Chris Blattman’s post on the value of cash transfers in economic development got me thinking about the other ways in which cash transfers could be used to solve a number of governance issues.  The Center for Global Development has a series of proposals on using cash transfers to mitigate the natural resource curse.  Here is a quick summary:

Todd Moss, senior fellow and vice president for programs at the Center for Global Development, demonstrates how leaders of poor countries can beat the resource curse — the paradox that countries that strike it rich often suffer from high poverty, dismal governance, and terrible corruption. His policy option, called Oil to Cash, helps foster a social contract in resource-rich countries by directly distributing natural resource revenues. Under this proposal, a government would transfer some or all of the revenue from natural resource extraction to citizens in a universal, transparent, and regular payment–and, importantly, then tax part of it back.

CGD also has a paper that addresses some potential criticisms, although these aren’t some of the obvious ones I would think of.

This is a really interesting idea, but I have a few concerns.

1.     The link between natural resources, political violence, and authoritarian is often attributed to the value of the state when the state controls natural resources.  See Thad Dunning’s excellent book.  It isn’t clear to me how cash transfers would change the incentives to rebel or for leaders hold onto power.  Unless there is a credible commitment to provide cash transfers in perpetuity, that value of controlling the state is very, very high.  That is one of the problems with natural resource wealth.

2.     Michael Ross has pointed out that many countries can use their natural resources as a means to borrow in international capital markets.  These “booty futures” lower the cost of borrowing for the state.  As long as natural resource producers can borrow against resource wealth, this can provide a steady stream of rents to the government.

3.     One classic problem with natural resources is that prices are volatile, affecting a government’s ability to budget.  I can imagine this being even more problematic for citizens.  One reason for governments (or MNCs) to control resources is that they mitigating the adverse effects of price volatility.

4.     A strong assumption in this work is that by allocating resources and then taxing them, citizens will demand more from the government.  This argument isn’t new, but I think the empirical evidence on this is shaky.  There is some good work on the “fiscal illusion” where citizens are especially bad at linking the costs of government spending to their own tax bills.

One final speculative concern, related to my own research, is how giving citizens direct access to revenue streams would affect a government’s incentives to uphold contracts with firms.  Many natural resource expropriations are popular with at least some segments of society.  Would giving citizens a direct financial stake in natural resource contracts increase their incentives to support expropriations or contract renegotiations with natural resource extraction firms?  Do citizens care more or less than the government about the reputational costs of reneging on contracts?

These are just a few random musings while my newborn son sleeps.  He sleeps a lot.  Shoot me off an email if you have seen any research related to this topic.