Economic reforms and product market integration in developing countries : an empirical investigation using retail prices in Zambia

Doctoral Thesis


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University of Cape Town

In spite of extensive trade reforms, markets for goods and services are not fully integrated across countries. Less appreciated also is that product markets within countries are frequently not integrated. Barriers to trade within countries are shown to be as important in preventing product market from integrating as barriers between countries. This evidence of withincountry market segmentation is largely based on data from developed countries. Yet market segmentation is likely to be greater between and within developing countries that face large infrastructure, trade facilitation, tariff and other regulatory barriers than between and within developed countries. This thesis uses newly obtained micro-price and tariff data to extend the price-based empirical evidence of product market integration in a developing country, namely Zambia, by examining the influence of trade costs, tariff reform and tradability on internal price dispersion. The main aim of this thesis is to examine how internal trade costs and exposure to external competition affect domestic prices and internal product market integration using Zambia as a case study of a developing country in Sub-Saharan Africa. The empirical analysis is conducted in four inter-related papers. The thesis chapters are organised as follows: The first chapter provides the general introduction of the thesis. The second Chapter documents the background to the International Monetary Fund and World Bank initiated stabilisation and structural adjustment reforms implemented by Zambia since the late 1980s. The focus of the chapter is on documenting in detail the trade liberalisation programme adopted over the period 1987 to 2011 using a highly disaggregated product-level tariff dataset constructed from primary sources, such as the Government Gazettes. This data is then used to document the extent to which the country opened up to external competition initially through multilateral reform and later through regional trade agreements. This chapter sets the scene and foundation for the later chapters, which unpack the link between tariff reform and domestic prices. The third chapter empirically investigates the extent of internal market integration in Zambia across districts, products and time using the law of one price as a theoretical benchmark. It draws on a unique product level database of monthly regional prices from 1993 to 2011 that are collected from the Central Statistics Office of Zambia. The chapter presents a descriptive iii analysis of this data. In addition, it presents a cursory assessment of how trade reforms are associated with the observed trends in internal price dispersion using simple econometric estimates.