Measuring untapped revenue potential in developing countries: cross-country frontier and panel data analysis

Abstract

Efforts supporting domestic revenue mobilisation in developing countries are often designed and evaluated based on empirical indicators, such as ratios of revenue to gross domestic product, which capture differences in achieved outcomes across countries. This article studies a complementary approach that also takes into account differences in countries’ fundamental economic structures associated with different capacities to raise revenue, which are not captured by simple ratios of revenue to gross domestic product. Non-parametric data envelopment analysis is applied to estimate domestic revenue potential in a panel of 118 low- and middle-income countries from 2008 to 2019. This approach provides a data-driven measure of how efficient each country is in raising domestic revenue given its national economic conditions. The results indicate that countries’ relative efficiencies do not exhibit the same strongly positive correlation with income levels as typically observed for ratios of revenue to gross domestic product. Instead, countries with low efficiency are spread across all income groups and geographical regions. This suggests that looking solely at ratios of revenue to gross domestic product might be misleading for drawing policy and normative conclusions about how much more revenue a country should aim to raise. Finally, panel regression analysis is used to investigate the extent to which international support is targeted at countries with larger untapped revenue potential.