Managing Windfal l Wealth : How Oil Resources Can Generate Development Rather than Decay

1. Managing Windfall Wealth: How Oil Resources Can Generate Development Rather than Decay Larry Diamond with the assistance of Jack Mosbacher Lecture to Ghana Centre for Democratic Development June 25, 2014

2. Africa’s Coming Resource Boom

3. Africa’s Coming Resource Boom • 12 New Exporters, 25 billion barrels • West Africa (Gulf of Guinea) • Gambia, Ghana, Liberia, Sao Tome and Principe, Senegal, and Sierra Leone • East Africa (Rift Valley) • Ethiopia, Kenya, Malawi, Mauritius, Tanzania, and Uganda • Transformative Impact • Total GDP (2011): $163 billion • ~$3 trillion • $60-$100 billion annually  Increase of over 1/3

4. The Resource Curse Countries with valuable natural resource wealth tend to experience: • Lowereconomic growth • More economic volatility • Impaired human development • Dramatically worse governance • Less political freedom & democracy • Higher instance &severity of civil war

5. The Resource Curse:Economic Causal Mechanisms • Inherent instability of commodity markets—“boom and bust” cycles • Windfall wealth  wasteful spending and borrowing • Dutch Disease: resource wealth  appreciation of exchange rate  weakening of agriculture and manufacturing”

6. Political Causal Mechanisms • Massive infusions of revenue into the central state  massive corruption, “predatory state” • Huge stakes in controlling the state  intense political conflict and violence • Ethnic & regional conflicts over the distribution of revenue • New state wealth funds larger coercive apparatus • Preemption or rupture of the bonds of citizenship between the state and individuals

7. Oil, citizenship & democracy The U.S. in 1776: “No taxation without representation” Contemporary oil states: “No representation without taxation”

8. No Taxation, No Accountability • (Windfall) resource wealth replaces taxation as main source of government revenue • The state becomes detached from citizens: no longer needing their tax revenue or compliance • Citizens become detached from the state, or in a position of beseeching politicians and state officials for some small share of the oil wealth • Governance descends into a protection racket, the state as organized crime

9. Regime Performance in AfricaScores on Mo Ibrahim Indices, 0-100

10. Regime Performance in AfricaFurther Comparisons

11. Oil Kills • In its most extreme form—in very poor and institutionally weak countries—dependence on oil and gas exports grossly stunts development and creates a political economy and culture of predatory corruption. • Perform this mental exercise: What if Angola and Nigeria did not have oil? What would their human development indicators look like today?

12. Life Expectancy in YearsGhana and Nigeria

13. % Mortality rates, children under 5(Oil Countries in Bold)

14. Under-Five Mortality Rates in Countries with Similar Per Capita GNI levels, 2012

15. Selected Development Indicators

16. Development Indicators, 2012 (in %)

17. How Many Excess Deaths In Nigeria? • UNICEF estimates 827,00 Nigerian children under 5 years old died in 2012 • 12.4% of those die every year. Under-5 mortality rate in Nigeria is 12.4%. In Ghana it is 7.2% • If Nigeria had Ghana’s under-5 mortality rate, of 7.2%, it would have suffered 347,000 fewer child deaths in 2012 • Over the past decade, some three million Nigeria children have died who would not have if Nigeria had Ghana’s under-5 mortality rate.

18. WB Governance Indicators, 2012

19. Oil  Bad Governance • If Nigeria had merely the middling levels of governance of Ghana, not to mention the better levels of Botswana, several hundred thousand children a year would be spared a needless death. • My assertion: • Nigeria has demonstrably poorer governance than Ghana (and the other democracies of Africa). • The principal reason why Nigeria’s governance is so much worse is 40 years of nearly total dependence on oil income.

20. A Glimpse Into Africa’s Oil and Governance Future

21. Africa's Future Oil States:Ratio of Rents to Taxes, Before and After Oil

22. Africa's Biggest Future Risks of Oil Curse:Ratio of Rents to Taxes, Before and After Oil

23. The Quality of Governance:Current vs. Future African Oil Exporters

24. Institutional Reforms & Policy Responses

25. Oil-to-Cash:An Overview Direct distribution of a portion of oil revenues to citizens as taxable income • Government receives revenue from oil and gas sales • A portion of revenues (e.g., 50%) is distributed annually to all citizens in direct cash payments • Distributed cash is treated as taxable income and collected as part of personal income tax. “Tax rate” can be set at any level. • Payments can be made as dividends from sovereign wealth fund

26. The Alaska Model • 1976: Voter referendum creates the Alaska Permanent Fund as a way of investing a portion of the state’s new oil wealth (in essence, a sovereign wealth fund) • 1980: State legislature creates the Alaska Permanent Fund Corporation to manage the fund • 1982: State government decides to distribute annually a portion of the fund as dividends to each individual citizen of Alaska, adult or child. • 1977-2012: Fund grows from $734,000 to $42.1 billion • Recent annual dividends range: $878 to $3,269 per person

27. Acting Alaska Revenue Commissioner Angela Rodell announces the 2013 Permanent Fund Dividend

28. Alaska’s gift • Because of the low population, Alaska has no income tax • Alaska has among the lowest rates of poverty and inequality of any state in the US.

