It is thrilling to watch the overthrow of despots and dynasties as people power erupts across the Arab world. But the headiness of the moment can only lead to durable political change and meaningful economic progress if the new governments that emerge find a better way to handle oil revenue and other easy money (rents, in econo-speak) that have corrupted the outgoing regimes.
How can this be done? In a series of CGD papers and articles, Nancy Birdsall and I, Todd Moss, and Alan Gelb have argued that one way of preventing the oil curse is to give some or most of the oil revenues directly to the people through regular cash transfers, then tax back part of it to fund government operations. We call this proposal Fighting the Resource Curse Through Cash Transfers or, more simply, “Oil2Cash.”
Why give money away and then tax it back? There can be no meaningful representation without taxation. When governments have access to easy money, they have no need to tax and hence no incentive to foster conditions needed for growth and wealth creation. Worse, the surfeit of money gives governments the means to suppress dissent and buy-off political opposition. This is precisely what we have seen throughout the Arab world: many oil-rich countries run welfare states with this aim in mind.
With oil money in the hands of the people, the relationship between the government and the governed would change for the better. Governments in the Arab world’s oil-rich states would need to tax their citizens, just like the governments in non-oil countries. As we are seeing now in the United States, citizens who pay taxes take a keen interest in how their money is spent. They hold their government to account.
Of course, it’s hard to imagine a regime in power voluntarily forsaking access to huge sums of easy money. One window of opportunity is when new constitutions are being written, when citizens are re-writing the rules—and when the identity of the particular group that will emerge victorious after the political transition is still uncertain. We may be witnessing just such a Constitutional Moment across the Arab world. The time is thus ripe for the people and their well-wishers to work together to design constitutional arrangements that will prevent the perpetuation of the oil curse by distributing oil wealth directly to citizens.
A lot of details must be sorted out, as the paper by Todd Moss makes clear. But the first step is for those winning their freedom in the oil-rich states of the Middle East to recognize that unless oil revenues and other rents are shared directly with the citizens, the region will sadly remain a case of plus ca change plus c’est la meme chose. The reasoning behind this is a little complex but the slogan needn’t be. I’m hoping we will soon be hearing a new rallying cry from the streets of the Arab world: “Power to the people—and oil revenues, too!”
(For more on the problem of rents in the Middle East, see my recent pieces in the Financial Times, available in un-gated versions at the Peterson Institute, here and here)