Working Paper
Is there a fiscal resource curse?

Resource rents, fiscal capacity, and political institutions in developing economies

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.