How to Handle Iraq’s Oil
|June 27, 2004||Posted by Staff under The Progress Report|
Natural Resource Values Should Benefit Citizens, Not Corrupt Government & Corporations
A popular idea: Give oil money to the people rather than the despots
This article re-emphasizes a point that we have been making for a long time. Natural resource values belong to all humanity. This item is being circulated by Transparency International and originally appeared in the New York Times.
by John Tierney
Few Iraqis have heard of the “resource curse,” the scholarly term for the economic and political miseries of countries with abundant natural resources. But in Tayeran Square, where hundreds of unemployed men sit on the sidewalk each morning hoping for a day’s work, they know how the curse works.
“Our country’s oil should have made us rich, but Saddam spent it all on his wars and his palaces,” said Sattar Abdula, who has not had a steady job in years.
He proposed a simple solution instantly endorsed by the other men on the sidewalk: “Divide the money equally. Give each Iraqi his share on the first day of every month.”
That is essentially the same idea in vogue among liberal foreign aid experts, conservative economists and a diverse group of political leaders in America and Iraq. The notion of diverting oil wealth directly to citizens, perhaps through annual payments like Alaska’s, has become that political rarity: a wonky idea with mass appeal, from the laborers in Tayeran Square to Iraq’s leaders.
American officials have projected that a properly functioning oil industry in Iraq will generate $15 billion to $20 billion a year, enough to give every Iraqi adult roughly $1,000, which is half the annual salary of a middle-class worker.
No one suggests dispensing all of the money – and some say the government cannot afford to give up any of it – but there have been proposals to dispense a quarter or more.
The Progress Report observes — That is false. Many wise people, including economists, do indeed suggest distributing all the money. If natural resource value belongs to the people, then none of it should be stolen from them.
Leaders of the American occupying force have endorsed the oil-to-the-people concept and said recently that they plan to discuss it soon with the Iraqi Governing Council.
The concept is also popular with some Kurdish politicians in the north and Shiite Muslim politicians in the south, who have complained for decades of being shortchanged by politicians in Baghdad.
“Giving the money directly to the people is a splendid idea,” said one member of the Governing Council, Abdul Zahra Othman Muhammad, a Shiite from Basra who leads the Islamic Dawa party. “In the past the oil revenue was used to promote dictatorship and discriminate against people outside the capital. We need to start being fair to people in the provinces.”
When oil wealth is controlled by politicians in the capital, one result tends to be the resource curse documented in the last decade in academic works with titles like “The Paradox of Plenty,” “Does Oil Hinder Democracy?” and “Does Mother Nature Corrupt?”
Among the many researchers have been Jeffrey Sachs of Columbia University and Paul Collier of Oxford University, both economists, and Michael L. Ross, a political scientist at the University of California at Los Angeles.
The studies have shown that resource-rich countries in the Middle East, Africa and Latin America are exceptionally prone to authoritarian rule, slow economic growth and high rates of poverty, corruption and violent conflict.
Besides financing large armies to fight ruinous wars with neighbors, as in Iraq and Iran, oil wealth sometimes leads to civil wars over the sharing of the proceeds, as in Sudan and Congo. “Governments tend to use mineral revenues differently from the revenues they get from taxpayers,” said Dr. Ross, who found an inverse relationship between natural resources and democracy. “They spend more of it on corruption, the military and patronage, and less of it on basic public services. Oil-rich governments don’t need to tax their citizens, and taxation forces governments to become more representative and more effective.”
Steven C. Clemons, executive vice president of the New America Foundation, a centrist research group, has proposed using 40 percent of Iraq’s oil revenue to create a permanent trust fund like the one in Alaska, which has been accumulating oil revenue for two decades. That capital is invested and each year a share of the income is distributed – more than $1,500 to each Alaskan in recent years.
“A fund like Alaska’s is the best way to prevent one kleptocracy from succeeding another in Iraq,” Mr. Clemons said. “It would go a long way to curbing the cynical belief that Americans want Iraqi oil for themselves, and it would give more Iraqis a stake in the success of their new country. It would be the equivalent of redistributing land to Japanese farmers after World War II, which was the single most important democratizing reform during the American occupation.”
