Revenue efforts in mineral producing districts

In Indonesia: is there a resource curse?

Adriyanto Adriyanto

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Revenue efforts in mineral producing districts In Indonesia: is there resource

curse?

Background:

Own source revenue at mineral producing districts is lower than non-mineral producing ones.

Following natural resource curse hypothesis, the natural resource endowment may potentially

become disincentive to intensify own revenue effort at mineral producing districts.

Aim:

This study aims to estimate the impact of natural resource endowment on local revenue effort

using econometric approach at mineral producing districts in Indonesia.

There are several reasons motivate to utilize the mineral producing districts:

(i) the natural resource endowment may become disincentive for tax effort as suggested by

previous studies,

(ii) many cases about environmental hazards are found in mineral producing districts

(iii) the revenue effort at these districts is lower than non-mineral producing districts

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Research question and Benefit of study

Research questions:

i.does natural resource revenue affect sub-national own tax revenue?

ii.are types of own revenue affected differently? ,

iii.what is the effect of natural resource wealth on revenue effort?.

Benefit:

1.provide background the designation of ecological fiscal transfer for local government in Indonesia,

2.provide alternative answer for persistent stagnant growth of subnational tax revenue, which is still limited in literature for Indonesia case,

3.to fill in the gap of study on the effect of natural resource endowment on revenue effort at sub national level.

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Is there difference in resource high districts?

Source: Own calculation based on DGFB data

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Country level:

Natural resource curse mechanism: low revenue effort

• The avoidance of broad based taxes lowers

citizen’s demand of better public spending,

lowering political cost and collection cost for

government.

• In the same vein, McGuirk (2013) suggests that

in the presence of high natural resource rents,

leaders lower the burden of taxation on citizens

in order to reduce the demand for democratic

accountability.

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Natural resource curse through local

revenue effort

• Sub-national control on resource revenue assignment plays crucial

role.

• The institution quality will affect the extent of potential adverse

effect

• Brosio and Singh (2014) argue that local governments do not have

the same capacity to face the resource revenue related problems,

such as revenue volatility, mobility of factors, the likely

misspending of the rent and on the potential for corruption.

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• At local level, some studies find the disincentive effect of fiscal

transfer on local tax effort (see Mogues & Benin 2011, Liu & Zhao

2011, Panda 2009, Rajaraman and Vasishtha 2000).

Author Region Methodology Results Jha et al (2012) Village level

(Panchayat, India)

3SLS cost of collecting taxes

discourages local tax effort

Liu & Zhao (2011) China provinces Fixed effect Negative correlation between

transfer and tax effort

Mogues & Benin

(2011)

Ghana Fixed and random effect,

Hausman-Taylor estimator

and GMM

Grant discourages revenue

effort

Bacarozza and

Espinoza (2010)

Municipalities in

Sinaloa, Mexico

Fixed effect and GMM Conditional transfer negatively

affecting the fiscal effort

Panda (2009) India provinces Fixed effect and random

effect

Fiscal transfers are negatively

associated with states’

own-revenue

Buettner (2005) German municipalities Regression discontinuity Negative correlation between

grant and tax rat

Rajaraman and

Vasishta (2000)

Panchayat in Kerala

state, India

Pooled data OLS Negative effect of un-tied grant

on own tax revenue

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Figure 5: Simplified conceptual framework-between resource revenue and revenue effort at

Sub-national government

Natural resource wealth

Non resource revenue

No role of local government in

resource revenue collection

Sub-standard Economic performance

The role of local government in

resource revenue collection

Institution failure

Revenue raising capacity

Estimation strategy

• This paper uses 302 mineral producing

districts and cities in Indonesia for the year

of 2001 to 2012

• The classification based on: the Decree of

Energy and Mineral resource Minister of

Indonesia number 2300 K/80/MEM/2012

• Mineral includes oil, gas, geo thermal, and

general mining

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Data source and types: Mean Std. Dev Min Max Source

Panel A:

Tax/RGDP 0.0032 0.0059 0 0.130 DGFB-statistics office-

Indodapoer

Charge/RGDP 0.0040 0.0041 0 0.053 DGFB-statistics office-

Indodapoer

Panel B:

Natural resource rev

sharing/RGDP

0.032 0.121 0 3.781 DGFB-statistics office-

Indodapoer

RGDP/Capita 8.11 15.81 0.331 270.80 Statistics office-Indodapoer

Trade, Hotel &

rest/RGDP

.155 .075 0 0.700 District in figure

Forest size (ln) 11.87 1.61 5.455 15.38 District-Province in figure

Population (ln) 12.53 0.96 8.72 15.42 District-Province in figure

Inflation -2.54 0.67 -6.90 2.27 Own calculation

Audit opinion 2.52 0.900 0 4 Supreme audit agency

Fiscal transfer/RGDP 0.412 0.72 0 19.73 DGFB-statistics office-

Indodapoer

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Main variable of interest

• Resource endowment:

- Resource revenue sharing from mineral and fishery (revenue stream)

- Forest size to proxy forestry revenue.

