Spatial equilibrium and price transmission between Southern African maize markets connected by informal trade

Abstract

Policies regulating the international grain trade in Southern Africa (SA) are motivated by uncertainty regarding private sector performance and, in turn, private sector performance is generally constrained by the policy environment. We study spatial price transmission between SA maize markets where trade is dominated by informal product flows. This provides an opportunity to study private sector market performance in a largely unregulated market environment. Contrary to some existing evidence on the performance of SA grain markets connected by formal trade, we find that informally trading markets work quite well. Long-run price equilibrium is consistent with competitive trade, price transmission is rapid, and potential trade constraints have no disruptive impact on long-run relationships. Nevertheless, we do find evidence of occasionally high transfer costs that may impede informal trade flows. The conclusion is that a policy focus on encouraging informal trade and lowering informal trade costs would lead to improved market performance.