Domestic resource trap: When raising revenue shrinks the economy

Business Recorder · 26/10/2026، 11:41:43 AM

For decades, a remarkably resilient idea has shaped economic policy across the developing world: before a government can invest, build infrastructure or expand public services, it must first “find the money”. This logic lies at the heart of Domestic Resource Mobilisation (DRM). Governments are urged to raise tax-to-GDP ratios, broaden tax bases and improve enforcement so that more resources can be mobilised domestically for development. There is an obvious truth here. Developing states need functioning tax systems. Pakistan cannot sustainably finance development while significant incomes, wealth and economic activity remain outside the tax net. But there is another question that receives far less attention: What if the way a government raises revenue weakens the very economy from which that revenue must ultimately come? Not every rupee of revenue is the same An economy is not a reservoir of taxable cash. It is an interconnected system of production, investment, employment, consumption and credit. Raising revenue from different parts of that system produces very different economic consequences. A rupee collected from speculative land gains is not economically equivalent to a rupee raised through an essential production input. A tax on cigarettes is not economically equivalent to a levy embedded in the fuel transporting vegetables from farm to market. Yet on the government’s revenue statement, each appears simply as another rupee collected. In a recent IDEAs working paper, economist Nkosi challenges the conventional DRM paradigm. Drawing on endogenous-money, post-Keynesian and structuralist traditions, he proposes shifting the discussion from Domestic Resource Mobilisation to Domestic Resource Creation (DRC). The central idea is that finance should not be understood simply as a fixed stock of scarce savings that must first be mobilised before development can occur. Applied to fiscal policy, that insight changes the question. Under a narrow resource-mobilisation approa