Is Africa Integrating? Evidence from Product Markets

Integration into the global trading environment is viewed as a key factor underlying the success of the fastest growing economies. Yet many African countries remain isolated and appear to have failed to achieve the level integration of these fast growing economies. This paper presents a price-based assessment of product market integration in Africa using disaggregated retail prices for over 200 products and 13 African cities. Product market integration is first assessed using absolute and relative measures of price dispersion. This followed by an econometric analysis to identify some of the domestic, regional and global factors that have contributed towards product market integration in Africa. Overall, we find evidence of increased product market integration in Africa. The volatility of real exchange rates between African countries has fallen over the past two and a half decades. Product price dispersion at the retail level amongst the sample of African cities also fell, although much of the decline was concentrated in North Africa during the early 1990s. The econometric estimates reveal that trade costs, as proxied by distance and MFN tariffs, are the dominant determinant of price dispersion amongst the African cities. External forces also matter. Global trends in price dispersion contributed around 29 percent of the overall increase in integration.