Following the procedure outlined above, a preferred OLS equation for each independent variable will be constructed on the basis of the robust BASE variables. This final equation will be subjected to common tests for the distribution of the error term, heteroskedasticity in the error term, model mis-specification, and influential points.

# **VI. Test Results and Interpretations**

## _A. Aggregate Revenue Deviations_

The results of the analysis for aggregate revenue deviations are shown in Table 7. Column 1 shows the hypothesized signs for each independent variable in equation 9. Columns 2 and 3 show the results for an encompassing equation 9a that includes 28 hypothesized variables. Prior to testing, several dummy variables were added to equation 9a in order to obtain a normally distributed error term. The dummy variables were selected from the largest positive and negative residuals in the error term. Further investigation suggests that these should be retained as explanatory variables because each represents an unusual set of circumstances. These are summarized below:

- **Georgia 2004:** The government had implemented tax policy reform that far exceeded expectations.  According to the PEFA report for Georgia, the authorities had set cautious targets until they knew reform would work.  They expected a gain of 1-2 percent of GDP but instead gained 4.1 percentage points, from 9.4 percent of GDP in 2003 to 13.5 percent of in 2004.  By contrast, 2005 and 2006 saw adverse shocks from drought and floods and energy price shock.

- **Ghana 2006:** There is a discontinuity in the nominal GDP data from WDI.  The authorities revised the national accounts from 2006 onwards and the WDI reflect this but the data prior to 2006 were not adjusted to compensate.

- **Ghana 2008:** The combined impact of tax administration reforms and unanticipated rapid growth in the tax base led to a revenue surplus.  According the PEFA report for Ghana, there were “significant improvements made with respect to taxpayers’ access to information on tax liabilities and administrative procedures and on the collection of tax arrears.”  Nominal GDP growth accelerated from 20 percent per annum in 2006-07 to 30 percent in 2008.

- **Peru 2006:** According to the PEFA report for Peru, a substantial portion of tax revenues is derived from commodity exports, particularly from copper.  Copper prices increased by 83 percent in 2006.

- **Solomon Islands 2004:** In July 2003, an Australian-led peace-keeping force landed in the Solomon Islands, putting an end to several years of conflict and economic mis-management including a large build-up of payments in arrears.  The Regional Assistance Mission to Solomon Islands (RAMSI) provided substantial technical assistance to the Ministry of Finance and Treasury.  With their help, actual revenues in 2004 were 73 percent higher than budgeted revenues due to a combination of deliberate under-targeting in order to create a surplus to pay down the stock of arrears and a failure to anticipate how rapidly the economy would rebound following the end of conflict.

Columns 4 and 5 show the results of the Bayesian averaging after selecting the 19 most significant variables from equation 9a. Columns 6 and 7 show the author’s initial preferred equation 9b, based on the Bayesian outcomes. Four variables are indicated for inclusion in equation 9b on the basis of their PIP scores. The variables PCT_INT, DRY, _rp∙Z(SYSTEM)_ and _rp∙Z(GNIPC)_ have PIP scores above 29