Price integration in wholesale maize markets in Pakistan

Abstract

Market integration is perceived as a precondition for effective market reforms in developing countries. The high degree of market integration means the markets are quite competitive and provide little justification for extensive and costly government intervention designed to improve competitiveness so as to enhance market efficiency. This study tests long-run spatial market integration between price pairs of maize in four regional markets of Pakistan using cointegration and error-correction model (ECM) approaches. Hypotheses tests of market integration and causality are conducted using monthly wholesale maize prices in logarithmic form over the period January 1995 to December 2005. The results show that the regional markets of maize have strong price linkages, and thus are spatially integrated. Lahore market dominates with price formation in the other three regional markets. Thus, maize markets across Pakistan are efficient and are functioning well. Furthermore, the findings of the study suggest that by stabilising maize price in Lahore market, the government can rely on arbitrage to produce similar outcomes in the regional markets. Thus the cost of stabilisation may be reduced considerably. © The Pakistan Development Review.