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The CGD Podcast
Curing the Resource Curse
00:15:36
If you won the lottery tomorrow, what would you do with the money? Whatever difficulty you have in arriving at an answer, imagine the dilemma an entire nation might face. Several countries have struck gold and squandered it. In this podcast, Todd...
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- [00:05]
A
Hello, I'm Rajesh Merchandani and thanks for joining me for the latest edition of the CGD podcast. Now, if I were to tell you that I had just won the lottery, well, firstly, this chair would be empty. But it also might get me thinking about how do I spend all that money or what do I do with all that money without being wasteful? Many countries also have the same dilemma. It's called the resource curse. They succumb to it when huge revenues from things like natural resources, coal, oil, gas, iron, diamonds, the list goes on, don't actually end up improving the lives of most people in those countries. My guest today has written a new book addressing that issue. It's called Oil to Fighting the Resource Curse Through Cash transfers. He's also CGD's chief operating officer and a former Deputy Assistant secretary at the U.S. state Department. Todd Moss, it's great to have you here for the podcast. Thanks for joining me.
- [00:57]
B
Great to be here.
- [00:58]
A
Now, why is there a need, Todd, for a new way of managing natural resource revenues?
- [01:04]
B
Well, it's actually even going back to your lottery example. It's even worse than not just wasting the money. It can actually make you worse off. Imagine if you won the lottery, you might quit your job, you might not go to graduate school. Maybe your cousins or long lost relatives would all start coming around. Everybody looking for a bit of money actually could ruin your family relationships, could undermine your happiness. And actually the data shows that a lot of lottery winners turn out worse off. Not just wasting their money, but worse off than before.
- [01:36]
A
How does that relate to countries?
- [01:37]
B
Well, that can be the same thing with countries. So if you're a poor country, you're trying to build agriculture, manufacturing sector, all of a sudden, wham, you get older oil income, all of a sudden the value of your currency goes up, people stop paying attention to manufacturing and farming. Everybody just starts to fight for the oil money. Politics becomes not about building a broad based, prosperous economy, but about fighting over oil spoils. And it can have both economic and politically harmful effects.
- [02:09]
A
I'm wondering if maybe your time spent working and studying in Africa has helped made you see a lot of examples of this. What kind of things have you seen in your time?
- [02:20]
B
Well, you know, virtually every African country is either producing oil or actively looking for oil in the last five or six years, virtually. If you think of a map of Africa, if you go around the coast, virtually every country with a coast coastline has had a major either oil or natural gas find offshore. They're all trying to figure out, okay, what do we do with that? These are also countries that are relatively young. You know, independence was only in the 1960s. And they're also all struggling with how do you spend regular money? Well, how do you fight corruption, how do you deliver public services to people, how do you fight poverty? And this, while it could be a benefit, all this influx of cash, it can actually make things tougher.
- [03:08]
A
And talking about African countries, we know that Tanzania is particularly one of those because it's got huge reserves of natural gas. CGD is doing work on looking at some of the different policy options for what it should do when it starts to develop those assets as well. It's a real issue facing that country, not least because there are presidential elections there later this year. It's not just a problem for African nations, any countries that find themselves with potential windfalls through natural resources. But the idea, oil to cash, which that's what you've called it, that's the idea that you give citizens money directly. Hooray, we all say, but it's not quite as simple as that, is it?
- [03:42]
B
It's not as simple as that. So the idea of oil to cash is that the money would go into a special fund. Every citizen would be essentially a shareholder of that fund and would receive a portion of that benefit in a regular, transparent and rules based payout. That also would could be a way to help to build a tax base in a country, something that resource rich countries tend not to do. They tend not to tax their citizens. And so there's lots of ways that this could have a beneficial effect. Both the direct cash payment and then also the accountability benefits of getting people to see that income and those resources as theirs and to create incentives for them to put push for good governance.
