Working Paper 272 - Price effects of borders between Lesotho and South Africa

Despite efforts to increase integration within Africa, product markets remain segmented between countries. This paper examines the magnitude of price gaps, known as the border-effect, between Lesotho and South Africa using retail price data for 49 products in 35 cities over the period 2006–2009. Using a production–consumption pair approach, we estimate that crossing the border between South Africa and Lesotho is associated with an absolute product price gap that widened from 18 percent in 2006 to 29 percent in 2009. The structure of relative prices also differs markedly, revealing a lack of convergence to a common set of internal relative prices. These results are robust to the choice of alternative production centers in South Africa and the imposition of distance thresholds between region pairs. The results indicate that the border between South Africa and Lesotho remains an impediment to trade flows and price competition, despite their joint membership in a customs union and monetary area.