Maybe governments should just give all their money away…and then tax it back

With all the talk of giving poor people money (yes, this could only be considered a new idea in to development workers), I wanted to highlight a paper that addresses the concerns with the oil-to-cash idea, which is related to cash transfers as you’ll see. The idea stems from the resource curse which has shown that countries with an abundance of natural resources are often hindered in their development for a number of reasons. One of those reasons is that the revenue from the natural resources allows leaders to neglect its citizenry. They don’t have to rely on taxation for money, they get it from the natural resource.

The oil-to-cash idea, which Todd Moss of CGD presented a few years ago, calls on governments to distribute oil revenue directly to citizens and then tax some of it back. In this way, governments are forced to build up their tax collecting capabilities—which in itself has been shown to be a huge benefit—and reinforce some accountability of the government to its people.

The new CGD paper runs down a list of 10 reasons why the oil-to-cash idea is better than the alternatives. The first three points deal with collective action problems, ie the provision of public goods isn’t going to come from private citizens. Yes, giving money to people is probably good, but isn’t improving infrastructure, health, or education a bigger problem? The answer harps on the fact that first of all, evidence has shown that resource revenue hasn’t been used all that well towards these public goods in the past and second, by giving the money and taxing it back you can build these things up.

Other concerns about just giving the money away are more technical but worth exploring. Would this just create a lot of inflation, therefore negating any benefit? Moss says program design could largely avoid inflation. In Bolivia, they gave people the dividend on their birthday, meaning the money wasn’t all dumped into the economy at once. In other places they gradually increase the money over the years, allowing the economy to adjust to the new increase in demand without triggering a lot of inflation. The GOP-like argument comes up too: Won’t that just make people lazy? And just as in the US where actual evidence shows the unemployment insurance does not keep people from looking for jobs (despite what so many claim), the answer seems to be no.

The most important issue perhaps, whether taxing people somehow magically makes the government more accountable is interesting and maybe less convincing. Moss says that basically we know that with oil revenues, they don’t practice accountability. And by taxing, it increases citizens’ power, diminishing the likelihood of corruption.

With more and more developing countries producing oil (115 countries in total), this is an important discussion to have. Maybe the most compelling reason is that the other way wasn’t working, although that is an admittedly dangerous reason to try anything. Anyway, the paper is worth a scan for Cashionistas and anyone else interested in development.

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