Chapter

Chapter 7. Natural Resource Endowments, Governance, and Domestic Revenue Mobilization: Lessons for the CEMAC Region

Author(s):
Bernardin Akitoby, and Sharmini Coorey
Published Date:
August 2012
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Author(s)
Sanjeev Gupta and Eva Jenkner 

Financial flows to sub-Saharan Africa, spanning from aid and debt relief to remittances and foreign direct investment, have increased sharply since 1980, supporting higher public spending, including much-needed outlays on health and education. However, domestic revenue mobilization has been less successful, with revenue largely stagnating during 1980–2005 (Keen and Mansour, 2010). This has raised concerns about whether sub-Saharan Africa’s vast developmental requirements can be financed in a fiscally sustainable manner.

A low, nonresource-based tax burden can, in principle, help to create a more diversified private sector. However, this chapter argues that it may not be the optimal strategy for many resource-rich countries. The reasons are manifold: In those instances in which natural resources are expected to be exhausted in the foreseeable future, the gradual development of a diversified tax base would be a rational strategy. And in countries that have not successfully dealt with volatility in resource revenue, a broadening of the revenue base can strengthen fiscal management. Furthermore, insufficient reliance on nonresource taxation fails to promote citizens’ involvement in scrutiny of the government’s operations and, therefore, in building of the state. Institutional weaknesses, in turn, affect a country’s ability to channel resources to their best uses. Thus, the advantages of a relatively low tax burden on the nonresource sector can easily be outweighed by the potential cost of stunted institutional development, which typically manifests itself in rent-seeking, corruption, and limited democratic accountability and legitimacy (Leite and Weidmann, 2002; Isham and others, 2003; Sala-i-Martin and Subramanian, 2003; Collier and Hoeffler, 2005; Moore, 2007; and Bräutigam, 2008).

Dependence on foreign aid or natural resource revenue can create disincentives for countries to mobilize domestic revenue or nonresource revenue (Gupta and others 2004; and Bornhorst, Gupta, and Thornton, 2009). This chapter starts by exploring the links between natural resource revenue and efforts to mobilize nonresource revenue in the Central African Economic and Monetary Community (CEMAC) region. It then discusses the implications for governance and state-building of dependence on natural resource revenue. Conclusions are drawn in the final section.

The Impact of Natural Resource Endowments on Domestic Revenue Mobilization and the CEMAC Experience

The traditional view has been that natural resource endowments can provide significant support to countries’ economic development and growth. Natural resources were seen as a capital endowment that would positively affect production and output (Viner, 1952; Lewis, 1955; and Rostow, 1960), and certainly industrial development in Europe was supported by the existence of energy sources such as coal.

Subsequently, this view was challenged by a sizable literature that emphasized the potential negative consequences of natural resources, or the “resources curse.” However, discussion mainly focused on commodity prices and so-called Dutch disease. On the one hand, commodity prices were expected to fall over the long run as the result of greater competition in markets for primary goods (Prebisch, 1950; and Singer, 1950), and their great volatility was seen as undermining development through large swings in revenues and exports, complicating fiscal management and creating investment uncertainty (Micksell, 1997; and Auty, 1998). On the other hand, Dutch disease relates to a real appreciation of the exchange rate through capital inflows and high inflation fueled by strong domestic demand, which, in turn, undermines the development of other sectors of the economy. As a result, once resources are depleted, adjustment costs can be significant (Magud and Sosa, 2010).

Recently, studies have added another dimension to the “resources curse” by exploring links between natural resource endowments and domestic revenue mobilization. Some scholars have argued that resource-rich governments have less of an incentive to mobilize revenue from domestic sources (Collier, 2007; and Moore, 2007), akin to a weakening of incentives in countries that rely heavily on external aid (Bauer, 1976; and Gupta and others, 2004). A first attempt was made by Bornhorst, Gupta, and Thornton (2009) to analyze empirically the impact of natural resource revenue on nonresource revenue for 30 hydrocarbon-producing countries. They found that nonresource revenue is lower by about 20 percent in these countries that rely on hydrocarbon-related revenue.

