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Oil to Cash: Fighting the Resource Curse through Cash Transfers
Natural resources and the income they generate can stifle development by undermining the relationship between citizens and their state. In a series of papers and a book, CGD’s Todd Moss proposed oil-to-cash—direct distribution of resource revenues—to encourage a “social contract” in resource-rich countries. The income generated by resource extraction can be distributed directly to citizens and then taxed by governments. With a personal stake in the government’s budget, the citizens could then hold the government accountable for providing goods and services with their taxes.
One of the nearest real-world examples of Oil-to-Cash is Alaska, which has paid an annual dividend to every state resident since 1982. One of the presumptive lessons drawn from Alaska’s experience has been that once a dividend was in place, political forces aligned to protect it from politicians. Yet last week, Alaska Governor Bill Walker announced the first-ever cut to the Alaska Permanent Fund dividend. The battle now moves to the legislature, which next week may try to vote to override the veto. Here’s why CGD is also watching.
Our Oil-to-Cash proposal lays out a policy option for governments experiencing resource windfalls: pay a portion of the revenue directly to citizens. Several countries have taken steps toward the model, such as Mexico with its prospera program or Saudi Arabia’s new cash transfer scheme, while Mongolia’s attempt at a mining-linked dividend has largely faltered.
One of the rationales for Oil-to-Cash is that a regular, universal cash transfer linked to revenues would create incentives for citizens to pay attention and build a constituency for better revenue management. In Alaska, every resident receives an equal share of half of the five-year average earnings of the state’s sovereign wealth fund, which is itself funded by 25 percent of all incoming oil royalties. In 2015, Alaskans each received a check of $2,072. The dividend seems to have helped to generate an unusually high level of public interest in fiscal issues. This was the vision of Governor Jay Hammond, the architect of the fund, who believed the dividend would ensure that citizens prevented his successors from raiding state savings or even changing the dividend formula. For 34 years, Hammond’s prediction has held.
Until, perhaps, 2016. Governor Walker, facing plummeting oil revenues and a large budget deficit, last week announced a slew of vetoes to the state budget, including capping the dividend at $1,000, a roughly 50 percent cut from the current formula. The battle now moves to the state legislature, which is holding a second special session beginning July 11 where lawmakers may try to override his vetoes. The proposed cuts could also wind up in court, as there are questions over the legality of the governor’s moves and no guiding case law on the matter. Will public interest and outrage over the proposed restructuring of the fund force legislators to reverse the governor’s action? Has Governor Walker committed political suicide? Find not-so-supportive comments from legislators here and here.
We will be watching closely what happens next in Juneau. So too, we suspect, will policymakers and citizens in Mexico, Mongolia, Saudi Arabia, and other resource-rich countries.
The slave trade, colonial rule and apartheid were once all legal. Hard power then won lawful authority: might literally made legal rights. The global revolutions that abolished those coercive rights were extraordinary—yet they left today’s multi-trillion trade in oil and minerals untouched. Current law incentivizes authoritarianism, conflict and corruption so strongly that oil states in the developing world today are no freer, no richer and no more peaceful than they were in 1980. All of the recent reforms around extractives—from transparency to certification to oil-to-cash—point toward the modern idea that the people, not power, should have the ultimate right to control a country’s resources. Can the US lead the West toward the next global revolution, by abolishing its legal trade in authoritarian oil and conflict minerals?
Credit: World Economic Forum | Matthew Jordan cc-by-sa
Ali Bongo owes his position and his wealth to his father, Omar Bongo, who ruled Gabon for forty-one years until his death in 2009. The elder Bongo, who made his money supposedly from donations by oil companies, was notorious for his lavish lifestyle and connections into the highest French political circles. Certainly the oil wealth of Gabon benefited the Bongos more than it has regular citizens. Despite government oil revenues of about $2 billion last year, an estimated one-third of Gabon’s 1.7 million people live on less than $2 per day.
So far, Ali Bongo says he’ll give away two of his private luxury homes in Paris to the government for cultural and diplomatic use. He’s also donating a villa in the capital Libreville to a state university and promised to some share of his inheritance to a local education foundation. That’s all very nice, but it hardly scratches the surface.
If the younger Mr. Bongo was serious about giving back to the people, he would provide a share of government oil revenues in a regular dividend to every citizen. We call it Oil-to-Cash, but if that’s too threatening, perhaps he could put his inheritance into a special account to make payments (or more accurately, a refund) to every Gabonese citizen? For a mere $60 million, he could give $100 to every single Gabonese child. Or, even better, he could use his loot to endow a trust fund with $600 million that, assuming 5% return, could pay a child benefit of $50 per child to every Gabonese mother every year into the future. Now, that would be giving back to the people.
