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

Oil, Cash and Biometrics:Tools for Avoiding the Resource

CurseAlan Gelb

Center for Global DevelopmentDSA 2012 Conference, London, November 3,

Oil Cash and Biometrics A DSA 110312

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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

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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

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Uganda is not alone

Chad 1973 Oil 1.5 billion barrelsSudan/S.Sudan 1979 Oil 5 billion barrelsEquatorial Guinea 1995 Oil 1.2 billion barrelsUganda 2006 Oil 3.5 billion barrelsGhana 2007 Oil 660 million barrelsSouth Africa 2009 Shale gas 16 trillion cubic metersMozambique 2010 Gas 2.8 trillion cubic metersTanzania 2010 Gas 6.5 trillion cubic metersKenya 2012 Proving reserves

Source Arezki, Dupuy, Gelb 2012 forthcoming

Country                                   Date            Reserve EstimatesRecent 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

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High Expectations• “No one in Uganda or internationally can now doubt

the country’s 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 country’s 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?

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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

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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……..

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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 (Iran’s 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 0 1 2 3 4

EAP

ECA

LAC

MENA

SSA

0 1 2 3 4

MICs

LICs

0 1 2 3 4

OilExporter

Non-oilexporter

Oil Exporter Management Deficit

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Uganda ranks 41 out of 71 countries, especially weak in executionAbsorptive constraints => Investment budget under-executed

The Exhaustion Argument• How much should countries save because of

finite reserves? • Simple PI model (Timor L’Este)

– 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

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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 L’Este (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

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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 (Pakistan’s Watan card (flood relief))• Many have operated in difficult conditions (DRC demobilization)• Some have been running a long time (South Africa social transfers)

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Developmental Biometric Cases by Type and Region

Source: Gelb and Clarke 2012

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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.

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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

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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

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