A Disaggregated Analysis of Product Price Integration in the Southern African Development Community

Abstract

Empirical evidence on the extent to which product markets are integrated within Africa remains noticeably limited. This paper uses highly disaggregated retail price data for 32 narrowly defined products collected at the district level in five SADC countries (Botswana, Malawi, South Africa, Tanzania and Zambia) and Uganda to assess the extent to which product prices are integrated within and between these countries. We find evidence of large and persistent absolute deviations from the law of one price (LOP) both within and between each of the six countries. We also find that price dispersion is higher between the six countries in comparison to within individual countries. Simple econometric estimates indicate that, on average, absolute price deviations between country pairs are smaller for countries adjacent to each other and for countries that share common membership in the Southern African Customs Union, the Common Market for Eastern and Southern Africa or the East African Community. We find no evidence that product prices in the region have become more integrated between 2001 and 2011, despite the liberalization of tariffs under the SADC Protocol on Trade. This implies that trade liberalization may not be sufficient on its own to generate greater product market integration within the region.