Trade Policy Reforms in the Cereals Sector of the SADC Region: Implications on Food Security

This study evaluates the welfare implications of tariff reforms in the cereals sector of the SADC region. Applying the global simulation model (GSIM), a multi-country partial equilibrium model, to the cereals industries of thirteen SADC countries, the study computes price and welfare effects of tariff reforms on different economic groups in each coun try, and evaluates responsiveness to external supply shocks. Results indicate that on net, elimination of intra-regional tariffs is welfare reducing for the region - a robust result as ind icated by the sensitivity tests. South Africa emerges as the sole beneficiary of intra-regional tariff elimination, with positive net welfare gains attained through higher producer surplus; whereas the rest of SACU experiences losses in consum er surplus, and the rest of SADC experiences losses in produ cer surplus. Imports from the rest of the world drop for most netimporter SADC countries, whereas trade with the SADC region generally increases, indicating that both trade diversion and trade creation result from these tariff reforms. The negative net welfare effects suggest that the trade diversion effects exceed the trade creation effects for most of SADC. Larger, positive welfare effects are expected for all of SADC, except South Africa and Zimbabwe, when countries implement indiscriminate reform of MFN tariff rates, although gains come at major costs to regional producers. Imports from both the region and the world are also expected to increase. Tariff reforms also seem to serve the purpose of spreading price and quantity risk, albeit meagerly, from supply shocks generated within the region, making it less intense in countries of origin, and more intense for the rest of SADC.Tariff reforms, SADC, cereals markets, GSIM model, welfare effects, trade diversion, food security, Food Security and Poverty, International Relations/Trade,

Competitiveness and revealed comparative advantage in the SADC maize industry

This paper evaluates the production and trade trends for maize and maize products in southern Africa, individual countries’ revealed comparative advantages in producing these products, and the expected implications of freer trade in this sector. The analysis employs mainly annual bilateral trade data for the period 1996-2004, evaluated using comprehensive descriptive measures and the Revealed Comparative Advantage index. Results indicate that at least half of the countries in the SADC region are deficit producers of maize and maize products, and that only South Africa is a net exporter of all products considered. Substantial cross-hauling is observed, and the bulk of locally produced products are traded regionally, with over 90% regional bias for half of all positive trade, although specific opportunities for increased regional trade also exist. Tariff protection generally lies below rates observed elsewhere in the world for this sector; however, for half of the region, consistent non-tariff measures also are maintained. Regional competitiveness in production is restricted to a few countries that possess the capacity to produce and export significant quantities; and with the exception of those countries, the region as a whole lacks net comparative advantage in maize and maize flour production by global standards. These results suggest a need for concurrent policy interventions to improve production, regional and international trade. Food security strategies focusing solely on improving regional trade, while beneficial to specific regional producers, are unlikely to produce major food security benefits. Keywords: Comparative Advantage, Competitiveness, Maize, SADC,Community/Rural/Urban Development, Food Consumption/Nutrition/Food Safety, Food Security and Poverty, Industrial Organization, Institutional and Behavioral Economics, International Relations/Trade, Marketing, Productivity Analysis, Research and Development/Tech Change/Emerging Technologies, Research Methods/ Statistical Methods,

