By Shanta Devarajan
Resource-rich countries have weaker governance (Figure 1). This widely documented finding has led to the suggestion that the people in these countries may be better off if the government transferred the oil revenues directly to the citizens (see here, here, and here.) But this raises the question: Why would the elites in government, who are clearly benefiting from these resource rents give them up as cash transfers to the people?
Figure 1. Resource-rich countries have weaker governance
In a recently published paper, Quy-Toan Do and I provide a partial answer to this question. We start by noting that, in addition to weak governance, resource-rich countries also have lower levels of taxation (Figure 2).
Figure 2. Resource-rich countries also have lower levels of taxation
By definition, resource-rich countries do not need to rely on fiscal revenues because they have resource revenues. But this also may be why these countries have weak governance. Taxation has traditionally been a way for citizens to hold governments accountable for public spending. In resource-rich countries, where the oil revenues (say) go directly from the oil company to the government without passing through the hands of the…