India is getting some serious cash from coal. According to official estimates, the government will get nearly $250 billion in revenues over a period of 30 years from the sale of over two hundred coal blocks to private bidders, only 29 of which have been auctioned so far. Nearly all of the auction money and royalties will go to six of India’s poorest states and, within them, to about two dozen districts where the coal deposits are located. Given India’s record of corruption and mismanagement of natural resources, it is difficult to be optimistic that it will be able to cash in on this windfall and use it for development. But there are a few silver linings in the grey cloud that may prove us (happily) wrong:
The auctions have largely gone according to plan so far. The central government implemented a relatively transparent and efficient bidding process, replacing the previous government’s allocation system that was rife with cronyism (known as the “Coalgate” scam).
The mining states will get most of the proceeds from auctions and royalties. This assures them of a long-term revenue stream. And, thanks to a new fiscal devolution formula (see blog posts here and here), the coal revenues will give them greater fiscal autonomy to increase public expenditure on health, education, and poverty alleviation – if they choose to.
A considerable portion of the revenues could benefit some of the most deprived people in India (and in the world). That’s because coal and mineral producing areas are also some of the poorest parts of the country, with extremely low levels of health, nutrition, and education, especially for children. Districts where mines are located have a significantly lower proportion of institutional births and child health care. (See maps below.) Allowing districts to manage revenues could reverse this trend.
According to the World Bank and IFC, despite health and environmental risks posed by large-scale coal mining, there can still be overall health gains in mining districts if spending is targeted towards providing health care. A significant part of the mining revenues, therefore, needs to be prioritized for health for two reasons: first, to correct for a general deficit in health outcomes in these districts, and second, to address long-term health impacts from local mining activity.
This is certainly achievable. Some estimates put the current annual revenue from the coal auction in Chhattisgarh state at two-thirds of the total health budget, which will increase as more blocks are auctioned over the coming months. Our estimates indicate that the annual per capita royalty already accruing to the district of Raigarh is Rs.1500 (about $25), nearly equal to the per capita expenditure on health for the state, according to the latest budget. Empowering local communities and involving them as stakeholders is crucial to ensure that the natural resource dividend is spent on the right things, in the right way.
Fortunately, the recently amended Mines and Minerals (Development and Regulations) Amendment Bill, 2015 addresses this issue. The law states that in any district affected by mining operations, the State Government shall establish a trust as a non-profit body – to be called the District Mineral Foundation (DMF) – with the objective to work for the interest and benefit of people affected by mining operations. Moreover, the holder of a mining lease shall pay the DMF of the district up to one-third of the royalty, according to rules created by the Central Government.
Not much has been said until now about the how the DMFs will function. However, India is not the first to attempt a local revenue sharing scheme and can learn from lessons of other countries. According to Natural Resource Governance Institute, there are at least 30 systems around the world that have established subnational resource revenue sharing systems. In Peru, for example, mining companies contribute directly to local development projects through social funds and voluntary contributions to the Peoples’ Solidarity with Mining Program. According to one study, nearly 20 percent of the funds were spent on health, 15 percent on education and the rest on infrastructure, training, and employment generation.
The impact of the expenditure is, however, unclear. There are pervasive issues of transparency and accountability; monitoring compliance with legal obligations of African mining projects, for example, has proved to be extremely difficult. More often than not, good intentions are not translated into better outcomes for the people who are most affected.
More recently, CGD has proposed an initiative known as “Oil-to-Cash.” As our colleague Todd Moss has observed, Oil-to-Cash can be used to combat the resource curse by transferring some or all of its natural resource windfall revenue to citizens in a universal, transparent, and regular payment. The potential for Indian coal revenues is obvious. This could strengthen the social contract, fight corruption, and lay the foundation for future prosperity. It also gives people the choice to use the resources that are rightfully theirs!
India has the chance to use a natural resource often derided as dirty to make a real difference to the welfare of millions of its poorest citizens, who rank among the poorest people on earth. Innovative ideas like this can make the difference between development and destitution – but only if they are backed by transparent and accountable government.
Todd Moss, Caroline Lambert, and Stephanie Majerowicz offer a well-argued explanation of how oil-to-cash transfers could help countries overcome the corruption, economic volatility, and lack of government accountability that too often plague countries with rich resources but weak institutions.
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At first glance, winning the lottery seems like a momentous stroke of good fortune. Money is often what people — especially poor people — need to get back on their feet and make a new start. Unfortunately, it’s often the people who need the money most who, even with the best intentions, end up mismanaging their newfound wealth until they end up worse off than they were before.
The same phenomenon exists for poor countries that find themselves managing enormous sums of money from newly discovered natural resources. It’s called the resource curse.
