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Transfer mineral revenues directly to citizens—and avoid the resource curse

Shanta Devarajan's picture

My colleague Marcelo Giugale and I have an Op-Ed in today’s Guardian online advocating the direct transfer of mineral revenues to citizens. 

Mineral revenues typically go from the extracting company to the government without passing through the hands of citizens.  As a result, citizens do not scrutinize the expenditure out of these revenues as much as they would if it were financed by tax revenues.  The net result is misallocation of public spending, slower growth and even slower poverty reduction in many of these mineral-rich countries, such as Cameroon or Nigeria. 

We propose that all or part of the revenues be transferred directly to citizens, so they can decide how it is spent.  If the government needs money for public goods, such as bridges, roads, clinics and schools, they can tax citizens.  Citizens might then scrutinize public spending more, since it is their taxpayer money. 

Furthermore, the technology to transfer money in this way is already here—debit cards with biometric information cost only a few dollars; the money can also be transferred by cell phone.

Pie in the sky or an idea worth pursuing—especially in the “new” oil producers such as Ghana, Uganda and South Sudan?  Let the debate begin…
 

Comments

Submitted by DEMBA on
Indeed such an ideal public good management scheme would require having mature civil society organizations able to hold accountable themselves first and make good use of dividends derived from such resources... Most developing countries CSOs are not yet equipped with the organizational structure required to handle the shift... Demba NDIAYE

Submitted by Tony Thompson on
I think this is a great way to go. But why stop at the national level? Imagine a carbon tax both levied and distributed globally which allocates a notional right to consume carbon to everyone on the planet, taxes excess consumption and redistributes to those who under-use their allocation? As Shanta mentions, the technology to distribute funds is already in place. It would redistribute funds to the poorest, not as charity, but as a rightful return on their "stock" in "Corporation Earth". It would combine poverty reduction with climate change mitigation - the two biggest challenges facing humanity today! Tony Thompson

Submitted by Fraser Dinnis on
This is highly compelling on a number of levels, but fraught with dangers. No doubt, politicians would still be able to make money by awarding the contract for the distribution of monies to a 'related' corporation, but that can probably be accepted. The bigger concern would be the opportunities that would open up to organised crime at the street level once people were given cash. Some of the problems in the micro-credit industry would be minor compared to the possibilities that distributing even a few dollars per head of population would offer to such low-lifes. However, I am unsure whether this is a good reason not to pursue the plan. Such criminal activity will always exist, but the democratic nature of this may be worth trying in countries such as Sierra Leone that are showing signs of recovery. That the World Bank would support it is fantastic, the question is whether other Govt and multilateral agencies will also stand behind it?

Submitted by OLUGBENGA ADESANYA on
Most countries in the sub-sahara Africa have no credible census figures. Otherwise, I subscribe to it.

Submitted by Anonymous on
It makes sense in some way, but it would really make more sense if they will educate the people first not just specifically for this but also in general.

Submitted by Maxwell on
I see this as an innovative idea which is aimed at reducing the malpractices and conflicts that erupt due to the mineral revenues. However, this approach is potentially suicidal to the citizens themselves as it begs the question of how much should the citizens get? Who should be eligible to get these monies-targeting challenge? Should we consider equity issues or anybody should benefit including the presidents and ministers? What about those directly linked to the sector, would they demand the same wages with this new approach? This suggestion is synonymous to the idea of government stopping the formulation of national budgets and just divides the monies to the number of citizens. It is a brilliant idea though but it requires further refining to ensure that we don't eventually tax ourselves so severely in the hypo-critic idea that "you are paid". All that is needed is a proper transparent and accountability system. Unfortunately, it is hard to set up such a system. Regards Maxwell

Submitted by Stephen on
Please correct me if I am wrong, but isn't there some precedent for this in a number of Gulf oil states which provide very generous allowances to their citizens and have therefore ended up with a relatively unproductive indigenous population, serviced by a larger migrant worker population? I guess you would have to look closer at local spending patterns to know whether the additional incomes would likely be invested or consumed. On the other hand, I have sometimes wondered why on some large infrastructure projects we spend substantial amounts on consultations and technical studies to determine how resettled people can continue to eek out a meager living on some marginal land they are being relocated to. Much of the money ends up going to consultants, and the people themselves are left with a few new tools and an idealized, imported livelihoods model that may or may not work out for them. Wouldn't a more efficient option at times be to just provide them with a share of the revenues of the project?

