Presenter:Olivia Quek （Research Associate, WIAPS）
Presentation Theme:An analysis of impediments to trade between local rice markets in the Philippines
In most developing nations such as the Philippines, there is a large degree of heterogeneity in each geographic market’s ability to produce food staples. Also, a lack of rice for consumption has often been at the root cause of political instability. The sharp contrast in the supply of rice available for consumption across geographic markets within the nation speaks of the importance in ensuring that rice is redistributed efficiently from regions where it is produced in surplus, to regions where it is in deficit. This paper aims to answer two questions, which have a tremendous bearing on food security. First, are rice markets in the Philippines well arbitraged across space, ceteris paribus (that is, given the existing state of transportation and logistics facilities)? Second, what factors prevent rice from being traded between surplus regions and deficit regions?
The existing literature is unable to provide a conclusive answer to both questions. For example, while findings have been made, which suggest that Philippine rice markets are well arbitraged across space, time series data on the wholesale price of regular milled rice in each of the different provinces in the Philippines indicates significant price gaps across provinces which do not get arbitraged away across time. Compared to the observable shipping cost of less than 1 peso/kilogram, there seem to be opportunities for traders to make profits via arbitrage.
On the other hand, in an influential and highly cited paper, [Allen, T. (2014). Information frictions in trade. Econometrica, 82(6), 2041-2083.] argues that Philippine rice markets are not well arbitraged across space and large information frictions are responsible for preventing trade from taking place between surplus and deficit markets. In this paper, we scrutinize the author’s claims and make findings that differ.
In order to answer our research questions, we build an original model to predict the amount of trade that would take place between every pair of provinces within a given period of time, such as a quarter of a year. The model assumes perfectly competitive markets and perfect information across space. We solve the model using linear programming and concepts from transportation theory and compare the model’s solutions with actual trade flow data. Due to its assumptions on perfect competition, the model’s solution is a Pareto optimal set of trade flows between every pair of provinces in the Philippines, where the exporting province has a surplus and the importing province a deficit of rice. The solution serves as a Pareto optimal benchmark, against which we can compare actual trade flow data, to evaluate how far away from Pareto optimality Philippine rice markets are. The solution, or predicted trade flows, of our model, captures the features of observed trade flows very well even though the model assumes perfect information.
The findings of this research suggest that previous work may have over-estimated the significance of information asymmetries in preventing arbitrage from taking place between rice markets in the Philippines. Our results also indicate that non-observable trade costs, including packaging, storage, and logistics costs, play a large role in obstructing the trade of rice between surplus and deficit markets. The policy recommendations are clear-cut. Better transportation, packaging, storage, and logistics facilities, which would help to reduce trade costs, are of tremendous importance in ensuring that rice markets are better integrated across space. In other words, we would expect price differentials between regions to converge closer to the observed trade costs, as the above-mentioned services improve.