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A Constitutional Moment: Oil2Cash in the Arab World
February 24, 2011
It is thrilling to watch the overthrow of despots and dynasties as people power erupts across the Arab world. But the headiness of the moment can only lead to durable political change and meaningful economic progress if the new governments that emerge find a better way to handle oil revenue and other easy money (rents, in econo-speak) that have corrupted the outgoing regimes.
How can this be done? In a series of CGD papers and articles, Nancy Birdsall and I, Todd Moss, and Alan Gelb have argued that one way of preventing the oil curse is to give some or most of the oil revenues directly to the people through regular cash transfers, then tax back part of it to fund government operations. We call this proposal Fighting the Resource Curse Through Cash Transfers or, more simply, “Oil2Cash.”
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Why give money away and then tax it back? There can be no meaningful representation without taxation. When governments have access to easy money, they have no need to tax and hence no incentive to foster conditions needed for growth and wealth creation. Worse, the surfeit of money gives governments the means to suppress dissent and buy-off political opposition. This is precisely what we have seen throughout the Arab world: many oil-rich countries run welfare states with this aim in mind.
With oil money in the hands of the people, the relationship between the government and the governed would change for the better. Governments in the Arab world’s oil-rich states would need to tax their citizens, just like the governments in non-oil countries. As we are seeing now in the United States, citizens who pay taxes take a keen interest in how their money is spent. They hold their government to account.
Of course, it’s hard to imagine a regime in power voluntarily forsaking access to huge sums of easy money. One window of opportunity is when new constitutions are being written, when citizens are re-writing the rules—and when the identity of the particular group that will emerge victorious after the political transition is still uncertain. We may be witnessing just such a Constitutional Moment across the Arab world. The time is thus ripe for the people and their well-wishers to work together to design constitutional arrangements that will prevent the perpetuation of the oil curse by distributing oil wealth directly to citizens.
A lot of details must be sorted out, as the paper by Todd Moss makes clear. But the first step is for those winning their freedom in the oil-rich states of the Middle East to recognize that unless oil revenues and other rents are shared directly with the citizens, the region will sadly remain a case of plus ca change plus c’est la meme chose. The reasoning behind this is a little complex but the slogan needn’t be. I’m hoping we will soon be hearing a new rallying cry from the streets of the Arab world: “Power to the people—and oil revenues, too!”
(For more on the problem of rents in the Middle East, see my recent pieces in the Financial Times, available in un-gated versions at the Peterson Institute, here and here)
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10 Responses to “A Constitutional Moment: Oil2Cash in the Arab World”
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February 25th, 2011 at 8:18 am
Counter intuitive but not certainly not dumb. I will look at the papers, but for me the key thing is the principle mentioned, not the way you do it, namely:
“oil revenues and other rents are shared directly with the citizens”.
On the other hand, why not tax at source and distribute the net income to citizens, that would certainly make tax adminstration easier in such countries.
Basically the idea echoes the Muslim Charitable Waqf foundation, whereby the (state) would be custodian of a (public) good, but doesnt own them, just manages them and related income streams in perpetuity (on behalf of God who is the only owner), as efficiently as possible and distributes net income to beneficiaries. In these countries it would be wholly in compliance with Islamic law to constitutionally declare all mineral resources of a country as waqf and the state as the custodian (mutawalli). Then the exact revenue sharing scheme would be a matter of law.
February 25th, 2011 at 12:22 pm
I really have a problem with the “rent” concept, and also with the analysis raised in the article. I think the article’s analytical framework follows a typical Western approach and is completely unaware of or neglect the history of a country like Egypt and its socio-economic relations and development.
Egypt is the oldest living nation-state on earth, which started at least 15-20 thousands years ago; I don’t know how many year a nation/society/economy needs to reach the point of wealth/knowledge/organizational accumulation to build the pyramid (which was build about 5000 years ago!).
Any way, Did Egypt use “rent” through out the centuries to build and maintain its civilization. was that rent or societal wealth? And in this case was it a curse during some times and a blessing during others?
