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Beating the ‘Resource Curse’

By Larry Diamond and Jack Mosbacher

Novel recommendations for ensuring that Uganda’s ‘Black Gold’ cash benefits as many citizens as possible

Uganda is awash in oil. But how can the country avoid the negative development outcomes experienced by every previous oil-rich country in Africa? Uganda’s legislators have tried to craft laws that will curb corruption, ensure fair play, and promote positive economic and political development as Uganda becomes an oil exporter.

We recommend that Uganda takes it a step further: implement an oil-to-cash scheme that would place a portion of the nation’s petrodollars directly into the bank accounts of all Ugandans and revolutionize the way that Ugandans and their public servants interact.

Oil booms have poisoned the prospects for development in Africa’s oil-rich states. The surge of money from oil often has insidious effects on the greater economy: the influx of oil money fuels inflation, distorts exchange rates, undermines the competitiveness of traditional export sectors such as agriculture, and preempts the growth of manufacturing.

Oil booms are also bad news for democracy and the rule of law: rather than fostering economic and political competition and an entrepreneurial middle class, oil wealth generally promotes or exacerbates corruption while swelling the power of the State.

These effects combine to produce a phenomenon known as the ‘resource curse,’ in which the arrival of valuable natural resources into a low-to-middle income economy coincides with negative economic and governance outcomes.

In fact, resource-rich economies around the world have performed far worse than their resource-poor neighbors over the long-term, and increased natural resource wealth is strongly correlated with greater corruption, authoritarianism, political and economic instability, and civil war.

The resource curse is rooted in the divergent effect that resource wealth has on the incentives of citizens and their public representatives. In healthy democracies, citizens consent to be taxed in exchange for public services and protection.

Taxation, therefore, creates a social contract between citizens and their public officials: because the government is funded through taxation of businesses and individuals, citizens are direct and active investors in the government, and public officials are beholden and accountable to the population they serve. This ‘social contract’ forms the foundation of any healthy democracy.

However, when money from oil or other natural resources – or “rents,” as economists say – replaces taxes as the main source of government funding, the social contract between a population and its government is distorted. The incentives of public officials shift to the collection of as many oil dollars as possible for themselves and their supporters.

Because public officials no longer need to rely on taxation, they become less accountable to their citizens, who in turn become less invested in the performance of their government. In this way, the replacement of tax dollars with oil rents corrupts the social contract, diverging the interests and incentives of the government and the population and resulting in widespread corruption, negative economic outcomes, and decimated governance.

Accountability connection

Like many developing countries, Uganda struggles with corruption. According to the most recent East African Bribery Index from Transparency International, nearly 50% of Ugandans reported that bribes were either expected or demanded in normal interactions with government service delivery institutions. According to the Afrobarometer, almost 90% of Ugandans believe that their President, Members of Parliament, local officials, police, and judges are corrupt.

The resource curse strikes most lethally at political systems unable to contain corruption. Therefore, without radical, path-breaking intervention, Uganda will likely fall victim to the resource curse.

The legal system created by Uganda’s policymakers to regulate Uganda’s coming oil sector will likely be too weak and flawed to effectively control corruption. The current framework gives the President and the Minister of Energy and Mineral Development far too much discretionary power.

For example, the minister retains the exclusive power to issue and revoke oil exploration and production licenses, and the President can arbitrarily remove a Board member from the new Petroleum Authority at any time for “incompetence” or “misbehavior.”  Overall, the current regulatory framework is full of glaring loopholes that will likely invite and perpetuate long-term corruption and abuse in the oil sector.

There are a series of amendments that, by checking and balancing the powers of different actors, could shore up some of the existing holes in the current system. To begin with, Members of Parliament could replace the discretionary abilities of the Minister to issue and revoke contracts with a formalized, transparent, and competitive bidding process.

The influence of the President and the Minister could also be disentangled from the Petroleum Authority through greater Parliamentary involvement and oversight. However, given Uganda’s past struggles to control basic corruption, it is unlikely that these small changes would preempt the resource curse.