Submitted by Philipp Krause on
This is a very interesting, out of the box idea. The argument that this will benefit a lot of people seems sound, and the fact that such a stop-gap measure isn't exactly following budgeting 101 might well be justified by the benefits. There is also the benefit that this could help the acceptance of otherwise controversial, peace-threatening resource-extraction activities and the companies involved (although some might call it bribery). Having said that, I think the final part of the proposal misunderstands the nature of the resource curse. Citizens don't literally consent to taxes in exchange for public goods, just as Russeau wasn't thinking of the social contract as a piece of paper. At any given point in time, the provision of public goods makes (violent) resistance to taxes less likely. At the same time, governments historically didn't tax more because they felt that more public goods were in order, but because they were deeply, desperately short of money in order to sustain themselves as going concerns. If 10% of resource revenues are distributed, then 90% is still plenty to sustain a limited access order type elite and give it every incentive not to provide more public goods, and certainly not do anything so foolish as to tax the same citizens they just bought off. The nasty effects of the resource curse might be ameliorated by distributing these funds, and $100 plus improved stability is not trivial. But for the governance situation, what matters isn't what the 10% do to the population, it's what the 90% do to the state and the elites it sustains.

Submitted by Apurva Sanghi on
The authors pose some very interesting ideas, no doubt. Two points: 1) One can't help draw parallels with similar "direct dividends" arguments that were made in favor of voucher privatisation of many state owned enterprises in Central Asian countries in particular. But look where that experiment of the 1990s ended up. What are the parallels and differences? 2) More, of a clarification...are the risks of environmental damage from natural resource extraction really growing as asserted in the article? One would have thought that ceteris paribus, such risks would have declined as technologies have improved over time...

I've written a lengthy response on my blog - http://sanchitkumarblog.wordpress.com/2011/07/02/transferring-commodity-revenues-from-african-governments-to-the-african-people/ - which you can read there. Here's a summary of what I think: - Your idea will help reduce poverty. No question, more money for people to spend will help. - Suggesting that giving some share of revenue to citizens will help improve scrutiny of public finances and help drive out corruption is a strong claim, one that needs more support from studies, statistics or policy impact assessments. - Ignoring the environmental and economic concerns is not such a great move, because I think there are limitations on how effective governments can be in managing those concerns. I do think it's a creative idea, and I'm glad the World Bank is recognizing the role that technology can play in closing the gap between people and their governments, even on matters such as public spending and fiscal responsibility. Realistically though, your policy needs to be coupled with other plans to help deal with the environment, corruption etc.

Submitted by Anonymous on
How has this worked in Alaska where oil revenue is in part shared directly with citizens. There is a difference if citizens are paid directly (receive a dividend which is open to multiple uses) versus if they act as a board directing how the revenue is spent (via a vote) on different publicly funded projects. I'd vote for the latter option.

Submitted by Rick Rowden on
While this idea may seem appealing on the face of it, it is hardly a development strategy. That it may also help in stemming corruption seems appealing, too. But it side-steps the broader problem of a lack of development. Giving poor people a small dividend may ameliorate some suffering but people will still be poor and be stuck in underdeveloped economies. A far better use of the proceeds from mineral extraction would be to support domestic manufacturing firms with greater research and development and help build advanced services industries to reduce countries’ over-reliance on extractive industries. Countries which continue to rely on primary agriculture and mining will not get far in terms of economic development unless they also take real steps to build manufacturing and services sectors with increased value-added over time. To facilitate and support this shift towards more meaningful economic development, history shows countries will need to be able to use various industrial policies of the kinds Shanta’s organization has long opposed and outlawed for its borrowers. Like the silver-bullet of microcredit, natural resource dividends are very nice but have nothing to do with serious economic development strategies.

Submitted by ishac on
This recipe had been floated before but has never been popular in Africa, or for that matter anywhere else than Alaska. Perhaps Alaskans rather live in Florida if they can, but most other people need to develop their country. In Africa, a key constraint to higher incomes remains the lack of infrastructure. Catching up requires massive investments, and governments will not only want to use fiscal revenue from natural resources for infrastructure investments, but they want also want to borrow against future flows to accelerate those investments. Of course, there are all sorts of constraints to the good utilization of these funds, and in countries where these cannot be solved, your proposed transfer scheme may make sense. But these should be the rare cases where one has given up on the possibility of the emergence of a good state. Also, the argument that these transfers can be taxed back is unrealistic – taxation is one of the most inefficient functions in poor states. Distributing some of the revenues can still be desirable, but should be evaluated on its own merit. For example, cash distribution for those that are not getting their fair share of development efforts, such as lagging regions or groups, until such efforts get to them can be a realistic way of keeping the country together while sequencing investments to more profitable ventures, initially.