Till very recently (the last 200 years) Egypt never knew private ownership of land (it was on right-of-use basis) and also never knew slavery (as a factor of production). The harvest which comes after flood of the Nile is usually distributed in three parts (not necessarily equal): one to the pharaoh, one to the temple (bureaucrats-technocrats-scientists) and the third part is consumed directly by the farmers. In return the pharaoh and temple defend the country, organize the irrigation and use of water, and develop science and technology for the development and sustainability of the nation-state.
Do we consider the two parts (not consumed directly by farmers) but then reused by the whole society as rent to the Pharaoh and temple? and then when this societal wealth/rent is used for national projects such as building the pyramid or improve the irrigation system … etc. was it a curse or a blessing.
Now I have some questions regarding what identified by Arvind as rent:
do we consider the return on the temples, pyramid … that was built a little while ago by societal investment as rent? or we consider it as societal wealth that needs to be reinvested for the good of the society and its future?
similarly do we consider the return of the investment which the whole Egyptian society made to dig the Suez canal as return? by the way 20,000 people died while digging the canal and then Egypt was occupied by Britain because the country was not able to pay to “GB” the debt accumulated due to digging the Canal, and the manipulation of France and “GB” in the price of the share of the Suez canal company?
Do we consider the societal return on human capital (i.e. worker remittances) through investment in education and health as rent? Does it have curse?
If Egypt develops a national project for solar energy, would the return form the sun energy (with some value added by the Egyptians) be considered a rent with a curse or blessing?
The only thing I consider as a cures is the handout/loans/grants given by US (or IMF and World Bank … etc) to the Ruling Elite as a bribe to lure them, and prevent them, from using the societal wealth in an efficient way to have a good and sustainable return to the whole society.
The real source of the curse of Egypt’s (or any other country/society) societal wealth is when the Rich colonial west try to take over this wealth by many different means.
The abundantly clear example of this is the British occupation of Egypt right after the digging of the Suez Canal. And the recent occupation of Iraq by the US. The real curse comes after the occupation and then the systemic acquisition by a foreign power of the national wealth, and the systematic destruction and distortion of the physical economy (public and private sectors) and destruction of the people will to use its own wealth to reinvest it for the future good of the people.
Another example of the societal wealth being a curse is the IMF/World Bank restructuring (privatization) programs. These programmes are meant to destroy (and not to correct the mistakes of) the accumulation of the societal wealth in successful public sector project. (by the way the World Bank rejected financing the Aswan High Dam back in the late 1950).
February 25th, 2011 at 6:06 pm
A friendly fellow economist sent us a note about Arvind’s blog post, as follows:
I know CGD has been pushing this line for some time, but I am not persuaded. In effect Alaska and Louisiana have this system and they are a mess. What makes one think that the “people” will be any wiser or fundamentally less corrupt in their spending-investment decisions? You cannot get rid of the resource curse by going on the a spending spree, and corruption – rent seeking — is an insufficient excuse for it.
Here is my response:
Dear friendly fellow economist:
It is too bad we don’t have a better test of the idea. We certainly cannot guarantee it will “work”. Considering the risks and benefits we think it should be tried.
On Alaska and Louisiana, let me invoke the counterfactual: We don’t know how much worse would be accountability of its government to its citizens in Alaska without the distribution (of the interest income from the oil fund). It may be that whatever the problems it is primarily a design issue: Perhaps Alaska needs an incentive to match the easy money with tax revenue, and should limit distribution annually to only xx percent of its tax revenues, and send the rest to the U.S. Treasury. The question in Egypt and Bahrain is whether some direct distribution would reduce rather than increase the risks to governance that the resource curse represents. And whether, independent of long-term effects on overall governance and accountability, whether sending a bit more money directly to households, given in Egypt that a rough estimate of median daily income per capita is less than $3, wouldn’t be a good idea anyway.
We think it is worth asking how Egypt and with any luck Libya can avoid becoming the Venezuela or the Nigeria of the Middle East. Alaska and Louisiana don’t look all that bad for that matter.
February 27th, 2011 at 3:03 am
Further to my comment below, I want to say that Arvind’s proposal “that one way of preventing the oil curse is to give some or most of the oil revenues directly to the people through regular cash transfers, then tax back part of it to fund government operations” is a very clear and straight forward “Laisses affaire – liberal” approach to use national rent/wealth.
