Modelling trends in spatial market integration in the post-liberalized era : a case of maize markets across surplus and deficit regions in Kenya

Abstract

Kenya has continued to be beleaguered by high and unstable food prices since 2009. This is despite the stabilization and decline in world food prices. The government perceived the persistent high food prices as a failure by the markets, and therefore embarked on implementing various trade and marketing policies aimed at stabilizing food prices. In order to discern the causes of persistent high food prices in Kenya, this study pursued three objectives: (1) to examine the degree and extent of spatial market integration across the domestic, regional and world markets; (2) to examine the effects of government policy interventions on spatial market integration across domestic, regional and world markets; and (3) to examine the effects of shifts in domestic commodity supply and demand dynamics on maize price formation. Results from the study indicated that 13 out of 14 market pairs from the domestic markets were integrated. Market pairs that were further apart were less integrated, compared with the market pair closer to each other. All the domestic and regional markets had a long-run relationship and were integrated. Shocks in the domestic markets were eliminated faster than shocks emanating from the regional markets were. In addition, the domestic markets were better integrated with the Ugandan markets than the Tanzanian markets. The domestic and the world markets were integrated and had a long-run relationship. Shocks emanating from the regional markets dissipated faster, compared with shocks emanating from the world markets. Regarding the effects of government policy interventions, the markets were less integrated during the regime of heavy government interventions, as compared with the regime of minimal policy intervention. The policy interventions to stabilize food prices not only failed, but also further exacerbated the situation by leading to a low extent and degree of market integration. Regarding the local dynamics in demand and supply, the decision by farmers to plant maize was less influenced by the price incentive. Just as with most staples, maize was highly inelastic to changes in price and income. Rainfall and technology (high-yielding variety) adoption played an important role in maize production as it contributed to a significant decline in imports and maize prices. The removal of an import tariff during the time of poor harvest helped to shield consumers from high food prices. The removal of the fertilizer subsidy was detrimental to food security, as maize prices increased significantly, while the cost of food imports were 20% higher compared with the cost of the subsidy. The government should endeavour to create a conducive policy environment that allows markets to operate freely, thus reducing uncertainty. Interventions in the market by the government should be transparent and strictly adhere to market forces. Such interventions should aim at deepening regional trade through collective action by regional governments for tackling challenges that hinder arbitrage in the regional trade. To ensure that consumers benefit from lower food prices, the government should lift the GMO import ban and remove the import duty on maize.