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Empirical Evaluation of the Degree of Price Transmission

from the Border to the Consumers in Mozambique

Xavier Cirera and Virgulino Nhate

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Objectives The gains of international trade depends of the degree of price transmission

to the economy (SADC countries undergoing major integration from January 2008. Will this

results in gains to the consumers? Only consumers will gain if the reduction of customs duties are transmitted to the consumers).

The high transaction costs and the monopolistic behavior in the distribution side can act as the barriers for price transmission

Objectives: Quantify the degree of price transmission from the border to

the consumer To decompose the most relevant factors which contribute

for price determination of the tradables Find if the price transmission is the same at all main markets

in Mozambique

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Theoretical Background

Law of one Price (LOP) Establish that in absence of any barriers to trade, costless trade and perfectly functioning markets, prices of the same good in different countries should be the same when converted in the same currency.

Violations to the LOP are due to: Goods are not homogeneous There are costs in trade and arbitrage not always

happen (transportation, taxis,...) Prices rigidities Imperfect competition

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Theoretical Background

Evidences of violations of LOP:

Literature about Exchange Rate Pass-Through (ERPT) – The degree of transmission of the exchange rate – complete ERPT indicates perfect competition or constant margins Evidences indicates ERPT incomplete – imperfect competition ERPT to consumer prices is less compared to the border ERPT is great in small countries

Pricing to Market (PTM) – Krugman – some evidences that export companies use the monopoly power to discriminate prices in different markets

Evidences of asymmetric transmission and non-linear (threshold models)

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Evidences The recent literature is concentrated in the import side and

the tact that the prices at the border are much sensitive to changes in the exchange rate than the consumer prices.

Three potential explanations:

i) The existence of non-tradable in the CPI

ii) Existence of imperfect competition in distribution sector - double marginalization – distributors adjust the profits and margins to expand the market

Theoretical Background

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Methodology

Estimation of equation based on the LOP – differences in prices are due to barriers to trade, transportation costs and the commercialization margins

This study is concentrated in the border prices – CIF unit prices – leave aside the exporter behavior

Products selection – more than 20 products mainly agricultural products – assure homogeneity

3 markets – Maputo, Beira e Nampula

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Methodology (cont.)

Pfobit et (1 + acif

it) (1 + τit) (1 + trit) (1+ηit) = Pcit (1)

Pcif

it= Pfobit (1 + acif

it) (2) Ajuste fob/cif Tit = (1 + τit) =(1+tit)(1+vatit) (3) Taxes TRit = (1 + trit) (4) transport costs

)5(lnlnlnlnlnlnititititt

cif

it

c

itMTRTePP

)6(lnlnlnlnln1

1ittititt

cif

it

i

iii

c

it CPITRTePMP

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Data

Products – Sample from CPI basket (INE) – more than 20 products

Consumer prices – Monthly CPI Maputo, Beira and Nampula

Unit cif price – average monthly of unit price (value/net weight) of imports in the customs border post of the province – customs data base

Transportation costs – average distance between the customs border post and the market

Variables of the equation (5) defined at provincial level – the CIF price and the CPI also defined at same level

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Taxes – customs taxes and the VAT – really paid in the border post – take in account the exemptions – customs data base provide this information

Exchange rate – official rate – two series rand e dollar – Not weighted rate but the majority of imports are expressed in rands

CPI – series of CPI aggregated by INE

Commercialization margins – Problem- no data!!!

Observations of the three markets: 25 products e 1140 observations. Maputo 24 products and 696 observations, Beira 18 products and 324 observations and Nampula 8 products e 104 observations.

Unbalanced panel

Data (cont.)

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Results – pooled

OLS OLS(ii) LSDV FE RE-1 -2 -3 -4 -5

pcif 0.1316*** 0.1362*** 0.0165*** 0.0165*** 0.0171***[0.0176] [0.0168] [0.0056] [0.0056] [0.0057]

e 0.3436 0.5986*** 0.7616*** 0.7616*** 0.7605***[0.3207] [0.1551] [0.0489] [0.0489] [0.0491]

cpi 0.3239[0.3565]

tax 1.5987*** 1.5121*** -0.1434 -0.1434 -0.14[0.4038] [0.3924] [0.1381] [0.1381] [0.1385]

dist -0.017 -0.0177 -0.0164*** -0.0164*** -0.0165***[0.0176] [0.0176] [0.0054] [0.0054] [0.0054]

beira -0.2679*** -0.2772*** -0.0529*** -0.0529*** -0.0538***[0.0661] [0.0653] [0.0203] [0.0203] [0.0204]

nampula 0.2610*** 0.2664*** -0.1783*** -0.1783*** -0.1769***[0.0983] [0.0981] [0.0307] [0.0307] [0.0308]

Constant 5.1463*** 4.5797*** 5.2802*** 4.0360*** 3.9655***[1.4041] [1.2579] [0.4043] [0.3936] [0.4293]

