Royalties Distribution and Subnational Governments Performance: Evidence from Colombia

• In Event: Subnational Taxation and Economic Development

Abstract

The widespread practice of sharing natural resource royalties from central to subnational governments—common across Latin America—has often led to exacerbated horizontal inequalities, inefficient spending, and heightened budget volatility. This paper examines the impact of Colombia’s 2011 reform to its royalty distribution system on the fiscal performance of subnational governments. We investigate whether the pre-reform system contributed to increased regional inequality, fiscal disparities, and inefficient public investment, and whether the 2011 reform effectively addressed these problems. Using a panel dataset of administrative records on subnational budgets, we exploit the reform as a quasi-experimental setting. Our empirical strategy treats royalty allocations as a continuous treatment, given the heterogeneous exposure across regions. Preliminary results suggest that the reform led to a reduction in regional inequality, with evidence of convergence in GDP per capita, Gini indices, multidimensional poverty, and access to public services such as education, sanitation, and healthcare. While the reform successfully reduced fiscal disparities in royalty distribution, we find indications of a decline in local tax collection efforts among newly eligible recipients—suggesting the emergence of “fiscal laziness.” Additionally, the reform does not appear to have significantly reduced revenue volatility. In terms of expenditure efficiency, performance indicators show modest improvements in dimensions such as distributional equity, stabilization, and economic outcomes, though less so in administrative effectiveness. By providing new empirical evidence on how natural resource revenue sharing shapes subnational fiscal outcomes, this paper offers important insights for royalty reform efforts in Colombia and other resource-rich developing countries.

Authors

• Federico Corredor, Georgia State University

• Jorge Martinez, Georgia State University