Measuring Untapped Revenue Potential in Developing Countries : Cross-Country Frontier and Panel Data Analysis

Efforts aimed at supporting domestic revenue mobilization in developing countries are oftendesigned and evaluated based on empirical indicators, such as revenue-to-GDP ratios, which capture differences inachieved outcomes across countries. This paper studies a complementary approach to estimate domestic revenuepotential that also takes into account differences in countries’ fundamental economic structures and constraintsassociated with different capacities to raise domestic revenues, which are not captured by simple revenue-to-GDPratios. Specifically, nonparametric data envelopment analysis is applied to estimate domestic revenue potentialin a panel of 118 low- and middle-income countries from 2008 to 2019. The analysis addresses the following researchquestions: (i) How efficient are low-income countries compared with richer countries in mobilizing domesticrevenues given the national economic conditions and resources available to each country (ii) What factorsaccount for the variation in relative domestic revenue mobilization efficiency, that is, the fact that somecountries generate more revenues than other countries with comparable economic structures The paper discusses thepolicy implications of the findings and demonstrates how the proposed method can be used to identify countries that arealready performing close to their limit and those that still feature large untapped potential for further increasingrevenues (and thus likely higher marginal benefits to external support for domestic revenue mobilization).Finally, the paper provides insights on the extent to which existing international support for domestic revenuemobilization is targeted at countries with larger untapped revenue potential.