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Oil, Cash and Biometrics: Tools for Avoiding the Resource Curse Alan Gelb Center for Global Development DSA 2012 Conference, London, November 3, Oil Cash.

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Presentation on theme: "Oil, Cash and Biometrics: Tools for Avoiding the Resource Curse Alan Gelb Center for Global Development DSA 2012 Conference, London, November 3, Oil Cash."— Presentation transcript:

1 Oil, Cash and Biometrics: Tools for Avoiding the Resource Curse Alan Gelb Center for Global Development DSA 2012 Conference, London, November 3, Oil Cash and Biometrics A DSA 110312 1

2 Overview Driven by high prices and technology, the rate of resource discovery has accelerated – Many countries, including Uganda and other African countries, are discovering oil, gas and other minerals. Countries face a choice on how to absorb natural rent from these resources. – Public investment or transfers as citizen dividends – Evidence is growing in favor of the dividend option New technology makes the dividend option feasible – Political economy constraints will limit full application Especially non-discretionary allocation – But there is space for partial application of direct distribution 2

3 Discovery: Uganda Example Oil deposits long suspected in the Albertine Lakes Basin – January 2009 Heritage and Tullow Oil announced major find: exploration has continued, including on DRC side of the lakes High payoff to exploration costs of about $1 billion – Reserves initially estimated at over 1 billion barrels. – Some difficulties: remote location and low grade: lower natural rent Huge increase in national wealth. – Rent flow around 10% of GDP for 20 years – Comparable with recent aid flows – Total about $1500 per citizen or 15 times annual investment Reserve levels recently upgraded to 3.5 billion barrels – Typical pattern: Initial greenfield finds are followed by further finds as knowledge base expands 3

4 Uganda is not alone Chad1973Oil 1.5 billion barrels Sudan/S.Sudan1979Oil 5 billion barrels Equatorial Guinea1995Oil 1.2 billion barrels Uganda2006Oil 3.5 billion barrels Ghana2007Oil 660 million barrels South Africa2009Shale gas 16 trillion cubic meters Mozambique2010Gas 2.8 trillion cubic meters Tanzania2010Gas 6.5 trillion cubic meters Kenya2012Proving reserves Source Arezki, Dupuy, Gelb 2012 forthcoming Country Date Reserve Estimates Recent Oil and Gas Discoveries in Africa Global Discovery 2000-2008 Oil 44% of initial reserves, Gas 35%, Copper 70% Gold 54% On average, imputed discovery 4% per year Value of Oil Reserves discovered 2000-2008 at current rent (CR) valuation about $38 trillion (compare to Global GDP 2009 $54 trillion) Source: Gelb, Kaiser Vinuela CGDWP 290 2012 4

5 High Expectations No one in Uganda or internationally can now doubt the countrys steady and deliberate path to a middle- income country status in the near future…This is more so with the reasonable discoveries of oil which, without any doubt, will accelerate our progression to middle- income country status….With the recent discoveries of oil in Western Uganda, the countrys prospects for domestic revenue and self-reliance in financing public investments and programmes are much brighter today than at any time in the past. President Yoweri Museveni, National Address, October 9, 2009. But will it happen? 5

6 Investment versus Citizen Dividends: Governance, Efficiency, Exhaustion The Governance Argument: Distribute and Tax Studies suggest the Resource Curse is Path-Dependent – Effects depend on initial conditions and trajectory of governance and/or policy Governance includes both accountability and capacity dimensions – Accountability: Tsui 2005: 100 billion barrel discovery pushes democracy 20% below trend – Capacity: Quality of public investment management, tax administration, below non-oil countries (Knack) Oil boom 2002-2009: Autocracies become more entrenched, regulatory quality and rule of law erode in factional LAC democracies (WGI: Gelb forthcoming) Advocates: strengthen the fiscal contract: Distribute oil rents to citizen- owners and tax back – Erase the participation deficit – No representation without taxation – Analyses include Brautigam, Fjeldstat and Moore 2008, Moss 2011, Devarajan et al 2012 and others 6

