Further conceptual and empirical considerations using Indian wholesale prices

Spatial and intertemporal integration of food markets in developing countries are important for the price system to efficiently allocate resources and products across regions and time. India’s liberalisation of food crop marketing in the early 1990’s has renewed interest in evaluating the consequences for market integration. Not surprisingly, this interest is widespread because structural change and liberalisation have occurred in the agricultural sectors of many developing countries. Given the importance of this topic there have been many international studies on agricultural market integration. The influential research in the 1990’s criticised the early reliance on correlation analysis due to the prevalence of temporal trends in agricultural commodity prices. These studies commonly used Engle-Granger type cointegration techniques to overcome the statistical inference problems. The finding of cointegration was presented as evidence of market integration. This paper provides a critique of the reliance of these studies on the analysis of pairwise price relationships using correlation and cointegration techniques. It is shown by a simple example using Indian wholesale wheat prices that analyses which ignore the effects of simultaneity are flawed and any conclusions about market integration based on this methodology, will be invalid. A conceptual framework is developed which formally models market price interdependencies in a simultaneous system of temporal price equations. Johansen's maximum likelihood procedure is used to estimate the minimum amount of information needed to identify the market system. This procedure derives significant long run cross-price, own-price, non-price and short run equilibrating price elasticity measures which are used to indicate the degree of market integration. Evidence is provided on market integration for Indian wheat, jower, paddy rice, groundnut, rapeseed and mustard seed. Comparisons are made before and after agricultural marketing liberalisation.