29. Virtues of Oil-to-Cash Attack the fundamental causes of the resource curse • Create domestic tax base • Incentivize active citizen participation & engagement • Incentivize government accountability • Create/restore connection between public officials and citizens • Limit the windfall, boom/bust mentality surrounding government revenue

30. Technical Challanges • How to get the money to the people? • Underdevelopment of banking infrastructure • Danger of leakage in corruption

31. Oil-to-Cash:Is it feasible? • In 2009, regular direct transfer payments were made to 170 million people in 60 countries • Advancements in personal ID technologies • Biometric identifiers: fingerprints, facial and retinal recognition, etc. • 450 million people in developing countries • Progress in electronic/mobile banking • 800 million cell phones in Africa • Promise of mobile banking platforms • Example: Kenya’s M-Pesa

32. The Politics of Oil-to-Cash • States do not want to surrender revenue • Politicians and state officials want direct access to oil revenues But, 9 of the 12 future oil exporters are democracies: • Oil to cash may resonate with democratic publics • Promise for Opposition Platforms • Saving grace for otherwise doomed incumbents?

33. Common Objections, & ResponsesSee CGD Policy Paper 24, June 2013, by Todd Moss & Stephanie Majerowicz • Only the state can promote economic development Much development is bottom-up. Small entrepreneurs are short of capital. Ordinary people are short of money to feed and educate their children, and get them health care. This does not eliminate the state, but enables another source of development energy. • Only states can invest in public infrastructure But they will not do so effectively until subjects become citizens and demand accountability

34. Objections and Replies, cont. • Cash Payments to citizens will stoke inflation So can state expenditure of oil bonanzas Manage and mitigate “through careful monetary policy” Cap transfers at a realistic level, relative to inflation • Why not use the oil wealth to subsidize basic goods? Consumer subsidies violate elementary market principles. They are “inefficient, regressive, highly distortionary, and expensive.” They also promote waste (e.g. of energy) and corruption/smuggling.

35. Objections and Replies, cont. • The ignorant, unwashed masses will waste the money “Studies suggest that the cash transfers tend to lead to increased spending on health, nutrition, sanitation, and education.” (p. 14) Transfers can be focused on women, or women and children, and made conditional on healthy behaviors. Studies show that some portion of the transfers is invested in productive activity. • The men will grab the money and get drunk Give the women the money and a whistle.

36. Objections and Replies, cont. • Corruption and clientelism will just distort the transfers People will have more incentive to monitor the system and defend their rights Need to raise citizen awareness and civic capacity Limit administrative/political discretion (but this is in tension with conditionality) • What if the country has no mobile banking system Many of these prospective oil producers have plenty of time to put in place all the needed financial and administrative infrastructure

37. Objections and Replies, cont. • What political leader is going to surrender the right to loot the national treasury, get rich, and remain in power indefinitely? Opposition leaders who want to get elected. Ruling presidents in political trouble Rival factions of a ruling party The occasional reformist who actually has some interest in seeing his or her country develop. And it is much easier to implement this before the oil revenue starts flowing and the political economy changes. • Doesn’t this sideline other reforms of the resource curse that are gathering momentum?

38. Need for a Comprehensive Approach:Throw Everything At It • Radical Transparency in the Oil and Gas sector: • All extractive industries “publish what they pay” • Government fully reports all revenue streams from extractive industries • Budget Transparency • Revenue stabilization/sovereign wealth fund • Counter-corruption reforms • Freedom of Information • Vigorous independent media and civil society

39. Counter-Corruption Reforms • Create strong, constitutionally protected counter-corruption agencies • Ensure they have independent power to investigate and prosecute; and adequate staff and resources • Ensure vigorous, politically neutral leadership of agencies these (and other) agencies of accountability; e.g., give appointment power to the Supreme Court • Make all assets declarations of public officials publicly available on the Internet

40. Countering Corruption • Raise the costs and risks of engaging in corrupt conduct • Increase the rewards of honest behavior; increase official pay, and ensure it is paid on time. • “Fry big fish” • Educate and mobilize the public • Get civil society and official accountability institutions working together

41. Strategies for Reform • Mobilize coalitions for governance reform: • From below, in civil society • From within, among reform minded-elements of the state, the parliament, and the party system • From without, among international donors, partners, and international civil society • Use the Open Government Partnership as leverage to press government to work with civil society to develop an Action Plan to improve government transparency