Spreading the Wealth
In resource-rich countries, subsidies haven't made people happier or governments more accountable. What might actually work? Just give money to the masses.
Even as the West is cheering on the popular revolts against odious dictators across North Africa and the Middle East, there is a sinking dread of what may come next. Few will shed tears for Libya’s Muammar al-Qaddafi if he falls from power, but what if he’s replaced by another iron-fisted dictator? What if the next ruler in Tripoli also uses Libya’s wealth to entrench his own power rather than build the country?
The great nightmare, of course, is that what comes next could be even worse than Qaddafi — or that Libya turns into another rogue regime like Iran. And one place to turn to for a big idea to ensure this doesn’t happen is, paradoxically, Iran.
Since its 1979 revolution, Iran has used its oil wealth to subsidize basic goods for its citizens, most notably fuel. Gasoline is just 10 cents a liter — cheaper than bottled water. But these subsidies now cost nearly one-quarter of Iran’s GDP and have become unsustainable. So last year, the Islamic Republic approved a more efficient and novel approach: phase out subsidies and replace them with direct cash payments to poor families. The idea is partly aimed at efficiency. Cash payments will not only cost less than the subsidies, but are also a better way to fight poverty and share national wealth.
The case for cash transfers — to just give money to the poor — is getting stronger every day. Special programs that link direct payments to school enrollment and clinic visits have proved highly successful in countries from Mexico and South Africa to Nepal and Namibia. In Brazil, more than 12 million families now participate in its conditional cash-transfer program called Bolsa Familia. And just this month, India began phasing out its subsidy program to be replaced by, you guessed it, cash payments to the poor.
The cash-transfer model involves a leap of faith: the bet that people know better than bureaucrats how to use their money. This has made direct payments politically attractive to both the populist left and the libertarian right. What better way to push "power to the people" than to give them the money that was the source of elite dominance and corruption in the first place?
These benefits likely apply in Libya too — so much so, that Qaddafi himself proposed in 2008 to give away a chunk of the country’s $50 billion annual oil and gas income directly to Libya’s 6 million citizens. That plan, like many of Brotherly Leader’s grand ideas, was more ruse than reality, and it never actually left the drawing board. But a post-Qaddafi Libyan government might consider trying again, not as a one-time show of populism or a desperate attempt to buy off the angry and newly assertive masses, but as a constitutionally enshrined, regular, transparent payment to every citizen.
Done this way, cash transfers could be a useful way for Libya to beat the resource curse. Mongolia is using some of the proceeds from its gold boom to finance child cash benefits, while Bolivia is using its gas receipts to fund its pensions (which are, really, just cash transfers for retirees). Most famously, Alaska has used dividends from its petroleum fund to cut checks for state residents since 1982.
The real way that regular cash transfers fight the resource curse is by creating demand for better use of public money. Alaska launched the Permanent Fund Dividend not because Alaskans were poor, but because then-Governor Jay Hammond wanted to create a durable citizen check on state power and wasteful spending. (It’s telling to contrast Alaskans’ tight watch on state income versus their penchant to squander federal funds.) As de facto owners of Alaska’s oil wealth, the state’s residents would have a vested interest in making sure their government didn’t abuse it.
Such a system could be particularly useful in fragile states, where incentives for government accountability to citizens are especially weak. The leading thinking on why oil wealth too often leads to poverty and conflict — think Nigeria or Chad — is the effect of easy money. Governments that live off oil income don’t have to tax people and firms, so politicians don’t care about creating wealth or encouraging business growth. And because citizens don’t pay taxes, they don’t demand much in the way of services either. Thus there is no bargain of consent: Oil kills the social contract.
That’s why, instead of using oil income to build the country, politicians find it easier to buy guns and hire secret police to strengthen their grip on power. In fact, this is exactly what we are seeing unfold in Libya: The Libyan people are being killed with weapons paid for with money that rightfully belongs to them.
Doling out oil wealth directly not only denies those resources to the government, but also creates incentives to tax it back — and thus provides an interest among politicians in fostering thriving businesses and among citizens to demand more from their government. It may seem needless to give money away only to tax it back, but that’s precisely the point. In not taxing their citizens, oil states have proved the inverse of the Revolutionary War slogan: There is no representation without taxation.
There are, of course, plenty of reasons to pursue this path with caution. For starters, the central bankers will worry that fueling consumer demand will lead to inflation. But there’s little reason to believe that spending by individuals will be more inflationary than massive government spending — on subsidies, highways, or luxury goods. The real choice here is how much income to save for later versus spend now, not whether people or politicians decide how to spend it.
Another good question is: Can you pay millions of people cash without having it all disappear? South Africa and Brazil can manage because they have a decent banking system, but what about places like Ghana, East Timor, or Libya? Fortunately, new technologies, such as biometric identification (fingerprinting, iris scans, smart cards) and mobile banking, make it not only feasible but also relatively cheap. If iris scanning can be used to make payments to demobilized soldiers in eastern Congo or refugees in Afghanistan, then it can probably work anywhere.
The final hurdle is political. Giving up control of the budget and empowering your people to decide how to spend it takes vision and no small dose of courage. But windows of opportunity arise, and just such a moment might soon be upon Libya. The space before anyone consolidates power and when a new constitution is being written could be just the moment to strike a grand bargain and lock in the people’s rights to regular distributions of their country’s wealth.
Qaddafi proclaimed himself the King of Kings, dreaming that he would one day be the leader of all of Africa and that his vision for Libya would inspire oppressed people around the world. It’s not the way he would have hoped, but after his brutal and delusional regime, Libya might just be inspirational by showing the way from tyranny and poverty to freedom and development by just giving the oil money back to the people.