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Oil to Cash: Fighting the Resource Curse through Cash Transfers
This work has now concluded.
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.
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.
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.
Nigeria, perhaps the world’s poster child for the oil curse, is the latest country to deploy a sovereign wealth fund as a tool to try to better manage national income. At the same time, Nigeria is struggling with depleted savings and growing fiscal concerns, even in a time of high oil prices. Will the sovereign wealth fund help Nigeria get back on track? What are the chances it won’t be raided by politicians with short-time horizons, as in the past? Could cash transfers help? Two new background papers from CGD’s Oil2Cash Initiative look at these questions from different perspectives.
The Arab Spring has grabbed the world’s attention, yet Iraq—the Arab country that not long ago was the very epicenter of American foreign policy—has all but fallen off the front pages. While Iraq’s security has improved greatly, the country is still struggling to consolidate a functional government in the face of strong sectarian tensions. Not least of these big challenges is reaching agreement on oil. Eight years after the fall of Saddam, Iraq has yet to pass a hydrocarbons law, let alone come up with a coherent spending plan for its oil wealth.
Related Working Paper and Podcast
Iraq’s Last Window: Diffusing the Risks of a Petro-State - Working Paper 266
Oil 2 Cash in Iraq: Johnny West (Podcast)
So how could Iraq manage its oil? One idea (and readers of this blog will be shocked to hear) is a universal dividend paid to all Iraqis. Colleagues Nancy Birdsall and Arvind Subramanian proposed just this idea back in 2004 as a way to try to create accountability. The idea of an Alaska-style dividend for Iraq was starting to catch on, for example, this NY Times oped by Steven Clemons, proposals from Senators Lisa Murkowski (R-AK) and Mary Landrieu (D-LA), and even former Alaskan governor and dividend godfather Jay Hammond tried to export his grand experiment to Baghdad. Given the political and security climate of the time, the idea was thought too radical.
The Washington Post reported yesterday that India will, starting Jan 1st in 51 districts, pay cash directly into the accounts of poor families as it begins unraveling its convoluted web of food, fuel and other subsidies. India’s been toying with this idea for a while, so it’s good news that it’ll finally kick-off in the New Year. Many others will be watching.
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.
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.