In America, Mr. Clemons’s idea was quickly embraced by many foreign aid experts, editorial writers, and even some Bush administration officials and politicians. Some experts, though, have faulted the trust fund, saying it would be expensive to administer and would pay out small dividends at first, perhaps only $20 per Iraqi adult, until more capital was amassed.
As an alternative, some have suggested skipping the individual payments in the early years and dedicating the money to economic development or social programs. Money could be invested in a long-term pension program, as Norway does with some of its oil revenue.
Another alternative would be to make bigger payments up front by giving the money directly to citizens instead of putting it into a trust fund. Thomas I. Palley, an economist at the Open Society Institute, proposed dividing a quarter of the oil revenue each year among all adults in Iraq. That could amount to $250 per adult, assuming that the administration’s hopes for oil production prove accurate.
Oil companies would not be directly affected by an oil fund, since they would be paying the same taxes and fees no matter what the government did with the money. “The oil industry likes working in countries with dedicated oil funds and transparent accounting, because there’s less loose money to corrupt the government,” said Robin West, chairman of PFC Energy, an American consulting firm to the oil industry.
“Corruption is bad for business,” Mr. West said, “because it creates instability. In places like Alaska and Norway, people support the oil industry because they see the benefits. In places like Nigeria, they see all this wealth that doesn’t benefit them, and they start seizing oil terminals.”
The Progress Report observes — despite West’s coverup, it is the oil companies themselves who refuse to publish what they pay for access to oil in Nigeria and other countries. No one is stopping them from coming clean.
Even Iraq’s latest non-elected leader, Paul Bremer, has praised the idea of sharing “Iraq’s blessings among its people,” and suggested that the Governing Council consider some kind of oil fund. Iraqi politicians, of course, have no trouble understanding the appeal of handing out checks to voters.
The chief argument against an oil fund is that Iraq’s government cannot afford to part with any oil revenue for the foreseeable future. It faces a large budget deficit this year, and sabotage to the oil industry has reduced oil production far below projections.
“There isn’t that much money now, and we need every penny for rebuilding the country,” said Adnan Pachachi, a member of the Governing Council and former foreign minister of Iraq.
“Giving away money would be politically popular,” he said, “but we should not gain popularity at the expense of the long-range interests of the country. By giving away the money you may sacrifice building more schools and hospitals.”
Some have suggested letting the government keep all of the revenue until oil production increases well beyond current levels, then putting the extra money into a fund.
But the oil-to-the-people advocates say that now is the time to at least establish the framework for the fund, before a permanent government gets addicted to the revenue. If experience is any guide, that government would probably not be devoting the money to schools and hospitals.
“There is a direct proportional relationship between bad government and oil revenue,” said Ahmad Chalabi, the current chairman of the Governing Council, leader of the Iraqi National Congress, [and fugitive who fled Jordan rather than face trial]. “If the government performs well or badly it doesn’t matter, because the oil revenue continues to flow. The government will use the oil revenue to cover up mistakes.”
Mr. Chalabi pointed to a precedent: a trust fund that existed in Iraq during the 1950′s, when part of the oil revenue went not to the government’s budget but to a development fund whose disbursements were directed by Iraqi and foreign overseers.
“The fund worked very well,” he said. “Iraq’s economy in the 1950′s and 1960′s was relatively good.”
Back then, Mr. Chalabi said, oil revenue was a relative pittance, adding up to less than $10 billion in the four decades preceding the Baath Party’s rise to power in the late 1960′s. But then came the resource curse. During a single decade, the 1980′s, Iraq’s oil revenue amounted to more than $100 billion.
“What happened to it?” Mr. Chalabi asked. “Iraq was a much better country in every aspect before it got that money.”
For more on the Alaska oil dividend, see this prize-winning essay
Learn about the Niger Delta Fund Initiative
Learn more about the Citizens Dividend concept
What should happen to natural resource values in Iraq and other nations? Tell your views to The Progress Report!