A cursory examination of disaggregated trends in revenue mobilization in the CEMAC suggests that such disincentive effects are indeed prevalent in the region. Although overall revenue collection has increased in the CEMAC since 1980, and is comparable to other regional blocks in sub-Saharan Africa, higher resource revenue is the driving factor (Figure 7.1). Nonresource revenue as a share of GDP declined sharply because revenue from trade taxes fell by almost 5 percent of GDP and was only partially compensated for by indirect tax revenue such as the value-added tax and excise duties (Keen and Mansour, 2010). Income tax revenue also decreased marginally, by 0.5 percent of GDP. As a result, average nonresource revenue in relation to GDP in the CEMAC region was significantly lower than in all other regions during 2003–05.

Figure 7.1Sub-Saharan Africa: Total Tax Revenue by Regional Block

Source: Keen and Mansour, 2010.

Note: COMESA = Common Market for Eastern and Southern Africa; EAC = East African Community; SADC = Southern African Development Community; WAEMU = West African Economic and Monetary Union.

Focusing specifically on revenue from hydrocarbons supports a similar conclusion. Although total revenue in CEMAC countries exceeds total revenue in non-hydrocarbon-producing African countries, the comparison is less favorable when revenue from hydrocarbon sources is excluded (Figure 7.2). Moreover, country data reveal that the decline in nonhydrocarbon revenue has been pronounced in Chad, Equatorial Guinea, and the Republic of Congo (Figure 7.3). Through 2005, nonhydrocarbon domestic revenue started to fall as hydrocarbon revenue grew in Equatorial Guinea and the Republic of Congo, and grew along with hydrocarbon income in Cameroon—a country whose hydrocarbon resources are projected to be exhausted by about 2030.

Figure 7.2Government Revenues from Hydrocarbon and Nonhydrocarbon Sources, 1992–2005

Sources: IMF staff estimates; and IMF staff calculations based on data from Bornhorst, Gupta, and Thornton, 2009. Note: Data for Chad are for 1994–2005. Nonhydrocarbon producing African countries are countries with no or insignificant hydrocarbon production: Burkina Faso, Burundi, Cape Verde, Comoros, The Gambia, Guinea-Bissau, Madagascar, Malawi, Mozambique, Namibia, Rwanda, Senegal, Seychelles, Sierra Leone, Swaziland, Tanzania, Togo, and Zambia. CEMAC = Central African Economic and Monetary Community/

Figure 7.3CEMAC: Revenue from Hydrocarbon and Nonhydrocarbon Sources, 1992–2005

Source: Bornhorst, Gupta, and Thornton, 2009.

Note: Data for Chad are for 1994–2005.

This trend reverses when domestic revenue is estimated in relation to non-hydrocarbon GDP (Figure 7.4).2 Specifically, revenue effort measured as a share of economic activity unrelated to hydrocarbons appears to have increased significantly in all countries—in particular in Chad and Gabon—exceeding average rates for all 30 hydrocarbon-producing economies worldwide. However, this result should be interpreted with caution given the difficulties in estimating nonhydrocarbon GDP in these countries. Also, the estimation of nonhydrocarbon revenue may be biased upward by the inclusion of indirect hydrocarbon-related revenue (such as corporate income tax, value added tax receipts from upstream companies, or personal income tax on wage earnings in the hydrocarbon sector).

Figure 7.4CEMAC: Change in Nonhydrocarbon Domestic Revenue, between 1992–95 and 2002–05

Source: IMF staff calculations based on data from Bornhorst, Gupta, and, Thornton, 2009.

Note: Data for Chad are for 1994–2005. “Hydrocarbon producers” excludes Norway, Russia, and Kuwait. CEMAC = Central African Economic and Monetary Community.

Natural Resource Endowments, State Building, and Governance

A number of considerations underscore the need to strengthen the nonresource revenue base in the CEMAC region. First, CEMAC has a criterion on non-oil revenue as part of the fiscal convergence under which non-oil fiscal revenue should equal or exceed 17 percent of GDP (see Box 2.1 in Chapter 2). Admittedly, this is among the secondary surveillance criteria, and its compliance by member countries is not obligatory. Nevertheless, its existence is indicative of the desire of member countries to diversify their revenue base.

