spreads relative to the lower average prices spreads during the post-liberalization period (i.e., the
coefficient of variation), the instability of cereal prices relative to mean cereal price levels has
declined in only 12 of 24 cases.
It is important to note that price instability is not necessarily indicative of price unpredictability.
Some variation in cereal prices is predictable and actually necessary, such as intra-seasonal price
increases after the harvest in order to induce incentives for grain storage for consumption later
in the year. Also, variations in cereal prices between regions are also important to provide the
incentives for private traders to transport grain from surplus to deficit regions. Future efforts to
improve the performance of grain markets through price stabilization will be more effective if they
do not remove the predictable and useful forms of price variation, both spatial and temporal, that
are necessary to induce private traders to undertake critical storage and transportation functions.
Changes in market price correlation
The extent to which grain prices at different markets are correlated is important in the design of
appropriate market development, stabilization, and food security strategies. For example, if a
price increase in one market is not associated with an associated price increase in another market
linked by trade, this may (but not necessarily) be because of poor infrastructural links between
these markets, lack of competition in grain distribution, or other problems that inflate costs in the
food system. As an initial step to assess the extent to which grain markets are spatially integrated,
correlation coefficients are computed and presented between different pairs of markets which are
linked by trade (Table 6). The coefficients are computed for both prices in levels and first
differences.8 While there are well-established limitations of examining market integration through
correlation analysis, it can be said that low price correlation between markets is generally
indicative of relatively high costs and/or weak transmission of information within the marketing
system.
Across all commodities and market pairs, price correlation increased after liberalization in 17 of
24 cases. Of the six cases in which price correlations declined, five of them involved Mekele
market. On-going analysis is examining the reason for the apparent disconnection between
Mekele, the largest city in Northern Ethiopia, and the rest of the country. Correlation coefficients
in the price differences also increased in 17 of the 24 cases. These initial descriptive statistics
indicate that cereal market liberalization has generally increased the extent to which prices in the
country move together. Such a result generally (but not necessarily) indicates an improvement
in market efficiency and reduction in marketing costs, other factors constant. These findings are
also consistent with those of Dercon (1994).
Results of grain checkpoint survey
Much controversy has surrounded the issue of grain checkpoints. The newly formed regional
governments have used tariffs on grain transported across road checkpoints as a means to raise
public revenues. The conventional wisdom in Ethiopia is that these tariffs constitute a tax on
8The correlation coefficient for levels indicate that to what extent price levels in different markets are
related while the correlation coefficient for first differences indicate that how the changes in price levels
for different markets are related to each others.
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