Given the reality of Uganda’s challenges, it is time to try a new policy approach: the distribution of a portion of oil revenues directly to citizens as taxable income.  Practically, the scheme would work as follows: when the Government of Uganda receives oil revenue, a certain proportion of it (ideally, at least 50%) would immediately be distributed directly to the bank accounts of all Ugandan families via a mobile banking network.

At the same time, each payment would come with a message indicating that some portion of their “share” of Uganda’s oil revenues had been returned to the State as a tax.  This oil-to-cash approach, pioneered by scholars at the Center for Global Development (CGD), would attack the fundamental causes of the resource curse. Suddenly, oil becomes the common property of all Ugandans. Directly distributing oil revenues to the people would create a broad and active constituency of citizens who are directly affected by the government’s management of their resources.

This game-changing mechanism would use the presence of oil to restore and strengthen the ties of accountability between the officials who control the state and the people they represent and whose money they are spending.

To many, the concept of direct cash transfers of oil dollars seems practically impossible. How can a country like Uganda, with millions of citizens who do not currently have bank accounts or even basic personal identification, be expected to implement a nationwide cash transfer program?

Successful model

In fact, according to CGD scholars Todd Moss and Alan Gelb, over 60 developing countries have made regular direct transfer payments to over 170 million people. This is partly due to advances in biometric technology: as many 450 million people in developing countries have had their biometric data (fingerprints, facial and retinal recognition, etc.) documented and catalogued.

Of course, implementing oil-to-cash will require a huge investment in infrastructure, but new technology in electronic and mobile banking through cell phones is making this undertaking continuously cheaper and more logistically feasible.

By 2015, it is projected that over 70% of Ugandans will have access to a mobile phone; Kenya’s highly successful mobile banking platform, M-Pesa, demonstrates that a  mobile phone can serve as a bank; that same mobile phone could very easily receive a direct cash payment.

Some critics of oil-to-cash fear that the injection of ‘free money’ into the economy would stoke inflation. However, inflation is a threat faced by any resource-rich economy, and it can be mitigated through a smart monetary policy. In particular, Ugandan policymakers could adjust the rate of taxation to transfer only that amount of cash that economists determine could be absorbed by the average poor family without fueling inflation.

Other critics claim that individuals, particularly those in extreme poverty, will waste or otherwise unproductively spend oil-to-cash funds. But numerous studies demonstrate that cash transfers, particularly to the most impoverished, have been spent largely on health, education, and small business investment.

Furthermore, as CGD scholar Todd Moss points out, increased spending by the poor on nutrition, health, and education is not frivolous “consumption;” rather, it is investment in human capital that allows individuals, rather than bureaucracies or governments, to make decisions to maximize their own welfare.

Finally, if oil-to-cash spending were being wasted, particularly on alcohol or illicit drugs, transfer payments could simply be sent to mothers, who have a record of better financial stewardship and management.

Oil-to-cash by itself will not cure the resource curse. Uganda’s legislators must continue to strengthen the entire legal-regulatory system to curb corruption and increase government performance and accountability.

Similarly, Uganda should join global efforts like Publish What You Pay, the Extractive Industries Transparency Initiative, and best practices in budget transparency so that Ugandans can know how much oil revenue the government is recovering and how it is being spent.

In the oil-rich developing countries that have come before Uganda, every conventional policy approach to avoiding the resource curse has failed. Why should Uganda be any different?  Only through a radical new approach to oil governance can Uganda achieve a different fate.

Larry Diamond is professor of Political Science and Sociology and a Senior Fellow at the Hoover Institution, Stanford University. He also coordinates the Democracy Program of the Center onDemocracy, Development, and the Rule of Law (CDDRL).


Jack Mosbacher is Research Associate at CDDRL and a Research & Policy Analyst at California Common Sense.

This article has been specifically written by Prof. Larry diamond and Jack Mosbacher for The Independent. It is an abridged version of their path-breaking article published in the current issue of Foreign Affairs, an authoritative US magazine on international relations and foreign policy.

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