Second, natural resources—and the associated revenue flows—are exhaustible. In the medium to long term, natural resource–producing states would need to develop alternative revenue streams to sustain their spending and to provide critical public services to the population (see Chapter 5 in this volume). Furthermore, diversification of the revenue base is also needed to offset the volatility associated with natural resource revenue.3 Although some resource-dependent economies, such as Chile, Mexico, and Norway, have managed revenue volatility by establishing large stabilization funds or by using hedging mechanisms, overreliance on natural resource income for most countries tends to translate into volatile income flows, which significantly complicate fiscal management. Inevitably, the institutional framework and capacity for raising domestic nonresource tax revenue will have to be developed, and the cost of moving to higher domestic taxation only after resources are depleted may be significant.

Third, natural resource endowments encourage rent-seeking, and as a result, institutional development may be stunted (Isham and others, 2003; and Sala-i-Martin and Subramanian, 2003) and the probability of civil conflict and general waste and corruption can rise (Leite and Weidmann, 2002). In this regard, the structure of a country’s tax regime can affect the quality of its institutions and governance, with large resource endowments potentially having a detrimental impact on state-building. Consequently, greater reliance on domestic taxes could increase public scrutiny and accountability of governments in resource-rich countries, which, in turn, would help to strengthen governance and develop state institutions (Collier and Hoeffler, 2005; and Moore, 2007). Apart from building state capacity, the social contract and bargaining that surround taxation foster the legitimacy of the state and representative democracy (Bräutigam, 2008). However, should higher domestic taxation fail to instill greater accountability and transparency, augmented resources would only fuel public sector profligacy. It could also be argued that a reliance on natural resource taxation allows these countries to maintain low domestic taxation, which can help foster private sector activities and support much-needed diversification of the economy. Unfortunately, the limited analysis that has been carried out for developing countries finds no significant relationship between the level and composition of taxes on one hand and long-term growth on the other (Tanzi and Zee, 2000; Adams and Bevan, 2005; and Martinez-Vasquez, Vulovic, and Liu, 2009).4

Finally, corruption lowers tax revenue as resources are diverted, and tax collection is reduced through capture of tax inspectors (Tanzi and Davoodi, 2002). Transparency International’s Corruption Perceptions Index supports the general conclusion that corruption is higher in hydrocarbon-producing countries than in nonhydrocarbon-producing countries in Africa and worldwide (Figure 7.5). The index illustrates that poor governance is a particular concern among hydrocarbon-producing economies in Africa. Average perceived corruption in the CEMAC region is also found to be similarly high (Figure 7.6). This roughly corresponds to the finding that average nonhydrocarbon domestic revenue (10 percent of GDP) in the five CEMAC oil-producing countries is almost in line with the relatively low domestic revenue mobilization for all African hydrocarbon producers (9½ percent of GDP), although both corruption and domestic revenue mobilization are slightly above average in the CEMAC economies.

Figure 7.5Perception of Corruption in Hydrocarbon-Producing and Nonhydrocarbon-Producing Countries, 2010

Source: Transparency International.

Note: Corruption is measured as a perceptions-based index that assigns risk points on a scale from 0 (high) to 10 (low), according to the perceived amount of corruption.

Classification of countries into hydrocarbon-and nonhydrocarbon-producing follows Bornhorst, Gupta, and Thornton (2009). Hydrocarbon producers include Algeria, Angola, Azerbaijan, Bahrain, Brunei, Cameroon, Chad, the Republic of Congo, Equador, Equatorial Guinea, Indonesia, the Islamic Republic of Iran, Kazakhstan, Kuwait, Libya, Mexico, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sudan, the Syrian Arab Republic, Trinidad and Tobago, the United Arab Emirates, Venezuela, Vietnam, and Yemen. Nonhydrocarbon producers include Albania, Bhutan, Burkina Faso, Burundi, Cape Verde, Comoros, Costa Rica, Cyprus, Djibouti, Dominica, the Dominican Republic, Eritrea, Estonia, Finland, France, The Gambia, Greece, Guinea-Bissau, Iceland, Israel, Jamaica, Japan, Jordan, the Republic of Korea, Kyrgyzstan, Latvia, Lebanon, Luxembourg, Madagascar, Maldives, Malawi, Mali, Malta, Mauritius, Moldova, Mongolia, Morocco, Mozambique, Namibia, Nicaragua, Panama, Paraguay, Portugal, Rwanda, Senegal, Seychelles, Sierra Leone, Singapore, Slovenia, Spain, Sri Lanka, Swaziland, Switzerland, Taiwan Province of China, Tanzania, Togo, Uganda, and Zambia.

