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State-Building in Resource-Rich Economies

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  • Anders Jensen

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Abstract

One of the most significant differences between developing countries and today’s advanced states is the fact that many developing countries rely heavily on one or several natural resources. That such dependence shapes the state’s ability to tax—its fiscal capacity—is commonly argued in the political science and applied development literatures. This paper approaches the issue from an economic angle. Our analytical foundation builds upon a novel theoretical framework, and allows us to model fiscal capacity as an ex ante investment under uncertainty. For our panel of 30 hydrocarbon-rich economies, instrumental-variables results provide strong empirical support for our theoretical proposition: resource intensification weakens state-building by impeding the state’s fiscal capacity. This result provides an inaugural validation of the economic analytics of state-capacity determinants: understanding these determinants serves to build stronger states and support sustainable paths of development. Our result also suggests that one of the main tools of fiscal policy-analysis in resource-rich economies, namely optimal taxation, could gain in practical relevance by incorporating capacity-constraints into the analytical fiscal-framework. Copyright International Atlantic Economic Society 2011

Suggested Citation

  • Anders Jensen, 2011. "State-Building in Resource-Rich Economies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 39(2), pages 171-193, June.
  • Handle: RePEc:kap:atlecj:v:39:y:2011:i:2:p:171-193 DOI: 10.1007/s11293-011-9269-z
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    File URL: http://hdl.handle.net/10.1007/s11293-011-9269-z
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    References listed on IDEAS

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    1. Timothy Besley & Torsten Persson, 2009. "The Origins of State Capacity: Property Rights, Taxation, and Politics," American Economic Review, American Economic Association, vol. 99(4), pages 1218-1244, September.
    2. Timothy Besley & Torsten Persson, 2010. "State Capacity, Conflict, and Development," Econometrica, Econometric Society, vol. 78(1), pages 1-34, January.
    3. Kolstad, Ivar & Wiig, Arne, 2009. "It's the rents, stupid! The political economy of the resource curse," Energy Policy, Elsevier, vol. 37(12), pages 5317-5325, December.
    4. Howell H Zee & Vito Tanzi, 2001. "Tax Policy for Developing Countries," IMF Economic Issues 27, International Monetary Fund.
    5. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    6. Abhijit Sen Gupta, 2007. "Determinants of Tax Revenue Efforts in Developing Countries," IMF Working Papers 07/184, International Monetary Fund.
    7. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
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    Citations

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    Cited by:

    1. Vitor Gaspar & Laura Jaramillo & Philippe Wingender, 2016. "Political Institutions, State Building, and Tax Capacity; Crossing the Tipping Point," IMF Working Papers 16/233, International Monetary Fund.
    2. Vitor Gaspar & Laura Jaramillo & Philippe Wingender, 2016. "Tax Capacity and Growth; Is there a Tipping Point?," IMF Working Papers 16/234, International Monetary Fund.
    3. Jørgen Juel Andersen & Mads Greaker, 2014. "The fiscal incentive of GHG cap and trade. Permits may be too cheap and developed countries may abate too little," Discussion Papers 785, Statistics Norway, Research Department.
    4. Chen, Shawn Xiaoguang, 2017. "The effect of a fiscal squeeze on tax enforcement: Evidence from a natural experiment in China," Journal of Public Economics, Elsevier, vol. 147(C), pages 62-76.
    5. Timothy Besley & Torsten Persson, 2014. "Why Do Developing Countries Tax So Little?," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 99-120, Fall.

    More about this item

    Keywords

    Natural resources; Public finance; H2; 01; E62; 010;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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