Tuesday, November 18, 2008

Libya's oil money plan: distribute directly

Libya's president Muammar Gaddafi appears to be taking interest in a revolutionary idea which is supported by a number of prominent people, as well as publications like The Economist magazine, and which is already being implemented in a limited form in Sarah Palin's Alaska, where each resident gets just over $2,000 from its permanent oil fund. But take a look at this story:

"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.


Blogger Unknown said...

Dear Nick, I'll be generally supportive of your proposal to redistribute a part of the oil revenue directly to the citizens.

The comments of the central bank director are ridiculous, as it assumes that government officials either spending in their ministries or looting the oil revenues for themselves wouldn't equally cause inflation.

The best way to fight inflation is to invest, and there is no indication that the poor wouldn't invest in their own education, health and other basic services. Actually, the basic income grant can be made conditional to a social contract, to have your children in school, vacinate them, and have regular medical checks.

This is how the Bolsa Familia, the family grant, transfer payment works in Brazil. There low-income families receive about 50 dollars per month in return for keeping their children in school. Subsequently other social services are also passed through the bolsa familia programme, including HIV/AIDS prevention and family violence awareness.

As a Lula himself once said "when you give tax breaks to the rich it's called investment, when you hand money to the poor they call it waste". The perception of the poor as incapable of managing their own lives, or as irresponsible consumers couldn't be further from the truth.

As a direct consequence of the Bolsa Familia, food consunmption rose in the North and North East of Brazil, school attendence soared, and for the first time in recorded history the Gini coefficient actually dropped. For the first time in the 500 year history of Brazil these people had a contact with the state, breaking old patriarchical, ethnic and patrimonial ties, and a form of active citizenship.

Also it's mothers who mainly receive the money, as they are seen as being more responsible for household spending, linking the grant to school attendence and early child health.

Now what's the difference between direct income transfers from an oil fund, and income transfers from other tax revenues. I don't see a great difference, as in any case oil money will circulate the economy much like other revenue. The more you try to direct it towards investment the better, and I wouldn't always consider the government is best placed to ensure the money gets reinvesteda. The Nigerian government is incapable of solving their internal brawls, the Angolans and Gaboninans invest in a bubble housing market, and many North Africans have wasted a historical opportunity to modernise their economies. It seems Tunisia with no oil or gas is doing best as they've managed to diversify.

What both micro-finane and income support schemes show, is that the poor are more responsible spenders than what the Libyan central bank governor would imagine.

4:04 am  
Anonymous Anonymous said...

Dear Matti and Nick, another important factor in favour of targeted direct distribution is that poorer households tend to spend on domestically produced goods and services, whereas wealthy elites tend to spend a higher proportion of their household expenditure on imported luxury goods. Needless to say, domestic expenditure has a higher multiplier effect within the local economy, creating more, productive, jobs, rather than supporting the import-export activity favoured by merchant classes.
best wishes

6:49 am  
Blogger Nicholas Shaxson said...

In an e-mail correspondence, it has been suggested that this proposal represents some kind of privatisation. It is absolutely nothing of the kind. Certainly not in the core proposal; I am not sure that Gadaffi is after "privatisation" either.

In such a scheme, there may be greater private provision of services, but not necessarily so. There is no reason at all why the government should not continue to deliver core services. The only difference is that the government would be more accountable to its people, so the core services it provides would, it seems likely, be generally better. This proposal is only about transferring mineral income from state to citizen. There is absolutely no transfer of sovereignty inherent in this. It's important to understand this. There would be interesting questions of sovereignty if a third party were required to ensure the transfer from mineral to citizen, bypassing the government (but again, this is nothing at all to do with privatisation.)

10:15 am  

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