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

Abstract

While it is recognised that the ability of states to raise revenues (i.e., fiscal capacity) is important for the provision of key public goods in less developed economies, it is less clear what its determinants are and what explains cross-country differences. We focus on the impact of natural resources. Standard arguments suggest that natural resource rents may harm fiscal capacity, as governments tend to substitute tax revenues with revenues from natural resources. We argue, instead, that a fiscal resource curse may materialise or not depending on whether political institutions can limit the power of the executive and on how easy it is to control or appropriate natural resources. We investigate this hypothesis using panel data methods covering the period 1995–2015 for 62 developing countries. The results suggest that: (i) point-source resources are negatively associated with fiscal capacity, while diffuse resources are not; (ii) developing economies with political institutions placing institutionalised constraints on the executive power are able to neutralise the negative effect of point-source resources on fiscal capacity. Our findings imply that it is possible to develop a natural resources sector without necessarily harming fiscal capacity.