Wednesday, January 19

Is the resource curse embedded in African economies?

Countries with abundant natural resources (gold, diamonds, crude oil) often fail to transform that advantage into favorable development outcomes. This is known as curse of natural resources. Countries such as Nigeria, Angola, and the Democratic Republic of the Congo are often cited as examples.

Various explanations have been offered for the resource course. These include the lack of government accountability generally associated with large windfall gains from natural resources relative to other sources of tax revenue. Others are a rise in the local currency against major currencies like the US dollar, making it difficult for other sectors of the economy to compete globally. This is known as the Dutch diseaseNamed for the economic crisis that hit the Netherlands in the mid-1970s following the discovery of oil in the North Sea.

A related problem, but one that has received less attention, is the curse of fiscal resources. It refers to the inability of a country well endowed with natural resources to generate internal income from other sectors of the economy. For example, between 2000 and 2010, resource income in Angola remained above 20% of GDP compared to a non-resource tax level of around 7% in average.

But the curse of fiscal resources does not have to be a foregone conclusion for developing countries. A recent study finds signs that China’s approach to trade with resource-rich African countries could be the answer.

China has been offered bilateral infrastructure investment deals to resource-rich countries. For example, China “pays” for some of the commodities by investing in the infrastructure of the supplying country. This has been a common approach in several African countries, including Angola, Sudan, Nigeria, and Ethiopia.

There is no consensus in the economic literature on the relationship between the abundance of natural resources and the mobilization of domestic income. However, many studies suggest a compensation between the revenues of the natural resources sector versus those of other sectors.

Our study investigated whether revenues from natural resources displace non-resource tax revenues in developing countries. His novel contribution is that he explores the impact of China. This is specifically about China’s extensive involvement (as a buyer) in natural resource trade since it joined the World Trade Organization (WTO) in 2001.

Enter the dragon

We examine whether China’s entry into world trade has affected the relationship between natural resources and domestic revenue mobilization.

We do not find consistent evidence of a negative relationship between revenues from natural resources and the mobilization of tax revenues from other sectors. The key implication is that the abundance of natural resources need not translate into a curse.

In our study We use a single global data set that separates national resource income and non-resource income. The database was developed by the International Center for Taxation and Development. It is hosted by the United Nations University. We also use data from the World Bank World Development Indicators and the International country risk guide.

We analyze a sample of 45 developing countries with data covering the period 1980-2015. More than half of these countries are African.

The post-2001 period was characterized by growth in commodity trade and rising commodity prices. These were triggered by the growing demand for crude oil and metals from China. For example, China’s global demand for metals increased to about 40% of total demand after 2001 compared to a paltry 3%. before. Africa met a third of China’s energy requirements.

This demand shock stimulated exports of natural resources, which resulted in an increase in resources revenue growth.

The shock from China

Disregarding the role of China, we find a negative relationship between natural resource revenue and non-resource tax revenue. In other words, developing countries do not appear to raise taxes outside the resource sector when commodity prices are high and resource revenues are increasing. But robust statistic analysis suggests that it is not that simple.

If we take the “China shock” into account, there is no consistent evidence of a negative relationship between natural resource revenue and non-resource tax revenue. Our study finds that natural resource revenue could play a complementary role in raising taxes outside of the natural resource sector.

On average, a one percentage point increase in revenue from resources generates an increase in non-resource tax revenue of approximately 0.3 percentage points for the countries and the study period. However, the relationship is not statistically strong.

A plausible explanation could be how developing countries take advantage of China’s demand for natural resources. In exchange for commodities, China offers a bilateral infrastructure investment strategy. This often offsets the financial market and governance challenges that developing countries face. For example, China “pays” for some of the commodities by investing in the infrastructure of the supplying country. This has been a common approach in several African countries, including Angola, Sudan, Nigeria, and Ethiopia.

China’s infrastructure development in these countries could be stimulating growth in its non-resource sectors. Infrastructure is one of the main obstacles to private sector growth. In turn, private sector growth can help these economies diversify the economic base and increase non-resource income. Therefore, increased revenues from natural resources need not displace sound fiscal policy. The mobilization of tax revenue in the non-resource sector need not be affected.

Concerns about opacity

The lack of a statistically significant positive relationship deserves comment. First, even if China’s impact makes a difference, building taxation capacity in developing countries takes time. Furthermore, China’s natural resource trade model with developing countries should not be expected to automatically guarantee favorable outcomes in all cases.

Indeed, the growing literature on China’s involvement in Africa paints a mixed picture. For example, despite the potential benefits of infrastructure projects, there are concerns about the opacity of Chinese contracts and the quality of the infrastructure. Projects. Some governments are also concerned about the cost of loans backed by natural resources. Furthermore, many developing countries lack the capacity to manage infrastructure projects effectively.

Overall, our analysis shows that there is no strong evidence that natural resource revenue displaces non-resource tax revenue. Investments in infrastructure in developing countries thanks to windfall gains from natural resources could help diversify economies and public revenues. This offers policy makers the opportunity to broaden the tax base and maintain a relatively stable tax rate. It also puts something in the internal revenue buckets even when oil wells run dry.The conversation

Daniel Ofoe Chachu, Researcher, Institute of Political Sciences (Group of Political Economy and Development), University of Zurich and Edward Nketiah-Amponsah, Associate Professor, Department of Economics, University of Ghana

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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