Libya's oil money plan: distribute directly
"Gaddafi, complaining about ineffective ministries and corrupt officials, said in March the government should hand oil wealth directly to the people so they can choose where to get basic services. He also urged a sweeping reform of government bureaucracy, saying most of the cabinet system should be dismantled to free Libyans from red tape and protect the state budget from graft."
It should be noted that the paragraph above involves two separate proposals: one, to distibute the oil revenues directly to the people; second, to overturn the government system and dismantle most of the cabinet system. It is the first one that is most interesting (the second one seems a little strange, but we don't have enough information to know what Gaddafi really means by this.) It would be important to complement it with a second: tax citizens directly on the income they receive. Once you build up direct taxation, you get into interesting territory.
We don't have any more precise details yet, but at this stage it is hard to understate how fundamentally the first part of this proposal, if enacted properly, could change Libya. The idea, which hinges on fundamental relationships of taxation, could catch on elsewhere. Some TJN members support this idea (direct distribution, then direct taxation), and others don't -- so it's not a core TJN position.
If done properly, it would imply a dramatic redistribution of wealth from rich to poor (which should please those on the political Left); it would put money into the hands of private citizens (which should please those on the Right); and -- if Gadaffi intends to complement this with new direct taxation systems to recoup some of the wealth handed out -- it would potentially create an economic system where rulers had to bargain with their citizens for tax revenues (instead of just taxing the oil companies, meaning they could forget about their people); this would, if done rightly, improve accountability and governance.
'Gaddafi said on Tuesday that Libyans should not trust government bureaucrats to manage their money. "Whatever, you have to think about how the oil money will be distributed directly to the Libyans. . . . There is no ruse here. People cannot be fooled. This oil belongs to the Libyans. They have to take the oil money and do whatever they like with it," Gaddafi said.'
This theory in principle has been supported by a fair few economists and others. For example, it was advocated for Iraq in the publication Foreign Affairs a while back (and a TJN blogger more recently had something shorter published in Foreign Affairs and a longer article in the publication International Affairs, touching on this same subject, and presented a long paper at a recent AABA workshop.) It is also supported by the popular economist Tim Harford, and it's discussed at length in this IMF working paper on Nigeria by the senior former IMF economist Arvind Subramanian. The US-based academic Martin Sandbu has also explored this proposal in some detail. This proposal, it should be noted, can be combined with other policy instruments recommended to tackle the "Resource Curse", such as oil savings funds. Norway's oil fund has a limited and specific form of direct distribution involved; it serves to pre-fund public pension spending.
Others in Libya, presumably including a fair number of people who have done well out of the current arrangements thankyou very much, are not happy with this. Not at all. As the FT described it:
"In a country where no dissent is tolerated, viewers heard Farhat Omar Bin Guidara, central bank governor, telling the leader that doling out large sums of money to the masses would fuel inflation, cause the value of the dinar to drop and create a balance of payments deficit."
Others argue that giving people money reduces their incentives to work. These concerns, and others, have been aired many times before. But they are all (at least partly) misplaced, and they can be tackled too. Practical implementation would be hard - but probably not that much harder than, say, organising an election in a poor country, or a mass vaccination campaign. Politicians will resist it - but there are ways this might be overcome - Gaddafi's latest idea being one example. This is a complex and interesting area, and for those interested in pursuing this idea further, the papers mentioned above discuss a number of practical and other issues.
This is all mixed up with the subject of tax and accountability, a subject where TJN is starting to build up a significant programme. See this web section for more. And watch this space.
Update 1: the first comment under this blog provides some extra perspective on this idea. Further comments welcome.
Update 2: it has been suggested that this proposal represents some kind of privatisation. It is not yet clear what Gaddafi has in mind in this particular case; but in terms of the generic idea of direct distribution, this has nothing to do with privatisation, which is about passing management and ownership of business from the public to the private sector. This proposal is about transferring income, not business.