- [04:31]
A
Now I think few people would disagree with me when we say that not many of us like paying taxes. Some of us think taxes are a bit like medicine. You know, you hope it's doing some good, but it's very hard to swallow. But your idea is that taxes can create a bond, a contract between citizens and government. And that's an important part of the oil to cash idea, isn't it?
- [04:53]
B
Yes, and it's not my idea. I mean, this goes back to, you know, the formation of European states and the idea of how do we, how do states raise armies, provide security for the population? It's all based on taxation. Because of a lot of the new states. A lot of the former European colonies that we're talking about, they kind of short circuited that process and they've been reliant for a long time on external finance, either from foreign donors or from foreign companies like oil and mining companies. And when you get your resources from, when you get your income from Exxon Mobil or British DFID and you don't have to tax your citizens, that creates all kinds of negative dynamics where you don't really deliver very good public services, the public doesn't expect very much from you. And that whole feedback loop between a population and its government kind of starts to break down. And we hope that oil to cash, if it's done in the way that we're talking about, could help to rebuild that social contract.
- [06:01]
A
Because by paying taxes, citizens have a stake in the government.
- [06:05]
B
They have a reason to pay attention. They have a way of holding their government accountable. And it's really just creating incentives on both sides for people to do what it looks like they're supposed to do on paper.
- [06:20]
A
Well, what is to say that the tax system is functioning in a country? I mean, look at somewhere like Pakistan, it doesn't really function.
- [06:27]
B
Well, Pakistan is a great example of a country where it doesn't function and most people don't pay taxes. But most countries, most developing countries, it's a very, very small tax base. And the people that do pay taxes, it's very distorting, like trade taxes or other ways to that they don't realize where they're paying those taxes. And the trick for making the social contract work is for people to see, oh wait, I'm paying to government and I'm supposed to get something in exchange. Even if you're not a US citizen, you live here in Washington D.C. you pay taxes and you can see the school budget, you know exactly where your money is going. That's the kind of dynamic we hope to help encourage.
- [07:16]
A
And the book is not just about the idea of oil to catch. It also sort of sets out exactly how to make it work, the various steps that should be implemented for it to work successfully. Explain a bit about that.
- [07:27]
B
Yeah, so of course it's going to differ a lot by countries. Big countries are going to be more difficult than small countries. It depends if you're rich or not rich or do you already have a banking system in place. So a lot of those issues are going to depend country to country. But the basic principles of oil to cash are this three step process. One, that the funds come into the country into a ring fenced fund of some kind. Two, that a portion of that based on some kind of rules are distributed on a regular, universal and transparent basis. To every citizen. And three, that a portion of that is then taxed back. That's the basic recipe for oil to cash.
- [08:12]
A
It rests on a prerequisite, I suppose, of good and transparent governance. How do you sort of guard against cronyism or corruption?
- [08:23]
B
Yeah, this is a great question. You know, we're talking about some of the, you know, when we talk about a country like Sierra Leone or Venezuela, you know, we're talking about some of the most difficult and in some cases most corrupt countries in the world. How could you make this work? Well, there's two answers to that. One is that smart design. This could actually be done if you use biometric ID and mobile money, the money can be traced. You can be sure that each person is only getting one payment. You actually could have this be done by a third party. It could actually be implemented by a third party in India. Their unique ID system is, is mostly done by private contractors overseen by a separate entity. A lot of the biometric idea is done by private companies. A lot of the wealth management, the fund management is done by private investors, by private firms with public oversight. So a lot of this could be outsourced. In fact, the entire enterprise could be outsourced. Potentially. The second answer to that is what is the counterfactual? Would oil to cash be 100% squeaky clean? Probably not. But relative to other kinds of spending, would it be better off? That's what I think is the question for policymakers. And when we look at the history of governments negotiating with oil companies, receiving those funds and then spending those funds, the record is terrible. The World bank does these expenditure tracking surveys to watch money that goes from the center, how much of it actually winds up where it's supposed to go. And the numbers are shocking. They're terrible. And so if oil to cash can just beat that, it will be more efficient than what we've currently got.
