Commodity dependence and fiscal capacity

This paper shows that higher commodity dependence reduces the government's incentive to invest in fiscal capacity. After developing a model that makes this prediction, evidence is provided supporting the view that countries more dependent on commodities (whose rents can be easily appropriated by the government, such as oil) have weaker fiscal capacity. Also, fiscal capacity is found to improve less over time in commodity dependent countries relative to countries where commodity exports play a less relevant role. These empirical results are obtained in a panel dataset with estimators that address endogeneity issues.