Market Distortions and Political Rent: The Case of Fertilizer Price Divergence in Africa

We examine the fertilizer retail-import price gap in 14 African countries between 2002 and 2013. This price differential is large and remains persistent even after accounting for changes in the cost of domestic transportation. We hypothesize that these persistent deviations may be indicative of market power by importers/suppliers granted to them by governments that are prepared to bar competition in exchange for political rent. Our results show that the retail-import price differential is negatively correlated with government effectiveness. Quality of institutions both in terms of executing public policy and delivering services is, on average, likely to affect retail-import price gaps. Overall, our understanding of market imperfections is enhanced by a closer examination of the role of governance and regulation. The study illustrates this by establishing a link between retail-import price differentials and market efficiency and the quality of regulatory environment in Africa.