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Friday, 8 July 2011

The Alaskan Model, Revisited

One of the benefits of being “antique” in the blogging world, is that very few issues are new. But once in a while old ideas are repackaged and given a more coherent outlook which warrants a second look.  This appears to be the case with  World Bank's Marcelo Giugale  take on what could solve Africa's 'resource curse' - which involves putting resource wealth revenues in people's pockets directly  :
Would putting money in Africans' pockets, rather than in their governments' treasuries, really reduce corruption? It probably will, for three reasons. First, it would intensify social monitoring. If you know your government is giving you ten percent of its new oil revenue, you will surely be interested in what it does with the other ninety percent. You will also want the company that explores, exploits and exports your natural resources to be managed competently -- if it fails to find, extract and sell, you lose money. You will be less patient with the public monopolies that usually control those resources and behave as self-serving, unaccountable, states-within-the-state. In fact, you will begin to wonder whether your country should get rid of those public monopolies all together, and hire experienced, private operators to work for you.

Second, direct dividend transfers would make politics more contestable. There is no question that the transfers would be popular. Social programs that deliver cash to the poor have survived presidential transitions everywhere -- for example, in Chile, where the recent political alternation went from left to right, and in El Salvador, where it went from right to left. But incumbent governments may be reluctant to give up part of the easy revenue that comes from commodities -- less money, less power. Democracy would take care of that, as politicians in opposition can only gain by proposing to give people real access to their nation's wealth -- "Vote for me and the oil is yours."

And third, alternative ways of transferring natural resource wealth are worse. Governments in resource-rich countries are always under political pressure to be seen as passing some of the "dividends" to the population. The usual means have been to give out tax breaks, sell fuel or food below their cost, or give away jobs in the civil service. All this has in practice been captured by the rich and the connected. (Rule of thumb: the average developing country spends more on subsidizing public college education for the rich than on primary schools for the poor). If anything, giving people a direct stake in their country's riches can be an opportunity for -- and can be funded by -- the abolition of other inefficient, inequitable and morally-questionable transfers. You get a dividend, but you accept to pay full price for what you consume.
Those that have been on the road with us for a while will recognise this as the much discussed "Alaskan model". The state of Alaska takes a quarter of the money it makes on oil leases and royalties and puts it in an investment portfolio. This portfolio then pays a dividend, each year, to every Alaskan citizen. Alaska set up this fund 30 years ago, and it now more than $36 billion in assets. In 2007, the annual dividend was over $1,100 for every adult and child. But is this the solution to Zambia's mining problems? 

The "entitlement" argument is certainly powerful. In  theory handouts should certainly give people a sense of ownership which could have significant spillover effects in other areas. All of sudden, the idea that they are owners of state property like the public media wont seem so alien. The evidence from Zambia's ongoing experiment with conditional cash transfers does appear to suggest that such mechanisms properly targeted can have some impact on poverty, though scaling issues remain. Dividends in the Alaskan manner presumably would have the same effect - all things being equal, which is highly unlikely for reasons set out below. Separately, empirical evidence from cash transfers on entitlement is also missing

I suppose the main problem with this proposal is that it is too vague and missing important nuances such asthe scale of  “corruption” in question. For example, there’s an inherent assumption made by the author that revenue theft is rampant in the mining industry and it is most likely unmanageable. This is far from clear for many countries. For example in Zambia, though corruption in the sector is rampant (due to state capture by mining companies through campaign finance), the mechanism of corruption has not worked itself through explicit theft of funds but through maintaining a strategically poor fiscal regime (a legitimate way of stealing from the people). In that sense the big question is whether Zambians would demand a better taxation regime (and presumably kick out corrupt guardians) if they were directly entitled to the revenue. In short,  is it because we think any new mining revenue will just go into people's pockets, the reason why we are so quiet about demanding for higher tax revenues? If the answer is yes, then perhaps the author has a point. 