This is one of the things I wanted to say below, I thought it is better to spell it out clearly.
March 1st, 2011 at 2:53 pm
As an oil-cursed citizen well aware that it is impossible to expect democracy to function whenever the government receives in net resource revenues more than 5% of GDP, or 15% of its exports, or 25% of all tax revenues received from the citizens I cannot but wholeheartedly support this proposal. As an absolute minimum, governments should at least hand over to each one of the citizens a yearly receipt on how much it has received in oil revenues on behalf of each one of them. Last time I wrote about it was in Venezuela in April 2010, but as you can understand there is not a lot of interest for a chavez or anyone else in power to adopt that idea. http://theoilcurse.blogspot.co.....ceipt.html
March 1st, 2011 at 11:08 pm
In total agreement with Arvind.
The “fellow economist” should think that corruption emerges when someone spends other people´s money, like bureaucrats using the common wealth for their own benefit. If natural resources belong to all, no matter what people do with the money received from rents, it will not be corruption. Is theirs! It may be more or less wiser, but it will also be their responsibility to define what is or not better for them.
The Bonosol experience in Bolivia, a non conditional cash transfer, has proven that people is much wiser than bureaucrats when spending. And we already have more than 10 years experience in that.
I am sure that real change will come when we transfer all natural rents to all! And yes… let the State build its credibility to tax.
March 2nd, 2011 at 8:36 am
To the “fellow economist” this is not about economy this is about governance and citizenship… and living. There are no oil-cursed governments… in fact government’s petrocrats and their friends, the oiligarchs, they are all oil-blessed. Those cursed are the citizens, and you might have to live the curse to really understand the horrors of how the government is set up to “spend wisely” and the citizens to expect the results of that “wise spending”.
In 1974 I was named Manager of Diversification in the Venezuelan Investment Fund that was set up to “wisely manage” the oil-revenue tsunami of those days… and it took me just 2 weeks to find out that I had to run from there. When government oil revenues pass a certain threshold there is nothing to do, and in those cases to hear an EITI proposing their transparency placebos is as frustrating as can be. When oil revenues are extremely high, more transparency is like allowing the tortured the right to also watch when they pull his fingernails out.
By the way I often feel somewhat uncomfortable with the idea that organizations from oil-consuming countries are to help out on governance issues in oil extracting countries… for instance, when has EITI transparently referred to the fact that the taxman of any European country is receiving, by taxing gas (petrol) consumption, more income per barrel of oil than what the taxman of the country that gives up the barrel of oil forever receives?
March 2nd, 2011 at 3:11 pm
Re- Oil2Cash. The concept has some immediate appeal, in that at fulfills some basic elements of social and economic empowerment, which may lead to greater and more profound transformation at the levels of state governance, however, its more likely to parallel the involuntary biological response that is invoked upon meeting an attractive looking individual; short term pleasure with little prospect of real long term co-habitation.
There are profound problems with this concept, not the least being that wealth distribution of such a nature does not in itself create fundamental change; UAE? What about all natural resources? How to deal with production/revenues move higher and individuals wealth means that there is little to no reliance upon the state for services (such can be purchased individually) This proposed model is likely to create and undermine social cohesion by introducing a financial agent as the primary mechanism for reform when the solution resides in exactly the opposite forces
March 2nd, 2011 at 7:42 pm
@martin macmahon “There are profound problems with this concept, not the least being that wealth distribution of such a nature does not in itself create fundamental change”
Excuse me and is not giving the government directly those resources wealth distribution with wealth concentration of the worst kind? Have you not seen how Gadaffi has been empowered by it? Have you not seen what one trillion dollars and more of oil revenues over a decade in the hands of a chavez has NOT done? He distributes a big part of it by selling gas at 4 US$ cents per gallon, to those who have cars, instead of giving it in cash to the people.
One of the many things we citizen have to fight in order for this idea to gain traction are all those out to manage the resource revenues for us.
March 3rd, 2011 at 4:42 am
[...] gone. The Center for Global Development has dusted off an existing proposal for oil revenue to be distributed to the population in the form of direct cash transfers, á la Alaska. (H/T [...]