SPATIAL PRICE TRANSMISSION AND MARKET INTEGRATION IN AGRICULTURAL MARKETS AFTER LIBERALIZATION IN GHANA EVIDENCE FROM FRESH TOMATO MARKETS

Abstract

Spatial price transmission or market integration measures the degree to which geographically separated markets share long-run market information on homogenous commodities. One very contentious issue in Ghana is the concern about the implications of trade liberalization for spatial price transmission and integration of local tomato markets i.e. whether or not price linkages between tomato markets in Ghana improved following the countries adoption of trade liberalization policy in the mid 1980s. Opposed to this contention is the view that well functioning markets are necessary for the realization of the welfare impacts of trade liberalization. Despite insufficient empirical evidence on how Ghana’s tomato markets performed following trade liberalization, prevailing public opinion and findings of advocacy studies blame supply gluts and perennially volatile, dispersed and often low prices of tomato on the importation of tomato products into Ghana. It is to verify this opinion and contribute to the policy debate that this study was conducted. The main objective of the study is to determine the extent of post-liberalization price transmission and market integration between fresh tomato markets in Ghana. To achieve this objective, we sampled five major, fresh tomato markets, comprising two net tomato producer markets - Navrongo and Techiman and three net consumer markets – Tamale, Kumasi and Accra for the analysis. The dataset for the analysis includes monthly, secondary price series from 1.1992 to 4.2009, and primary, semi-weekly price and trade flow data collected by self conducted market surveys between 3.2007 and 4.2009. The estimation is performed using Johansen’s cointegration approach, and the threshold autoregressive and vector error correction models and their extensions. We first test for the existence of cointegration between producer and consumer pairs of tomato markets. Then we estimate the speeds of price transmission between the market pairs under two sub-periods following trade liberalization in Ghana. The first sub-period, the high-tariffs period is from 1992 to 2000, while the second, a reduced-tariffs period is from 2001-2009. Our objective under this analysis is to determine whether price transmission and hence the factors responsible for market integration sufficiently improved over the two sub-periods. Lastly, we examine the importance of direct, inter-market trade flow vis-à-vis other factors in price transmission between the markets under study.Results of the pair-wise cointegration analysis between surplus, producer and deficit, consumer tomato markets using both datasets reveal at least one significant, cointegrating vector between the market pairs, while results of the Johansen’s multivariate cointegration approach of testing for cointegration between each producer market and all the consumer markets as a group demonstrate an integrated tomato marketing system. This implies that a common stochastic process, possibly the effective flow of the commodity and/or trade information, seems to determine price dynamics between markets. As a result, tomato prices between the markets do not drift apart in the long run, but always converge towards long run equilibrium following random, short run shocks on prices. Estimated, cointegration coefficients (the long run relationships between prices) range from 0.38 to 0.98, averaging 0.67, and appear to suggest a high degree of price transmission and market integration between fresh tomato markets in Ghana. The results of the standard threshold autoregressive model reveal that the rate of price adjustment or error correction in each of the two periods under study is also high, averaging about 50.8% and 47.6% in the high-tariffs and reduced-tariffs periods respectively. Using an extended threshold autoregressive model which estimates speeds of price adjustment as time varying parameters, we discover that adjustment speeds average about 64.5% under the high and about 69.9% under the reduced-tariffs periods respectively. This confirms the cointegration results of rapid convergence of price deviations to long run equilibrium. Although the empirical evidence, overall is mixed, the findings of the extended threshold autoregressive model, the most ideal approach to modelling price adjustment between the markets, reinforce the view that there is no compelling evidence to blame trade liberalization as the sole cause of the gluts, price volatility and dispersion, and other marketing problems in fresh tomato markets in Ghana. The findings of the vector error correction model support those of the threshold autoregressive model; they reveal high speeds of price adjustments, with deviations from equilibrium requiring an average of about 12 weeks to be completely corrected. Most importantly, we find significant price adjustment in both periods with and without trade from the results of the switching vector error correction model. This is evidence supporting the often underemphasized notion that direct, physical trade between markets may not be the sole underlying factor determining price transmission and market integration. It appears, in this case, that other indirect mechanisms drive price transmission when autarky between markets occurs due to seasonality in production. Lessons from the literature indicate that the added benefits of trade liberalization are contingent on the availability of complementary market infrastructure and policies. To that end, we recommend that appropriate investments should be made in road, transport, storage, processing and marketing infrastructure to improve the connection and reduce transaction costs between farm gates and net consumer markets, and between surplus producing areas and deficit consumer markets that are off the West African highway. Extensions to this study should consider the role of factors like seasonality, market power, road barriers, storage and processing on price transmission. Further research along these lines will improve our understanding of the problem and help develop more nuanced policy measures to ensure that farmers in Ghana reap the added benefits of trade liberalization.