The import channel of the resource curse

Natural resource dependence presents significant macroeconomic and structural challenges, often referred to as the \”resource curse.\” While much of the literature has focused on the export side, particularly the Dutch disease—where resource booms lead to a loss of competitiveness in other sectors—less attention has been paid to the import side. Yet, the economic significance of imports in developing countries has not escaped the notice of rent seekers.  

Using new firm-level data on imports in 53 countries, recent research uncovers a channel of the resource curse running through the “monopolization of imports”. Resource-dependent economies not only face the well-documented Dutch disease, where resource wealth leads to a stronger currency and a smaller non-resource export sector, but also an expanded import sector. This expansion, coupled with weak institutions, can lead to rent-seeking behavior where importers exert influence to protect their markets from competition.

The paper uses a new database of firm-level import transactions to examine the impact of resource dependence on import market concentration.

There are three main findings:

1. Countries with greater resource export intensity have more concentrated markets
2. These economies impose higher tariffs and non-tariff measures which further concentrate import markets.
3. Within countries, increased import market concentration is associated with higher domestic prices, suggesting that the negative effects of market concentration outweigh potential cost efficiency.

The data reveals a clear positive relationship between a country’s commodity exports and the concentration of its import markets (Figure 1a), measured by the Herfindahl–Hirschman index (HHI). The HHI for an imported product market is the sum of the squared market shares of every firm importing that product. Econometric analysis confirms this relationship is robust and potentially causal, as increases in world commodity prices also lead to greater import market concentration. 

Trade protection appears to be a key mechanism for import monopolization in natural resource dependent economies. Figure 1b shows that higher commodity export shares correlate with increased tariffs and non-tariff measures (NTMs), which are often used by developing countries to support industrial policies and reduce competition in their primary goods markets. This protectionism leads to increased import market concentration through both direct and indirect means.

Traditional Dutch disease models focus on the relative price changes between tradable and non-tradable goods, but they overlook the market structure and 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. The study suggests that monopolistic or oligopolistic pricing by importers leads to elevated prices, which is an additional mechanism by which the resource curse can affect an economy.

This research contributes to the broader literature by systematically exploring import market structures across countries. It contrasts with studies on export market structures, where higher-income economies tend to have more concentrated export markets. In import markets, the pattern is reversed: higher-income economies have less concentrated import markets, regardless of their commodity export intensity. The paper highlights unique entry costs in importing for resource export-intensive economies, which can lead to higher overall costs.

The findings suggest a new channel for the resource curse through the monopolization of imports. Given the significant size of the import sector in developing countries, the policy implications are clear. To counteract monopolization, direct policy interventions should aim to increase import competition including 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 spread of oligarchies which constitute an important lobby competition and often seize control of liberalization efforts, with the unfortunate being the loss of belief in competition by citizens.

In conclusion, while the resource curse has traditionally been associated with the export side of economies, it is equally important to consider the import side, particularly in the context of developing countries. The monopolization of imports is a significant issue that requires targeted policy interventions to ensure that the benefits of resource wealth are not undermined by anti-competitive practices.

Source: blogs.worldbank.org