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Commodity Dependence and Fiscal Capacity

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Name of the Asset | Commodity Dependence and Fiscal Capacity
Type of Asset | Working Paper
Date | June 2011

Summary

The natural resource wealth of a country can be a curse or a blessing for the country’s economic development. This study investigates the relationship between commodity dependence and fiscal capacity. A detailed theoretical model is offered, which predicts that higher natural resource rents lead to lower investment in fiscal capacity.

The paper uses a panel data approach that exploits the variability within countries. Flow variables, such as commodity export shares, capture the relative size and variability of resource rents across and within countries that can potentially affect institutional quality. Although resource abundance (a stock variable) can also have an impact on institutions, this study considers resource dependence, which is a choice variable affected by political incentives, making it more relevant for the analysis of the political economy of natural resources in a panel of countries. It finds that at the cross-country-year level, most commodity types show a negative and significant correlation with fiscal capacity, and only oil retains its negative effect once initial conditions and endogeneity problems are properly tackled. The within-country analysis suggests that not all-natural resources undermine institutional development, just those whose rents can be easily appropriated by the government, as is the case of oil. The natural resource curse is not a law that applies to all commodities, but most likely to those that have an industry concentrated in few state-controlled hands, of which oil is a typical example.

Authors

  • Mauricio Cárdenas, The Brookings Institution.
  • Santiago Ramírez, Universidad de los Andes.
  • Didem Tuzemen, The Brookings Institution and The University of Maryland, College Park.

Country and/or Region | Latin America
Name of the Program | Inter-regional Research Project Latin America and Africa: Cross-Regional Dialogue on the Effects of Commodity Dependence
Funder(s) |  The World Bank and the UK Department for International Development (DFID)

Download the Full Study here

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