Institutional Quality and Tax Revenue Mobilization in Sub-Saharan Africa: Evidence from a Panel ARDL-PMG Analysis

This study examines the effect of institutional quality on tax revenue mobilization in 10 selected Sub-Saharan African (SSA) countries spanning from 2002 to 2023. The period was chosen because it captures a significant era of fiscal and institutional reforms across Sub-Saharan Africa. The data explored in this study originate from the World Development Indicators (WDI) dataset. The data includes tax revenue mobilization, institutional quality components such as regulatory quality (REQ), voice and accountability (VOA), control of corruption (COC), rule of law (ROL) and government effectiveness (GOE) and political stability (POS). The study also explored some other control variables such as GDP Growth, macroeconomic stability (Inflation) and international economic integration (FDI Inflows and Trade Openness). The study explored total tax revenue as a percentage of GDP to proxy tax revenue mobilization. Utilizing a Pooled Mean Group (PMG) Autoregressive Distributed Lag (ARDL) estimation technique, the study analyzes the distinct short-run and long-run dynamics of fiscal capacity. The empirical results reveal a robust long-run cointegrating relationship, evidenced by a statistically significant and negative Error Correction Term (ECT) of −0.1858, which suggests that an 18.6% annual deviation from equilibrium is corrected within the following year. The long-run estimates indicate that institutional quality is a pivotal catalyst for tax. Additionally, inflation and trade openness exhibit significant and positive long-run effects, while Foreign Direct Investment (FDI) exerts a significant damping effect on tax revenue, likely due to aggressive tax incentives. Conversely, the short-run results revealed a significant effect of institutional quality, which suggests that stricter regulations and administrative overhauls may cause immediate transition costs and compliance shocks. Robustness checks using disaggregated institutional quality indicators, which include control of corruption, rule of law and government effectiveness, consistently validate the primary findings. The study concludes that while institutional reforms may disrupt revenue collection in the short term, they are indispensable for building a sustainable long-term social contract and expanding the formal base. Policymakers should prioritize institutional transparency and trade integration while rationalizing FDI-related tax holidays.