to information to takes advantage of unexploited arbitrage
opportunities, and in the longer term, dealing with structural barriers to trade that prevent market entry
especially where positive returns are currently observed. In some cases though, the lack of trade is an efficient
outcome that probably requires no immediate policy interventions.