Global South Nations eye VAT Reform to Break Cycle of resource Dependence
A new analysis by Rabah arezki, Greired Rota-Graziosi, and Rick argues that strategic Value-Added Tax (VAT) reform offers developing economies a pathway to escape the ”resource curse” and foster long-term economic stability. Published by project Syndicate and gaining traction as of October 8, 2025, the research highlights how current tax frameworks often perpetuate reliance on unprocessed raw material exports.
The authors contend that combining tariff reductions with existing tax systems has inadvertently lowered resource extraction costs while concurrently deepening dependence on exports like oil and minerals, hindering the advancement of value-adding industries. This creates a self-reinforcing cycle of limited diversification and economic underdevelopment – the resource curse.
The analysis points to the need to move beyond simply transplanting tax systems wholesale, noting the VAT’s numerous adaptations since its inception in the early 1950s to suit different national contexts.
China‘s experience provides a compelling case study. Introduced in 1994 with a 17% rate and initial adherence to the destination principle-full VAT refunds for exporters-China quickly adapted the system. By 1996, the government began restricting VAT refunds on certain exports due to budgetary pressures. This evolved into a deliberate industrial policy tool, alternately incentivizing exports or boosting revenue based on economic needs. In December 2024, China halted VAT reimbursements for copper and aluminum exporters, raising export costs while simultaneously encouraging domestic processing and value capture.
The authors suggest resource-rich countries can learn from China’s model,carefully designing and implementing VAT reforms to promote industrialization,diversification,and long-term economic stability. For developing economies facing budget constraints and the need for job creation, reforming the VAT is presented as a crucial step to break cycles of dependence.