7 Uganda: Institutional Risks Corruption: CPI ranking 2001 80, 2010 127 Corruption in procurement a serious concern – High loss estimates, widespread impunity – Gap between existence and implementation of safeguards one of the largest in the world (Global Witness) Also in revenue administration – Domestic non-oil tax yields stagnant at about 11% of GDP – Revenue Authority second most corrupt institution in Uganda (AfDB) – Efficiency of decentralized government low and falling Remorseless sub-division to create new districts for patronage: now 111 districts Limited local capacity. Teacher absenteeism estimated at 35% Concern over political entrenchment. Common in resource-rich countries – President in power since 1986…….. 7

8 The Efficiency Argument Governments often already transfer part of the oil rents to citizens through inefficient and inequitable means – Iran fuel subsidies: richest quintile received 6 times per-head subsidy than poorest quintile – Tend to become unsustainable (Irans subsidies up to 30% of GDP) – Discretionary distribution politicized (Venezuela: Misiones) Public investment has less growth impact if inefficient and also if fails to stimulate private investment The larger the windfall the greater share should be transfers Arezki, Dupuy, Gelb 2012 IMF index of Public investment Management Oil Exporter Management Deficit 8 Uganda ranks 41 out of 71 countries, especially weak in execution Absorptive constraints => Investment budget under-executed

9 The Exhaustion Argument How much should countries save because of finite reserves? Simple PI model (Timor LEste) – Rent 100, no discounting; investment real return 3% – 10 years reserve: permanent consumption = 25 – 30 years reserve: permanent consumption = 59 The exhaustion argument is weakened by patterns of discovery – Resource horizons typically far longer than initial estimates – There are still many reasons to spend cautiously, especially market uncertainty 9

10 Citizen Dividends Many studies of cash transfer systems (CCT, UCT) – Ease constraints on poor households to access income opportunities: Few negative incentive effects for moderate transfers Very large transfers, as in Gulf, may be different Only few examples of dividend programs in developing resource exporters: – Iran (fuel price compensation), Mongolia (child benefits) Bolivia (pensions), Timor LEste (veterans) – Venezuela: misiones and off-budget funds 2011 $30 billion = $1000 per head or 61% of oil income Not citizen dividends but at government discretion: potential to entrench populist policies 10

11 Dividends and Technology Any dividend program will need two elements: – Who are the citizens? Identify uniquely – Transfer on basis of citizenship and without leakage Biometric ID expanding rapidly in developing countries – Some 150 programs cover over 1 billion people – Used for a range of applications, including transfers, often with smartcards or electronic banking – At least half are donor funded – Gelb and Decker 2011 summarize 19 transfer cases. Some are large-scale (Pakistans Watan card (flood relief)) Many have operated in difficult conditions (DRC demobilization) Some have been running a long time (South Africa social transfers) 11

12 Developmental Biometric Cases by Type and Region Source: Gelb and Clarke 2012 12

13 Dividends and Technology contd. Few rigorous impact evaluations but evidence show: Technology now makes it possible to provide unique ID to citizens, at least up to 200 million population – India UIDAI technical reports Can transfer funds with little leakage to large numbers of identified individuals – Pakistan Watan card Can audit transfers down to finial recipient Technology also has risks but makes the theoretical prospect of citizen owners a practical option. 13

14 Conclusion. Few governments will voluntarily divest themselves of all resource revenues – But even partial distribution as dividends could get closer to the optimal balance – Help strengthen citizens sense of ownership – And relieve pressure for highly distortionary and inequitable subsidies Until recently there was no feasible way to implement such a program in most countries – It is now possible, with political will – Can facilitate through the design of programs through which oil income can be progressively channeled 14

15 Some GCD Working Papers Moss. 2011 No. 237 Gelb and Decker. 2011. No. 253 Gelb and Majerowicz. 2011. No. 261 Devarajan, Ehrhart, Le and Rabelland. 2011. No. 281 Gelb, Kaiser and Vinuela. 2012. No. 290 Rodriguez, Morales and Monaldi. No. 306 Gelb and Clarke. 2013 forthcoming 15

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