Abstract
Differences in storage costs, in particular differences in real interest rates, are a significant determinant of comparative advantage and hence the pattern of production and trade within a set of six major Southern African countries (SA6). Applying a spatial-temporal price equilibrium model of regional maize trade, we confirm the hypothesis that South African comparative advantage is rooted in more developed financial market and storage infrastructure rather than costs of maize production. With a decline in real interest rates, results indicate that Mozambique and Tanzania would export maize to the other SA6. Intra-SA6 maize trade intensifies, with a simultaneous decline in trade with the rest of the world. A stochastic version of the model, that accounts for year-to-year production variability among SA6, produces results similar to the deterministic version.
Introduction
Traditionally, trade models have focused on relative production efficiencies, trade barriers, such as tariffs, and transport costs as major drivers behind the pattern of trade. However, Benirschka and Binkley (1995) show, in the context of the United States, that another factor, storage cost – the opportunity cost of capital proxied by the real rate of interest paid by storing agents plus direct storage costs plus any risk premium – has significant implications for the pattern of commodity trade. As storage costs, most visibly the opportunity cost of capital component, are much higher in the Southern Africa region than in the United States, the implications of storage costs, including differentials in storage costs across countries, are likely to be more profound in Southern Africa than in the United States. This study analyzes the implications of storage costs and storage cost differentials across countries in the Southern Africa region on market prices, trade patterns, and volume of production and consumption.
To accomplish this, a spatial and temporal equilibrium model is constructed in the tradition of Takayama and Judge (1971). The analysis emphasizes changes in trade patterns, including trade with the rest of the world, and changes in welfare following shocks to storage costs in various regions. A deterministic version of the model establishes the fundamental role of storage in determining comparative advantage. More efficient storage scenarios are also combined with lower transportation cost and intra-SA6 tariff free trade scenarios in order to account for simultaneous effects. In addition, a stochastic version of the model examines the relative roles of regional and international markets while accounting for correlations in production volumes across the various productive regions.
This article is structured as follows. The second section identifies the key features of the maize market in Malawi, Mozambique, South Africa, Tanzania, Zambia, and Zimbabwe (henceforth known as SA6 countries). The third section provides a brief literature review. The fourth section defines the spatial-temporal price equilibrium model. Section five presents data and discusses specification issues. Section six develops model simulations and presents results for both the deterministic and the stochastic versions of the model. A final section concludes.
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