Natural Resource Values Should Benefit Citizens, Not Corrupt Government & Corporations
|December 31, 2003||Posted by Lindy Davies under The Progress Report|
Natural Resource Values Should Benefit Citizens, Not Corrupt Government & Corporations
IMF Economists Propose Oil Dividend for Nigeria
(but the NDFI is Better!)
This original article analyzes the recent International Monetary Fund report that called for a citizens dividend system to distribute Nigeria’s petroleum value.
by Lindy Davies
In the Working paper titled Addressing the Natural Resource Curse: An Illustration from Nigeria, Xavier Sala-i-Martin and Arvind Subramanian made a bold and newsworthy proposal: that Nigerias oil revenues should not be allowed to get into the hands of the Nigerian government, but should, rather, be distributed directly to the people of the nation as a cash dividend. Their idea was welcomed with glee by others who were already working to build support for a Niger Delta Fund Inititative whose goal would be ensure a progressive and equitable sharing of Nigerias oil windfall. Upon examination, however, important differences can be seen between the Sala-i-Martin/Subramanian plan and that of the NDFI.
Sala-i-Martin and Subramanian employ an econometric strategy. It uses sophisticated statistical techniques to tease out correlations, upon which to base policy recommendations. Theres nothing per se wrong with such a methodology, of course — except that here, they actually take seriously the preposterous question of whether valuable mineral resources are a curse for a nation! Now, what could that possibly mean? Would anyone ever think to pose that question to Alaska, or Texas? Russias economy might not be in the best shape, but is it because it has lots of oil and gold? We could reduce this to absurdity, citing Frances curse of ideal wine-making conditions, and New York Citys terrible burden of a magnificent natural harbor. The working paper begins:
Some natural resources — oil and gas in particular — exert a negative and nonlinear impact on growth via their deleterious impact on institutional quality. We show this result to be very robust. The Nigerian experience provides telling confirmation of this aspect of natural resources.
There is a fallacious assumption about causation here that renders suspect everything else that is said in the paper. No explanation is offered of how natural resources corrupt civil institutions that were, presumably, otherwise just and serviceable. They merely note that nations with oil have been more corrupt, less tractable and more prone to violent power-transfers than nations without it. Nor are we provided with a sufficient working definition of institutions. One would hope they mean processes that would secure human rights, fostering equality and association for all the people in Nigeria — but, were looking at things from the perspective of the International Monetary Fund, and we cant necessarily take that for granted. Institutions that rendered Nigeria a responsible debt-server and a predictable place to invest in real estate would almost certainly be good enough. Well return to this point in a moment.
The basic thesis of this paper is that the windfall of oil rent is an irresistible temptation for governments. Nigerias post-independence history would appear to be a telling confirmation of this. The ability of a small controlling elite to seize power and make deals with oil companies is just too strong for the forces of freedom and democracy to fight. Nigeria has, recently, been making steps in these fruitful directions, but the oil curse has continued to strongarm them, and no progress is made. So, Sala-i-Martin and Subramanian propose that the Nigerian government comport itself as though it governed a nation that had no oil. To achieve this, oil revenues would be turned over to the people, either on a straight per-capita basis, or possibly on some sort of per-family basis designed not to incentivise higher birth rates. To get public revenue, then, the government would have to impose conventional taxes on its people, like well-behaved governments do the world over.
It might seem that an oil fund, which could be invested for growth and income, would be preferable to a cash dividend. The authors recommend against this, however, because the conditions that generally thwart sound fiscal policy are likely to undermine the effectiveness of funds. The oil curse, essentially, makes the raiding of an oil fund inevitable. This point, however, seems disingenuous. The authors do note the enormous procedural challenges to implementing the cash dividend plan — but they cite three basic reasons why it could be expected to succeed: 1) The Nigerian government has taken steps toward democracy; particularly, voter ID cards have been issued, and these rolls could be used to identify recipients (which would have the bonus of creating an added incentive to vote in elections); 2) If all eligible Nigerians knew they were entitled to a dividend, those who did not receive it would have recourse in the legal system; 3) Implementation could be tied to debt relief. One might react with some skepticism, however — the Nigerian electoral system has hardly been a shining example of transparency, and implementation would have to depend on an accurate count of people in states that differ, sometimes bitterly, over who should receive what degree of profit from oil revenues. As for the justiciability of this remedy, we should recall that Nigerians speak many different languages, and an estimated 32% over the age of 15 are illiterate.
It could be argued, though, that the objectives called for here could be achieved whether or not the dividend got to every Nigerian citizen, if only it got to a sufficient number of them to have the desired macroeconomic effects. The reasoning is that until now, oil revenues in Nigeria have been a drag on growth because they have not achieved the kinds of multiplier effects that they would in a nation whose institutions were already highly developed. Those institutions include a formal land-tenure system, a stable currency and conventional real estate and financial markets. Without such institutions, Nigerian oil benefits only two groups: the oil companies and the group that currently rules Nigeria. With these institutions in place, profits would accrue to one other very significant group: Nigerian landowners (whether domestic or foreign). This would, of course, stimulate investment in Nigeria. The ruling elites of Nigeria have not needed the ratcheting-up effect of a real estate market, because they have been able (essentially) to take the oil revenue for themselves, and have not been forced to use it to the benefit of their nation. If, however, oil revenues were put directly into the hands of ordinary Nigerians, land values would certainly go up. There would be money to be made, particularly in places where land tenure had still to be formally determined and documented: there, international investors could literally get in on the ground floor. Wages, probably, would not go up, although it seems likely that there would be a trickle-down effect that served to lower the current unemployment rate of 28%.
In contrast, the Niger Delta Fund Initiative proposes the creation of a trust fund that would provide, in addition to a (smaller) cash dividend, funds for low-interest loans to qualifying sustainable-development projects, particularly in rural areas where people have no access to credit. In such communities (as seen in the famous and well-established example of the Grameen bank) very small initial investments can yield huge benefits to the overall community. The NDFI also proposes to earmark a smaller percentage to fund conflict resolution and conservation programs.
It might be said that the significant difference between the IMF proposal and the NDFI is that the former, by stressing conventional economic institutions, really focuses on the passive economic factor of land, while the latter concentrates on the active factors of labor and capital, especially in the poorest communities where help, and self-help, is needed the most, and where small seeds can yield large fruit.
Indeed, it is for precisely those reasons that, one would surmise, the NDFI proposal would be far less to the liking of the IMF than the Sala-i-Martin and Subramanian plan. I make no accusations, but it almost seems as though their plan could have been issued to preclude an idea such as the NDFI gaining a political foothold. Nevertheless, although the cash dividend plan would certainly be better than what they have now (what wouldnt?), the NDFI is by far the better plan for all the people of Nigeria.
Lindy Davies runs the Henry George Institute.
For more on the IMF report, see this earlier Progress Report article
Learn more about the Niger Delta Fund Initiative
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