Country and border effects in the transmission of maize prices in Eastern Africa: evidence from a semi-parametric regression model

There is an extensive literature on distance and border effects in trade, but little attention has been paid to the impact of distance and borders on spatial price transmission. We analyze distance and border effects in maize price transmission between Kenya, Tanzania and Uganda. Using monthly data from January 2000 to October 2008, maize price transmission is measured for 85 market pairs within and between these countries. The magnitude of price transmission between market pairs is found to vary systematically with distance and the presence or lack of a national border between a market pair. This analysis extends the border effects literature in three ways. First, price transmission rather than trade flows or price variability is analyzed. Second, the impact of distance on price transmission is shown to be nonlinear, and is modelled using a semi-parametric partially linear model. Third, strong evidence is found that border effects are heterogeneous; the Tanzanian border has a significant negative impact on price transmission, while the Ugandan border has no effect. The results suggest that Tanzania is a relatively isolated and internally fragmented island within the East African maize market. Price transmission between Nairobi and other markets is strong, which confirms the role that Nairobi plays as a hub on East African maize markets.