Ishac: Thanks for your comment. Of course these countries need infrastructure, but the question is why oil-rich countries like Nigeria and Cameroon have not been able to use the oil money to build infrastructure. The reason is that these funds have been diverted to other uses, mainly consumption, and mainly related to political patronage. For a "good state" to "emerge", there must be a mechanism where the preferences of the citizens (which would be for infrastructure) get translated into actual outcomes. That is what the increased scrutiny of public spending brought on by direct distribution of revenues can foster. Also, taxation is inefficient, but it's hardly "one of the most inefficient functions in poor states" when you consider how public monies are spent (think of the white elephants across the country). Shanta

Submitted by Rogier van den Brink on
Distribute cash to every citizen, unconditionally and untargeted, because they know best how to use it? There are very few countries which do this. As far as I know, today, only Alaska and Mongolia do it. Alaska has been doing this since 1982. Mongolia started recently, because of popular pressure to deliver on an escalation of political promises between the two main political parties made during the last elections. We do not know the impact of these monthly cash handouts on household behavior in Mongolia, since it has been too recent. We do think, however, that it is stoking inflation. And we know that even during the current mining boom it has already proven difficult to finance: the government just missed the last two payments. We also know that the two major parties have promised not to promise cash handouts ahead of the next elections, and to discontinue the program thereafter. They now both agree that it was a bad idea, or so they say. What do we know about Alaska? There, the wealth distribution takes the form of an annual payment to each resident, financed from the dividends of the Permanent Fund. We know that the popular support for it is huge. So much so, that it is a political taboo to even suggest tampering with it. So the first lesson from Alaska is that once such a scheme is in place, it will be very difficult to reverse. It gets worse: the constituency around paying out the dividends to the residents is so strong that the original objective of the Permanent Fund—-to sustain public services once the oil revenues disappear—-has now been completely subverted to providing permanent dividends to the residents. When the oil revenues run out, and they are declining as we speak, there will be no alternative source to fund public services, other than tax increases. And we know how Sarah feels about that... But what has been the economic and social impact? One study tried to link the cash distribution to improved health outcomes. Surely, higher incomes should lead to better health outcomes? Surprisingly, in the short run, Alaska’s cash handouts actually increase mortality! Why is this? Because lump sum payments like this produce the “full wallet” syndrome, causing people to suddenly increase consumption. And not just of alcohol and drugs-—that is actually the lesser of the problems. But consumption in general, which leads, for instance, to more heart attacks, strokes traffic accidents. So mortality is pro-cyclical. “During the week that direct deposits of Permanent Funds dividends are made, mortality among urban Alaskans increase by 13 percent” (Evans and Moore, 2010, p. 2). In other words, there is no case to be made for proposing cash distributions from a health perspective. In fact, the evidence supports a strong case against the cash handouts. They can kill you. There are other arguments against universal cash hand-outs. These include disincentives to work and increased migration from other states and countries leading to lower wages. Unfortunately, and maybe tellingly, the social and economic impacts of the Alaskan dividend distribution have not been studied. One explanation given is that Alaskans feel that the use of the dividends is a private matter, not to be researched. However, researchers do tend to believe that the payouts have helped to reduce poverty among Native Americans and improve the income distribution in general. But those outcomes could of course also have been achieved, and more efficiently, through targeted transfers, so they hardly make a case in favor of universal hand outs. What is the most compelling case against? That the Alaska pay outs have undermined the basis for collective action and citizens’ interest in the public good. Here is Scott Goldsmith, Professor of Economics at the University of Alaska, who has studied the scheme for a long time. He concludes: “After 29 years the dividend has become an integral part of the Alaska experience. Many, if not most, Alaskans view it as an entitlement—-a distribution from their share of the natural resource wealth of the state. An entire generation of Alaskans has been raised having received a dividend annually since birth without necessarily understanding the purpose for which it was created. This generation has also never experienced paying for the state services they have received because petroleum revenues have covered all costs. This has fostered a distorted sense that the role of the state is to provide public services at no cost and also to hand out cash to all citizens. Some would compare this generation of Alaskans to trust fund babies. Furthermore, because there are no personal taxes and receipt of the dividend carries no public responsibilities, the two together undermine the sense of community that comes from the need to collectively choose and fund public services. They also foster a disconnection between government and residents, leading to a deterioration of the quality of government.” (Goldsmith, 2010, p. 19) The first principle of our policy advice should be “do no harm”. Based on what we know about the Alaskan experience, let’s not include this idea in our menu of policy options, Marcelo and Shanta. references: William Evans (Department of Economics of the University of Notre Dame) and Timothy Moore (Department of Economics of the University of Maryland, 2010. "The Short-Term Mortality Consequences of Income Receipt". Scott Goldsmith, 2010. "The Alaska Permanent Fund Dividend: A Case Study in Implementation of a Basic Income Guarantee." Anchorage, Alaska: Institute of Social and Economic Research, University of Alaska.

