Transportation costs and spatial integration of agricultural commodity markets in Africa

By

Edward Mabaya

Introduction

· A key argument of Chapter II and VI of the “Transport and the Millennium Development goals in Africa” working document is that efficient operation of transport infrastructure will contribute towards eradication of extreme poverty and of hunger (MDG 1) and enhance international cooperation in support of economic development (MDG 8).

· An implicit assumption behind this premise is that reduced transport costs will increase spatial market integrations, allowing for specialization within and across countries thereby maximizing benefits from trade.

· This paper evaluates the potential impacts from reduced transportation costs on intra- and inter-country integration of agricultural commodities markets.

Background

· As part of the Structural Adjustment Programs (SAP) introduced in the late 1980s and early 1990s, most African governments relinquished their control on agricultural markets to the "invisible hand" of market forces. Implicit in the deregulation of agricultural markets was the assumption that, when left to themselves, markets would converge toward a competitive market equilibrium in which gains from trade are maximized.

· Because agricultural production is highly specialized across both space and time, and the commodities are bulky and often highly perishable, the degree of relationship between pairs of markets across space, time and form is key to appraising the economic performance of agricultural markets.

· Inter-market transfer costs consist mainly of loading and unloading costs, transportation, and the traders’ normal profit, applicable taxes, financing costs and risk. Of these, transportation costs usually constitute the largest share.

Market Integration, Competitive Equilibrium and Social Efficiency

· Market integration is defined as the transfer of excess demand from one market to another, manifest in the physical flow of commodities (tradability) and/or the transmission of price shocks from one market to another (contestability).

· Competitive equilibrium, on the other hand, refers to the state in which the marginal profits from arbitrage equal zero. If markets are in competitive equilibrium, opportunities for profitable arbitrage cannot exist at the margin. Thus, for competitive spatial equilibrium, price differentials for an identical good between any pair of spatially distinct markets should be less than or equal to the cost of transferring the good between them (with equality if trade occurs).

· Social Efficiency: Both market integration and competitive equilibrium treat inter-market transfer costs as exogenous. To maximize the social benefits from specialization and trade, inter-market transfer costs should be minimized, all trade restrictions abolished, and market failures corrected. Thus, to attain “social efficiency of product allocation across markets depends fundamentally on the minimization of the costs of commerce” (Barrett, 2001). It is this last concept, social efficiency, that development oriented spatial market analysis study should seek to evaluate and public policy makers should aim for. However, because inter-market transfer costs are difficult to observe and measure, spatial market integration is often used as a proxy measure.

Eradication of extreme poverty and of hunger (MDG 1)

· Chapter II of the “Transport and the Millennium Development goals in Africa” working document argues that improvements in transport infrastructure will help achieve inclusive development. Transport infrastructure has a large effect on the pattern of growth, especially is geographical inclusiveness.

· With more than 70% of Africa’s population located in rural areas where the main source of livelihood is agriculture, maximizing social efficiency in domestic agricultural commodity markets is essential to achieving MGD1.

· Examples are given in the working paper on the impacts of transport infrastructure on growth patterns. High transportation costs result in segmented spatial equilibrium or isolation for both input and output markets within most a most African countries.

· Segmented input markets imply that productivity enhancing agricultural technology such as fertilizer and improved seed does not reach farmers in remote areas. There is strong empirical evidence supporting the link between farmer’s access to an all-weather road access to technology adotion (Zavale, 2005; Croppenstedt and Mulat, 1996). Improved road infrastructure places agricultural technologies closer to the farmers at affordable prices.

· For output markets, segmented equilibrium implies that comparative advantages in agricultural productivity are not fully exploited and farmers are forced to pursue food security through self sufficiency. Without integration, no mechanism exists for price signals to be transmitted from food deficit to food surplus areas, prices may become volatile, and producers may fail to specialize according to comparative advantage (Baulch 1997).

