Political Trade Protection in Developing Countries: Firm Level Evidence from Indonesia

48 Pages Posted: 8 Aug 2005

See all articles by Ahmed Mushfiq Mobarak

Ahmed Mushfiq Mobarak

Yale School of Management; Yale University - Cowles Foundation

Denni Purbasari

University of Colorado at Boulder - Department of Economics; Universitas Gadjah Mada

Date Written: July 9, 2005

Abstract

Empirical tests of the "Protection For Sale" hypothesis typically involve regressing industry-average tariff or non-tariff trade barriers on campaign contributions or organized industry lobbies. In developing countries, politicians in power are typically interested in protecting the business interests of particular individuals "connected" to them, not industries as a whole. Political protection is therefore firm-specific and based on personal relationships between firm owners and influential politicians. Politicians rely on import licensing more than other trade barriers, since licensing requirements are easier to obfuscate from the public eye. This paper identifies "politically connected" firms from the entire population of over 20,000 manufacturing firms in Indonesia, and studies the impact of a connection to President Suharto on the probability that those firms are granted import licenses for raw-materials and for commodities for sale in local markets. We find that connected firms are between 6 and 22 percentage points more likely to receive a license than their competitors, and that these licenses often create monopolies for connected firms. We also show that licenses are valuable to those who receive them, and that there are economy-wide welfare costs of this system of corrupt protection. In particular, there is evidence that licensing increases industry concentration, and decreases the correlation between firm productivity and market share. Finally, we show that industry-level analysis of tariff rates or non-tariff barriers would miss important details of the system of corrupt trade protection prevalent in Indonesia.

Keywords: Protection for Sale, Developing Countries, Political Connections, Import Licensing, Indonesia

JEL Classification: F1, F13, O12

Suggested Citation

Mobarak, Ahmed Mushfiq and Purbasari, Denni, Political Trade Protection in Developing Countries: Firm Level Evidence from Indonesia (July 9, 2005). Available at SSRN: https://ssrn.com/abstract=770949 or http://dx.doi.org/10.2139/ssrn.770949

Ahmed Mushfiq Mobarak (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5787 (Phone)

HOME PAGE: http://mba.yale.edu/faculty/profiles/mobarak.shtml

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Denni Purbasari

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States

Universitas Gadjah Mada

Bulaksmur
Yogyakarta 55281
Indonesia

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