# **1. Introduction**

Market integration matters for economic development. Non-integrated markets are somehow “blind”. Producers cannot see what is appreciated in other markets and what is not, and therefore they cannot make the best possible production decisions, leading to inefficiencies. Through scale, market integration also allows for spreading fixed costs and productivity improvements through specialization. Better integrated markets help development through price stabilization, as local shocks are mitigated more rapidly through trade between surplus and deficit areas (Timmer, C.P. (1996), Donaldson (2014)). Finally, in food markets integration increases the power of price interventions as a public policy to reduce prices has larger impacts on poverty and shared prosperity.<sup>1</sup> The integration of markets is associated with large gains from increased trade. Donaldson (2014) estimates that increased connectivity across districts due to the railroad network raised real agricultural income by over 16 percent in British India. This gain is entirely explained by the increased trade between districts. That also confirms the theoretical results of Arkolakis et al. (2012).

Despite its importance, relatively little evidence exists on the effects of market integration on poverty. That is particularly the case for low income countries, which have poor data, but have the highest barriers to internal trade. This paper aims to help address this gap, focusing on the case of South Sudan. In order to do that, it first examines to what extent key commodity markets are spatially integrated across states. It then checks to what extent this domestic integration is affected by imports, by testing whether the border closure in 2011 with Sudan has affected this integration. It also tries to identify the drivers behind the (scant) markets’ integration using price differentials between Juba and the other major towns as the inverse measure of integration. The paper then uses these estimates to compute the possible effects of changes in these drivers on poverty.

The question on the poverty impact of market integration is important in South Sudan, which has one of the highest incidences of poverty in the world. Years of wars and instability, which continues unabated to this day, have killed thousands and profoundly affected all economic activities. This instability is compounded by an unfavorable location without access to the sea, unstable neighbors, and weak political institutions. The outcome is a country where more than half of the population is poor (according to estimates from the 2009 household survey, which have likely worsened after the latest rounds of violence).<sup>2</sup> Much of the population, including the poor, relies on markets for their basic consumption. Indeed South Sudan’s economy has a very low domestic production capacity – excluding oil. Before the oil closure, the oil sector represented around 66 percent of GDP, 98 percent of government

> 1 For example, governments or parastatal agencies could affect the price structure for a commodity produced and consumed within the country through arbitrage by operating on small amounts of easily controlled trade flows (Timmer, 1986).

> 2 World Bank (2011), “A Poverty Profile for the Southern States of Sudan”. Africa Region, World Bank, and World Bank (2014), “South Sudan Poverty Note: Impact of a Continued Internal Conflict on Food Security and Poverty”, World Bank.