Study: African nations should give citizens a direct cut of their mineral wealth

Sometimes the most efficient solution to poverty alleviation is the simplest: give poor people more money to spend.

•A version of this post originally appeared on the blog A View From the Cave. The views reflected are the author's own.

Natural resources could be the next great development financing tool.

It is quite simple. Take the money that a government makes from the sale of oil, gold, copper, etc. and give citizens a cut.

Giving direct cash will help out the people that need it most and it could spur on development as people will then spend the money on local businesses and services. Additionally, it will reduce corruption and let the average citizen hold his or her government accountable for how money is spent.

That is the basic case made by Todd Moss of the Center for Global Development with his oil-to-cash initiative. A new working paper from World Bank economists Shanta Devarajan and Marcelo Giugale takes the idea and applies it to resource-rich African nations. They come up with some theoretical ways that countries can design schemes that will turn natural resources from a curse to a blessing.

It matters now because more African countries are discovering major reserves that will significantly alter their national trajectories. The researchers suggest that governments can follow the example of Alaska and the Canadian province of Alberta who developed schemes that distribute a fixed proportion of resource revenues to all citizens, adopting what the researchers call direct dividend payments (DDPs).

Giving a modest amount of natural resource revenues to citizens can contribute significantly to the elimination of poverty in some countries.

“A transfer of about 10 percent of oil revenues in Angola, Equatorial Guinea and Gabon, distributed universally, would be sufficient to close the poverty gap in these countries,” write Mr. Devarajan and Mr. Giugale. “For larger countries such as Mozambique and Nigeria, the transfer would cover about half the poverty gap.”

Governments were initially resistant to DDPs for three reasons:

1. Too hard and costly to identify citizens;
2. No incentives for present leaders to give up resource revenues;
3. Cash-strapped governments cannot afford to give away valuable revenue that pays for public services.

Devarajan and Giugale admit that all were problems year ago, but changes in countries and technological advances wipe away the three concerns. Identifying citizens is easier than ever. India, home to 1.2 billion people, is a third of the way done with its identification card scheme. If India can do it, so can smaller countries. The second concern is less of an issue due to increased democratization. With more countries having elections, candidates can campaign on the idea of initiating a DDP scheme.

Finally, the implementation of DDPs may actually make governments better. With less money, governments will have to eliminate wasteful spending and programs and may even increase public scrutiny for government spending. DDPs recognize the limitations of governments in accomplishing what they set out to do.

In an ideal world, where governments perfectly reflect the preferences of citizens and face no constraints in providing public goods, there is no need for DDPs or, indeed, for any type of cash transfer. The government will choose the correct mix of public investment and consumption, and implement it costlessly.

That sounds simple enough, but it may not be so easy. Prior research from Devarajan shows that increased scrutiny can slow down the ability of the government to invest natural resource revenues into services. Other research shows that governments may react by providing people with the services they want in order to avoid further scrutiny. In such a case, DDPs would ensure that governments are more responsive to the needs of citizens in order to keep people happy.

This careful balance means that DDPs will work well in countries already benefiting from natural resources, where the transfers would increase level of government scrutiny and the political system where the ruling party has to respond to citizen needs.

It will also work better in smaller countries where taking a small cut from revenues will go a long way. However, large countries should not be dismissed, say the authors. The transfers can move people living in poverty above or closer to the poverty line. Picking up on DDPs will improve transparency in governments, something that the authors say is a good thing.

They are not a substitute for continuing and enhanced efforts at developing the institutional capacity of governments. On the contrary, they complement those efforts, because they trigger additional demands for public accountability.