State-Building in Resource-Rich Economies

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.