Resource Rents, Redistribution, and Halving Global Poverty Through Resource Dividends

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* Article: Resource Rents, Redistribution, and Halving Global Poverty: The Resource Dividend. Paul Segal. World Development, Volume 39, Issue 4, April 2011, Pages 475–489

URL = http://www.sciencedirect.com/science/article/pii/S0305750X10001774

finalized draft of the same paper here: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/SP22-ResourceRentsRedistributionandHalvingGlobalPovertThe-ResourceDividend-Paulsegal-2009.pdf]

Abstract

"This paper considers the proposal that each country distributes its resource rents directly to citizens as a universal and unconditional cash transfer, or Resource Dividend, and estimates its potential impact on global poverty for the years 2000–06. Using a global dataset on resource rents and the distribution of income, I find that if every developing country implemented the policy then the number of people living below $1-a-day would be cut by between 27% and 66%, depending on the year and the assumptions made. Looking ahead, poverty could be better than halved as long as commodity prices do not drop below their 2004 level."

Excerpt

From the introduction:

Paul Segal:

"In this paper I ask what would happen if, contrary to J. Paul Getty’s prediction, mineral rights were in fact distributed more equitably. In particular, I consider the scheme under which each country taxes the rents due to their natural resources, and distributes the proceeds directly and unconditionally back to every adult citizen on an equal basis. I call this scheme the Resource Dividend (RD). Versions of it have appeared in different literatures going back to Thomas Paine in 1795, with recent proposals including the distribution of oil revenues in Iraq. But two developments make its more general application of particular current relevance. First, resource nationalism and resource ownership rose in importance amid the dramatic rise in resource prices up to mid-2008. Second, the first Millennium Development Goal, adopted by the United Nations in 2000, is to halve global poverty at the $1-a-day line from its 1990 level by 2015. I estimate the global impact of the policy on poverty and find that if enough poor countries were to adopt the RD then it would be sufficient to achieve the first Millennium Development Goal: extreme global poverty would be cut by half.

While I estimate its global impact, the RD is a national, not international policy, and in recent years versions have been proposed for Iraq (Palley 2003, Birdsall and Subramanian 2004), Nigeria (Sala-í-Martín and Subramanian 2003), and Bolivia (Durán et al. 2007). Sandbu (2006) discusses the scheme in more general terms. These authors cite the possible advantages of the policy in the context of substantial resource wealth, where direct distribution of revenues may help to alleviate the resource curse. In addition to this argument I discuss potential advantages for all countries, including those with modest resource wealth. First, as already mentioned, it would substantially reduce poverty. Second, by being levied only on rents, the scheme implies none of the economic distortions or efficiency loss that other redistributive schemes may risk.

Third, it provides an incentive to informal workers and individuals with little or no formal interaction with the state to register with the fiscal system. Finally, there is a moral and legal argument that by the nature of rents, no individual has a special claim to them, so the only morally defensible distribution is an equal distribution.

The distribution of resource rents is always and everywhere a political decision, not an economic outcome. Unlike the value of most output, there is no one to whom they “naturally” accrue. Put another way, in other sectors taxes and transfers act on a pre-intervention distribution, but there is no pre-intervention distribution of resource rents. In practice most countries have assigned ownership of resources to the government, making the government the recipient of resource rents. This political decision is followed by political decisions regarding expenditures of these rents, which have a direct distributional impact. It is less obvious but equally important that if resource rents substitute for other taxation then individuals benefit according to how their actual tax bill compares with the counterfactual situation of the absence of the resource. Thus the elimination of taxation of the private sector, as in some resource-rich countries, should not be mistaken for a distribution-neutral tax policy. The RD is therefore no more political a policy than any other distribution of resource rents.

The policy may appear radical, and its global implementation would indeed have a dramatic effect. But as a redistributive policy it is relatively modest in magnitude compared with existing policies in Europe. I show that cash benefits in the EU15 comprise 6.6 percent of GDP, while resource rents comprise under 6 percent of GDP in most countries, including those that account for most of the global poverty reduction under the Resource Dividend."


On The Idea of the Resource Dividend

Paul Segal:

"The idea that natural resources belong to all the citizens of a nation, and that no individual or privileged group of individuals should have the exclusive right to enjoy rents from natural resources, has a long pedigree. An early and important contribution to the debate is Thomas Paine’s pamphlet Agrarian Justice, written in 1795 and frequently cited today by advocates of a basic income (e.g. van Parijs 2004). Paine started from the premise that “the earth, in its natural, cultivated state was, and ever would have continued to be, the common property of the human race. In that state every man would have been born to property” (emphasis in original). Paine argues that the institution of private property, while leading to massive increases in the productivity of land, at the same time “has dispossessed more than half the inhabitants of every nation of their natural inheritance, without providing for them, as ought to have been done, an indemnification for that loss.” He accepts that land owners should enjoy the benefits of the investments they have made in productivity improvements, but argues that they owe a ground rent on the land to indemnify non-land owners for their loss of the use of the land. But in contrast to the prevailing fate of resource revenues today, his conclusion is not that the government should receive this rent. Instead, he argued that the ground rent paid by land owners be used to fund a payment of a lump sum to every individual when they reach age 21, and an annual pension for everyone from the age of 50, in recognition of their loss of property.

The idea that natural resources belong to all citizens of a nation has been behind the battles for nationalisation of oil and gas resources in numerous countries and, more widely, the fact that in almost all countries’ national governments own subsoil resources (Mommer 2002). It is also codified in numerous international human rights treaties (Wenar 2007, p. 14). Both the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social, and Cultural Rights state in their Article 1 that “All peoples may, for their own ends, freely dispose of their natural wealth and resources.” Of 192 UN members, 151 have adopted at least one of these treaties. The African Charter on Human and Peoples’ Rights and the (US-approved) Iraqi constitution of 2005 also include comparable articles assigning ownership of natural resources to “the people”.

