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Missed opportunities and missing markets: Spatio-temporal arbitrage of rice in Madagascar. Christine Moser, Chris Barrett and Bart Minten May 18, 2005 World Bank seminar. Motivation. Markets are crucial for -transmitting macro/sectoral policy signals to micro-level agents - PowerPoint PPT Presentation
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Missed opportunities and missing markets:
Spatio-temporal arbitrage of rice in Madagascar
Christine Moser, Chris Barrett and Bart Minten May 18, 2005
World Bank seminar
Motivation
Markets are crucial for -transmitting macro/sectoral policy signals to micro-level agents- maintaining incentives in the face of technological change - managing locally covariate risk
Yet we know surprisingly little about: - how markets function - the correlates of markets which are competitive, non-competitive, or segmented- scales at which policy interventions ought to occur
This paper addresses these gaps using data from Madagascar.
rit=rjt + ijtSpatial competitive equilibrium (1)
ri(t+1)=rit +
Intertemporal competitive equilibrium (2)
rit =pit + Processing competitive equilibrium (3)
Competitive marketing equilibrium conditions with
trade
Where r is rice price, p is paddy price, τ is spatial marketing margin, π is storage and interest costs, and α is milling costs.
Thus,
pit = rj(t+1)--jit- Integrated food marketing system eqln (4)
rit=rjt + ijtRegime 1: Competitive tradable
equilibrium
|rit-rjt| < ijtRegime 2: Competitive segmented
eqn
|rit-rjt| > ijtRegime 3: Non-competitive equilibrium /disequilibrium
But competitive equilibrium doesn’t always hold…
Baulch (1997 AJAE) and Barrett and Li (2002 AJAE) develop appropriate mixture distribution-based ML methods – parity bounds model (PBM) – for estimating the probability that markets are in one or another regime.
PBM (Parity Bounds Model)
0
5000
10000
15000
20000
25000_stack
1 1 1 1 2 2 2 2 3 3 3 3 3 4 4 4 4 Quarter 1 Quarter 2 Quarter 3 Quarter 4
Pri
ce D
iffere
nce (
ab
solu
te)
Regime 3: Non-competitive/ disequilibrium
Regime 1: Competitive eqlnRegime 2: Segmented eqln
Policy Implications Vary By Regime
Regime 1: laissez faire, perhaps work to reduce marketing margins
Policy interventions most appropriate under:Regime 2: marketing margins a binding constraint
on market-based transmission of policy signals, diffusion of local risk, incentives to adopt improved technologies.
Regime 3: market competition a constraint on market-based transmission of policy signals, diffusion of local risk, incentives to adopt improved technologies.
Market Integration
Methods
• Model of trader entry. Basic model of trader entry into a market given prevailing transport costs, access to finance, and other commune characteristics.
• Estimation of Parity Bounds Model (PBM) by MLE. This produces the probability that the market is integrated. The PBM is used to test spatial and intertemporal integration as well as integration across space, time and form.
• Explaining non-integration. Using the PBM results, estimate a multinomial logit to examine the factors affecting whether a market is integrated (Regime 1), non-trading (Regime 2), or non-competitive (Regime 3).
Boundaries:
Provincial
Fivondronona (sub-regional)
Commune
Cities
Capital
Provincial capital
Other major cities
Antsiranana
Toamasina
Mahajanga
Toliara
Morondava
Fort Dauphin
Fianarantsoa
Antsirabe
Antananarivo
Data Source:2001 commune census
• Rice & paddy prices for 4 quarters
• Rainy & dry season transport costs for products to different destinations.
• Also: imported rice prices, whether commune exports rice to other areas, access to public goods and services, types of economic activity, and climate variables.