Two reasons (i) revenue sharing from forestry sector does not reflect the real value due to the massive illegal logging (HRW 2013, Tacconi 2007, Wildberg & Carius 2003, see also Lutrell et al 2011, Lawson and Mac Faul 2010, (ii) to capture the impact of resource endowment reflected by forest size instead of revenue stream.

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Estimation model:

I postulate the following hypothesis:

•HP-1: Natural resource revenue sharing has negative correlation with sub-national revenue

effort

•HP-2: Forest size is negatively associated with subnational revenue effort.

The estimation model:

•Revenue/RGDP= γ0 + γ1 Resource Revenue sharingit + γ2Forest sizeit + γ3 GDP/Capitait +

γ4Trade,hotel and restaurant/RGDPit + γ5 Inflationit + γ6Populationit + γ7 Audit opinionit +

γ8Timedummy2005it+ αi + εit ……………………………(1)

•Revenue/RGDP= γ0 + γ1 Fiscal transferit + γ2Forest sizeit + γ3 GDP/Capitait +

γ4Trade,hotel and restaurant/RGDPit + γ5 Inflationit + γ6Populationit + γ7 Audit opinionit +

γ8Time dummy 2005it+ αi + εit ……………………………………………………….(2)

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Ordinary least square (robust standard error)

District and time Fixed effect with robust standard error

District and time Random effect with robust standard error

Dependent variables: Tax/RGDP Charge/

RGDP Tax/RGDP Charge/

RGDP Tax/ RGDP

Charge/ RGDP

Resource revenue

sharing/

Real RGDP

-0.0004

(0.00098)

-0.0017

(0.001)

0.002

(0.0016)

0.0003

(0.001)

0.0017

(0.0017)

-0.00093

(0.0006)

Forest size (Ln) -0.0005***

(0.00016)

-0.0003***

(0.0001)

-0.0011**

(0.0005)

-0.002*

(0.001)

-0.0003*

(0.0002)

-0.0004**

(0.0001)

Real RGDP /Capita -1.67e-06

(0.00004)

-0.00004***

(0.00001)

0.00003

(0.00002)

-1.56e-07

(0.00002)

-2.96e-06

(8.45e-06)

-0.00003***

(0.00001)

Trade, hotel and

restaurant (share of

Real RGDP)

0.010**

(0.004)

0.005*

(0.002)

0.018***

(0.007)

0.017***

(0.004)

0.014***

(0.005)

0.010***

(0.003)

Inflation(Ln) -0.0005*

(0.0003)

-0.00009

(0.0002)

-0.0003*

(0.0002)

-0.00008

(0.0001)

-0.0005**

(0.0002)

-0.0001

(0.00012)

Population (Ln) -0.0006*

(0.0002)

-0.0008***

(0.0002)

0.007*

(0.004)

0.001

(0.0014)

0.00041

(0.00045)

-0.0006***

(0.0002)

Audit opinion 0.0004***

(0.0001)

0.0002**

(0.0001)

0.0003***

(0.00009)

0.0001

(0.00008)

0.0004***

(0.00008)

0.0002**

(0.00008)

Time effect 0.0008***

(0.0001)

0.0013***

(0.00018)

0.00036

(0.00038)

0.0011***

(0.0002)

0.0009***

(0.0003)

0.0014***

(0.0002)

r2 0.056 0.09

F Test 6.59*** 16.05*** 7.77*** 16.07***

Wald chi(2) 60.27*** 132.06***

Observations 2327 2327 2327 2327 2327 2327

Table-7: Panel Data Results with fixed effects

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Dependent variables: Tax/RGDP Charge/RGDP Resource revenue sharing/Real

RGDP 0.0036 (0.002)

-0.0011 (0.0022)

Tax sharing/RGDP -0.0009 (0.0022)

-0.003 (0.002)

Un-earmarked Grant/RGDP 0.0014*** (0.0003)

0.004*** (0.0006)

Forest size (Ln) -0.002** (0.0007)

-0.001 (0.0014)

Real RGDP /Capita 0.00005* (0.00002)

-0.00001 (0.00002)

Trade, hotel and restaurant (share of

Real RGDP) 0.0143** (0.006)

0.009** (0.003)

Inflation -0.0003** (0.0002)

-0.0001 (0.00012)

Population (Ln) 0.0077** (0.0038)

-0.0004 (0.0011)

Audit opinion 0.0003** (0.00009)

0.00006 (0.00007)

Time effect 0.0002 (0.0004)

0.001*** (0.0002)

F test 9.44*** 17.69*** Observations 2239 2239

Table 8: Time and district fixed effect-Fiscal transfer (robust error)

Conclusion and policy implication

• This study finds evidence that resource wealth does not become disincentive to

revenue effort . The effect is found for all specification. This implies that this

paper does not find the potential channel for resource curse in mineral producing

districts Indonesia. However, the presence becomes disincentive for revenue

effort.

• This paper finds strong and positive correlation between un-earmarked grant and

revenue effort . This suggests that grant transfer does not become substitute for

local government revenue. Nevertheless, this suggest the likely dependence

upon grant.

• The strong revenue raising capacity is important to ensure quality public service.

There needs broader revenue sources for local government to increase their own

source revenues.

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