Ideas to Action:

Independent research for global prosperity

Implementing Oil-to-Cash—Todd Moss

2/6/12

Owen Barder

When a poor country finds oil, bad things often get worse. Countries rich in extractable natural resources, especially oil, frequently suffer from crummy governance, high poverty, endemic corruption and conflict. Is it possible to beat this oil curse? My guest on the Wonkcast this week, Todd Moss, CGD vice president for programs and senior fellow, says yes. He argues that a government that transfers some or all of its oil revenue to citizens in a universal, transparent, and regular taxable payment, could strengthen the social contract, fight corruption, and lay the foundation for future prosperity.  

This iconoclastic idea – which Todd calls oil-to-cash —is gaining increased attention from policymakers, due in part to a spate of CGD working papers investigating promising experiments in oil revenue management in a diverse set of countries. To share the work more widely, and to build a global community of researchers and practitioners interested in pushing the idea forward, Todd is launching this week the first issue of a new CGD newsletter, the Oil-to-Cash Update.

“We’ve seen that a lot of countries have a problem when they receive a large influx of income that the government hasn’t done anything to earn,” Todd explains. “The money isn’t spent well and can lead to corruption and conflict… When you get money that just drops out of the sky there’s no incentive for you to spend it well, or for the citizens to hold the government accountable.”

Todd tells me that the best time to try oil-to-cash is probably when a country has discovered oil but not yet received the revenue—a situation that applies to a growing number of countries, especially in Africa. Once payments begin, citizens experience the benefits first hand and will demand information to ensure that oil revenues are not lost to corruption. If the payments are taxed, citizens have an additional incentive to ensure that their taxes are spent well.

It’s exciting because we’re starting to see a lot more experiments that are moving in this direction,” says Todd. Mongolia and Bolivia have tried variations on this approach, he says, by linking a cash transfer programs to their natural resource revenues (gold in Mongolia, natural gas in Bolivia). Iran and India, meanwhile, have utilized cash transfer programs in successful efforts to phase out inefficient fuel subsidies.

Recent advances in biometric identification systems make it possible to identify the intended beneficiaries and avoid duplicate payments, he says. Senior fellow Alan Gelb is tracking these advances and has written on their development potential, work that Todd is drawing upon in CGD’s oil-to-cash initiative.

While implementing oil-to-cash seems like a common sense solution, politicians are often reluctant, for good reason.

“You’re asking politicians to give up control of resources,” says Todd. “Especially in countries where spreading money around is how you build political coalitions, this seems like a counter intuitive strategy.  We’ve been exploring the political and economic environments of a number of countries to see where this would make sense and where we can find a bold leader who would try this approach.”

Nigeria is a country where both the potential and the opposition to such an innovation are clear. Todd would like to see Nigeria opt for what he calls a 20-20-20 plan: the government would use 20% of oil revenue to pay each Nigerian the equivalent of 20 U.S. cents per day each year until the person turns 20 years old. While Nigeria’s current rulers might not like this, it’s not impossible to imagine an opposition politician who would.

Not persuaded? Listen to the Wonkcast. We have new music and are experimenting with breaking the audio into briefer segments, for easier listening, thanks to our J-term intern, Ness Smith-Savedoff, an audio buff who left CGD last week to resume his studies at Oberlin. I’m eager to hear what you think of the new format. And if you think oil-to-cash has promise, I hope you will sign up for Todd’s new newsletter. Finally, I’d like to thank Alexandra Gordon for serving as producer and recording engineer, and for helping to draft this post.