Obs. 1140 1140 1140 1140 1140

R2 0.11 0.11 0.93 0.03 (0.25) 0.03 (0.25)Products 25 25 25 25 25

Table 2 Price Transmission Panel Estimates-Pooled Provinces

Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%

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Results – Maputo

OLS OLS(ii) LSDV FE RE GLS (AR1) REGLS

(AR1) FE GLS (AR1) PCSE

-1 -2 -3 -4 -5 -6 -7 -8 -9

pcif 0.1590*** 0.1482*** 0.0243*** 0.0243*** 0.0247*** 0.0127** 0.0181** 0.0164*** 0.0260***[0.0238] [0.0217] [0.0050] [0.0050] [0.0050] [0.0050] [0.0078] [0.0028] [0.0052]

e 1.4541*** 1.0206*** 0.9150*** 0.9150*** 0.9147*** 0.3828*** 1.2824*** 0.5144*** 1.3825***[0.4449] [0.2247] [0.0485] [0.0485] [0.0488] [0.0717] [0.0103] [0.0369] [0.0095]

cpi -0.5711[0.5060]

tax 2.3254*** 2.3994*** -0.2224 -0.2224 -0.2152 -0.0237 0.156 -0.1500** 0.2410*[0.6229] [0.6196] [0.1611] [0.1611] [0.1620] [0.0915] [0.1404] [0.0683] [0.1431]

dist -0.2161*** -0.2147*** -0.0262*** -0.0262*** -0.0269*** -0.0008 -0.0210** -0.0045 -0.0303***[0.0451] [0.0451] [0.0094] [0.0094] [0.0095] [0.0066] [0.0101] [0.0036] [0.0072]

Constant 0.4495 1.3513 4.0661*** 2.8725*** 2.7848*** 6.9782*** -0.2583*** 7.2674***[2.0077] [1.8422] [0.4095] [0.4017] [0.4418] [0.6084] [0.0099] [0.3050]

Obs. 696 696 696 696 696 696 672 696 696

R20.15 0.15 0.97 0.04 (0.47) 0.04 (0.47) 0.04(0.46) 0.04 (0.98) 0.99

Products 24 24 24 24 24 24 24 24 24

Table 3 Price Transmission Panel Estimates – Maputo Province

Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%

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Results – Beira

Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%.

OLS OLS(ii) LSDV FE RE GLS (AR1) RE GLS (AR1) FE

-1 -2 -3 -4 -5 -6 -7

pcif 0.1540***0.1476*** -0.0052 -0.0052 -0.0042 -0.0038 0.002[0.0383] [0.0387] [0.0109] [0.0109] [0.0109] [0.0063] [0.0087]

e -0.7809 0.5590* 0.5011***0.5011***0.5064*** 0.3424*** 1.2076***[0.5582] [0.2935] [0.0912] [0.0912] [0.0913] [0.1165] [0.0264]

cpi 1.5849***[0.5638]

tax 2.4182** 1.4095 -3.1351***-3.1351***-3.0835*** -0.2694 0.6326[0.9912] [0.9339] [0.6635] [0.6635] [0.6619] [0.3940] [0.5148]

dist 0.0144 0.0135 0.0013 0.0013 0.0013 0.0007 -0.004[0.0246] [0.0249] [0.0059] [0.0059] [0.0059] [0.0039] [0.0054]

Constant 7.8828***4.5928* 8.0023***7.0370***7.0065*** 7.2583*** -0.0064[2.6996] [2.4588] [0.9213] [0.9037] [0.9394] [0.9727] [0.0162]

Obs. 324 324 324 324 324 324 306

R2 0.11 0.09 0.96 0.0001 (0.34)0.0001 (0.34) 0.01(0.31) 0.02 (0.98)Products 18 18 18 18

Table 4 Price Transmission Panel Estimates – Beira Province

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Results – Simetric ERPT

Pooled Maputo Beira NampulaLSDV (3) PCSE (9) GLS (AR1) FE (7) GLS (AR1) FE (7)

pcif 0.0041 0.0044 0.0011 -0.005[0.0059] [0.0035] [0.0045] [0.0056]

e_apr (λ1) 0.8872*** 1.3903*** 1.2213*** 1.1988***

[0.0429] [0.0100] [0.0128] [0.0602]e_dep (λ2) 0.8853*** 1.3825*** 1.2162*** 1.1944***

[0.0427] [0.0100] [0.0127] [0.0599]tax 0.0733 0.1887 0.3251* 0.0138

[0.1117] [0.1223] [0.1965] [0.0935]dist -0.0161*** -0.0251*** -0.0053 0.0005

[0.0050] [0.0073] [0.0049] [0.0029]beira -0.0500***

[0.0186]nampula -0.1561***

[0.0283]Constant 4.2164*** -0.0579*** -2.7659***

[0.3548] [0.0121] [0.0081]

Test H0: λ1=λ2 Accept Reject Reject Reject

Obs. 1303 760 389 108

R2 0.93 0.99 0.98 0.81Products 24 18 9

Table 6 ERPT Symmetry Specifications

Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%.

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Main Results The tests indicates existence of product specific effects – can be specific margins or

other characteristics

ERPT almost complete and robust – constant margins?

Transmission of CIF unit price too low – adjustment of margins? And constant for exchange rate change?

Transmission of border taxes low – but small variation within and between

Elasticity of transportation costs negative – bad quality of the proxy (distance) or the transportation costs is not significant

Symmetric ERPT

Results looks the same for the tree provinces in analysis

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Policy Implications

Importance of stabilizing exchange rate Competition policy in the distributor sector

Discussion Points Problems:

Lack of the data of commercialization margins Cointegration – short run estimation – problems of

working with unbalanced panel with many gaps Homogeneity of the products in the sample

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THANK FOR YOUR

ATTENTION