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Testing for Food market integration: A study of the Vietnamese paddy market

Listed author(s):
  • Le Dang Trung


    (Centre for Analysis and Forecasting, Vietnam Academy of Social Sciences)

  • Tran Ngo Minh Tam

    (Centre for Analysis and Forecasting, Vietnam Academy of Social Sciences)

  • Bob Baulch

    (Institute of Development Studies at the University of Sussex)

  • Henrik Hansen


    (Institute of Food and Resource Economics, University of Copenhagen)

With its increasing integration into the world economy, agricultural exports and rural incomes in Vietnam have increased substantially in recent years. At the sub-national level, however, there are concerns that not all regions and categories of agricultural producers have and will benefit from the ongoing liberalization of agricultural markets. Vietnam's elongated geography and lack of spatial market integration pose special problems in this regard. Accordingly, this study aims to answer three interrelated questions: (a) whether there is spatial integration between paddy markets in the North and South of Vietnam; (b) whether there is spatial integration in paddy markets within the North and within the South; and, (c) if within-region integration is stronger and faster than between-region integration. The empirical model we develop to answer these questions, uses estimates of transfer costs to generalize the well known model of spatial market integration due to Ravallion to allow for the possibility of threshold effects. A sequential testing strategy is developed which progressively tests for market segmentation, the number of thresholds, long-run market integration, common dynamics/informational efficiency, and (a strict version of) the 'Law' of One Price within an error-correction framework. When the unrestricted version of this model is estimated using monthly paddy prices for eight markets between 1993 and 2006, we find weak evidence of market integration between paddy markets in the North and South of Vietnam with an absence of threshold effects. However, there is evidence of both threshold effects and stronger forms of spatial market integration for paddy markets within the North and within the South, with at least 60% percent of price changes being transmitted between markets within one month whenever price spreads exceeds their upper or lower thresholds. The extent and speed of price transmission within regional paddy markets is generally faster in the South than the North of Vietnam. However, the instantaneous version of the 'Law' of One Price, which requires full price adjustment to occur within a month, only holds for a few regimes and market pairs. Three main policy implications flow from these results. First, since there is limited evidence of integration between paddy markets in the North and South of Vietnam, national level policies cannot be relied upon to stabilize or support paddy prices.Second, since there is evidence of spatial market integration within the Red River and Mekong River deltas, paddy markets within these regions can be relied upon to transmit price signals between deficit and surplus areas relatively well. Third, since the speed and extent of price transmission is relatively rapid within the North and within the South of Vietnam, the private sector trade can be relied upon to transfer rice and paddy between markets in an efficient manner. Problems might, however, emerge if large demand-supply imbalances were to emerge between the North and South, as transfer costs would prevent private sector trade taking place. In these circumstances, the public sector might need to intervene, in a consistent and market friendly way, to ensure adequate food supplies in the short-term.

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Paper provided by Development and Policies Research Center (DEPOCEN), Vietnam in its series Working Papers with number 11.

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Length: 30 pages
Date of creation: Jul 2007
Handle: RePEc:dpc:wpaper:1107
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  1. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
  2. Meyer, Jochen, 2004. "Measuring market integration in the presence of transaction costs--a threshold vector error correction approach," Agricultural Economics, Blackwell, vol. 31(2-3), pages 327-334, December.
  3. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
  4. Jones, William O., 1968. "The Structure of Staple Food Marketing in Nigeria as Revealed by Price Analysis," Food Research Institute Studies, Stanford University, Food Research Institute, issue 02.
  5. Richardson, J. David, 1978. "Some empirical evidence on commodity arbitrage and the law of one price," Journal of International Economics, Elsevier, vol. 8(2), pages 341-351, May.
  6. Christopher F Baum & Richard Sperling, 2000. "DFGLS: Stata module to compute Dickey-Fuller/GLS unit root test," Statistical Software Components S410001, Boston College Department of Economics, revised 16 Dec 2001.
  7. Barry K. Goodwin & Nicholas E. Piggott, 2001. "Spatial Market Integration in the Presence of Threshold Effects," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(2), pages 302-317.
  8. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
  9. Dwayne Benjamin & Loren Brandt, 2002. "Agriculture and Income Distribution in Rural Vietnam under Economic Reforms: A Tale of Two Regions," Working Papers benjamin-02-01, University of Toronto, Department of Economics.
  10. Sarno, Lucio & Taylor, Mark P. & Chowdhury, Ibrahim, 2004. "Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 1-25, February.
  11. Bob Baulch, 1997. "Transfer Costs, Spatial Arbitrage, and Testing for Food Market Integration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 477-487.
  12. Minot, Nicholas & Goletti, Francesco, 2000. "Rice market liberalization and poverty in Viet Nam:," Research reports 114, International Food Policy Research Institute (IFPRI).
  13. P. J. Dawson & P. K. Dey, 2002. "Testing for the law of one price: rice market integration in Bangladesh," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(4), pages 473-484.
  14. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-948, December.
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