The Effect of Central Grants on Local Tax and Non-Tax Revenue Mobilisation in a Conflict Setting: Evidence from Côte d’Ivoire

Abstract

This analysis uses panel data from thirty-five departments over the period 2001-2011 to analyse the effect of grants from central government on local revenue mobilisation in CA´te d’Ivoire. The study considers the two components of local own revenue in CA´te d’Ivoire: tax revenue (LTR) and non-tax revenue (LNTR). To perform the investigation, the analysis is based on a carefully-constructed novel dataset, and very recent and appropriate econometric estimators (Grouped Fixed Effects (GFE)). The GFE method assumes that unobserved heterogeneity can be constant and/or varying over time among individual departments. We combine this method with Instrumental Variable (IV) regressions in a two-stage least squares procedure to control for endogeneity of grants. Overall, the results show a statistically significant and positive effect of central grants on local mobilisation of tax and non-tax revenue. Thus, the study finds that central grants to municipalities do not displace local revenue, but instead lead to higher revenue. However, the effect on tax revenue is more important than that on non-tax revenue. A 10 per cent increase in total grants to local government is associated with a 4.1 per cent increase in tax revenue mobilised by local administration, while increasing non-tax revenue by only 1.8 per cent. We also find that, although conflict has a negative impact on mobilisation of local revenue, this impact remains generally limited. The conflict is not significant at 5 per cent statistical significance.