Cointegration and Causality: An Application to Major Mango Markets in Pakistan

By Ghafoor, Abdul; Mustafa, Khalid et al. | The Lahore Journal of Economics, Summer 2009 | Go to article overview

Cointegration and Causality: An Application to Major Mango Markets in Pakistan


Ghafoor, Abdul, Mustafa, Khalid, Mushtaq, Khalid, Abedullah, The Lahore Journal of Economics


Abstract

Mangoes are one of Pakistan's most important fruits; the country is the world's fourth largest producer and exporter of mangoes. Integrated markets are those where price signals are transferred from one to another, allowing physical arbitrage to adjust any disturbances in these markets; integrated markets are thus a sign of efficiency. From this viewpoint, we investigate domestic integration among ten major mango markets, i.e., Lahore, Faisalabad, Multan, Gujranwala, Sargodha, Karachi, Hyderabad, Sukkur, Peshawar, and Quetta employing Johansen's cointegration approach and error correction model. Data on monthly wholesale prices data (PRs/100 kg) were obtained from the agricultural and livestock marketing advisor, Government of Pakistan. The results of the study confirm the presence of integration among major mango markets in Pakistan. These markets were able to adjust for 16 to 68% of disequilibrium in one month, implying that it takes almost two to six months to remove any disequilibrium and to move back to long-run equilibrium. The Granger causality test shows that the Karachi market has bidirectional causality with Lahore, Faisalabad, Multan, Hyderabad, and Sukkur, and a unidirectional relationship with the rest. An impulse response analysis was also conducted to check the stability of these markets given a standard error shock to the Karachi base market.

JEL Classification: A10, C01.

Keywords: Mangoes, cointegration, causality, Pakistan.

(ProQuest: ... denotes formulae omitted.)

Introduction

Fruits are an important sector of Pakistan's agricultural economy. They are valued as a rich source of minerals and vitamins providing more energy per unit weight than cereals. An increasing trend in population and changing consumer behavior toward a more balanced diet has increased the demand for fruit. Pakistan has a wide range of agro-climatic conditions, which allow the production of a variety of tropical and subtropical fruits. Among the major fruits of Pakistan, mangoes occupy the second position, coming after citrus fruits in terms of area and production: 192,000 ha of land (2,458,000 tonnes) are under citrus fruit cultivation and 156,000 ha (1,753,000 tonnes) under mangoes (Government of Pakistan 2005/06). While there is much emphasis on the area and production of mangoes in Pakistan, relatively little is known about how price transmission takes place in domestic mango markets. Such information is important for mango producers and other mango value chain role players since it affects their marketing decisions (buying and selling), which in turn affect decisions related to logistical matters and eventually the export potential of mangoes from Pakistan.

In a market-driven economy, the pricing mechanism is expected to transmit information to determine the flow of marketing activities. Pricing signals guide and regulate production, consumption, and marketing decisions over time, form, and place (Kohls and Uhl 1998). Identifying the causes of price differences in interregional or spatial markets has therefore become an important economic analytical tool to better understand markets.

In developing economies, there are several impediments to the efficient functioning of markets, particularly agricultural commodity markets. These include inappropriate transportation infrastructure, difficulties in access to market information, government-imposed restrictions on the movement of goods between regions, government monopoly over the marketing and distribution system, and poor enforcement of anti-trust regulations that result in price fixing and oligopolistic market structures. If markets are not well integrated then price signals can become distorted, leading to the inefficient allocation of resources. The marketable surplus generated by farmers could then result in depressed farm prices and diminishing income (Tahir and Riaz 1997).

Spatial market integration refers to co-movements or the long-run relationship among prices. …

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