Is There a Fiscal Resource Curse? Resource Rents, Fiscal Capacity and Political Institutions

ESID Working Paper No 96. Manchester: Effective States and Inclusive Development Research Centre, The University of Manchester

40 Pages Posted: 22 Feb 2018

See all articles by Tania Masi

Tania Masi

'Gabriele d'Annunzio' University of Chieti-Pescara; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Antonio Savoia

University of Manchester - Global Development Institute

Kunal Sen

University of Manchester

Date Written: February 13, 2018

Abstract

While several studies have focused on the effect of natural resources on economic development, less attention has been paid to their effects on other development outcomes. We contribute to this literature by studying the impact of resource rents on fiscal capacity, i.e., the ability of states to raise revenues from broad tax bases. We posit that natural resource rents reduce the incentives to invest in fiscal capacity. However, political institutions that limit the power of the executive, by reducing rulers’ discretion over the use of resource revenues, may mitigate, neutralise or reverse such negative effect. We provide empirical support for this hypothesis using a recently constructed data set on non-resource taxes and panel methods for 98 developing countries covering the period 1981-2011. Moreover, we show that the effect of resource rents is likely to work mainly through institutions that make the tax system accountable and transparent to citizens. Our findings imply that it is possible to develop both fiscal capacity and the natural resources sector, without any trade-off. Whether a fiscal resource curse exists or not is a question of what type of political institutions countries have adopted before they became resource-rich.

Keywords: state capacity, fiscal capacity, resource curse, institutions, economic development

Suggested Citation

Masi, Tania and Savoia, Antonio and Sen, Kunal, Is There a Fiscal Resource Curse? Resource Rents, Fiscal Capacity and Political Institutions (February 13, 2018). ESID Working Paper No 96. Manchester: Effective States and Inclusive Development Research Centre, The University of Manchester, Available at SSRN: https://ssrn.com/abstract=3123027 or http://dx.doi.org/10.2139/ssrn.3123027

Tania Masi

'Gabriele d'Annunzio' University of Chieti-Pescara ( email )

Viale Pindaro 42
Chieti Scalo, Pescara 66013
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

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Milano, 20126
Italy

Antonio Savoia (Contact Author)

University of Manchester - Global Development Institute ( email )

Arthur Lewis building
Oxford Road
Manchester, M13 9PL
United Kingdom

Kunal Sen

University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

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