Transport and the Millennium Development goals in Africa” working document is that efficient operation of transport infrastructure will contribute towards eradication of extreme poverty and of hunger (MDG 1) and enhance international cooperation in support of economic development (MDG 8). An implicit assumption behind this premise is that reduced transport costs will increase spatial market integrations, allowing for specialization within and across countries thereby maximizing benefits from trade. This paper evaluates the potential impacts from reduced transportation costs on intra- and inter-country integration of agricultural commodities markets.

1. Transportation costs and spatial integration of agricultural commodity markets in Africa
By
Edward Mabaya
Introduction
A key argument of Chapter II and VI of the “Transport and the Millennium Development goals
in Africa” working document is that efficient operation of transport infrastructure will contribute
towards eradication of extreme poverty and of hunger (MDG 1) and enhance international
cooperation in support of economic development (MDG 8).
An implicit assumption behind this premise is that reduced transport costs will increase spatial
market integrations, allowing for specialization within and across countries thereby maximizing
benefits from trade.
This paper evaluates the potential impacts from reduced transportation costs on intra- and inter-
country integration of agricultural commodities markets.
Background
As part of the Structural Adjustment Programs (SAP) introduced in the late 1980s and
early 1990s, most African governments relinquished their control on agricultural markets
to the "invisible hand" of market forces. Implicit in the deregulation of agricultural
markets was the assumption that, when left to themselves, markets would converge
toward a competitive market equilibrium in which gains from trade are maximized.
Because agricultural production is highly specialized across both space and time, and the
commodities are bulky and often highly perishable, the degree of relationship between pairs of
markets across space, time and form is key to appraising the economic performance of
agricultural markets.
Inter-market transfer costs consist mainly of loading and unloading costs, transportation, and the
traders‟ normal profit, applicable taxes, financing costs and risk. Of these, transportation costs
usually constitute the largest share.

2. Market Integration, Competitive Equilibrium and Social Efficiency
Market integration is defined as the transfer of excess demand from one market to another,
manifest in the physical flow of commodities (tradability) and/or the transmission of price
shocks from one market to another (contestability).
Competitive equilibrium, on the other hand, refers to the state in which the marginal profits from
arbitrage equal zero. If markets are in competitive equilibrium, opportunities for profitable
arbitrage cannot exist at the margin. Thus, for competitive spatial equilibrium, price differentials
for an identical good between any pair of spatially distinct markets should be less than or equal
to the cost of transferring the good between them (with equality if trade occurs).
Social Efficiency: Both market integration and competitive equilibrium treat inter-market
transfer costs as exogenous. To maximize the social benefits from specialization and trade, inter-
market transfer costs should be minimized, all trade restrictions abolished, and market failures
corrected. Thus, to attain “social efficiency of product allocation across markets depends
fundamentally on the minimization of the costs of commerce” (Barrett, 2001). It is this last
concept, social efficiency, that development oriented spatial market analysis study should seek to
evaluate and public policy makers should aim for. However, because inter-market transfer costs
are difficult to observe and measure, spatial market integration is often used as a proxy measure.
Eradication of extreme poverty and of hunger (MDG 1)
Chapter II of the “Transport and the Millennium Development goals in Africa” working
document argues that improvements in transport infrastructure will help achieve inclusive
development. Transport infrastructure has a large effect on the pattern of growth, especially is
geographical inclusiveness.
With more than 70% of Africa‟s population located in rural areas where the main source of
livelihood is agriculture, maximizing social efficiency in domestic agricultural commodity
markets is essential to achieving MGD1.
Examples are given in the working paper on the impacts of transport infrastructure on growth
patterns. High transportation costs result in segmented spatial equilibrium or isolation for both
input and output markets within most a most African countries.
Segmented input markets imply that productivity enhancing agricultural technology such as
fertilizer and improved seed does not reach farmers in remote areas. There is strong empirical
evidence supporting the link between farmer‟s access to an all-weather road access to
technology adotion (Zavale, 2005; Croppenstedt and Mulat, 1996). Improved road
infrastructure places agricultural technologies closer to the farmers at affordable prices.
For output markets, segmented equilibrium implies that comparative advantages in agricultural
productivity are not fully exploited and farmers are forced to pursue food security through self

