Turning the oil frown upside down

It would be nice if we could avoid this

It would be nice if we could avoid this

Via Owen Abroad, I discovered this interesting “wonkcast,” hosted by Lawrence MacDonald, in which he interviews CGD fellow Todd Moss on a new working paper on protecting Ghana from the natural resource curse, given that they’ve recently found oil.

Moss’s solution? Look to Alaska: rather than bending over backwards to design a transparent system and institutions for the government to handle the oil revenue, distribute the profits equitably among the Ghanaian population as directly as possible. The argument is that as all Ghanaians will be deeply concerned with this new income source, the natural process of citizen oversight will kick in.

Initially, I was a bit sceptical (surprise!). Several studies have shown that just giving cash to the poor is quite effective (many, including the critical folks at Aid Watch, consider it the benchmark for judging aid interventions). But while getting cash directly to the people is clearly welfare enhancing, and leads to all sorts of great outcomes at the micro level, those benefits haven’t been shown to extend past the micro-level. Wealthier people are not necessarily any more likely to get past the collective action problems that obstruct the provision of the sorts of public goods conducive to development. Also, bypassing government means that government system lose out on “learning-by-doing.” It also does little to enhance the more basic accountability link between governments and people.

However, about half-way through the talk, Moss and MacDonald start talking about these things, and conclude that getting the money to the people opens up a more tantalising opportunity: let the government tax the people even more (either directly, or through a VAT). Now the governments have to work hard to earn their revenue from the people, which is what governments should be doing. When the government takes a hunk out of our salary (or, in this case, our oil-allotment), we’re more likely to care about how that money is spent.

This sort of idea combines the best of both worlds: it allows government free access to (a portion) of a large windfall of resources, which in the short term is fully fungible (a good thing), but in the long term subject to the accountability link that is fostered by the taxation of the population!

Large-scale, equitable government policies may have another benefit: by distributing money more or less equally, a government can signal that it is moving beyond ethnic or regional favouritism. Malawi, a country with a history of ‘super-ethnic’ regional cleavages, recently had an election where (for the first time) voters largely ignored the regional dimension. I attribute this to five years of the (mostly) equitable government policy of fertiliser subsidy distribution. Similar policies using oil revenue might help other governments send similar signals (although Ghana seems to have already avoided the perils of ethnic politics).

Another question remains: why don’t we consider this process for aid? I’m a big proponent of general budget support, but have linger qualms about how completely free windfalls of aid will undermine the tax-driven accountability link I’ve talked about. We want governments chasing local money, not foreign money. Maybe we should give the foreign money to the people on the ground first, and then let governments tax them at a reasonable rate, while determining their own development policies?

4 thoughts on “Turning the oil frown upside down

  1. Ranil Dissanayake

    October 22, 2009 at 9:33am

    Cracking idea. As I always say: the purpose of aid is to eventually give way to a fully taxation and borrowing-financed system.

    The only quibbles is: what is the taxation and tax collection system like now? I think the latter in particular is probably no so great, given the size of the unenumerated (‘informal’) sector in the economy.

  2. Andy

    October 22, 2009 at 11:09am

    “Maybe we should give the foreign money to the people on the ground first, and then let governments tax them at a reasonable rate, while determining their own development policies?”

    Amen, great idea.

    Ranil – I guess that for the idea to work a revenue distribution system would need to be constructed. Could an improved tax collection system be part of this?

  3. Ranil Dissanayake

    October 22, 2009 at 11:50am

    Andy – The revenue distribution system and tax system will depend on different levers.

    A revenue distribution system only really depends on there being some form of administration that reaches all people, like a local authority tier to whom all have access. Then self-interest does the rest, as people will self-report to collect the money. (you could even kill two birds with one stone and give all registered people a bank account at a state bank and pay the money into it).

    To collect the taxes, coverage and self-interest aren’t enough. You need some form of coercion to ensure that the tax revenue is collected. The Government needs to be able to punish non-payers, which has two requirements: state power, and information.

    With so much work defined as ‘infromal’ and not part of a legal, on-the-record economy (see de Soto for some estimates of the enormous size of this sector in most developing countries), the information required is not normally held.

    For this specific tax you could easily do it by just reducing the amount of revenue distributed to the population, but surely it’s better to distribute it all, and reap the full economic fruits of the consumption and investment it bears (through multiplier effects) and taxing a proportion of all income and purchases.

    Improved tax collection requires a lot of thought and a lot more effort than the revenue distribution. Alaska already has a good tax collection system. Ghana might not (I don’t know) and needs to get it in place.

    This isn’t an argument against the idea, by the way. Just a stumbling block that can and should be rectified anyway.

  4. Taxing Times « Aid Thoughts

    October 23, 2009 at 5:19pm

    […] love a pithy turn of phrase but Franklin clearly wasn’t talking about Africa. Matt’s recent post about using revenue distribution and taxation to avoid the natural resource curse in Ghana turned […]

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