Building Markets

Back to all blogs

Cash for Oil: Are Cash Transfers a cure for the Resource Curse

In Oil to Cash:  Fighting the Resource Curse through Cash Transfers, Todd Moss of the Center for Global Development, suggests cash transfers as a tool to curb many of the deleterious effects of the “resource curse.” In Moss’ own words, this scheme represents “a new model for natural resource management in resource-rich, poorly-governed states: give the revenues to the citizens in a regular, universal, and unconditional cash transfer.” Among nations with relatively weak institutional structures, this cash transfer scheme –already being implemented in places like Bolivia, and Mongolia –allows resource revenues to be transferred directly to citizens in the form of an income check instead of being lost to corrupt, kleptocratic, rent-seeking behavior perpetuated by the state (read symptoms of the resource curse), often leading to economic stagnation and even violent conflict.

Moss claims that addressing the “resource curse” has gained new significance in recent time due to historically high commodity prices, coupled with technological advancements, which is driving up the demand for oil exploration in many nations also plagued by weak institutional structures, including Sierra Leone, Cambodia, Papua New Guinea and Liberia (see the copy of his Table 1 above). In his article, Moss outlines four specific advantages of this cash transfer system:

1.      Increase tax incentives:  Cash to citizens from oil revenues would create both the means and incentives for the government to tax its citizens in order to offset state expenditures instead of relying on resource rents. This would not only limit governments’ dependence on, and accountability to the small group of elites who control the resources, it would also create a functioning tax system, strengthening the social contract between the people and the government.

2.      Constituency for greater accountability: The provision of a cash transfer would increase citizens’ incentives to more closely monitor the management of income generating resources, decreasing waste and incidence of corruption by the government and increasing demands for more sustainable, careful management of said resource.

3.      Increase in spending equity:  Moss argues that current government spending patterns in many poor countries favors certain regional and affluent sectors of the population. A universal cash transfer, to all citizens rich and poor, would more equitably benefit the poor and otherwise marginalized sectors of the population.

4.      Direct benefit to the poor:  Cash transfers would provide an immediate and desperately needed cash inflow to the poorest households, allowing them to increase their investment in areas like nutrition, health and education and thus contribute immediately to increased human development in these countries.

In addition to cash transfers, Moss outlines two other prominent government strategies for allocating resource revenues, including transferring the revenues directly into government-run public expenditure accounts (spend it now) and placing the revenues in a savings fund (save it for future generations). The chief problem with these strategies, as Moss contends, is that they require the one component that many poor and developing countries lack: experienced and well developed institutional structures in order to prevent corruption and waste (or “leakage” as Moss puts it). Moss cites one study of Ghana as an example of such waste, in which 50% of public funds for education and 80% of public funds for health were “lost” due to leakage.

On the surface, Moss’ strategy makes sense:  take the revenues out of the vast government bureaucracy, avoid potential waste and corruption, and place it directly in the hands of the people where it can help pull many out of crippling poverty and directly stimulate the economy. And while Moss’ scheme potentially represents a step forward in addressing the resource curse, there are real challenges to this strategy that deserve greater attention.

One challenge comes with the implementation of a cash transfer scheme. Resource rents represent an enormous source of potential revenue and power for whomever is in government, and it is highly unlikely that politicians would forego this treasure chest, as evidenced by so many past cases of the “resource curse.” Moss, citing Alexandra Gillies piece entitled Giving Money Away? The politics of Direct Distribution in Resource Rich States, believes that the cash transfer system is possible if implemented before the resource extraction begins, when politicians are not yet addicted to this revenue mainline. This logic downplays the fact that politicians (both those in power and their loyal opposition) are very well aware of the potential benefits/power that will come with this type of resource extraction. Once a resource like oil is discovered, the proverbial cat is already out of the bag and no political calculus is made without consideration of this variable. A more successful proposal would be the implementation of a cash transfer system before resources are even discovered, but this seems unrealistic and highly unlikely. Further, what is to be done with all of the “poorly governed states,” currently suffering under  the rule of kleptocratic regimes who remain in power thanks to vast resource rents?

In addition, even in cases where cash transfer schemes have been implemented, the results are not as promising as expected. Take the case of Alaska. Since the early 80s Alaskan residents have received cash transfers (in the form of dividend payments) from the interest earned by Alaska’s Permanent Fund (a savings fund set up by revenues from the state’s oil industry). But, as Gillies points out, the Permanent Fund Dividend (PFD) program did not create the causal chain reaction of “direct distribution → taxation → accountability” hoped for by many. One reason for this is that Alaskan citizens received the dividend distribution from the oil revenues but opted out of taxation (Alaskans pay no state income tax). Without taxation the citizens of Alaska have less interest in government accountability so long as they get their check (strike one for Moss’ advantage #1 above). Moreover, it is questionable whether the PFD has fostered any increase in stewardship toward Alaska’s oil reserves (see Moss’ advantage #2 above), as evidenced by the popular political slogan, “Drill baby drill,” brandished in many recent state and national elections. Finally, again as Gillies points out, Alaskan’s are so dependent upon the cash transfer system that any effort to change the current legislation, even if intended to avert economic hardship and potential loss as was the case with the decreased oil prices of the 1980s, is seen as both impossible and certain political suicide.

This is not to argue that Moss’ plan is a wash. On the contrary, it has already witnessed some success in a few oil exporting nations. But, in order that it can achieve more universal success, even among countries already suffering from the resource curse, important challenges must be addressed, including the political feasibility of implementation and a closer look at proposed versus actual effects. Moving forward, Southern Sudan could provide an interesting look at how a truly new state mitigates these challenges and manages its resource extraction industry. In the end, even with challenges, cash transfers and the other hybrid schemes offer new hope and possibility that vast resource wealth will not be inescapably linked to corruption, waste and potential violence but instead help poorer countries realize greater economic equality and increased human development.

1 Comment

  1. […] This post was mentioned on Twitter by Honey swinton and, Finance-For-Life. Finance-For-Life said: Cash for Oil: Are Cash Transfers a cure for the Resource Curse … […]

Rss Feed Tweeter button Facebook button Youtube button