Todd Moss at CGD writes
Just as cash transfers are gaining recognition, there are also a bunch of countries facing the very real problem of what to do with newly-found oil wealth.Â Ghana began pumping oil last month, Cambodia and Uganda will start this year, and the likes of Liberia, Sierra Leone, and Papua New Guinea may be next.Â Given the problems so many countries have faced managing oil (Nigeria has earned some $400 billion from oil but its population has gotten poorer), so many of these new producers are fragile states, and the very limited ideas we have so far (sequester funds, promote transparency, cross your fingers) isnâ€™t it perhaps time to try something fresh?
Why not just give the money to the people?Â Why not ride the wave of cash transfers to break the resource curse?
Moss suggested something similar last year when Ghana discovered it had joined the oil club. He’s developed the idea a little further in a new working paper incorporating the growingÂ consensus over the efficacy of cash transfer progammes.
As I mentioned last year, the tricky bit is maintaining the social contract that exists between a government who depends on taxation and the citizens that demand services in exchange for a portion of their income. Handing point resources directly over to the population doesn’t immediately fix this problem unless the government can tax it back. Moss addresses this:
After giving cash to its citizens, the state would treat it like normal income and tax it accordinglyâ€”thus forcing the state to collect tax revenues and build tax administration, rather than simply bypassing the taxpayers by relying solely on rents. Although this initially sounds like an unnecessary step (why give something away that you are going to partly take back?), creating incentives for tax collection and administration is perhaps the most important potential benefit of this scheme (Devarajan, Le, and Raballand 2010).
Because the government must tax the oil revenue to recover some of it for public spending, the social contract is strengthened rather than broken by natural resource revenues. Governments will be forced to depend on the citizens for income, and consequently, citizens will have increased leverage and incentives to exert pressure on public policy.
There are still issues here (Ranil, in response, wrote an insightful post about tax systems). The biggest hurdle is the government’s willing to forgo all chances at rent-seeking, although this can be weighed against the obvious political benefits of handing out free cash. Countries with relative decent governance, like Ghana, may be able to clear these hurdles easily.
All of this leads to the same question I asked last year: if we think this would work with natural resources, why don’t we try this with aid?