Market Reforms, Spatial Price Dynamics, and China's Rice Market Integration: A Causal Analysis with Directed Acyclic Graphs

Article excerpt

Previous studies on post-reform market performance of Chinese grain markets have produced mixed results. This paper employs province-level price data to determine if China's food market liberalization policies in the 1990s resulted in interregional rice market integration. Furthermore, this study extends the literature on spatial market integration by augmenting multivariate cointegration modeling techniques with directed acyclic graphs (DAGs), a recently developed statistical method for analyzing contemporaneous causal relationships. While the empirical results confirm the existence of strong market linkages subsequent to the reforms of the early 1990s, the linkages became less as the Chinese government reversed several reform policies in the mid-1990s. Overall, the empirical evidence from this study indicates that China's agricultural market policy reforms have been relatively effective.

Key words: directed acyclic graphs, grain prices, interregional trade, market liberalization, spatial price dynamics

Introduction

In recent years, many developing and transition economies have engaged in structural adjustment and market reform programs to liberalize their agricultural markets. These efforts were perceived as prerequisites for achieving efficient resource allocation and long-term growth in the agricultural sector. China, in particular, has experienced a rapid and significant level of growth in agricultural productivity (Diao, Fan, and Zhang, 2003). Many analysts attribute a significant portion of China's economic success to its economic liberalization policies and the reform of the food market distribution system (Lin, 1992; Sicular, 1995; Park et al., 2002). However, periods of market liberalization were also accompanied by cases of retrenchments (Park et al., 2002; De Brauw, Huang, and Rozelle, 2004).

In a recent study, Keller and Shiue (2004) tried to place China's economic growth into historical perspective by examining the linkages between economic reform, market integration, and domestic regional trade in China over the course of three centuries. However, despite the well-documented positive effects of the first phase of rural reforms on China's economy, disagreements persist on the relative impact of the second phase of rural market reforms on the integration of China's agricultural markets. This paper reexamines the evidence on China's post-reform market performance by using recently developed causal modeling techniques to analyze the extent of market integration in domestic rice markets.

Recently, the analysis of spatial market integration has been used in assessing the effectiveness of liberalization policies in developing countries (Alexander and Wyeth, 1994; Goodwin, Grennes, and McCurdy, 1999; Park et al., 2002; Laping, 2004). Since tests of market integration usually investigate the extent to which price shocks are transmitted among spatially separated markets, such an analysis can provide information on price discovery and the extent of competitive behavior. Because of its position as both a large developing and transition economy, China provides an excellent case study on the impact of market liberalization policies on a transitional economy. In addition, grain markets are ideal for the study of spatial market integration because of the ability to compare prices across regions for such a relatively homogeneous commodity.

A majority of the past studies of the impact of market reforms on China's agriculture have focused primarily on allocative efficiency and productivity issues (Fan and Pardey, 1997; Lambert and Parker, 1998; Lin and Wen, 1995; Xu, 1999). Fewer studies have investigated the effects of the reform policies on distributive (or market) efficiency. Furthermore, the few studies available on post-reform market performance of Chinese grain markets have produced mixed and conflicting results. For instance, Wu (1994) used average rice prices to investigate the extent of market integration in China and found little or no evidence in support of market integration. …