Privatization, concentration, and pressure for protection : a steel sector study

In considering whether to privatize a large state-owned steel enterprise in Argentina, the question arose: Would its sale to a consortium of large domestic enterprises, and the resulting increase in firm concentration, inevitably lead to cries for protection? To shed light on the question, the authors examine data for steel industries in the major industrial countries. They also construct a simulation of Argentina's steel sector to study the relationships between levels of industrial concentration, substitutability between domestic and imported steels, trade policy regimes, and mark-ups of domestic prices over international prices. Their simulation results show that heavier rents and economic distortions are generated through fixed-ratio import quotas (quotas that are a fixed proportion of domestic sales) than through use of a tariff or a fixed-quantity import quota. The results show why industries seeking protection prefer a fixed-ratio import restraint - a practice being used increasingly often in industrial countries. If there is not perfect substitutability between domestic and imported steels, the incentives for the Argentine industry to seek protection - particularly as a fixed-ratio quota - are greater, the more concentrated the industry is. The lesson for policymakers - who should be trying to minimize economic distortions - is that if protection is necessary, tariffs are preferable to import quotas, perhaps even to the point of making quota-type restrictions unconstitutional. The simulation results for Argentina confirm that the less substitutable domestic and foreign goods are, the higher the rents of domestic industry can extract. So, it is important for policymakers implementing privatization schemes to ease any explicit or implicit obstacles to imports by such measures as: (a) standardizing domestic product classifications with international classifications; (b) modernizing transportation facilities to improve the speed of shipment and communication; (c) reducing bureaucratic practices related to trade in goods and services; and (d) releasing foreign exchange restrictions. The goal should be to make a foreign transaction as easy as a domestic transaction.