National Sub-regional
Regional
Three scales of spatial market integration
Quarter 1: pre harvest
Quarter 2: harvest
Rice price/kg in FMG
The Commune CensusDry season cost of transporting 50kg
to major city
Results: Spatial Market Integration
Sub-regional Regional
National
Coeff. Std Error
Coeff. Std Error
Coeff. Std Error
Regime 1 0.689 0.0249
0.055 0.0245 0.128 0.0276
Regime 2 0.215 0.0194 0.311 0.0228 0.830 0.0301
Regime 3 0.096 0.634 0.043
E 1.512 1.91 1.530 3.11 0.025 1.76
U 8.623 7.35 5.989 4.98 3.894 2.13
V 4.39 11.65 1.003 5.03 0.241 4.28
(unobserved costs,FMG/kg)
8.257 9.04 27.619
14.05 18.238
9.72
N 4930 5070 5070
Table 4: Spatial PBM Estimation Results
Explaining Spatial Market Integration
Table 5 Spatial market regimes—Sub-regional level Multinomial logit
with sub region fixed effects Regime 2
(Segmented) Regime 3
(Non-competitive) Regime 1 is comparison group Coeff. Std Error Coeff. Std Error High crime area (dummy) -0.074 -0.750 0.462 2.850 Bank (dummy) -0.038 -0.170 0.618 1.720 Same ethnic group as town (dummy) 0.060 0.440 0.463 2.210 Travel time (log of hrs) to town 0.450 10.260 0.188 2.690 No motorized transport (dummy) -0.071 -0.640 0.584 3.070 Mean income (log of Fmg) -0.272 -1.250 -2.127 -5.150 Population (log) -0.002 -0.700 0.006 1.330 Percent working in agriculture -0.103 -1.310 -0.045 -0.330 Radio reception (dummy) 0.083 0.850 -0.326 -1.920 April-June (dummy) -0.170 -1.440 0.063 0.420 July-September (dummy) 0.271 2.440 -1.435 -6.990 October-December (dummy) 0.357 3.240 -1.441 -6.960 Constant 2.908 0.980 23.868 4.280 N= 4089 2= 1104 Log likelihood value = -2810.08 Pseudo R2= 0.164
Intertemporal Market Integration
(between the second and third quarters)
Table 7: Intertemporal PBM estimation results
Rural Town/city
Coeff. Std Error Coeff. Std Error
Regime 1 0.061 0.023 0.114 0.011
Regime 2 0.556 0.019 0.872 0.017
Regime 3 0.383 0.014
2.293 0.121 2.594 0.018
U 1.772 0.106 1.677 0.029
V 0.933 0.085 1.243 0.023
Unobserved costs (%/quarter)
0.972 0.020 0.321 0.014
N 1239 98
Chi-squaredP(Chi-sq > value
75600.000
3900.000
Table 8 Intertemporal market regimes Multinomial logit
with region fixed effects Regime 2
(Segmented) Regime 3
(Non-competitive) Regime 1 is comparison group Coeff. Std Error Coeff. Std Error High crime area (dummy) 0.053 0.210 0.212 0.780 Bank (dummy) -1.092 -2.260 -1.162 -2.110 Same ethnic group as city (dummy) -0.372 -1.530 -0.130 -0.510 Travel time (hrs) to city 0.019 0.190 0.190 1.760 No motorized transport (dummy) -0.796 -2.850 -0.197 -0.690 Mean income (Fmg) 0.958 2.160 -0.226 -0.480 Population (log) 0.197 0.990 0.459 2.180 Percent working in agriculture 0.012 1.740 0.005 0.670 Radio reception (dummy) 0.225 0.920 0.256 1.000 Fianarantsoa -0.077 -0.230 0.902 2.800 Toamasina 1.938 3.040 1.589 2.420 Toliara 1.237 2.730 -0.386 -0.730 Mahajanga 0.990 2.620 0.018 0.040 Diego 0.672 1.430 0.415 0.800 Antsirabe 0.221 0.370 1.162 1.990 Morondava 1.831 1.720 1.457 1.330 Fortdauphin 1.294 2.240 -0.367 -0.530 Constant -12.994 -2.120 -1.007 -0.160
Explaining Intertemporal Market Integration
Interseasonal flow reversals
Low Season Harvest Season
Quarter 1: pre harvest
Quarter 2: harvest
Price Difference (local – city)
Rural Town/city Rice price Oct-Dec 2000 2,525.81 2,468.26 Rice price Jan-March 2001 2,558.69 2,517.15 Rice price April-June 2001 1,780.85 2,156.88 Rice price July-Sept 2001 1,953.81 2,012.50 Percentage change in rice price 85.40 64.73
Table 10 Flow reversals Probit =1 if flow reversal is feasible Coeff. Std Error High crime area (dummy) 0.171 1.880 Bank (dummy) -0.026 -0.120 Same ethnic group as town (dummy) -0.171 -1.940 Travel time (log of hrs) to town -0.169 -4.590 No motorized transport (dummy) 0.065 0.600 Mean income (log of Fmg) 0.162 0.970 Population (log) 0.137 1.920 Percent working in agriculture 0.005 1.890 Radio reception (dummy) -0.168 -1.900 Fianarantsoa -0.074 -0.590 Toamasina -0.435 -2.730 Toliara -0.362 -2.280 Mahajanga -0.076 -0.560 Antsiranana -0.264 -1.610 Antsirabe 0.142 0.730 Morondava -0.105 -0.410 Fortdauphin -0.372 -1.800 Constant -3.218 -1.400 N= 1049 2= 59.23 Log likelihood value= -691.82 Pseudo R2= 0.041
Market integration across space, time and form
Sub-regional Level Regional Level
Coeff. Std Error Coeff. Std Error
Regime 1 0.793 0.014 0.000 0.019
Regime 2 0.052 0.014 0.045 0.003
Regime 3 0.155 0.955
4.062 0.047 0.543 0.011
U 1.318 0.034 0.532 0.008
V 1.087 0.067 0.686 1.71
Unobserved costs (%/quarter)
1.947 0.059 0.073 0.028
1104 1136
Chi-squaredP(Chi-sq > value)
70090.000
509750.000
Summary of Results and Implications
• Markets are fairly well integrated spatially and across time, space and form at the local/sub-regional level.
