Natural resource dependence subjects economies to macroeconomic and structural challenges. The focus of attention in the ‘resource curse’ literature has been on the export side, while the import side has received much less attention. This column uses new firm-level data on imports in 53 countries to explore the effect of natural resource dependence on market concentration of imports. The findings suggest a novel channel of the resource curse running through the monopolisation of imports.
Economies dependent on natural resources face macroeconomic and structural challenges known as the ‘resource curse’ (Hauk and Cabrales 2011, Ross 2012). One challenge traditionally emphasised in the resource curse literature is ‘Dutch disease’ wherein a natural resource discovery or price increase is accompanied by an appreciation of the real exchange rate, which in turn shrinks the non-resource export sector (van der Ploeg 2011, Gylfason et al. 2012, Arezki et al. 2017). The overlooked consequence of the real appreciation associated with Dutch disease is that it also increases the size of the import markets. Another challenge of the resource curse is rent seeking wherein natural resource rents controlled by the state increase the return to state capture, leading to inefficient policy choices in the absence of strong institutions (Tornell and Lane 1999).
In principle, both challenges namely the import side of Dutch disease and rent seeking could interact. Foreign exchange receipts from natural resource exports imply greater demand for imports, increasing the value of the domestic import market. Consequently, natural resources raise the return to effort by importers towards capturing the state and directing state power to shield them from competition, especially in developing economies with weak institutional arrangements.
In a recent paper (Arezki et al. 2024), we use a new database of all firm-level import transactions in 53 developing and emerging market economies to explore the effect of natural resource dependence on market concentration of imports. There are three main results. Countries with greater resource export intensity have more concentrated markets for imported goods. Economies with greater resource export intensity have higher tariffs and non-tariff measures that concentrate markets. Within countries over time, import market concentration is associated with higher domestic prices, suggesting that markups due to greater concentration outweigh any potential cost efficiency.
The new firm-level import data reveal that natural resource dependent economies have more concentrated markets for imported products. This basic pattern is illustrated in Figure 1a, which shows a positive association across countries between commodity exports as a share of total merchandise exports and the weighted average Herfindahl–Hirschman index (HHI) across all imported product markets in a country. The HHI for an imported product market is the sum of the squared market shares of every firm importing that product. Econometric estimates show this relationship is robust a variety of controls including country-product and product-year fixed effects as well as controls for income per capita, governance, and inequality. An alternative specification shows exogenous increases in world commodity prices also increase import market concentration, suggesting the relationship is causal.
Additional evidence suggests that trade protection specifically is the mechanism for import monopolisation in natural resource dependent economies. Figure 1b shows that the commodity export share is positively associated with higher tariffs on imports. The commodity export share is also associated with greater use of non-tariff measures (NTMs) such as quotas, that limit entry into exports. This is expected, as the sample includes mainly developing countries, where domestic firms are more likely to produce primary goods and have incentives to reduce competition in their primary good market. Developing countries also use tariffs to support industrial policies designed to develop novel exports and diversify away from commodities. Trade protection increases import market concentration – through both direct and indirect mechanisms.
Figure 1 Import market concentration in natural resource-dependent countries and a potential mechanism
Notes: Panel A displays the average HHI of a country’s import markets and the country’s average commodity export share, where averages are taken over years. Within years, the HHI is the import value-weighted average of the log of the HHI across HS 6-digit products for a given country. The slope of the best fit line in Panel A is 0.86 (standard error = 0.19). Panel B displays the import value-weighted average tariff rate of a country and the country’s average commodity export share, where averages are taken over years. The slope of the best fit line in Panel B is 0.031 (0.022).
The traditional models of Dutch disease emphasise the increase in the price of non-tradable goods relative to the price of tradable goods hence the appreciation of the real effective exchange rate. Yet, these traditional models ignore elements of market structure and the presence of mark-ups in import markets. These elements can affect prices in important ways over and above the effect on relative prices stemming from the traditional Dutch disease. Indeed, the mechanism suggested by our results is that prices are elevated due to higher markups ensuing from monopolistic or oligopolistic pricing by importers.
Our paper is the first to systematically explore differences across countries in import market structure, contributing to several literatures beyond that about the resource curse. While the export sector has been the traditional focus of the trade and development literature, in developing and emerging markets the value of imports is about as large as the value of exports, and many exported goods are made using imported inputs (UNCTAD 2021). We identify patterns in import market structure that contrast starkly with those in studies examining export market structure. Fernandes et al. (2016) use the same customs transactions data to document that higher-income economies have more exporting firms, but also more concentrated export markets dominated by ‘superstar’ firms with especially large market shares. The pattern in import markets is the opposite. Higher-income economies have less concentrated import markets, independent of their commodity export intensity. Our paper provides evidence of entry costs in importing that are unique to resource export intensive economies, and which can account for higher costs in these economies.
These results suggest a novel channel for the resource curse stemming from the monopolisation of imports. Given the size of the import sector in developing countries, the policy agenda to de-monopolise imports is paramount. Direct policy interventions to increase import competition include reforms that lower tariffs and remove non-tariff measures such as quotas that restrict entry. The creation or the strengthening of credible and independent local bodies will help promote competition in general but also in the import sector in particular. Fighting anti-competitive practices can prevent the perpetuation of oligarchies who constitute an important lobby and often seize control of liberalisation attempts, with the unfortunate result that the idea of competition is sullied among citizens.
Source : VOXeu