But even if corruption happened through direct mismanagement of significant mining tax revenues, the question still remains whether the "Alaskan model" would be better than other alternatives (e.g. communal based tax transfers which culturally may sit better). Part of answering that question requires clarity on the scale of what is proposed. Would this be all the revenues or just part of it? If all the money is dished out the macroeconomic effects may well be negative depending on where the money is spent by consumers (clearly in the tradeable sector - though this could be managed over time). If only part of the money is dished out then the question would be how much? Presumably enough to stimulate rural activity but not to turn people into a welfare estate! But that also raises another difficult - haven't we been told such mechanisms breed perpetual dependency? 

Then of course there are legitimate questions regarding likely behavioural response from government. Would central government simply raise taxes? Presumably it would still need to find other sources of revenues. Or may be it would cut down on public goods? That question also highlights the issue of “economies of scale” and "free rider" resolutions. Believe it or not but one of the reason we all give money to government is that it achieves greater efficiency in some areas than if we kept all the money. This is the basic rationale for public provision (and why government exists). Dividends in your pockets won't translate in a road we all need – unless of course, I collected enough dividends and built one and started charging you for using it, but then again how long would that take? And yes, there are laws against such things! 

But the idea should not be dismissed off hand because we must remember that underpinning it is simply the idea that unless people develop a sense of entitlement about their resources it becomes very difficult to get government to act on their behalf. You must first realise all these things we talk about (freedom of press, mineral wealth, right of assembly, justice, accountable government, transparency) are not alien ideas but things that belong to you. There's no reason why government should not maximise revenue from its natural resources. There's no reason why you should not expect a neutral public newspaper! And we can go on and on. 

4 comments:

  1. Would putting money in Africans' pockets, rather than in their governments' treasuries, really reduce corruption?

    Well why not try putting money into the treasury first. Right now minig companies' tax payments are pretty irrelevant to taxes collected.

    It probably will, for three reasons. First, it would intensify social monitoring. If you know your government is giving you ten percent of its new oil revenue, you will surely be interested in what it does with the other ninety percent.

    People already are, the difference is that no one can do anything about what the state does with the money. Even within government, it seems to be the Finance Minister even more than the President who calls the shots. And the present FM used to be a non-executive director for ZCCM-IH.

    You will also want the company that explores, exploits and exports your natural resources to be managed competently -- if it fails to find, extract and sell, you lose money.

    Again, where does the control come from? You may be interested, but so what?

    You will be less patient with the public monopolies that usually control those resources and behave as self-serving, unaccountable, states-within-the-state. In fact, you will begin to wonder whether your country should get rid of those public monopolies all together, and hire experienced, private operators to work for you.

    And everyone will live in the bliss filled, neoliberal utopia too. :)

    The way I see it, is that natural resources belong to the people. No one built them, no human being worked to create them, they belong to the people. They should be administered by the State on behalf of the people.

    To go the Alaska route of simply writing a check to everyone in the country would be better whan the outright theft that is happening today.

    What is worse, in a largely undeveloped country, there would be no multiplier effect. It is better that the state uses the money in a concentrated way, to build roads between major commercial centers, or creates irrigation districts to mitigate the floods, or educates every child in the country through highschool and vocational training/college.

    In the US, the average person with a college degree earns $1,000,000 more during their lifetime than someone who does not - at 25% income tax, that is $250,000 per child that comes back to the state in income tax).

    And that brings me to the economic Multiplier Effect. If the state earns $1 billion from copper, and writes a check to every person in Zambia (13 million), everyone gets a check for $76,92. Most of that will be spent, which would stimulate the economy. However, it would not dramatically change most people's lives.

    Build bridges, 'small water' projects to raise the water table and store water on higher ground so it is available year around and make millions of hectares availbable for agriculture, while preventing the annual flooding (loss of life, property damage). That would be an increased per hectare of $400/hectare for maize (2 tonnes/ha at $200/tonne), per year.

    And here's another thing - can Zambians every TRUST transnational mining companies not to cheat? I don't think so. Here Anglo-American, which controls 90% of the world's diamond trade, cheating not only on their taxable income like Mopani/Glencore. They are caught smuggling diamonds out of Zimbabwe so they won't have to share profits or pay taxes. This is pure thievery, by the biggest diamond miner in the world.

