Does Tax Revenue Improve Economic Complexity in Africa?

Abstract

This study assesses the effect of tax revenue on economic complexity in Africa using a sample of 29 African countries from 1995 to 2018. Applying the system generalized method of moments (GMM), we found that tax revenue spurs economic complexity in Africa by providing countries with critical financial resources to produce complex and sophisticated goods. We performed several robustness tests, including controlling for macroeconomic volatility and employing various measures of economic complexity and tax revenue, and the results remain robust. Furthermore, the mediation analysis results show that the effect of tax revenue on economic complexity is mediated by financial development and government spending. This study advocates for government strategies to enact tax reforms and maximize tax revenue mobilization, which will help finance economic complexity.