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Oil to Cash: Fighting the Resource Curse through Cash Transfers
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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 President of Gabon, a small petro-state wedged between Cameroon and Congo, has announced that he’s giving some of his inheritance back “to the people of Gabon.” It’s a good start, but surely he can do better.
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. 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 that may prove us (happily) wrong.
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.
CGD vice president and senior fellow Todd Moss and reasearch assistant Lauren Young propose direct cash distribution of Ghana's oil profits to help the country avoid the natural resource curse. One positive effect of the plan would be to strenghten democratic pressure on the government to be good stewards of the resource.
Reliance on natural resource revenues, particularly oil, is often associated with bad governance, corruption, and poverty. Worried about the effect of oil on Alaska, Governor Jay Hammond had a simple yet revolutionary idea: let citizens have a direct stake. Thirty years later, Hammond’s vision is still influencing oil policies throughout the world.
Uganda has sought to finance its development agenda with oil since discovering the resource in its Albertine Lakes Basin in 2009. This paper considers alternative methods for distributing the rents from oil that mitigate some of the governance risks associated with natural resource revenues.
This paper surveys the arguments for and against cash-transfer programs in resource-rich states, discusses some of the new biometric identification technologies, and reaches preliminary conclusions about their potentially very large benefits for developing countries.
Todd Moss proposes that countries seeking to manage new natural resource wealth should consider distributing income directly to citizens as cash transfers. Beyond serving as a powerful and proven policy intervention, cash transfers may also mitigate the corrosive effect natural resource revenue often has on governance.