# **1. Introduction**

Market integration is crucial from the perspective of food security. Many Sub-Saharan countries face occasional food shortages as a result of crop failure, which can be caused by drought or other climatic hazard. Integrated markets for staple foods provide a mechanism for reducing the adverse impacts of these shocks by allowing food to move quickly from surplus to deficit areas. The increased integration of food markets in developing countries is also considered to be of vital importance for agricultural transformation and economic growth (Fafchamps, 1992). In addition, Rashid and Minot (2010) argue that knowledge of spatial market integration can also help better design social safety net programs.<sup>1</sup> An important step toward the implementation of well-targeted policies to improve regional market integration is to evaluate by how much trade in agricultural products is impeded by transport costs and transactions costs between domestic markets and at the border. In this paper we examine the effects of distance, road quality and additional impediments to market integration within and between thirteen countries of the East and Central African region<sup>2</sup> for three key staple foods: maize, rice, and sorghum.

The depth of market integration in a region is typically assessed by the volume of intraregional trade. This is difficult in Africa because of the substantial volumes of informal trade in food that are not captured in official statistics. A recent report (USAID, 2013) suggests that official statistics in West Africa may underestimate flows of trade in food by as much as 60%.<sup>3</sup> Our paper uses an alternative procedure to assess the extent of regional market integration for basic food staples by examining food prices in different markets and the extent to which they differ between towns. In well-integrated and well-functioning markets, price differences should be arbitraged away through intra-regional trade so that price differences between towns should be bounded by transportation costs between the markets. Yet, policy regulations (e.g., export bans), border barriers, and other impediments to trade may prevent arbitrage and lead to large sustained price differences between locations.

We use a database of monthly prices of maize, rice and sorghum for 150 towns in 13 African countries between May 2008 and September 2009, and estimate, first, the extent to which distance and road quality (as proxied by the proportion of roads that are paved) impact

> 1 If markets are integrated, cash transfers are often better than food transfers because they create demand that maintains incentives for local food production. On the other hand, if markets are not integrated, then food transfers will generally work better.

> 2 Burundi (BDI), Djibouti (DJI), Democratic Republic of Congo (DRC), Ethiopia (ETH), Kenya (KEN), Mozambique (MOZ), Malawi (MWI), Sudan (SDN), Somalia (SOM), Rwanda (RWA), Tanzania (TZA), Uganda (UGA) and Zambia (ZMB).

> 3 Official statistics on trade in the East and Central African region suggest that there exist substantial flows among countries of our sample (see table A.10. in the appendix). Moreover, it is likely that informal trade is even higher. For example, according to a report from OECD (Lesser, C. and E. Moisé-Leeman, 2009), in 2006, Uganda’s informal exports of agricultural goods to its five neighboring countries represented 75% of official agricultural export flows. In the Horn of Africa (Sudan, Ethiopia, Eritrea, Djibouti and North-East Kenya), Little (2005) notes that for some agricultural commodities — like livestock and grain — unofficial exports to neighboring countries in fact exceeded at times official trade by a factor of 30 or more, hence constituting over 95% of total trade in these commodities.

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