Economic Research Forum (ERF)

How import dependence could lead to corruption in MENA

1003
Export-led development strategies have had little success in MENA countries; what’s more, instruments of earlier import-substitution strategies – such as state-owned enterprises, high tariffs and subsidies – have survived. As this column explains, these legacies have created crony-capitalist industries that have limited the level of competition in many sectors of the economy and furthered the region’s dependence on imports.

In a nutshell

Barriers to competition in MENA have had the detrimental effects of fostering an import lobby that distorts market incentives, reinforcing an inefficient subsidy-based private sector, and causing higher prices for tradable goods.

Putting the emphasis on liberalising imports should be at the heart of any development strategy: that should foster the development of a productive sector and be a good base for promoting exports.

Even if that does not occur, reducing monopolies on imports would still be valuable because it would result in lower prices and reduced deficits.

Raúl Prebisch famously argued that developing countries should replace imports with domestic production because of the potential gains in industrialisation that would stem from such ‘import substitution’. In the strategy advocated by the late Argentine economist, the state would play a central role by nationalising companies, subsidising domestic producers and setting tariffs.

Prebisch-like development strategies gradually fell out of favour during the debt crises near the end of the last century – in no small measure because multilateral rescue organisations, such as the World Bank and the International Monetary Fund, advocated economic liberalisation.

Instead, the export-driven success of Asian economies like South Korea shifted the focus of the economic development paradigm from discouraging imports to stimulating exports. That change in emphasis from imports to exports was predicated on both the catalytic effect on domestic production of exposure to global competition, and the transfer of technology that stems from foreign direct investment.

Gradually, as the development paradigm shifted, so did policies – from those promoting trade to support domestic industries to those aimed at turning developing countries into platforms for multinational corporations in order to integrate into global markets.

But for countries in the Middle East and North Africa (MENA), export-led development strategies have had little success, and instruments of the earlier import-substitution strategy – such as state-owned enterprises, high tariffs and subsidies – have survived.

But instead of fostering domestic production as Prebisch envisioned, these legacies have created crony-capitalist industries that have limited the level of competition in many sectors of the economy and furthered the dependence on imports. Episodes of liberalisation ended up transferring ownership from state to private monopolies.

What’s more, competition authorities – still in their infancy in MENA – have had little space to level the playing field among private sector actors and stop collusion among companies including foreign and state-owned ones.

Besides tariffs, which are taxes on imports, restrictions can include quotas (limits on import quantities) and constraints on the purchase and sale of foreign currency. In MENA countries, these barriers have had the detrimental effects of fostering an import lobby that distorts market incentives; of reinforcing an inefficient subsidy-based private sector; and of causing higher prices for tradable goods.

First, agents that benefit from the import ‘industry’ constitute the biggest lobby against domestic production. For example, exclusive import licences grant a monopoly on imports to an individual or a national agency. These licences discourage potential domestic production. Indeed, licences – and the monopoly power associated with them – increase the domestic price of imports and import-competing goods, thereby increasing costs for producers who buy these imports (or substitutes) as inputs.

Auctions to allocate import licences with expiration dates are a good approach to taking on importer monopolies. Auctions could limit the capture of excess profits by non-deserving agents and result in, at the very least, lower prices and costs to downstream users and consumers.

Second, universal subsidies reinforce the distorted structure of the economy towards import dependence. Subsidies on imports such as food or basic goods increase demand for them.

Moreover, the subsidy renders artificially higher the demand for the products of the exclusive importers and can cost the government a lot of money that could be spent elsewhere. Profits from oil exports or foreign aid have funded the universal subsidies that support the monopolisation of imports. When government purchases are relatively large, the potential for quid pro quo corruption with private actors is large.

The agriculture and agribusiness sectors epitomise distorted competition between local production and (monopolised) imports in presence of consumer subsidies. That is especially the case for wheat and rice in many African countries.

There are, of course, other impediments to the development of agriculture to serve domestic demand, but ending monopolised imports and substituting targeted subsidies for the universal variety would help farm sectors meet domestic needs.

Third, import dependence leads to persistent twin deficits; that is, a budget deficit drives the trade deficit. Imports of universally subsidised goods are widely inflated. The excessive imports are either smuggled into other countries or used as an input in industry, which as a result garners an artificial advantage when the import is not sold at world prices.

That is especially the case when the government is in the business of buying the import and selling it. A good example is the soft-drink industry, which benefits from subsidised sugar – and carries bad health consequences to boot.

Liberalising imports and associated logistic and distribution chains, and cutting subsidies, would help resolve the persistent deficits that have plagued the region since the start of the Arab Spring in 2011 and the collapse in oil prices in 2014. Unless those deficits shrink, citizens may be asked to face drastic cuts in transfers or social services to preserve the rents of a few non-deserving oligarchs.

Putting the emphasis on liberalising imports should be at the heart of any development strategy in MENA. That should foster the development of a productive sector and be a good base for promoting exports. Even if that does not occur, reducing monopolies on imports would still be valuable because it would result in lower prices and reduce deficits.

 

 

 

 

 

 

 

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.




LinkedIn