Market Integration and the Long Run Adjustment of Local Markets to Changes in Trade and Exchange Rate Regimes: Options for Market Reform and Promotion Policies

A major limitation of the conventional market integration analysis is its neglect of the factors that underlie the cost associated with moving commodities across local markets. For instance, the existence of integrated markets implied by interdependently determined prices and stable spatial and temporal price spreads does not say much about the competitiveness and efficiency of local markets, or about the nature and determinants of the costs of market intermediation. Furthermore, while more efficient methods are being proposed to analyze price interdependence, the implications at the farm level and for agricultural transformation are not part of the analysis. One would, however, expect reforming governments to be more interested in issues such as i) the implications of market integration for the operation of local markets, ii) its impact on the process of domestic market reforms, iii) strategies to improve the degree of integration, and iv) the benefits of doing so. Market integration analysis may be helpful in providing a photography of the operation of local markets at a given point in time. However, the process of market reform in the context of structural and institutional deficiencies, rather than being a one-shot issue, involves a lengthy transition process from a state-run to a private-sector-based distribution system. Unless it is extended to examine, among others, how market integration affects the process of adjustment in local markets, integration analysis will be of limited help as a tool for market policy research. The approach outlined in the present paper proposes an extension that is based on two premises. First, that the impact of the shock in the central market prices does not only affect the short term level of the local prices, but also their time path. that second, long term impact is determined, by the degree of integration u and is affected by an accompanying changes in local arbitrage costs.