3. sufficiency. Without integration, no mechanism exists for price signals to be transmitted from
food deficit to food surplus areas, prices may become volatile, and producers may fail to
specialize according to comparative advantage (Baulch 1997).
Numerous studies have been conducted to investigate spatial integration and efficiency of
spatially distinct domestic markets for agricultural commodities: Dercon (1995) analyzed the
integration of teff markets in post-war Ethiopia; Goletti and Babu (1994) also used cointegration
in the analysis of maize markets in Malawi; Alderman (1993) also used the model Ravallion
model to test for integration among food markets in Ghana; Fafchamps and Gavian (1995) used a
combination of integration and efficiency techniques, including the PBM to test for market
integration and efficient spatial arbitrage in livestock markets in Niger.
Current evidence from formal markets in the most African countries suggests that intra-country
market integration of cereals is yet to be attained (Jayne et al 2005, Traub et al 2004, Mabaya
2003, Mutambatsere 2002, Abdula 2005, Barrett 1997). More recent studies that incorporate
inter-market transfer costs in analyzing market integration and spatial equilibrium have found
most markets to be in segmented equilibrium due to high transportation costs.
Inter-market transfer costs for agricultural commodities between domestic markets in most
African countries are extremely high due to poor road infrastructure and limited modes of
transportation. Traders still rely heavily on public buses, probably the least efficient way of
transporting bulky and often perishable agricultural commodities. . Despite the tremendous
potential for short term profits in arbitraging between markets, there are very few privately
owned trucks available for providing such services (Mabaya, 2002).
International cooperation in support of economic development (MDG 8)
Chapter VI of the “Transport and the Millennium Development goals in Africa” working
document highlights the “special needs” of Africa‟s landlocked countries. Proportionately,
Africa has the highest number of both landlocked countries and least developed countries in the
world.
Empirical evidence throughout the developing world shows that key factors in poor economic
performance of landlocked countries are “high transport costs and the inadequacy of transport
and communication infrastructure”.
The high elasticity of trade volumes with respect to transport costs support the argument that
transportation costs are a major barrier to trade, and thus specialization, by Africa‟s land locked
countries.
Improving intra-regional trade, through reduction of tariff and non-tariff measures has been
widely advocated for as a critical piece in the food insecurity puzzle (SADC FANR 2003, World
Bank DTIS, Mozambique 2004, Malawi 2002, Tschirley et al 2004, Mano 2003, Arlindo and
Tschirley 2003, Moepeng 2003).

4. There is significant trading in agricultural commodities among SADC countries at both the
formal and informal trade levels, with a country like Zambia trading with at least 9 of the 14
SADC countries in an average season (WITS 2005, FEWS NET 2005)
Within regions, countries with markets that are more open experience more trade and faster
market responses to shocks. (Tschirley et al 2004)
High transportation costs favor “high-value low volume” products in regional trade, thereby
sidelining development of the agricultural sector whose products are often “low-value high-
volume”.
The higher perishability of agricultural commodities also amplifies the impact of “slow and
cumbersome boarder-crossing procedures”. This additional risk faced by traders of agricultural
products is often not factored into trade and integration analysis that often assume equal per-unit
inter-market transfer costs for food products and manufactured goods.
Conclusion
The extent to which the benefits expected through greater market openness will be realized,
depends significantly on how well integrated and efficient the markets are, both within and
across borders (Ndlela 2002, Lewis 2002, Wobst 2002, Arndt 2005, World Bank 2002 and
2004).
Studies that evaluate market integration and spatial equilibrium for both domestic and regional
markets should pay closer attention to the size and seasonal variance of transportation costs.
In deciding priorities for investment in road infrastructure, priority should be given to road
networks that link high agricultural potential areas to food deficit regions. Market integration
and spatial equilibrium studies can be used to guide these priorities.
To maximize benefits from improved road and transport infrastructure, parallel investments
have to be made in the following complimentary areas: market information systems,
standardization of grades, contract enforcement, access to finance, and better coordination of
market institutions.
Given that central role of agriculture in rural development in Africa, investments in transport
infrastructure have to be evaluated based on potential impacts in transforming both input and
output markets for agricultural commodities.
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