Take the example of Ghana, a mid-sized West African country facing major power shortages that, in 2007, “struck gold” in the form of offshore oil and natural gas. By 2010, Ghana was projected to produce 120,000 barrels of oil, creating an earnings windfall of nearly $400 million in the first year alone. Most of the earnings were supposed to go toward infrastructure, like electric power.
Five years later, the lights are still mostly off, and few citizens have seen much direct benefit.
How can countries make winning the natural resource lottery as good as it sounds? Todd Moss, senior fellow and COO of the Center for Global Development, lays out a roadmap in his latest book, Oil to Cash: Fighting the Resource Curse through Cash Transfers. The book is co-authored by award-winning journalist Caroline Lambert and Stephanie Majerowicz, PhD candidate in Public Policy at Harvard’s Kennedy School of Government.
Moss sat down to explain how Oil-to-Cash, which calls for turning earnings from natural resources into cash dividends for citizens, could bolster developing countries and help them beat the resource curse.
Q: What’s the problem you’re trying to solve with Oil-to-Cash?
The problem is that many countries that become rich because of newfound natural resources often wind up becoming very poor. As more countries are discovering natural resources, they’re looking for ways to turn these new sources of wealth into progress, which can be very challenging.
Q: What is Oil-to-Cash, and what would it look like in practice?
Oil-to-Cash is the idea that a significant portion of natural resource revenue — from gas, oil, minerals, whatever it is — that comes into a government would be distributed directly to citizens in the form of a universal, transparent, and regular cash dividend. Instead of just hoping it goes into the treasury and hoping the government spends it well and that it trickles down into the population, you would short-circuit all of that by having this direct payment. The basic principles are that everyone would receive a fair share, and everything would be open and transparent.
Q: What impact would these cash dividends have?
Cash dividends would have three positive effects. Firstly, it would be a direct benefit to every citizen. How often do you hear from the citizens of rich countries that they have never seen a dime of the resource money? Secondly, it would create very strong incentives for citizens to pay attention to what their government is doing with oil or other natural resource contracts and the money that comes with them. Are they getting a good deal from the gas company? Is the government spending their money well? Now, because it will directly hit their pocketbook, they’ll have a reason to pay attention. Lastly, we believe the mechanism for delivering these dividends — which will likely include biometric identification and mobile payments — will also work in the other direction and become the foundation for building a tax base.
Q: Why is building a tax base important?
Taxation is really the foundation of any effective state. It builds a social contract, which is the unspoken bargain between the government and its people. We agree to pay taxes to the government and we receive services in exchange. We get security, police, military. We receive public services like healthcare and education, roads, all of that — and we expect that because we pay taxes. In countries where citizens don’t pay taxes, services tend to be terrible, and it’s in part because that bond between taxation and service delivery is broken. Lots of resource-rich countries don’t have a tax base — they collect it from oil companies not their own citizens. We’re trying to rebuild that bond.
Q: Are there any countries that are ready to adopt Oil-to-Cash?
It could happen in Liberia, Ghana, Venezuela, and others. Mongolia has come quite close to doing this with their mining revenues from gold and copper. So too has Bolivia with gas and its pension fund. There are a number of countries where Oil-to-Cash could be applied, but no country is going to roll this out with a bow on it. It’s going to come in incremental steps.
Q: What are you hoping readers get out of the book?
I hope that the community of policymakers and activists that are worried about countries facing the resource curse will read the book, think about national dividends as an option, and figure out ways to pilot it in a country.
As more and more countries are facing the pressure of how to spend a windfall income, there’s been a tremendous amount of success in getting more supply of information about how much money oil companies are paying governments and how much money governments are receiving. What we’re trying to do is complement this supply of new information by creating demand for information in populations of those countries. The average citizen living in, say, rural Tanzania, has no idea — much less any incentive — to use this data to hold their government accountable. We’re hoping to help generate that demand.
About the Center for Global Development
CGD works to reduce global poverty and inequality through rigorous research and active engagement with the policy community to make the world a more prosperous, just, and safe place for all people. As an independent, nonpartisan, and nonprofit think tank, focused on improving the policies and practices of the rich and powerful, the Center combines world-class scholarly research with policy analysis and innovative outreach and communications to turn ideas into action.
In the book, we’ve pulled more than three years of work together to try to answer some of these questions:
Why is Oil-to-Cash a good idea and how would it work?
What’s the relevant evidence from hundreds of cash transfer experiments?
What might be the economic or political benefits?
What problems, obstacles, or objections might arise?
When and where might Oil-to-Cash actually happen?
We hope the book will help to move the policy debates to the next phase and, eventually, a pilot.