Integration and Equilibrium in the Maize Markets in Southern Africa

For most countries in southern Africa, food security has been addressed through self-sufficiency, traditionally attained through widespread government involvement in the input and output markets for major food commodities. Food policies through the 1980s have been characterized by input subsidies for farmers; fixed, pan-seasonal and pan-territorial farm level pricing systems, mainly implemented through parastatal marketing boards; as well as subsidies and price controls at the wholesale and retail levels. Under Structural Adjustment Programs of the 1990s, most of those policies were abandoned for more market oriented policies. During the same period, many countries in the region joined the multilateral trading system, and on a regional level, two regional free trade agreements were ratified and bilateral preferential trading agreements continue to be negotiated. Those policy shifts have left in their wake a region characterized by a blend of food policies, with greater openness and a market-led economy in some countries, while substantial government involvement persists in others. In this policy environment, food supply volatility, price instability and weak coordination of trade policies remain fundamental problems. As the southern Africa region grapples with recurrent food shortages, reference is often made to increased intra-regional trade as an important integral component of a comprehensive food strategy. The assumption is that as countries reduce tariff and non-tariff barriers to trade, they become more integrated and more efficient, facilitating commodity movement at lower transfer costs, hence lower prices to the final consumer. In the southern Africa region, research efforts have focused on analyzing market integration at an intra-country level (Abdula 2005, Tostão and Brorsen 2005, Alemu and Baucuana 2006, Penzhorn and Arndt 2002, Traub et al 2004, Mabaya 2003, Mutambatsere 2002, Barrett 1997) . Limited work has evaluated how well integrated or efficient the food markets are at the regional level, to ascertain if in fact trade is a viable food security strategy given existing market systems. In this paper, we evaluate the extent to which maize market systems in the region have become integrated and efficient, and identify the nature of inefficiency where it exists. The analysis employs the Parity Bounds (Baulch 1997) and Barrett-Li (Barrett and Li 2002) models, in collaboration with comprehensive non-parametric descriptions of market pairs, to provide a holistic assessment of pair-wise market interaction, in the process also providing a comparison of the methods as measures of integration and efficiency. Specifically, this paper investigates pair wise spatial integration and efficiency for five central markets in southern Africa: Gaborone in Botswana, Gauteng in South Africa, Blantyre in Malawi, and Maputo and Mocuba in Mozambique. The analyses use monthly retail level data on commodity prices, trade flows, and transfer costs, for the period June 1994 to December 2004. The study seeks to evaluate the nature of price and trade relations, establish the level of regional spatial integration, and evaluate the level of efficiency in these markets. Results reveal significant frequency of market integration, indicating tradability of 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 about 25% of the time. Often however, when trade is observed, efficiency appears to be weakened by insufficient arbitrage. For those markets, positive trade is occasionally observed when arbitrage returns are negative. Where trade is not observed, efficiency holds with a slightly higher frequency, so that the lack of trade is often justified by the lack of positive arbitrage returns. Here again, efficiency is occasionally compromised by insufficient arbitrage, whereby trade sometimes fails to occur even when arbitrage incentives appear favorable. In order of frequency, we observe a high occurrence of positive returns imperfect integration (regime 3 in the Barrett-Li Model) and segmented equilibrium (regime 6), followed by a regular occurrence of perfect integration (regimes 1 and 2), and irregular segmented disequilibrium (regimes 4) and the negative returns type of imperfect integration (regime 5). Our results suggest a need for public policy in the areas of improved production to take advantage of unexploited arbitrage opportunities, as well as addressing structural barriers to trade that prevent market entry especially where positive returns are currently observed. Results highlight an important contribution to the trade food policy debate for the southern Africa region: that although restrictive transfer costs are observed in enough cases, the dominant form of inefficiency in regional markets is insufficient arbitrage, likely resulting more from supply side constraints, non-cost barriers to trade (infrastructural or regulatory) and imperfect information, than from restrictive tariffs. In some cases however, the lack of trade is an efficient outcome (indicating limited or negative arbitrage profits) that probably requires no immediate policy response.Crop Production/Industries, Marketing,

Trade Policy Reforms in the Cereals Sector of the SADC Region: Implications on Food Security

WP 2006-17 July 2006This study evaluates the welfare implications of tariff reforms in the cereals sector of the SADC region. Applying the global simulation model (GSIM), a multi-country partial equilibrium model, to the cereals industries of thirteen SADC countries, the study computes price and welfare effects of tariff reforms on different economic groups in each country, and evaluates responsiveness to external supply shocks. Results indicate that on net, elimination of intra-regional tariffs is welfare reducing for the region - a robust result as indicated by the sensitivity tests. South Africa emerges as the sole beneficiary of intra-regional tariff elimination, with positive net welfare gains attained through higher producer surplus; whereas the rest of SACU experiences losses in consumer surplus, and the rest of SADC experiences losses in producer surplus. Imports from the rest of the world drop for most net-importer SADC countries, whereas trade with the SADC region generally increases, indicating that both trade diversion and trade creation result from these tariff reforms. The negative net welfare effects suggest that the trade diversion effects exceed the trade creation effects for most of SADC. Larger, positive welfare effects are expected for all of SADC, except South Africa and Zimbabwe, when countries implement indiscriminate reform of MFN tariff rates, although gains come at major costs to regional producers. Imports from both the region and the world are also expected to increase. Tariff reforms also seem to serve the purpose of spreading price and quantity risk, albeit meagerly, from supply shocks generated within the region, making it less intense in countries of origin, and more intense for the rest of SADC

