Empirical Evaluation of the
Degree of Price Transmission
from the Border to the
Consumers in Mozambique
Xavier Cirera and Virgulino Nhate
1
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
2
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
3
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)
4
Theoretical Background
 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
5
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
6
Methodology (cont.)
Pfobit et (1 + acifit) (1 + τit) (1 + trit) (1+ηit) = Pcit
(1)
Pcifit= Pfobit (1 + acifit)
(2) Ajuste fob/cif
Tit = (1 + τit) =(1+tit)(1+vatit)
(3) Taxes
TRit = (1 + trit)
(4) transport costs
ln Pitc   ln Pitcif   ln et   ln Tit   ln TRit   ln M it   it (5)
i 1
ln P   i M i   ln Pitcif   ln et   ln Tit   ln TRit  CPIt   it (6)
c
it
i 1
7
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
8
Data (cont.)
 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
9
Results – pooled
Table 2 Price Transmission Panel Estimates-Pooled Provinces
cif
p
e
cpi
tax
dist
beira
nampula
Constant
Obs.
R2
Products
OLS
-1
OLS(ii)
-2
LSDV
-3
FE
-4
RE
-5
0.1316***
[0.0176]
0.3436
[0.3207]
0.3239
[0.3565]
1.5987***
[0.4038]
-0.017
[0.0176]
-0.2679***
[0.0661]
0.2610***
[0.0983]
5.1463***
[1.4041]
0.1362***
[0.0168]
0.5986***
[0.1551]
0.0165***
[0.0056]
0.7616***
[0.0489]
0.0165***
[0.0056]
0.7616***
[0.0489]
0.0171***
[0.0057]
0.7605***
[0.0491]
1.5121***
-0.1434
[0.3924]
[0.1381]
-0.0177
-0.0164***
[0.0176]
[0.0054]
-0.2772*** -0.0529***
[0.0653]
[0.0203]
0.2664*** -0.1783***
[0.0981]
[0.0307]
4.5797*** 5.2802***
[1.2579]
[0.4043]
-0.1434
[0.1381]
-0.0164***
[0.0054]
-0.0529***
[0.0203]
-0.1783***
[0.0307]
4.0360***
[0.3936]
-0.14
[0.1385]
-0.0165***
[0.0054]
-0.0538***
[0.0204]
-0.1769***
[0.0308]
3.9655***
[0.4293]
1140
1140
1140
1140
1140
0.11
25
0.11
25
0.93
25
0.03 (0.25)
25
0.03 (0.25)
25
Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%
10
Results – Maputo
OLS
-1
pcif
e
cpi
tax
dist
Constant
Obs.
2
R
Products
0.1590***
[0.0238]
1.4541***
[0.4449]
-0.5711
[0.5060]
2.3254***
[0.6229]
-0.2161***
[0.0451]
0.4495
[2.0077]
Table 3 Price Transmission Panel Estimates – Maputo Province
GLS
OLS(ii)
LSDV
FE
RE GLS (AR1) RE(AR1) FE GLS (AR1)
-7
-2
-3
-4
-5
-6
-8
PCSE
-9
0.1482*** 0.0243*** 0.0243*** 0.0247*** 0.0127** 0.0181** 0.0164*** 0.0260***
[0.0217]
[0.0050]
[0.0050]
[0.0050]
[0.0050]
[0.0078]
[0.0028]
[0.0052]
1.0206*** 0.9150*** 0.9150*** 0.9147*** 0.3828*** 1.2824*** 0.5144*** 1.3825***
[0.2247]
[0.0485]
[0.0485]
[0.0488]
[0.0717]
[0.0103]
[0.0369]
[0.0095]
2.3994*** -0.2224
-0.2224
-0.2152
-0.0237
0.156
-0.1500** 0.2410*
[0.6196]
[0.1611]
[0.1611]
[0.1620]
[0.0915]
[0.1404]
[0.0683]
[0.1431]
-0.2147*** -0.0262*** -0.0262*** -0.0269*** -0.0008 -0.0210** -0.0045 -0.0303***
[0.0451]
[0.0094]
[0.0094]
[0.0095]
[0.0066]
[0.0101]
[0.0036]
[0.0072]
1.3513 4.0661*** 2.8725*** 2.7848*** 6.9782*** -0.2583*** 7.2674***
[1.8422]
[0.4095]
[0.4017]
[0.4418]
[0.6084]
[0.0099]
[0.3050]
696
696
696
0.15
24
0.15
24
0.97
24
696
696
696
672
0.04 (0.47) 0.04 (0.47) 0.04(0.46) 0.04 (0.98)
24
24
24
24
696
696
24
0.99
24
Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%
11
Results – Beira
Table 4 Price Transmission Panel Estimates – Beira Province
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
[0.0383] [0.0387] [0.0109] [0.0109] [0.0109]
e
-0.7809 0.5590* 0.5011***0.5011***0.5064***
[0.5582] [0.2935] [0.0912] [0.0912] [0.0913]
cpi
1.5849***
[0.5638]
tax
2.4182**
1.4095 -3.1351***-3.1351***-3.0835***
[0.9912] [0.9339] [0.6635] [0.6635] [0.6619]
dist
0.0144
0.0135
0.0013
0.0013
0.0013
[0.0246] [0.0249] [0.0059] [0.0059] [0.0059]
Constant 7.8828***4.5928* 8.0023***7.0370***7.0065***
[2.6996] [2.4588] [0.9213] [0.9037] [0.9394]
Obs.
R2
Products
-0.0038
[0.0063]
0.3424***
[0.1165]
0.002
[0.0087]
1.2076***
[0.0264]
-0.2694
[0.3940]
0.0007
[0.0039]
7.2583***
[0.9727]
0.6326
[0.5148]
-0.004
[0.0054]
-0.0064
[0.0162]
324
306
324
324
324
0.11
0.09
0.96 0.0001 (0.34)
0.0001 (0.34) 0.01(0.31)
18
18
18
324
324
Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%.
0.02 (0.98)
18
12
Results – Simetric ERPT
Table 6 ERPT Symmetry Specifications
cif
p
e_apr (λ1)
e_dep (λ2)
tax
dist
beira
nampula
Constant
Test H0: λ1=λ2
Obs.
R2
Products
Pooled
Maputo
Beira
Nampula
LSDV (3)
PCSE (9)
GLS (AR1) FE (7)
GLS (AR1) FE (7)
0.0041
[0.0059]
0.8872***
[0.0429]
0.8853***
[0.0427]
0.0733
[0.1117]
-0.0161***
[0.0050]
-0.0500***
[0.0186]
-0.1561***
[0.0283]
4.2164***
[0.3548]
0.0044
[0.0035]
1.3903***
[0.0100]
1.3825***
[0.0100]
0.1887
[0.1223]
-0.0251***
[0.0073]
0.0011
[0.0045]
1.2213***
[0.0128]
1.2162***
[0.0127]
0.3251*
[0.1965]
-0.0053
[0.0049]
-0.005
[0.0056]
1.1988***
[0.0602]
1.1944***
[0.0599]
0.0138
[0.0935]
0.0005
[0.0029]
-0.0579***
[0.0121]
-2.7659***
[0.0081]
Accept
1303
Reject
760
Reject
389
Reject
108
0.93
0.99
24
0.98
18
0.81
9
Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%.
13
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
14
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
15
THANK FOR
YOUR
ATTENTION
16