Natural Resource Curse and Fiscal Governance: The Effect of Gold Customs Fraud on Military and Education Spending in Africa

In resource-rich countries, the illicit trafficking of minerals poses a growing threat to state stability and fiscal governance. This paper investigates the effect of gold customs fraud on the allocation of military and education spending, using a panel dataset of 45 African countries from 2000 to 2019. Employing an instrumental variables strategy, we find that higher levels of gold customs fraud are significantly associated with lower public spending allocations to both the military and education sectors. Results remain robust with System-GMM and Jackknife IV estimations. Moreover, we find that the marginal effect of gold customs fraud on military and education spending is negatively conditioned by armed conflict. These findings suggest that, in both peaceful and conflict-affected contexts, illicit resource flows undermine fiscal capacity and distort budgetary priorities, thereby constraining governments’ ability to finance defense and invest in human capital development.