Why is it important to measure the Market Development Gap? An application to the agricultural sector of Uganda

An abundant literature exists on measuring the effects pricing and trade policy on agricultural commodity prices since the seminal work by Krueger, Schiff and Valdes (1991) and then the massive worldwide project led by Kym Anderson (2009) on distortions to agricultural incentives. Much less empirical analysis is available on the effects of market and policy failures on production incentives or disincentives. This is most likely due to the difficulty of disentangling the effects of explicit policy instruments from other factors influencing price levels. In addition, this topic is much less relevant for high income countries where most of the OECD type of policy measurement work has occurred. Important challenges related to data scarcity in developing countries as well as methodological options have also prevented researchers from further investigating this topic. In this paper, these other factors are described as the Market Development Gap. The Market Development Gap is a concept that refers to the excessive marketing costs and inefficient price transmission resulting from poorly functioning market, inadequate market structure and uncompetitive behavior of agents in the value chains. The paper attempts to identify the major sources of market development gap in African commodity markets and proposes a methodological framework to measure it as a residual of price gap and the estimated policy-induced price gap. This methodology is applied to several commodities in Uganda. We find a number of cases where the estimation of the market development gap helps to better understand the factors driving the important disincentives affecting producers.