Submitted by Anonymous on
Here's the reason it should work: alot of money from the TNC-government transactions is lost to the actual people overseeing the deals, ie public servants. This does the authoritarian no-good, because this is money he could use to bribe his patrons who keep him in power. Instead, it goes to people who could conceivably challenge government power. This is even plausibly a part of the connection between abundant natural resources and civil war. So answer: reducing corruption actually results in the government getting more money (corruption that isn't theirs, that is). But what to DO with this new money? Well as always, it will be distributed on the basis of what "buys" the government more power. Military officers, tribe members, ministers, unionists, ect. BUT, the government has a self-interested reason to "bribe" the common people (this is known as public spending). reason one: fear of civil uprising, civil war and terrorist attacks reason two: diversifying the economy off mineral trade will, in some sectors, require alot of labor input. So winning the people over will help that go smoother. The reason this is the Machiavellian solution is because it harks back to one of his principles: is it better to be feared or loved? well if at all possible, always be both!

Submitted by Bolormaa Amgaabazar on
Unconditional and untargeted transfer of mineral revenues to every citizen is a bad idea. I am saying this based on my experience from Mongolia and the 2 Papuan provinces in Indonesia. By simply being a citizen on Mongolia, although I lived abroad for the last 20 years, I was told that I was entitled to a share of mineral revenues. With my mom's urging, I registered myself at the embassy and received the first transfer of $70. I felt uneasy, as I knew that while for me it was not much money, for somebody else the same amount might be a life-saver. I donated this money to charity. When the embassy announced a registration for the second transfer of a larger sum of $500, I did not register. I am not rich, my husband could not find job, so I am a breadwinner for my family. Also, every month I send $500 to my mom in Mongolia, who is retired and whose pension is not enough to sustain her. I could have used $500, but again, I thought that for somebody else this money would mean much more. I talked to my friends and many of them felt the same. Shanta and Marcelo wrote that "Optimally, one would means-test the dividend transfers, ie one would give more to those who are poorer. But that could be an insurmountable political and practical road-block". Not insurmountable. In many countries around the world, including in many African countries, self-targeting by communities is used to provide assistance to the poorest without making politicians look bad. Other targeting mechanisms can be used successfully to avoid or overcome political and logistics hurdles. My experience in Indonesian Papua was that of an observer. The riches of the Papuan soil benefited Jakarta for many years, while Papua remained the least developed and one of the poorest provinces of Indonesia. At the threat of breaking away from Indonesia, Papua gained an autonomy status and with that, a hefty share of mineral revenues. The Papuan Governor distributed part of so called “autonomy fund” equally to every “native Papuan”. Local Javanese, Chinese, Bugis, and Malucans who lived there for several generations, were excluded. “Non-natives” received this discrimination with understanding. These “non-natives” are somewhat well-off, as they came to Papua to make a living and many have succeeded. So, I speculate, that these “non-natives” felt the same as me, thinking that the “native Papuans” need these relatively small amounts of money more than they do. When Papuans received cash, men collected money from their families and many of them got drunk. It was not something unexpected though, as I witnessed in Jayapura, the capital of the old Papua province (it was split into 2 later) many drunk civil servants in uniforms on the day they receive their paycheck. While both experiences above left me with lots of questions about the best value for money, dependency, and sustainability, my visits to self-help poor women groups in Southern India accessing Government’s micro-finance schemes, widows groups in Indonesia helped by donors, and conditional cash transfers by the Mexican government were much more compelling. One last thought I had while reading some comments was that while equal distribution of wealth might appeal to our sense of justice and equality, we know of enough examples from history that these utopian ideals do not work.

Submitted by Eduardo on
It will be very interesting if you can pinpoint to some impact evaluation studies that give ue some idea of the benefit of this proposal.

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