Figure 7.6CEMAC: Perception of Corruption in Hydrocarbon-Producing Countries, 2010

Source: Transparency International.

Note: CEMAC = Central African Economic and Monetary Community.

Corruption is measured as a perceptions-based index that assigns risk points on a scale from 0 (high) to 10 (low), according to the perceived amount of corruption.

Classification of hydrocarbon-producing countries follows Bornhorst, Gupta, and Thornton (2009). Hydrocarbon producers include Algeria, Angola, Azerbaijan, Bahrain, Brunei, Cameroon, Chad, the Republic of Congo, Equador, Equatorial Guinea, Indonesia, the Islamic Republic of Iran, Kazakhstan, Kuwait, Libya, Mexico, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sudan, the Syrian Arab Republic, Trinidad and Tobago, the United Arab Emirates, Venezuela, Vietnam, and Yemen.

The pattern is less clear-cut for the individual countries because of the many determinants of governance and the great divergence in resource revenues (Figure 7.7). Lack of data makes it impossible to conduct a thorough quantitative analysis. The country with the highest perception of corruption, Chad, also has the highest share of nonhydrocarbon revenue in total revenue, even above the share in the least-corrupt country, Gabon. However, hydrocarbon-related income was still low in Chad during 2000–05, and changes in governance will need to be monitored as reliance on resource revenue grows. Relatively high perceived corruption and very low domestic revenue mobilization coincided in Equatorial Guinea.

Figure 7.7CEMAC: Tax Revenue and Governance, 2000–05

Sources: Bornhorst, Gupta, and Thornton, 2009; and Transparency International.

Note: Corruption is measured as a perceptions-based index that assigns risk points on a scale from 0 (high) to 10 (low), according to the perceived amount of corruption. Figures refer to 2005. CEMAC = Central African Economic and Monetary Community.

Conclusion

The potential advantages of enhancing the nonresource revenue effort in natural resource–producing countries are many, including more stable and sustainable revenue flows, improved fiscal institutions, and a generally strengthened state with better governance. These gains would need to be weighed against the possible benefit of low nonresource taxation for development of the private sector. To enhance nonresource revenue, these countries need to broaden their tax bases, especially for value-added taxes and corporate income tax, as well as strengthen revenue administration. Over the longer term, strong and stable domestic revenue and efficient expenditure allocations are critical for improved fiscal planning and management and the much-needed scaling-up of social spending in a fiscally sustainable manner. The presumption is that revenue diversification would contribute to institutional development and ensure that the resulting higher revenue would not be wasted. Finally, it is difficult to disentangle the revenue regime from the other complex determinants of governance simply by using superficial country snapshots. Governance indicators are a concern for most of the CEMAC region, in Chad and Equatorial Guinea in particular, and seem to coincide with decreases in nonresource revenue effort in those two countries.

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We wish to thank Ben Clements, Sharmini Coorey, Katja Funke, Mario Mansour, Jean-Claude Nachega, Atsushi Oshima, Darlena Tartari Schwegler, and Abdel Senhaji for helpful comments and data; and Lilla Nemeth for excellent research assistance.

Should hydrocarbon GDP increase sharply, nonhydrocarbon domestic revenue expressed as a share of total GDP may appear depressed. Measuring nonhydrocarbon revenue as a share of nonhydrocarbon GDP avoids this bias.

Ebeke and Ehrhart (2010) highlight the advantages of diversifying the revenue base for public investment.

Lee and Gordon (2005) find that lower corporate income taxes are associated with faster growth, including in countries that are not members of the Organization for Economic Cooperation and Development, though other tax variables are insignificant. Easterly and Rebelo (1993) note that the effects of taxation on growth are difficult to isolate empirically.

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