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The Great Extraction

Give the people their resource wealth

By Martin Sandbu and Nicholas Shaxson

Published: June 4 2009 20:34 | Last updated: June 4 2009 20:34

In 11 months, the price of a barrel of oil has gone from $145 to $30 and it is again pointing up. But whether prices are high or low, natural resources such as minerals or oil are a mixed blessing for ordinary people in countries that sell them.

Countries too dependent on extractive industries face three problems. Large foreign exchange inflows lead to the “Dutch disease”: local costs go up, so imports undercut domestic manufacturing and agriculture. Gyrating commodity prices play havoc with budgets. And mineral rents infest politics with corruption and conflict. As everyone fights over the mineral cake, good governance falls apart.

The solution is simple but radical: distribute extractive revenues directly and equally to all citizens. Instead of fighting each other for oil rents, political elites would have to bargain with the people for tax revenues. If the government did not tax everything back, direct distribution would dram­atically transfer wealth to the poor. This has nothing to do with privatisation: the government could still get funds for roads and schools – but with pressure to spend the money well.

This proposal is not yet taken seriously in policy circles. Instead, western advice makes three main prescriptions: establish savings funds to stabilise vulnerable economies and save wealth for future generations; build infrastructure and diversify the economy; and improve transparency.

These matter, but the politics and problems that make them necessary are the same ones that blunt them.

Savings funds work in Norway, with its political pressure for self-restraint. But in Nigeria, savings have been tempting targets for crooks. And politicians hate telling citizens they must wait before spending the cash: East Timor’s government last summer tried to raid its savings fund by more than double the legal amount.

Diversification is hard because natural resource dependence feeds on itself. Dutch disease, corruption and revenue volatility damage other sectors, making commodities more dominant. More than 99 per cent of Ang­ola’s exports are from oil or diamonds.

Transparency should always be improved, but how much can it solve? The Extractive Industries Transparency Initiative is the world’s foremost transparency scheme, but even its flagship project in Nigeria, though it has improved transparency, has hardly empowered ordinary citizens.

Today’s prosperous democracies became what they are because their rulers taxed the population to finance government, forcing them to grant the people a share in power. “No taxation without representation”, and vice versa: mutual dependence underpins a social contract. But resource-rich states tax extractive companies, not citizens. When citizens lack leverage, the social contract withers.

Our proposal is the only policy that directly addresses this power imbalance. It is automatically transparent: people can see what is in their hands.

Direct distribution can be combined with the other approaches, but it is self-sustaining. It needs no external financing and, once implemented, which ruler would dare take it away?

Direct distribution is the right answer for many oil or mineral exporters. But can it be done? Implementation would be tough – but not much harder than organising elections or mass vaccinations. A trusted outside agency may have to ensure that money flows directly from extraction to citizen, bypassing politicians. In a country that tried it, citizens would be eager to make it succeed. Examples exist, such as the US state of Alaska and (non-oil-related) cash transfer schemes in Mexico.

Most politicians will not want it. But some will. An opposition leader may need a populist platform to win an election. The government of a new or future mineral producer, still untainted by entrenched interests, may be open to it. An ageing ruler may want to do leave a legacy. (Maybe that is why Libya’s Muammer Gaddafi recently proposed it.) Once introduced successfully in one developing country, citizens elsewhere will be more likely to demand it.

This must now become part of the toolkit for resource-rich states. Development groups must build up the practical support so that if, say, an African politician wants this, help is there. Once wealth flows to the people, power and citizenship will follow.

Nicholas Shaxson is associate fellow, Chatham House, and author of ‘Poisoned Wells: The Dirty Politics of African Oil’. Martin Sandbu is economics leader writer for the Financial Times

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