Revenue mobilization in African countries: Does natural resource endowment matter?

Abstract

Natural resource endowment offers great opportunities for achieving high levels of growth and development, notably via fiscal revenue mobilization throughout the entire chain of operations from exploration to production to exports. In the case of African countries, however, resource-rich countries have not yet been able to take full advantage of their resource wealth to mobilize government revenue. In fact it appears that they have often been outperformed by their resource-scarce counterparts in this regard. Is the low revenue performance a result of distorted incentives induced by the natural resource bonanza or the lack of capacity to harness the revenue potential from the natural resource industry? This paper explores these questions and provides some empirical evidence based on data from a sample including African countries as well as countries from Latin America, Asia, and the Middle East for the period 1980-2007. The paper undertakes an econometric analysis to examine the factors that determine revenue performance in African countries from a comparative perspective, with a focus on the role of natural resource endowment. The results are consistent with the evidence from the literature, especially with regard to the role of economic structure (notably the share of agriculture in GDP), the tax base (per capita income), and trade. We compute an index of revenue performance that relates the actual revenue to the level predicted by the econometric model and we find that African resource-rich countries have performed poorly relative to their resource-scarce counterparts and compared to the oil-rich Middle Eastern countries. The paper concludes with some policy implications for African countries. © 2010 The Authors. African Development Review © 2010 African Development Bank.