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Direct Cash Transfers to Avoid the Resource Curse

Pouring Money over Poor People Will not Fix Politics

19-07-2013

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The current second-round resource boom in Africa should not be a missed opportunity. This time it must trickle down to lift people out of poverty. So far, all agree and the rhetoric about how to make it work is now well echoed in all spheres of policy, including outside Africa. But tangible results are yet to be seen and some are getting itchy. Rightly so!

Prescriptions and recommendations are fusing from all sides. Some of them are very pragmatic and rational, other are more, say, creative… Many though seem to overlook the fact that extractive resources are all but normal goods and therefore what may make economic common sense to enlightened economists might never deliver on the intended results, given the extremely complex imbroglio that the prospects of rent capture create and entertain. Politics and oil definitely do not mix.

Although not new, the idea of direct cash transfers of revenues from natural resources is making a strong comeback, widely supported this time by the World Bank and the Centre for Global Development, amongst others. In their latest publication, they propose to those African countries that have difficulties to deliver visible results to lift people out of poverty, to transfer a portion of their revenues from natural resources directly to their population – uniformly and universally. It promises to reduce poverty, improve social welfare through better provision of public goods and higher private consumption, make governments more accountable and enhance citizens’ scrutiny. THE dream! If only…

Cash transfers are being implemented: In the State of Alaska it is up and running and apparently effective. The Indian government is currently setting up a Direct Cash Transfer (DCT) plan (although not linked to any natural resources), aimed at replacing subsidies with direct cash-out to beneficiaries (through banks, post office and online connectivity) to fix leakages in the current system and to make it more efficient and transparent for the delivery of social welfare benefits.

The Indian system is not universal but targeted to the poorest. In the words of Union Minister Jairam Ramesh, it is the ‘largest experiment to reform a broken system’. But it is yet to be implemented and deliver on promises, in particular in a country where the population is essentially rural, the illiteracy rate is still high, poor people are unbanked and technological infrastructure is not so widespread. The Government of India has watered down its ambitions: programs covered under the DCT are minor in nature — scholarships and pension plans. The big-ticket items like food, fuel and fertilizer subsidies have been left for later. How the system will unfold in India will certainly be a good litmus test for other developing countries, especially resource-rich countries.

In Africa, cash transfers are very seductive but they are a (potentially dangerous) double-edged sword. Certainly, it appeals greatly to citizens – your money in your hands is a tempting slogan, can guarantee votes and to some extent make society less unequal. To politicians, it is a powerful populist tool that they can use to cling to power or to buy a conscience, hide failures under the carpet or shy away from state responsibilities. It can very easily become a quick fix or a ‘political capital’ machine gun that elites can use to shortcut the system and elude real issues.

Some argue that if governments are failing then people should not be penalised. Granted! But does it not defeat the purpose of strengthening governance structures and state building so that governments finally do precisely what they ought to do: care for their people? Doing it upside down is somewhat risky. Throwing money at people to buy peace will not fix key governance issues that the ostentatious resource revenues entertain: kleptocratic behaviour, corruption, looting, rent-capture, irresponsibility, you name it.

Can cash transfers ultimately make governments more accountable just because we assume people will pay their taxes and therefore will have the right (or capacity) of scrutiny? This is not certain. Even assuming that tax administrations are effective and efficient – which is not always the case – people below the poverty line generally fall outside the taxpayers’ constituency, or pay little taxes. So they might not demand more accountability, while it is far from clear that greater scrutiny will arise from those currently within the tax-net just because they have a marginally higher tax contribution.

Furthermore, pouring buckets of money over people will create unmanageable expectations. Extractive resources are finite and revenues are highly volatile. Some even predict that the end of the commodity super-cycle might come sooner rather than later. For having learnt it the hard way, most African countries know that cycles and counter-cycles fill or thrill treasury coffers, leaving in their wake a range of macroeconomic challenges. In periods of economic crisis, it will be political suicide for any government (in particular the sticky ones) to try to close the tap once people get the taste of cash pay-outs. Not many have such an audacious track record and it is doubtful that many will be ready take such a risk. We have seen the recent demonstrations and fury at attempts to remove petrol subsidies in countries like Nigeria.

While direct cash transfers are not a bad idea per se they can only work in resource-rich countries if and when the latter fix their politics, their governance and institutional challenges and are better able to manage the expectations windfall revenues create. Trying to bypass the system might ultimately have unintended or undesirable political and social consequences. And then we will have to rack our brains again …

The views expressed here are those of the author, and may not necessarily represent those of ECDPM.

Picture by Great Beyond on Flickr, CC licence.

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Economic Transformation and TradeDevelopment Finance and TaxationExtractive SectorsCash transfersNatural resourcesRaw materialsTaxAfrica