Avoiding a natural resource curse? The impact of administrative efficiency on Colombian municipalities’ fiscal effort

ABSTRACT

The term ‘paradox of the plenty’ was coined to describe an often-found inverse relationship between royalty revenue and economic development. The main causal mechanism is thought to be a substitution effect whereby governments use royalty revenue to lower taxes instead of investing in activities that promote long-term economic growth. However, the occurrence of a ‘natural resource curse’ differs widely both for countries and subnational jurisdictions. Based on a dataset that traces 1,078 municipalities in Colombia from 2006 to 2017 and utilising a policy reform in 2012 that reduced royalty revenue for producer municipalities, we argue and find that municipal fiscal effort is higher when producer municipalities have more-efficient administrations. Our findings have important implications for the design of policy that allocates royalty revenue across subnational jurisdictions, in particular for developing countries where administrative efficiency tends to vary widely between local governments.

KEYWORDS:

• Natural resource curse
• administrative efficiency
• royalty revenue
• municipalities
• paradox of the plenty
• fiscal effort

Acknowledgments

Maria Antonieta Collazos-Ortiz would like to thank Maastricht University, The Netherlands.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/03003930.2023.2282565.

Notes

1. Dauvin and Guerreiro (2017) also attribute the mixed results in the literature to differences in the way in which royalty revenue is measured, which natural resources are considered, the employed econometric methods, the countries that are included in the dataset, and the control variables that are included in the models (see also Cust and Poelhekke 2015).

2. Our data set includes 1,078 municipalities because data for some years are missing for 23 municipalities. Table A4 in the appendix presents robustness analyses conducted by running our models for all 1,101 municipalities.

3. The 1991 constitutional revision was implemented by a national law adopted in 1993.

4. Additional sources of municipal revenue such as non-tax current revenue, current transfers, co-financing resources and other revenue, amounted to 24% of revenue before and after the 2012 policy reform.

5. Before the 2012 reform, municipalities with maritime or river ports that were used to transport natural resources were also considered to be producer municipalities (Bonet et al. 2015).

6. The lower limit has increased over time, from 0.1% before 2012 to 0.3% in 2012, and to 0.4% in 2013.

7. Municipalities can introduce a new municipal tax, but a new tax has to be approved by the National Congress. No municipality introduced a new municipal tax during the time period covered in the data set (Procuraduría General de la Nación 2011).

8. An example of an exception is that the property tax rate may be increased to a maximum of 3,3% in the case of undeveloped land in an urban area (Law No 1450 2011). The cadaster must be updated every five years and a mayor needs to initiate the process. In addition, every year the national geography institute selects municipalities that must update their cadaster (Shapiro et al. 2018). Almost 60% of the municipalities updated their cadaster between 2006 and 2010 (Martinez 2019).

9. See Bonet et al. (2015) for further detail on the development and approval of municipal development plans.

10. The data were retrieved from www.dane.gov.co (DANE) and www.terridata.dnp.gov.co (DNP).

Additional information

Funding

The work was supported by the Trond Mohn stiftelse [TMS2019REK01 awarded to Arjan H. Schakel]; Universitetet i Bergen [812468 awarded to Arjan H. Schakel].