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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.
As we’ve shared the idea of Oil to Cash—that a portion of resource revenues be given directly to citizens in a regular, transparent, and universal dividend—we’ve heard a lot of concerns, such as that it’s impractical or that it’ll make people lazy.
Donald Kaberuka, the President of the African Development Bank and the leading voice for forward-leaning economic policy on the continent, has come out publicly in favor of paying some portion of natural resource windfalls as a direct dividend to citizens. We’re pretty excited about this policy idea at CGD, and have been thinking through some of the pros, cons, and practicalities of what we call Oil-to-Cash. Watch this space for our Oil-to-Cash book later in 2014.
When we share the Oil-to-Cash idea with people who are hearing about it for the very first time, the typical response is almost always viscerally negative. (If you aren’t familiar with Oil-to-Cash, here’s the web page and a 4-min jellybeans video.) They usually say “That won’t work because of X” or “Sure, that works in Alaska, but my country Y is very different” or “No, the money would be much better spent on Z”. Often, by the second or third time we talk with people about citizen dividends, however, they start to come around. In a few cases, we’ve even had former skeptics pitching us ideas of how it could work better.
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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.
Ghana’s recent recalculation of its GDP led to an overnight $500 per capita jump, putting in motion unexpectedly rapid graduation from the International Development Association (IDA) and ultimately a new relationship with the World Bank. In this week’s Wonkcast, I speak with Todd Moss, vice president for programs and senior fellow at CGD, about his recent trip to the newly categorized lower-middle income country, the implications of IDA graduation, and a sudden influx of oil wealth.
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.
To enhance efficiency of public spending in oil-rich economies, this paper proposes that some of the oil revenues be transferred directly to citizens, and then taxed to finance public expenditures. The argument is that spending that is financed by taxation—rather than by resource revenues accruing directly to the government—is more likely to be scrutinized by citizens and hence subject to greater efficiency.
This is a joint post with Stephanie Majerowicz. Venezuelan President Hugo Chavez hasn’t appeared in public since his cancer surgery last December and, given his sharply deteriorating health, it seems a safe bet that the country will be having another national election sooner rather than later. When that happens, the opposition will have a rare opportunity outflank the populist Chavistas and offer voters a share in the country’s oil wealth through direct payments of part of the revenue (see the recent WSJ article). Such a program has the twin advantages of being potentially hugely popular and of reducing corruption, strengthening accountability and curbing waste. Here at CGD we call this idea “oil-to-cash.”
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.