Academic journal article Contemporary Economic Policy

Integration of Rice Markets: The Case of Southern China

Academic journal article Contemporary Economic Policy

Integration of Rice Markets: The Case of Southern China

Article excerpt

LIANG B. CHEN [*]

In this article, integration of rice markets in southern China is analyzed using the cointegration technique and monthly price data. Results show that there is a general lack of integration among the indica rice markets in China. Poor transport facilities, government interventions, and the limited amount of grain available for arbitrage are identified as the major impediments to market integration. Policy implications are discussed. (JEL Q11, Q13, Q18)

1. INTRODUCTION

In the last 15 years or so, government intervention in the Chinese grain market has been reduced significantly. The private grain sector has been growing since the reemergence of free markets in 1979. The "unified grain procurement system" was abolished in 1985 after more than 30 years in operation. In May 1991, urban subsidies for rationed grains were cut via increases in sale prices. In April 1992, the sale prices were further increased to equal the grain procurement prices. By May 1993, the "unified grain sale system" disappeared in most areas, leaving urban dwellers responsible for purchasing their grain at market prices.

The purpose of these policy changes is to promote the formation of an integrated grain market in China. It is thus interesting and indeed important to test for spatial market integration, which can provide important information on how the grain market works. Such information may help the government to decide the extent to which it should intervene in the market (Wyeth, 1992, pp. 5-6). While studies of market integration are generally important to any economy, they are particularly so for grain markets in developing countries (Dercon, 1995). Some recent examples are Timmer (1987), Durojaiye and Aihonsu (1988), Palaskas and Harriss-White (1993), Alexander and Wyeth (1994), and Dercon (1995).

Unfortunately, empirical analysis on the integration of grain markets in China remains scarce. Recent attempts include Wu (1994), Cheng and Wu (1995), Rozelle et al. (1997), and Yu and Huang (1998). While Wu (1994) and Cheng and Wu (1995) show that there is a general lack of integration in the Chinese grain market, Rozelle et al. (1997) and Yu and Huang (1998) claim that there is a high level of integration, despite the existence of various institutional restrictions. Different data and the use of analytical techniques may have contributed to the discrepancies in the level of integration as found in these studies.

Wu (1994) examines the integration of rice markets using average prices of various rice varieties. Cheng and Wu (1995) focus on maize market integration. The number of price observations available for analysis was also small in both studies. Apart from data deficiencies, these two studies employed the Ravallion model (Ravallion 1986), which has some limitations (Wyeth, 1992; Palaskas and Harriss-White, 1993). Rozelle et al. (1997, rice and maize) and Yu and Huang (1998, rice) both use average prices at the provincial level. This may be inadequate. When a whole province is treated as a single market and all the prices are averaged out at the provincial level, much valuable information may be lost. In addition, the prices used in these two studies were for mixed varieties of rice. However, there is a distinct differential between the prices of indica and japonica rice, and they virtually represent two different markets. The importance of using prices of an individual variety of commodity, rather than mixed, fo r market integration analysis has been emphasized in various earlier studies (e.g., Palaskas and Harriss-White, 1993; Alexander and Wyeth, 1994).

Deficiencies in the existing market integration studies for China prompt the need for further research. More such studies are needed because not only will they add to an increased understanding of the level of integration in the Chinese grain market but also, more important, the results of such studies will have significant ramifications for government policy formation (Wyeth, 1992; Dercon, 1995). …

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