Measuring the impact of Swaziland's import licensing and price-setting policy on price dynamics between South African and Swaziland maize markets

Abstract

In Swaziland, maize is important for food security, yet its production is low and the country has not achieved self-sufficiency. Swaziland has had a shortfall in domestic maize production since independence. About 80 percent of the rural population never has enough maize for consumption. The National Maize Corporation (NMC) was established as a self-sufficiency mechanism in 1985. The NMC is the only white maize importer and is also responsible for the stabilisation of domestic prices. The organisation has endeavoured to stabilise Swaziland's maize prices, though they are still high by regional comparisons. This study seeks to investigate the relationship between Swaziland and South African white maize prices in the presence of maize marketing and pricing policy, as implemented by the NMC. The maize marketing policy controls flow of maize imports and exports in Swaziland, while the pricing policy controls the domestic white maize prices. The current pricing relationship between the two countries was compared with a scenario where marketing and pricing policies in Swaziland are absent. This was done in order to gauge the effect that these policies have on the integration of Swaziland into the regional maize market and ultimately how Swaziland maize prices are affected by price transmission process in the presence and absence of these policies. The study used secondary data from the NMC, the Ministry of Agriculture, and journals. Monthly data from 2000 to 2014 are used and econometric time series techniques are applied. The study hypothesised that there is a long-run relationship between Swaziland and South African maize prices, given the current market structure. It also hypothesised the short-run dynamics correct deviations from the long run in a fast and efficient manner. Lastly, it is hypothesised that current policies are not hampering marketing integration or impeding regional price signals to flow through to Swaziland maize markets. The results confirm the presence of a long-run price relationship between the above-mentioned markets. In the presence of the current maize marketing and pricing policy, the error correction term corrected or adjusted the disequilibrium, from long-run equilibrium levels, at a speed of 3.8 per cent per period, indicating relatively slow correction. This could serve as evidence of inefficient integration between the two markets and an indication of weak arbitrage process. Weak arbitrage, in turn, has definite welfare implications in that it leads to inefficient allocation of resources. In comparison to the other scenario, there is a slight difference: when analysing the relationship between import parity and Swaziland domestic prices without policy measures, short-run and long-run relationship between markets are also confirmed. Here the error correction term, however corrected the disequilibrium of the system at a speed of 4.7 percent per period. This shows a slight improvement of efficiency when policies are eliminated. This study could be useful to policy makers in that it imparts knowledge on how world price signals are transmitted to their domestic markets. Understanding the price dynamics could, therefore, facilitate policy formulation related to price and marketing in the white maize industry. The findings of this study could ultimately also inform the self-sufficiency versus food affordability debate.