# **I. Introduction**

For many policy makers in developing countries, improving the effectiveness of domestic revenue mobilization (DRM)—the generation of government revenues from domestic activities—has become a key policy objective to guarantee the financing of the basic functions of their state and provide essential public and infrastructure services (World Bank and IMF 2015; IMF 2018). Moreover, following the 2015 deadline for the attainment of the Millennium Development Goals, there has been a major shift in the importance assigned to DRM by the international development community, originating from the now widely accepted view that official development assistance is unlikely to be adequate to achieve the newly articulated and more ambitious Sustainable Development Goals (SDGs).<sup>1</sup> In this context, it is often argued that governments in developing countries should generate at least 15 percent of GDP in government revenues to finance their development goals in a sustainable and equitable manner (IMF 2018). However, despite the prominence of this goal on the international development agenda, little progress in raising revenue levels has been made. On average, revenue-to-GDP ratios over the past decade in low-income countries, and various countries in Sub-Saharan Africa and Latin America declined (World Bank 2021).<sup>2</sup> This paper provides a fresh perspective on the efforts performed to raise revenue levels in developing countries by comparing not only the absolute outcomes achieved (such as the achieved revenue-to-GDP ratios), as often done in the literature, but also taking into account differences in countries’ fundamental economic structures and constraints that are associated with different capacities to raise domestic revenues. Specifically, we address the following three questions: (i) ‘How efficient are low-income countries compared to countries belonging to higher income groups in mobilizing domestic revenue, given the national economic conditions and resources available to each country?’; (ii) ‘What factors account for the variation in relative efficiency in DRM across countries, i.e., what factors can explain why some countries generate more revenues than other countries with comparable economic structures?’; (iii) ‘Does existing international support for DRM target those countries with higher untapped revenue potential?’ The first question is answered using a non-parametric frontier analysis approach. Specifically, data envelopment analysis (DEA) is used to first estimate the empirical production possibility frontier for government revenues as a function of a set of indicators capturing differences in countries’ domestic economic structures and constraints, and then rate countries’ performance relative to other countries facing similar economic conditions. Question (ii) is answered based on a panel regression framework using the efficiency estimates obtained from the frontier analysis as the outcome variable and relating them to a set of explanatory variables, including institutional and societal factors as well as quality of tax policy (among others). Question (iii) is answered based on additional evidence from panel regressions focusing on projects aimed at improving DRM financed by the World Bank Group.

Results from the frontier analysis show that countries’ relative efficiencies in mobilizing domestic revenue given their economic structures does not exhibit the same strongly positive correlation with income levels as typically observed for achieved revenue-to-GDP ratios. In particular, we find that

> 1 The realization that achieving the SDGs would require a more concerted effort on DRM is reflected in several influential reports and statements originating from the international development community, including _Financing for Development Post-2015_ (World Bank 2013), _Sustainable Development Goals_ (United Nations 2015a), _From Billions to Trillions_ (AfDB et al. 2015), and _Addis Ababa Action Agenda_ (United Nations 2015b). Effective DRM is also directly relevant to at least two of the 17 SDGs, namely SDG 10 (reducing inequality between and within countries) and SDG 17 (strengthen the means of implementation and revitalize global partnership for sustainable development), with the latter under subsection “Finance” (point 17.1) referencing “Strengthen[ing] domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.”

> 2 Factors commonly used to explain why revenue collection lags behind government needs in many low-income countries include narrow tax bases, large informal sectors, and the difficult political economy of tax reform.

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