Collier, P. and Venables, A. (2008) “Illusory Revenues: Tariffs in Resource-Rich and Aid-rich Economies”

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Precept 9 recommends that government use resource wealth for increasing efficiency and equity in public spending. One hindrance to efficiency in both public and private investment is that in resource rich and low income countries the unit cost of capital goods is higher than global average.  According to Precept 9 a general principle that should be followed therefore is avoiding tariffs on capital goods. The paper by Collier and Venables provides support for this principle, finding that in resource rich economies, tariffs do not generate revenue.

 

The paper examines the fiscal consequence of tariffs for countries with large resource export and aid revenues. It is found that revenues generated by tariffs are “offset by unrecorded reductions in the real values of resource rents and aid flows, so that the apparent revenues are illusory” (p. 2). Import tariffs raise revenue whilst also reducing domestic purchasing power of revenues from resources or aid. As such, tariffs which appear to be providing government with revenue, often have no effect. They can however prevent export diversification and have a negative effect upon aggregate real income. The authors consider why such tariffs are still adopted; finding that either the true nature of tariffs is opaque or that the transfer of revenue between government accounts converts aid flows into tariff revenue and thus creates revenue free from donor conditionality. Although it is found that illusory revenues are particular to circumstances, the pertinence of the analysis to a particular context is the “sum of resource rents and aid relative to the value of imports” (p. 19).

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