Is there a fiscal resource curse? Resource rents, fiscal capacity, and political institutions in developing economies

Abstract

States' fiscal capacity plays a pivotal role in developing economies, but it is less clear what its determinants are or what explains cross-country differences. We focus on the impact of natural resources. Standard arguments suggest that natural resources rents may reduce incentives to invest in fiscal capacity. However, political institutions that limit rulers' discretion over the use of resource revenues may mitigate or neutralize this negative effect. We investigate this hypothesis using panel data for 1995 to 2015 for 62 developing countries. The results suggest: (1) point-source resources are negatively associated with fiscal capacity, while diffuse resources are not; (2) developing economies with institutionalized executive constraints can neutralize the negative effect of point-source resources; (3) the effect of resource rents works mainly through institutions that make the tax system accountable and transparent. Thus it is possible to develop both fiscal capacity and the natural resources sector, without any trade-off.

Institutions and tax capacity in sub-Saharan Africa

“…This approach does not distinguish effort as a performance from capacity as capability; the methods of measuring tax effort are not clear indicators of tax or fiscal capacity interpreted as the ability to raise the revenue desired by the government. 2 While tax performance has a standard definition in terms of measuring revenue collected and regressions suggest which characteristics are associated 2 This is also true for measures proposed for fiscal capacity in Persson (2011, 2013) and Masi et al (2020) such as shares of income taxes in total taxes. with performance, tax capacity is inherently vague as it includes structural (base), political (rate), and administrative (efficiency) elements which are inter-related (e.g.…”

What are the drivers of tax capacity in sub-Saharan Africa?

“…This is also true for measures proposed for fiscal capacity: (i) the total tax-to-GDP ratio(Baskaran and Bigsten, 2013;Besley and Persson, 2011;Masi et al 2020); (ii) the share of income taxes in total taxes(Besley and Persson 2009, 2013, 2014Masi et al 2020); (iii) the difference between the income tax share and the trade tax share(Besley and Persson 2011); and (iv) the size of the formal sector(Besley and Persson 2011).…”

The political economy of the resource curse: A development perspective

“…Another mechanism concerns the possibility that chief executives who are subject to formal limitations to their power may be more likely to follow the rule of law, so that an independent judicial system may be more effective against any breach of tax laws or abuse in tax levies. Masi et al (2020) and Ricciuti et al (2019aRicciuti et al ( , 2019b provide evidence consistent with such mechanisms.…”