Fixes looks at solutions to social problems and why they work.

Every nation wants to strike oil, and after it happens, nearly every nation is worse off for it. It may seem paradoxical, but finding a hole in the ground that spouts money can be one of the worst things that can happen to a country.

Oil-dependent countries, writes the Stanford professor Terry Karl, “eventually become among the most economically troubled, the most authoritarian, and the most conflict-ridden in the world.” This phenomenon is called the resource curse.

Oil is the world’s most capital-intensive industry, so it creates few jobs. Worse, it obliterates jobs all across the economy. The export of oil inflates the exchange rate, so whatever else a country manufactures is less competitive abroad.

Oil concentrates a nation’s economy around the state. Instead of putting resources into making things and selling them, ambitious people spend their time currying favor or simply bribing the politicians and government officials who control oil money. That concentration of wealth, along with the opacity with which oil can be managed, creates corruption.



Petro-dependence also leads to conflict. The conventional wisdom used to be that grievances were the cause of conflict, but that ended after the economists Paul Collier and Anke Hoeffler found in a series of ground-breaking studies that more important was the opportunity to grab oil or other commodity resources. They showed that if a third or more of a country’s G.D.P. came from the export of primary commodities, the likelihood of conflict was 22 percent. Similar countries that did not export commodities had a 1 percent chance.

If a government can finance itself through the profits on oil, it needn’t collect taxes. Let me suggest that this is not a good thing. Taxes create accountability — citizens want to know how the government is spending their money. Substituting oil revenues decouples government from the people. The list of the world’s worst-governed countries today features many that are dependent on the production of oil: Nigeria, Angola, Chad, Venezuela, Libya, Equatorial Guinea.

The big exception is Norway, which had the foresight to become wealthy and democratic before striking oil. As almost all the world’s untapped oil reserves now lie in the developing world, Norway is not likely to have much company.

Do these countries have a way out of the resource curse?

Todd Moss, a senior fellow and vice president for programs at the Washington-based Center for Global Development, believes they might. He points to an unlikely source of inspiration: Alaska. The state of Alaska is bound by law to put at least a quarter of its revenues from oil into the Alaska Permanent Fund, which was established in 1976. The money is invested and each year, every resident of Alaska gets a share of the dividends; for consistency, the amount is calculated using an average of the fund’s earnings over the past five years. The dividend check is considered taxable income. Last year, the check was for $878. In 2008, the high point, every Alaskan got $2,069.

These payments stimulate the economy and reduce income disparities. They have contributed (pdf, p. 12) to a large reduction in poverty in Alaskan Natives, the state’s poorest group.

But the fund has other benefits. “I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity,” wrote Jay Hammond, Alaska’s governor at the time. Governments often try to save for lean years by paying a portion of oil revenues into a walled-off, legally untouchable fund. Unfortunately, temptation is often more powerful than the law. Venezuela’s oil fund, for example, has been raided (pdf, p 16) by Hugo Chavez, dropping from $6 billion to $3 million in the last decade — during a time of record-high oil prices.

The dividend, by contrast, protects the Alaska Permanent Fund. Hammond’s achievement was to “protect against its invasion by politicians by creating a militant ring of dividend recipients who would resist any such usage if it affected their dividends.” (See here for a quirky summary of criticisms of the fund. )

Scott Goldsmith, an economist at the University of Alaska, writes that the dividend has some unanticipated consequences. “Some would compare this generation of Alaskans to trust fund babies, because there are no personal taxes and receipt of the dividend carries no public responsibilities, the two together undermine the sense of community that comes from the need to collectively choose and fund public services. They also foster a disconnection between government and residents, leading to a deterioration of the quality of government.”

Alaska, of course, has very little in common with Venezuela or Nigeria; American states don’t have to worry about exchange rates, for one thing. But some countries have set up comparable funds. Mongolia, which depends heavily on gold and copper, started a program in 2006 called Child Money, which used mining revenues to pay poor families with children. Since then, the country has swung between payments targeted at the poor and ones provided to all Mongolians.

In 1997, Bolivia decided to spend a quarter of the proceeds from the privatization of oil, telecom and transport companies providing a pension to every Bolivian over 65. The Renta Dignidad program now uses oil and gas proceeds, paying $258 a year to every citizen 60 and older who has some other pension, and $344 a year to those without.

These programs aim to improve citizens’ social welfare. A $300 dividend represents four months’ income for the poorest rural Bolivian families. Roberto Laserna, president of the La Paz-based Fundación Milenio think tank, writes in a forthcoming paper that since rural families invested the money in their own food production — better seeds, tools and farm animals — each dollar they received increased their food consumption by two dollars.