- [10:14]
A
I guess it's a bit similar to the Alaska system, where residents of Alaska get a dividend every year based on Alaskan oil revenue. What about at the country level, though? Alaska's population is not huge. At the country level, what are sort of the prime candidates? Do you think that where an oil to cash system could actually work, or are we seeing it actually working in places?
- [10:35]
B
Yeah, so Alaska is a great example to learn from. We went to Alaska, we launched another book in Alaska, talked with people that designed the Alaska Permanent Fund dividend itself to hear what they did right and wrong. And they were very, very gracious and also very candid about the mistakes that they had made. Now Alaska did that not because Alaskans were poor, but because the governor at the time, Governor Jay Hammond, wanted every Alaskan to pay attention to what was going on in his own government because he saw so much money being wasted on terrible projects. The state's famous for the bridges to nowhere, that kind of thing. And he wanted every citizen to receive a dividend so that it forced them to pay attention to what was going on. And he's been, I think, hugely successful in that regard. The level of discussion about fiscal issues in Alaska is unlike anything you'll see anywhere else in the United States. We haven't seen anything that close to oil to cash in the real world yet, but we've seen steps come very close. Countries like Mexico and Brazil have huge national cash transfer programs. Brazil, we're talking about 12 million families receiving that. India has been doing the biometric ID already and they've just started making cash payments to families in lieu of a gas cooking gas cylinder. So subsidy. So actually the world's largest cash transfer system is now India's LPG payment. Now the two countries that have come the closest to oil to cash so far are Mongolia and Bolivia. Now they each have. So Mongolia has a lot of mining revenues. They started with a child benefit program that was funded out of the mining. They kind of didn't do it very well. They stopped, they started it again. They made another mistake. We think that they're going to try again a third time and learn from their past mistakes. That's a pretty good example. Bolivia is another really interesting case. They have a national pension scheme. Most of the revenue comes from natural gas revenues. So they're making their pension payments partially contingent on their gas receipts. We're sort of edging closer to the ideal oil, oil to cash model, but we're not quite there yet.
- [13:06]
A
Hopefully this book will help kind of tip it over the top and people will end up piloting the actual idea that you've come up with. At its heart is this idea of domestic tax resources. And that's also one of the key areas of focus of the Addis Ababa Financing for Development conference. It's such a huge area right now. It's a target growth area, if you like. When we talk about development finance and that's because we're talking about potentially huge sums of money that developing countries could tap into with the right governance and structure.
- [13:34]
B
That's right. Well, you know, we think that oil to cash, even for countries that are not going to be major oil or gas or mining producers, this kind of system where you have biometric id, you have mobile, you have electronic bank accounts, people are receiving cash and then they're paying money out or they're having it withheld, is exactly the kind of technological leap that countries, countries can make. There's even a case for where countries are withdrawing from the international aid system. You know, a country like Liberia, they're exploring for oil, they haven't really found it yet. Very large international donor presence that's going to withdraw over time. One thing that the United States or the UN could do in Liberia would be to fund a national biometric ID system, make some cash payments. There's already cash transfer programs in Liberia that have been quite successful. But do it on a national basis with some kind of long term commitment, say over a 10 year period that as the donors withdraw, the government will step in and continue that. We've modeled that out for paying, say $40 US per child per year to every Liberian mother, up to three children. And it's eminently feasible and affordable and it could create lots of positive benefits.
- [15:00]
A
Okay, Sounds excellent. Okay. The book again is called Oil to Fighting the Resource Curse Through Cash Transfers. Todd Moss, great to have you here on the podcast. Thanks for joining me.
- [15:08]
B
Thanks for having me.
- [15:09]
A
Don't forget, you can find out more about all our work, including this work, on our website, www.cgdev.org. i'm Rajesh Merchandani. Join me again for the next podcast from cgd, the center for.