• At regional level, markets are largely non-competitive or in disequilibrium … need competition policy and foster market entry by traders (info, finance, crime, etc.)
• At the national level, transportation costs are generally so high as to preclude spatial arbitrage … transport key.
•Interseasonal storage is generally unprofitable due, it appears, to high unobserved storage/interest costs.
•Crime and isolation tend to reduce spatial integration.
Thank you for your comments and interest
Table 2 Rice prices and transport costs Rural Town/city Total
Rice price Oct-Dec 2000 (Fmg/kg) 2,525.81 2,468.26 2,521.78 (1,024.26) (487.42) (996.13) Rice price Jan-March 2001 (Fmg/kg) 2,558.69 2,517.15 2,555.77 (979.28) (691.55) (961.77) Rice price April-June 2001 (Fmg/kg) 1,780.85 2,156.88 1,807.18 (982.43) (2,113.64) (1,102.89) Rice price July-Sept 2001 (Fmg/kg) 1,953.81 2,012.50 1,957.92 (520.41) (402.13) (513.11) Percentage change in rice price 85.40 64.73 83.96
(from min to max across four quarters) (67.10) (46.47) (66.06) Transport cost to major city (Fmg/kg) 319.09 253.10 314.49 (414.52) (259.09) (405.90)
Table 3. Correlation coefficients Rice Price Oct-Dec
2000 Jan-March
2001 April-June
2001 July-Sept
2001 Jan-March 0.78 April-June 0.11 0.13 July-Sept 0.50 0.38 0.26 Quarterly paddy price 0.42 0.63 0.79 0.74 Quarterly imported rice price 0.92 0.91 0.16 0.26 Sub-region price 0.20 0.44 0.54 0.50 Region price 0.19 0.38 0.21 0.42
Table 6 Spatial market regimes—Regional level Multinomial logit
with region fixed effects Regime 2
(Segmented) Regime 3
(Non-competitive) Regime 1 is comparison group Coeff. Std Error Coeff. Std Error High crime area (dummy) -0.321 -2.040 -0.086 -0.580 Bank (dummy) 0.509 1.100 0.632 1.450 Same ethnic group as city (dummy) 0.867 1.420 0.931 1.540 Travel time (hrs) to city 0.494 7.550 0.083 1.370 Mean income (Fmg) -0.025 -0.090 -0.159 -0.570 Population (log) 0.048 0.400 0.107 0.940 Percent working in agriculture 0.005 1.220 0.010 2.630 No motorized transport (dummy) 0.111 0.620 0.025 0.140 Radio reception (dummy) 0.168 1.110 0.308 2.150 April-June (dummy) 0.026 0.130 0.550 2.880 July-September (dummy) 0.067 0.370 -0.151 -0.880 October-December (dummy) 0.201 1.060 0.160 0.890 Fianarantsoa 0.506 2.210 0.148 0.670 Toamasina 1.356 3.290 0.839 2.050 Toliara -0.804 -3.000 -0.057 -0.230 Mahajanga -0.812 -3.350 -0.229 -1.000 Antsiranana -1.477 -5.430 -0.537 -2.210 Antsirabe -1.068 -3.600 -0.939 -3.600 Morondava 0.789 1.430 0.489 0.900 Fortdauphin 0.675 1.470 0.821 1.850 Constant 0.212 0.050 2.514 0.650
N=47162=528.1
LL value = -3576.85Pseudo R2=0.069
Table 9 Difference between sub-region price and commune price
Sub-regionPercent of communes with:
Jan-March
HarvestApril-June
July-Sept
Oct-Dec
Higher price than town (rit-rjt
>0) 49% 26% 33% 43%
Lower price than town (rit-rjt
<0) 37% 59% 44% 32%
Price equal to town (rit-rjt =0) 14% 15% 23% 25%
Region
Higher price than town (rit-rjt
>0) 44% 21% 31% 36%
Lower price than town (rit-rjt
<0) 43% 69% 49% 47%
Price equal to town (rit-rjt =0) 13% 10% 19% 17%
Price Spans
0
500
1000
1500
2000
2500
3000
3500
4000
1 2 3 4
Figure 2. Rice price by quarter (Spans are trimmed at the 5 th and 95 th percentiles)
Ric
e P
rice
(F
mg/
kg)
Figure 3. Median and span of price differences at the regional level (Spans are trimmed at the 5th and 95th percentiles)
-2000
-1500
-1000
-500
0
500
1000
1500
1 2 3 4 Quarter
Pri
ce D
iffe
renc
e pe
r kg
in F
mg
(rit-
r jt)
Communes for which walking or traveling by ox cart is
necessary