Todd Moss of the Center for Global Development explains how oil-to-cash programs work.



Money given out to citizens, of course, is money that the government can’t use to build schools, roads and health clinics. Spending it that way might improve social welfare even more than simply passing out cash — or it could if the government were actually doing it. But governance tends to be so poor in oil-rich countries, so inefficient and corrupt, that social welfare programs end up never reaching the poor.

This is the big advantage of cash payouts — they are much easier for an ill-governed country to do well, and there are fewer opportunities for politicization or corruption. There isn’t a long track record with oil-to-cash programs, but more than 40 countries have some kind of cash transfer programs for the poor. The best known ones, like Bolsa Familia in Brazil and Oportunidades in Mexico, make recipients meet conditions — they need to have their children in school and take their families for regular health checkups to get the money.

These programs have been widely studied; they work. If you remove the conditions and just give out payments to the poor these programs are still good, but they don’t do as much to help those most marginalized — parents will use the money to send boys to school, but without the conditions, they won’t send girls.

Oil-to-cash programs are essentially unconditional transfers financed by oil. They can be targeted at the poor — like the cash transfers we know — or universal. It is obviously cheaper to pay only the poor. But universality helps the second goal of oil-to-cash: creating better government. If you want citizens to become effective watchdogs, it helps to include people with clout. Governments tend not to respond to the clamors of the poor.

This is why oil-to-cash proponents include something that seems inefficient: the government gives a dollar to people and then takes back 30 cents in taxes. Why not just give out 70 cents?

The reason for this inefficiency, says Moss, is that you want people to know they are paying taxes, and know exactly how much. “That’s exactly the point,” says Moss. “It creates accountability and forces tax authorities to build a sound, transparent system.” (This is plausible, but there is no evidence either way just yet that oil-to-cash programs would lead to better governance.)

Related More From Fixes Read previous contributions to this series.

Although oil-to-cash is logistically simple — the only thing that moves is money, and that should move electronically — Moss warns that it does have several prerequisites. You need a fund to hold the revenues, a reliable way to identify recipients, and an efficient channel for transferring money.

A decade ago, these would all have been daunting challenges. But in the last 10 years or so, some 40 countries have set up sovereign investment funds, including many oil producers. And most countries are developing biometric IDs — identification using fingerprints, face or iris recognition. India is seeking to provide biometric IDs to 600 million people in the next four years. The other trend is the explosion of cellphone banking — a particularly efficient way to transfer money.

Distributing oil money to citizens is a big step, and oil countries and companies have rejected much more modest ideas that might put limits on their abilities to manipulate oil revenues. One that is gradually gaining ground is the Extractive Industries Transparency Initiative, now implemented by 37 countries. Under the EITI, oil companies disclose what they pay to governments, and governments disclose what they receive. The EITI then compares and reconciles these figures.

Knowledge of the facts, however, does not necessarily lead to change when powerful interests don’t want to change. But oil-to-cash, as Governor Hammond said, is a reform with a constituency. (One potential problem with the idea is that politicians like it too much, says Alexandra Gillies, head of governance at the Revenue Watch Institute; in Mongolia, candidates competed to offer larger and larger transfers. “For this policy to work, it has to be implemented with a long-term goal in mind,” she said. “Implementing it for short-term political reasons is unlikely to produce the kind of economic outcomes you’re looking for.”)

Moss lobbied (unsuccessfully) for Iraq to institute oil-to-cash, and several prominent economists in Venezuela’s opposition to Chavez are arguing for it. But oil-to-cash is probably easiest to do in countries just starting to exploit oil — that way there aren’t entrenched interests guarding business-as-usual. That’s a big list: Cambodia, Papua New Guinea, Sierra Leone, South Sudan, Timor and Uganda recently discovered oil or gas.

Ghana has recently become an oil exporter. So far, government officials are not interested in oil-to-cash, preferring to keep the money for roads and bridges. “They had a big infrastructure shopping list,” said Moss. But these are the kinds of projects most likely to be felled by mismanagement and graft. “When they have their first major corruption scandal,” said Moss, “we’ll be back in touch.”

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Tina Rosenberg won a Pulitzer Prize for her book “The Haunted Land: Facing Europe’s Ghosts After Communism.” She is a former editorial writer for The Times and the author, most recently, of “Join the Club: How Peer Pressure Can Transform the World” and the World War II spy story e-book “D for Deception.”