Competitiveness and revealed comparative advantage in the SADC maize industry

This paper evaluates the production and trade trends for maize and maize products in southern Africa, individual countries’ revealed comparative advantages in producing these products, and the expected implications of freer trade in this sector. The analysis employs mainly annual bilateral trade data for the period 1996-2004, evaluated using comprehensive descriptive measures and the Revealed Comparative Advantage index. Results indicate that at least half of the countries in the SADC region are deficit producers of maize and maize products, and that only South Africa is a net exporter of all products considered. Substantial cross-hauling is observed, and the bulk of locally produced products are traded regionally, with over 90% regional bias for half of all positive trade, although specific opportunities for increased regional trade also exist. Tariff protection generally lies below rates observed elsewhere in the world for this sector; however, for half of the region, consistent non-tariff measures also are maintained. Regional competitiveness in production is restricted to a few countries that possess the capacity to produce and export significant quantities; and with the exception of those countries, the region as a whole lacks net comparative advantage in maize and maize flour production by global standards. These results suggest a need for concurrent policy interventions to improve production, regional and international trade. Food security strategies focusing solely on improving regional trade, while beneficial to specific regional producers, are unlikely to produce major food security benefits. Keywords: Comparative Advantage, Competitiveness, Maize, SADC

Trade Policy Reforms in the Cereals Sector of the SADC Region: Implications on Food Security

This study evaluates the welfare implications of tariff reforms in the cereals sector of the SADC region. Applying the global simulation model (GSIM), a multi-country partial equilibrium model, to the cereals industries of thirteen SADC countries, the study computes price and welfare effects of tariff reforms on different economic groups in each country, and evaluates responsiveness to external supply shocks. Results indicate that on net, elimination of intra-regional tariffs is welfare reducing for the region - a robust result as indicated by the sensitivity tests. South Africa emerges as the sole beneficiary of intra-regional tariff elimination, with positive net welfare gains attained through higher producer surplus; whereas the rest of SACU experiences losses in consumer surplus, and the rest of SADC experiences losses in producer surplus. Imports from the rest of the world drop for most net-importer SADC countries, whereas trade with the SADC region generally increases, indicating that both trade diversion and trade creation result from these tariff reforms. The negative net welfare effects suggest that the trade diversion effects exceed the trade creation effects for most of SADC. Larger, positive welfare effects are expected for all of SADC, except South Africa and Zimbabwe, when countries implement indiscriminate reform of MFN tariff rates, although gains come at major costs to regional producers. Imports from both the region and the world are also expected to increase. Tariff reforms also seem to serve the purpose of spreading price and quantity risk, albeit meagerly, from supply shocks generated within the region, making it less intense in countries of origin, and more intense for the rest of SADC

Trade Policy Reforms in the Cereals Sector of the SADC Region: Implications on Food Security

This study evaluates the welfare implications of tariff reforms in the cereals sector of the SADC region. Applying the global simulation model (GSIM), a multi-country partial equilibrium model, to the cereals industries of thirteen SADC countries, the study computes price and welfare effects of tariff reforms on different economic groups in each coun try, and evaluates responsiveness to external supply shocks. Results indicate that on net, elimination of intra-regional tariffs is welfare reducing for the region - a robust result as ind icated by the sensitivity tests. South Africa emerges as the sole beneficiary of intra-regional tariff elimination, with positive net welfare gains attained through higher producer surplus; whereas the rest of SACU experiences losses in consum er surplus, and the rest of SADC experiences losses in produ cer surplus. Imports from the rest of the world drop for most netimporter SADC countries, whereas trade with the SADC region generally increases, indicating that both trade diversion and trade creation result from these tariff reforms. The negative net welfare effects suggest that the trade diversion effects exceed the trade creation effects for most of SADC. Larger, positive welfare effects are expected for all of SADC, except South Africa and Zimbabwe, when countries implement indiscriminate reform of MFN tariff rates, although gains come at major costs to regional producers. Imports from both the region and the world are also expected to increase. Tariff reforms also seem to serve the purpose of spreading price and quantity risk, albeit meagerly, from supply shocks generated within the region, making it less intense in countries of origin, and more intense for the rest of SADC

