How Africa Can Extract Big Benefits For Everyone From Natural Resources

June 29, 2011

Shantayanan Devarajan The Guardian

Transferring a portion – or all – of the income from Africa's natural resources directly to citizens could help to reduce poverty and fight corruption

As the Natural Resource Charter holds its third annual workshop at the University Oxford, in the UK, this week, the combination of rising commodity prices and falling costs of communication technology presents Africa with an unprecedented opportunity to reduce poverty and fight corruption at the same time.

The continent is experiencing a commodity boom, and the bonanza is likely to continue – prices are expected to stay high until 2015 at least. It may even get larger through new discoveries. This causes a triple problem for the region's governments.

First, their currencies are appreciating, which leaves the other sectors of the economy – manufacturing, in particular – unable to compete with imports. Second, the risk of environmental damage associated with extracting natural resources is growing. And third, the opportunities for corruption and waste are multiplying – not just in the granting of exploration and exploitation permits, but also in the use of the revenues from resource extraction. Except for Botswana, the track record of Africa's mineral and hydrocarbon exporters is sobering.

While Africa's central banks are today better equipped to deal with currency appreciation, and its civil society more alert to environmental hazards, the institutions that control graft are not strong. They must be improved. However, this will take time. Is there a shortcut to better accountability in the management of natural resources? Yes, there is: direct transfers of resource dividends to citizens.

Around 35 African countries already transfer cash directly to their poor – through smartcards, debit cards, mobile phones, or in person. This is getting cheaper and safer. The coverage of banking and mobile phone services is expanding rapidly. So is biometric identification with mobile devices. Logistically, there is nothing that prevents governments from transferring a portion – or even all – of the income from natural resources directly to every citizen, not just the poor. This kind of direct dividend payment is not new – Alaska has been doing it since the early 1980s.

Why would giving people a share of commodity revenues help avoid, let alone reduce, corruption? Because if you know you are getting a portion of the oil revenues, you will surely be interested in the total amount – not to mention in what the government does with its share. You will want to know that the company which explores, exploits and exports your country's oil is competent and transparent – otherwise you lose money. You may not care about whether that company is public or private, as long as the best possible operator is in charge. You will not support politicians who interfere with the process. In brief, you will hold government to account more.

Optimally, one would means-test the dividend transfers, ie one would give more to those who are poorer. But that could be an insurmountable political and practical road-block. A uniform and universal transfer – the same amount to every citizen – would still be progressive, because it will help the poor more than the rich. If governments were to give up a tenth of their resource revenues, the typical dividend could amount to $100 per person per year. That's peanuts if you're rich, but a life-saver if you live on less than $2 a day, as most Africans do. And since the transfer goes directly to the individual, it could give a boost to groups that are regularly discriminated against, especially women.

As a possible additional benefit, direct dividend transfers could help national unity. In countries where regional, ethnic or religious differences make it difficult to agree on how to share natural wealth – a problem that is, sadly, common in Africa – the idea that everyone gets at least a bit of the riches, personally, individually, regardless of location, ethnicity or faith, just for being a citizen of the country, may be a useful source of national identity.

But if the resource money goes straight to the people, how will governments pay for "public goods" such as vaccinations, primary schooling, or defence? There are two possibilities. One is to transfer all the resource revenues to the citizens, and then tax them. After all, this is how resource-less economies pay for public spending – and why their taxpayers are keen to monitor it. The other possibility is to transfer only a portion of the commodity revenues.

Either way, direct dividend payments could be funded by governments' cutting back on the more inefficient and inequitable transfers that resource-rich countries already make – like tax breaks, fuel subsidies, and jobs in the civil-service – and which are regularly captured by the well connected and the wealthy. In other words, dividend transfers and fiscal integrity can go together.

Finally, will these transfers weaken public institutions by bypassing them? On the contrary, giving people a direct stake in their country's riches can buy time, and goodwill, for the slow-but-necessary construction of better governance institutions.

• Shantayanan Devarajan is chief economist of the World Bank's Africa region. Marcelo Giugale is director for economic policy and poverty reduction programmes for Africa at the World Bank