    Anglo-American De Beers caught stealing diamonds - (SAPA) Prope Into De Beers Operations in Chiadzwa.

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  2. MrK

    “To go the Alaska route of simply writing a check to everyone in the country would be better whan the outright theft that is happening today”

    Except there’s no money to steal because we don’t collect any!
    The money is stolen before it gets into the Treasury! That’s the problem!
    This is why we need a new fiscal regime.

    The Alaskan model is only helpful to us if we think that a new fiscal regime would come about when people starting seeing money going into their pockets.

    The interesting point of course is that Alaska only allocates a quarter. For Zambia I make that $1 per person annually!

    In 2009, we earned a paltry $52m in mining royalties. If we apply a quarter – that would be $52m/4 = $13m. Then divide that by the population of 13m and you get $1.

    If we decide to give it all away – its $4 per person! Its not worth it until we change the regime.

    I will put a table of revenue payments for the record later. But see table 1.4 at this ZRA link http://www.zra.org.zm/Statistical_Bulletin.html

    We are being robbed my brother!

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  3. “To go the Alaska route of simply writing a check to everyone in the country would be better whan the outright theft that is happening today”

    Except there’s no money to steal because we don’t collect any! The money is stolen before it gets into the Treasury! That’s the problem! This is why we need a new fiscal regime.

    You're right, but I was talking about the theft by the transnational mining corporations, not the government itself.

    The mining companies are alienating at least $2.5 billion a year from the Zambian economy. Those are the Zambian people's resources, and it is not to the MMD or any party to sign them away for a bribe, or any other reason.

    We are being robbed my brother!

    Absolutly.

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  4. I would really love for us to implement this Alaskan Model in Zambia. For the record- I have doubts about its efficacy if considered from the purely economic theoretical perspective. (Read- theoretical ivory tower economic theory- Keynesian, Chicago school, Neo liberal, ...name it, all the different dogma stuff ). I go with MrK. on this and posit that every extra K10,000 in govt hands has potentially more marginal utility than K10 each in 1000 people’s hands . But we need to step out for a moment and work out (practically)how exactly this can be accomplished in Zambia. It’s only then, that I get really excited about the idea. The potential spinoffs from implementing the ‘Alaskan payoffs could be enormous. They would, in my humble view, more than make up for the inefficiencies, frictions, corruptions,… name it- occasioned by splitting the payments
    Practical problem No 1 - How do you ensure that the recipient is not double dipping ?( Double tobela, triple or multiple tobela if we use the vernacular! ) How are you able to verify that Makatala Mundia of Misisi really exists? Are you able to visit him at his residence or his Kantemba even? Is he still alive? In short do we have usable information about our citizens? Do we have a specific database about our citizens that is current ? Modern States should/must know how many people, and their specific addresses and other pertinent data about its citizens. This Alaskan payoff opens up enormous possibilities. There is nothing like a promise of a sangwapo payoff to bring all citizens to register. But what will stop Musonda Mubanga from registering more than once? We have ghost voters , ghost workers etc. How do we reduce the incidence of ghost citizens? My suggestion is that we link this register to the ZRA tax register . So the benefit comes with an obligation.! It is this consolidated register that I think will kick start and our ascent to the next level.
    Benefit No 1- Suddenly it will be possible to have a functional database for institutions like Credit bureaus to access. With functional credit bureau’s the Supreme Furnishers, Woolworths, Banks and Financial institutions that are reluctant to bring financial products to the masses will be less reluctant. This will, at last, make it possible for the ordinary Zambian to have access to credit and the financial markets. The currently primitive financial market we have, will finally arise from its slumber and go out to start impacting the real economy
    Benefit No 2- why is it that in a country of over 11 million there are less than 600 000 taxpayers? I would tie the Alaskan payoff to being a registered tax payer! The informal sector is huge in Zambia. A lot of informal workers make much more money than, say civil servants, and I do not know why they should not be taxed. ZRA , GRZ and the formal employees would benefit from having the tax net cast a lot wider. Lower tax rates for all could become a reality while at the same time collecting much bigger sums.

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