Levels and determinants of agricultural market integration: the impacts of policies on marketisation

Abstract

Degree of market integration has often been used as a gauge of the success of market liberalisation and structural adjustment policies in developing countries. China is both an emerging economy and the world’s largest transitional economy. The target of its economic reform is the formation of an efficient market-oriented economy. Since it provides a wealth of evidence of the workings of a transitional economy, the performance of China’s market is of great interest to transitional economists. There are two reasons to believe that market integration must be tested if the progress of economic reform in China is to be determined. The first reason relates to debates about assessment of market performance. On the one hand, China has been praised for facilitating market competition amongst state-owned, collective and private sectors. On the other hand, Young argues that, despite market-oriented reform, segments of the Chinese economy freed from central control tend to exploit rent-seeking opportunities implicit in distortions of the economy. As Young puts it, ‘distortions beget distortion’. It is possible China’s ongoing reform will stimulate sustained economic growth. If Young’s prediction is accurate, however, China’s markets have been getting less rather than more integrated and sustained economic growth in the future is unlikely. It is necessary, then, to test rather than assume market integration. The second reason to believe market integration must be tested has to do with China’s accession to the World Trade Organization (WTO) at the end of 2001. Although China is classified as a developing country, no one doubts that its markets will be more integrated with world markets after its WTO entry. A well-functioning market needs many different forms of support, such as infrastructure, institutions and policies. Studies on key determinants of market integration have promising policy implications for the establishment of Chinese market institutions. Agricultural markets are indispensable for China, and they emerged at the very beginning of reform. Ever since, however, they have been subject to strong government intervention. A high level of agricultural market integration will benefit Chinese agriculture in various ways. For example, it will be possible to allocate endowments more efficiently. Existing studies show that allocation has an effect on patterns of regional economic growth and disparity, and that price and production fluctuate less in more integrated markets. Many other ongoing reform strategies, such as urbanisation, industrialisation and so one, are related to level of agricultural market development. Methodologically, the agricultural markets, especially the grain markets, provide an excellent window for examining market development during transition. Unlike factor markets (for example, labour markets), commodity markets (for example, grain markets) are ideal for the study of market integration because their product homogeneity makes prices comparable in different regions and across time. Show more