Integration and Equilibrium of Maize Markets in Southern Africa: A SADC Sub-regional Assessment

WP 2006-18 July 2006This 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

Market Integration and Efficiency in the Presence of Cross-border Trade Restrictions: Evidence from selected Maize Markets in Southern Africa

This study evaluates the extent to which regional trade might be relied upon as a policy strategy in achieving food security in southern Africa. The logic is that if significant diversities exist in production expertise and capacities for countries within the region, in the presence of integrated marketing systems, free trade can improve both supply and trade efficiency. Two components of the debate are analyzed: revealed competitiveness in production and export of the main staple – maize; and for a selected set of major markets, the nature of market interactions within the current regional trade policy framework. The analyses employ mainly non-parametric assessments, including such measures as revealed comparative advantage, price difference and transfer costs trends, and cumulative distributions of arbitrage returns, supported by econometric measures of integration and efficiency including parity bounds analyses. Results indicate substantial regional bias in maize trade among southern African countries, although competitiveness in maize production is restricted to a few countries that possess the capacity to supply significant quantities. Price and transfer costs trends, as well as the parametric market integration and efficiency tests, frequently fail to reject the null hypothesis of ‘integration’ in a selected set of markets in close proximity, regardless of country location, suggesting fairly consistent price movements, tradability of commodities and/or contestability of such markets across borders. For those markets, however, efficiency appears weak, as trade often fails to exhaust arbitrage profits. Markets not linked through trade tend to have a higher frequency of efficiency, so that the lack of trade often is justified by the lack of positive arbitrage returns. In those cases, market segmentation appears driven more by restrictive transport costs than tariffs or taxes on cross-border trade. These results suggest that the dominant forms of inefficiency in the markets considered in this study are (1) insufficient arbitrage resulting from supply side constraints, and other non-cost trade restrictions and (2) restrictive transport costs. Border administered tariffs and other forms of taxes on imports seem to account for a relatively low proportion of transfer costs, and generally reduce arbitrage returns marginally. Therefore policy interventions addressing both food supply and access are necessary to ensure meaningful food security benefits from trade.International Relations/Trade,

Market Integration and Efficiency in the Presence of Cross-border Trade Restrictions: Evidence from selected Maize Markets in Southern Africa

This study evaluates the extent to which regional trade might be relied upon as a policy strategy in achieving food security in southern Africa. The logic is that if significant diversities exist in production expertise and capacities for countries within the region, in the presence of integrated marketing systems, free trade can improve both supply and trade efficiency. Two components of the debate are analyzed: revealed competitiveness in production and export of the main staple – maize; and for a selected set of major markets, the nature of market interactions within the current regional trade policy framework. The analyses employ mainly non-parametric assessments, including such measures as revealed comparative advantage, price difference and transfer costs trends, and cumulative distributions of arbitrage returns, supported by econometric measures of integration and efficiency including parity bounds analyses. Results indicate substantial regional bias in maize trade among southern African countries, although competitiveness in maize production is restricted to a few countries that possess the capacity to supply significant quantities. Price and transfer costs trends, as well as the parametric market integration and efficiency tests, frequently fail to reject the null hypothesis of ‘integration’ in a selected set of markets in close proximity, regardless of country location, suggesting fairly consistent price movements, tradability of commodities and/or contestability of such markets across borders. For those markets, however, efficiency appears weak, as trade often fails to exhaust arbitrage profits. Markets not linked through trade tend to have a higher frequency of efficiency, so that the lack of trade often is justified by the lack of positive arbitrage returns. In those cases, market segmentation appears driven more by restrictive transport costs than tariffs or taxes on cross-border trade. These results suggest that the dominant forms of inefficiency in the markets considered in this study are (1) insufficient arbitrage resulting from supply side constraints, and other non-cost trade restrictions and (2) restrictive transport costs. Border administered tariffs and other forms of taxes on imports seem to account for a relatively low proportion of transfer costs, and generally reduce arbitrage returns marginally. Therefore policy interventions addressing both food supply and access are necessary to ensure meaningful food security benefits from trade