The special nature of rents also leads to both an ethical argument and an efficiency argument for the Resource Dividend. Rents are, by definition, the value of output that remains after factor inputs have been paid their market price. This implies that no individual has a special moral claim to them, since those who helped to produce the rents have already been paid their market rate. It is therefore plausible that the only fair distribution of resource rents is an equal distribution between all owners of the resource. But the nature of rents also implies an efficiency argument: taxing rents has no impact on behaviour, and is therefore non-distortionary, unlike most forms of taxation. Taxing rents is therefore an efficient means of raising revenue.

The first proposal I have come across for a scheme like the RD for oil revenues was made by the Financial Times journalists Samuel Brittan and Barry Riley (1978, 1980), responding to the discovery of British North Sea oil. They wrote, “The simplest and also the wisest answer to the question ‘What should we do with the state’s oil revenues?’ is ‘Give them to the people’” (1980, p. 1). Brittan and Riley’s proposal, which they called the people’s stake, was to offer each British citizen an equal share in oil revenues. The rights to this share in the income stream would be transferable, and therefore capitalisable on the stock market.

The RD considered here differs from Brittan and Riley’s people’s stake in that the rights to the revenue stream are not saleable, and they end when a person dies. While one would presumably be able to borrow on the strength of the revenue stream, its termination at death ensures that future generations receive a share as long as the revenues last. It is thus a basic income, an unconditional regular cash transfer, funded by resource revenues. The policy has been proposed for Nigeria by Sala-i-Martín and Subramanian (2003) and for Iraq by Birdsall and Subramanian (2004), while a scheme to distribute one-third of gas revenues has been proposed for Bolivia by a group of Bolivian economists and policymakers (Durán et al. 2007). The closest existing scheme is Alaska’s Permanent Fund Dividend. The Permanent Fund receives at least 25 percent of all revenues received by the state government from mineral extraction in Alaska, and a dividend from this fund is given to all those have resided in the state for at least one calendar year. The dividend is calculated as half of the Fund’s income averaged over five years, divided by the number of eligible recipients. In most years it has lain between $600 and $1,500. I have not found any research that relates the Dividend to poverty rates in the state, but in 2007 Alaska had the joint second lowest poverty rate (with Hawaii) of all the states of the USA, behind only New Hampshire, despite having only the 19th highest per capita personal income.

A related, but far more radical, idea is Pogge’s (2001) Global Resource Dividend (GRD). Under the GRD a small (and unspecified) share of the value of natural resources globally is taxed in order to fund a targeted program of redistribution towards the global poor. The idea behind the scheme is that “those who make more extensive use of our planet’s [limited natural] resources should compensate those who, involuntarily, use very little” (p. 66). In contrast, the RD that I consider here is strictly a national policy, although the hope is that many countries would adopt it. Compared with the present scheme, Pogge’s GRD has three drawbacks. First, since it is intended to target the poor, it would face enormous administrative challenges in determining who the poor are. Later I discuss the relative merits of universal and targeted transfers. Second, it would require international coordination, which is also administratively very difficult. Third, and perhaps most importantly, it faces the political challenge of persuading countries to give up ownership rights of the natural resources on their territory, which rights, as we have seen, are enshrined in numerous international human rights treaties.

There is no conflict between the view that natural resources belong to all citizens of a country and the view that private actors who realise the value of natural resources, through exploration, extraction and processing, should be paid for their efforts. It is therefore not the revenues from the natural resources that properly accrue to all citizens, but the rents, defined as revenues less the competitive price of inputs required to realise that value. In the data I use below on resource rents the cost of extraction and a normal return to capital employed are subtracted from total revenues. As I discuss later, different forms of taxes, bonuses, concession fees, royalties, equity shares and other mechanisms for splitting revenues are possible." (http://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/SP22-ResourceRentsRedistributionandHalvingGlobalPovertThe-ResourceDividend-Paulsegal-2009.pdf)


Conclusion

Paul Segal:

"The intuitive idea that the patrimony of a country belongs to all citizens has a long history. In this paper I presented a version of this idea in which it is the rents due to natural resources to which all citizens have an equal claim, and this claim is satisfied by a universal, unconditional cash transfer that I called the Resource Dividend. The policy faces challenges in developing countries with low administrative capacity, but I argued that these challenges would not be insuperable in any but the very weakest states. Indeed, the RD would provide incentives to governments and individuals to reduce informality and could help to strengthen state capacity.

Through this avenue it may also ameliorate the institutional causes of the resource curse, while it could reduce corruption by removing resource revenues from regular government budgets and by being a particularly easy policy to make transparent.

I also argued that the policy would be politically popular and would therefore have a reasonable chance of being adopted, particularly in democracies. While removing resource revenues from government budgets would not be in the interests of incumbent governments, opposition parties may decide that giving up direct control over resource revenues may be a price worth paying to achieve power.

The primary benefit of the Resource Dividend would be a dramatic reduction in poverty. If all developing countries adopted it, global poverty at the World Bank’s PPP$1-a-day poverty line would be cut by half. In India and China, the countries with the largest populations and the largest numbers of poor people, poverty would be respectively halved, and eliminated. While the impact of the Resource Dividend would be dramatic, for most countries it would comprise a redistributive policy more modest, relative to GDP, than cash benefits currently paid in the European Union, which also play an important role in poverty reduction." (http://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/SP22-ResourceRentsRedistributionandHalvingGlobalPovertThe-ResourceDividend-Paulsegal-2009.pdf)