‘Pockets of effectiveness’ to tax mining multinationals do exist

It is a common view that states in the developing world with substantial extractive natural resource discoveries may not have the capacity to tax and regulate multinational companies in the sector. In this article, we show that ruling elites in recently resource-rich Tanzania, and in Uganda – expected to become resource-rich in the foreseeable future - have learned from the resource curse: they seek to construct ‘pockets of effectiveness’ (POEs) to regulate and tax natural resources.

We explain the political incentives to create such pockets by combining insights from the POE and the Political Settlement literatures. We argue that POEs are likely to be established in emerging resource-rich countries with three characteristics: some degree of competitive elections; widespread voter expectations of future natural resource prosperity; and absence of powerful domestic firms in the sector who can resist taxation.

The political benefits of such POEs are higher revenues that can boost government spending power and, hence, political legitimacy. These outweigh the political costs of establishing POEs, namely rents and patronage foregone. This insight is missed in much of the writings on the impact of natural resource wealth in African countries.