Directly Distributing Natural Resource Revenues

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Directly Distributing Natural Resource Revenues

• Arvind Subramanian
• February 26, 2004

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The Natural Resource Curse

• Our research shows that the curse, empirically
  identified by Sachs and Warner (1995)
• Is alive and well
• Applies to oil and minerals and not all resources
• Works by corroding domestic political and
  economic institutions and not because of its
  volatility or Dutch disease efffects
• Thus, both geography and institutions matter

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Nigeria Poverty
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Nigeria Income Distribution
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Oil Dependent Countries Political Freedom and
Income Rankings 1/
Income Quartiles 1/ Income is measured as per
capita GDP in purchasing power parity terms.
Political freedom based on Freedom House index.
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Development Challenge

• How to accelerate development of institutions
  that promote rule of law and property rights
  democracy independent judiciary free press and
  well-paid meritocratic bureaucracy
• This challenge is hard enough
• But how to do so under circumstances where oil
  revenues make the task immeasurably more
  difficult because of the curse

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Alternative Approaches

• Privatize (Russia)
• Create Oil Funds (Azerbaijan, East Timor,
  Venezuela, Colombia etc.)
• Nothing fundamentally changes
• Note that Norway and Kuwait are not examples of
  successful Funds because they are not
  exceptions to the rule of the curse. Nor is
  Botswana.

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Direct Distribution

• People and households gain some economic power at
  the expense of state and vested interests who
  control state. Akin to De Sotos approach.
• This has important consequences for who spends
  money and howeconomic benefits
• Political consequencesgreater accountability and
  development of democratic institutions

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Unpersuasive Objections

• People cannot be trusted with money. They will
  squander it and macroeconomic consequences will
  be detrimental
• But who is better at spending money people or a
  weak/corrupt state? Evidence
• Government needs money for essential public
  services. Direct distribution involves waste
  because it will involve costs of initial
  distribution and then costs of taxation to raise
  money
• The paradox of the supply-siders paradise.
  Historical evidence

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More Serious Objections

• PoliticalHow to overcome opposition from
  existing vested interests
• AdministrativeCosts of distributionShould not
  be overstated though
• Clearly need for some international intervention
  to address these, especially political hurdles
• But the nature of the intervention would be
  different from conventional aid/conditionality
• Need to rely on demonstration effect of success.
  Iraq?

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Design Issues

• Who should receive moneyhouseholds, women?
• How much revenues to distribute All or some
  fraction
• Who should implement?
• Checks or cash? Monthly, semi-annual etc.
• Will vary from country to country