Published on Let's Talk Development

Cash for peace? How sharing natural resource revenues can prevent conflicts

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Some countries are blessed with natural resources, others are cursed. It’s been said that all the blessed ones are alike, they put the resources to good use, improving the people’s welfare in a sustainable manner. And for the cursed? More often than not, they struggle with political violence, especially when ethnic or religious fragmentation and weak institutions are a concern. Not surprisingly, it was Venezuela’s former Development Minister and OPEC Founder Perez Alfonso who christened oil the “Devil’s excrement.” 

If natural resources could be the source of such evil, are there ways of “exorcising” them? Perhaps policymakers could try to prevent or resolve resource-related conflicts by sharing natural resource wealth with opposition groups or directly with the people. Would such a counter spell work?

A brief look at the evidence suggests that the answer to this question is a Delphic “yes, no, or maybe.” Yes, because fiscal decentralization was instrumental to the 2005 peace agreement between the Indonesian Government and the Aceh Freedom Movement. No, because in Colombia, the 1991 fiscal reform, which transferred more resources to local governments, made it easier for left-wing guerrilla groups and the paramilitary forces to appropriate revenues and finance armed operations. Maybe, because the sharing of oil revenues between Baghdad and the Kurdistan Regional Government may have helped to preserve the territorial integrity of Iraq until now; nevertheless, by enabling the Kurds to strengthen the Peshmerga fighters, it may end up supporting their bid for independence in the future.

In a recent study, we try to explain the reasons behind this mixed evidence.

First, the devolution of natural resource wealth to potential opposition groups helps to prevent political violence but—and this is a big but—only if the groups in power are willing to devolve a substantial share of the resources. Small transfers are more likely to trigger a conflict than to prevent it.

The reason is simple. Transfers affect the likelihood of conflict through two opposite channels. On the one hand, by leaving behind less resources to fight for, they reduce the incentives to take up arms (rent dissipation channel). On the other, by increasing the resources available to finance mobilization, they increase the capacity to fight (opportunity cost channel). Whereas the first effect makes conflict less likely, the second makes it more likely. When transfers are large, the former effect dominates; clearly, if all resources are transferred, nothing remains to be fought over. However, this is not true for small transfers; by leaving a substantial share of the natural resource rents up for grabs, such transfers may only end up removing those financial constraints that prevented the very insurgence of a civil conflict.

Second, gradualism is not desirable in the implementation of conflict-preventing transfers.

If the effects of small and large transfer programs are different, then the conventional public reform strategy of starting with small projects and, if they are successful, to scale them up over time would not work. This is unfortunate; often the best way of promoting political consensus for potentially controversial programs is to build them up gradually and, along the way, buy-in those who were skeptical.

Third, transferring the money to the people directly is more effective in preventing conflicts than transferring money to subnational governments. This is especially true when fiscal institutions are weak.

Indeed, an important question is whether the way in which oil wealth is transferred matters or not. In this respect, our view is that transferring the money directly to people, the Alaska way, as recently suggested by World Bank economists Shanta Devarajan and Marcelo Giugale, is more effective in preventing conflicts than transferring it to subnational governments. However, this is not necessarily because handing out resource rents enhances citizens’ scrutiny and hence strengthens fiscal institutions, per Shanta and Marcelo’s argument, but because the opportunity cost channel is weaker under direct transfers.

Direct transfers make it more difficult for secessionist subnational governments (or, more generally, opposition groups) to appropriate the resources. Thus, what makes direct transfers more appealing, at least from a conflict-prevention perspective, is the fact that raising taxes to finance civil conflict is difficult; the more difficult it is, the more desirable are direct transfers vis-à-vis fiscal transfers.  However, we should note that where local taxation is inefficient, public goods and services are desperately needed, and fiscal transfers fare much better in promoting these. Thus, policymakers face a difficult trade off.

To be sure, this is a complex problem. Many factors determine whether transfers can prevent a civil war and whether the incumbent finds it in its self-interest to prevent political violence in such a way. However, one thing is for sure: There should be better mechanisms than political violence to allocate resources. And peace may still be for sale…

This blog was originally posted on Future Development.

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