The relationship between trade openness and government resource revenue in resource-dependent countries

Abstract

Natural resource-abundant countries are generally dependent on resource revenue for their government budgets. Given the volatile prices of natural resources, such high dependence has led to the need for government revenue diversification, that is, shifting from resource sources to non-resource sources. Meanwhile, recent globalization helps promote economic growth, but it makes resource-dependent countries more vulnerable to fluctuations in resource prices, motivating them to diversify revenue sources for sound fiscal policies. Thus, examining the role of international trade in government revenue diversification is an important issue for resource-dependent countries, which has not been examined empirically in the literature. To fill the research gap, this study discusses this issue in resource-abundant countries. An autoregressive distributed lag model is used with panel data of 13 countries from 1996 to 2014. Estimations reveal a negative long-run association between government resource revenue and trade openness. Resource-abundant countries that promote trade liberalization tend to break down the resource-dependent structure of government revenues. Our analysis also shows a negative long-run association between government resource and non-resource revenues, which suggests the substitutability between the two government revenue sources. The promotion of government non-resource revenues would help governments receive the benefits of stable government revenues.