· Numerous studies have been conducted to investigate spatial integration and efficiency of spatially distinct domestic markets for agricultural commodities: Dercon (1995) analyzed the integration of teff markets in post-war Ethiopia; Goletti and Babu (1994) also used cointegration in the analysis of maize markets in Malawi; Alderman (1993) also used the model Ravallion model to test for integration among food markets in Ghana; Fafchamps and Gavian (1995) used a combination of integration and efficiency techniques, including the PBM to test for market integration and efficient spatial arbitrage in livestock markets in Niger.

· Current evidence from formal markets in the most African countries suggests that intra-country market integration of cereals is yet to be attained (Jayne et al 2005, Traub et al 2004, Mabaya 2003, Mutambatsere 2002, Abdula 2005, Barrett 1997). More recent studies that incorporate inter-market transfer costs in analyzing market integration and spatial equilibrium have found most markets to be in segmented equilibrium due to high transportation costs.

· Inter-market transfer costs for agricultural commodities between domestic markets in most African countries are extremely high due to poor road infrastructure and limited modes of transportation. Traders still rely heavily on public buses, probably the least efficient way of transporting bulky and often perishable agricultural commodities. . Despite the tremendous potential for short term profits in arbitraging between markets, there are very few privately owned trucks available for providing such services (Mabaya, 2002).

International cooperation in support of economic development (MDG 8)

· Chapter VI of the “Transport and the Millennium Development goals in Africa” working document highlights the “special needs” of Africa’s landlocked countries. Proportionately, Africa has the highest number of both landlocked countries and least developed countries in the world.

· Empirical evidence throughout the developing world shows that key factors in poor economic performance of landlocked countries are “high transport costs and the inadequacy of transport and communication infrastructure”.

· The high elasticity of trade volumes with respect to transport costs support the argument that transportation costs are a major barrier to trade, and thus specialization, by Africa’s land locked countries.

· Improving intra-regional trade, through reduction of tariff and non-tariff measures has been widely advocated for as a critical piece in the food insecurity puzzle (SADC FANR 2003, World Bank DTIS, Mozambique 2004, Malawi 2002, Tschirley et al 2004, Mano 2003, Arlindo and Tschirley 2003, Moepeng 2003).

· There is significant trading in agricultural commodities among SADC countries at both the formal and informal trade levels, with a country like Zambia trading with at least 9 of the 14 SADC countries in an average season (WITS 2005, FEWS NET 2005)

· Within regions, countries with markets that are more open experience more trade and faster market responses to shocks. (Tschirley et al 2004)

· High transportation costs favor “high-value low volume” products in regional trade, thereby sidelining development of the agricultural sector whose products are often “low-value high-volume”.

· The higher perishability of agricultural commodities also amplifies the impact of “slow and cumbersome boarder-crossing procedures”. This additional risk faced by traders of agricultural products is often not factored into trade and integration analysis that often assume equal per-unit inter-market transfer costs for food products and manufactured goods.

Conclusion

· The extent to which the benefits expected through greater market openness will be realized, depends significantly on how well integrated and efficient the markets are, both within and across borders (Ndlela 2002, Lewis 2002, Wobst 2002, Arndt 2005, World Bank 2002 and 2004).

· Studies that evaluate market integration and spatial equilibrium for both domestic and regional markets should pay closer attention to the size and seasonal variance of transportation costs.

· In deciding priorities for investment in road infrastructure, priority should be given to road networks that link high agricultural potential areas to food deficit regions. Market integration and spatial equilibrium studies can be used to guide these priorities.

· To maximize benefits from improved road and transport infrastructure, parallel investments have to be made in the following complimentary areas: market information systems, standardization of grades, contract enforcement, access to finance, and better coordination of market institutions.

· Given that central role of agriculture in rural development in Africa, investments in transport infrastructure have to be evaluated based on potential impacts in transforming both input and output markets for agricultural commodities.

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