The response of local markets to sectoral and macroeconomic policy changes is a key determinant of the long term impact of policy reforms on reforming economies. In other words, changes in arbitrage costs that are associated with policy reforms as well as the level of integration among local markets exert a strong influence of the economic outcome of reform programs. The objective of this paper is to explore this question theoretically and empirically. A model that can be used to capture the long term process that is involved has been developed and tested using data from Ghana. The model is later applied to analyze the outcomes of further liberalization of groundnut markets in Senegal. The findings highlights the potential cost of failing to pay sufficient attention, when liberalizing domestic markets, to the emergence of a competitive and efficient private distribution sector. The results also indicate that, when state-run processing sectors with monopoly power are involved, effective liberalization of pricing and marketing policies in all likelihood would not yield the anticipated benefits, unless accompanied with efforts to improve productivity and cut unit costs of production in the processing sector.
why integration and arbitrage costs matter
International Food Policy Research Institute (IFPRI)