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Beating the Resource Curse with Oil to Cash Transfers, Part 2

April 5, 2012

A joint post by Michael French and Laura Esposito

Oil in Libya | Source: The Africa Report and Reuters

The resource curse plagues many nations, partially because it’s difficult to hold leaders accountable for the millions of dollars of oil revenue. However, some countries are making progress. For example, Libya’s new government wants more transparency around the oil sector, suggesting that government contracts will be published online. This, the new government hopes, will encourage Libyans to play a role in the process and potentially benefit from that nation’s large oil reserves. Another option is encouraging the government to use oil revenue for cash transfers to its people, increasing accountability and providing citizens with income to address their needs.

Using oil to cash transfers, championed by the Center for Global Development, the program would essentially take the revenue gained from the oil and put it in the hands of the people. The oil to cash transfer initiative divides a large portion of oil revenue and distributes it to the people evenly. These cash transfers are then treated as income and subsequently taxed by the government, with the taxes creating a stronger link between the people and government activity.

This program has many potential benefits. Firstly, the oil to cash transfers create taxes, therefore creating greater government accountability. Citizens have a greater incentive to monitor the government since it is essentially using the money gained as part of the funding for government activities. The universal aspect of the program would also help to improve spending equity, better reaching the marginalized parts of society often missed by corrupt governments. Third, oil to cash initiatives provide immediate and substantial aid to the poor.

The oil to cash transfer approach does not come without its critiques. Perhaps the most major criticism lies in a simple question: why would a government willingly forgo oil revenue that can go to its own singular advantage? This argument claims that a government in an oil rich country would be extremely reluctant to give up oil revenue, and essentially states that it would be difficult to get a government to agree to initiate a oil to cash transfer program. Another critique involves conditionality. While the program may work in a system with a benevolent and fair government, it may not with a more corrupt regime.

Despite its possible flaws, the oil to cash transfer approach does seem to have a promising future. Bolivia and Timor-Leste have recently implemented versions of cash transfer programs that should provide ample information about the programs’ successes and failures, as well as its prospects for the future. One example of an oil to cash transfer program that is already established can be seen in Alaska. Upon discovering a large amount of oil in 1969, the state established the Permanent Fund Dividend several years later, which transfers some of Alaska’s oil revenue to Alaskan citizens as income. The program, though not perfect, is considered by most to be a success.

If these initiatives prove successful, perhaps other oil-rich countries will adopt similar transparency measures, allowing the public access to resources that the oil wealth can provide. However, only time will tell if foreign countries can implement oil to cash transfers effectively. If they prove to work, the oil curse may just meet its toughest opponent yet.

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