The Coming Rise of ‘Citizen Wealth Funds’?

Ashby Monk

As you may have noticed, I’m keenly interested in potential solutions to the resource curse, as poverty, corruption and conflict remain endemic in resource-rich developing countries. I’ve talked at length about the utility of a well-governed and properly designed SWF in helping to resolve some of the more intractable problems. Still, I think we’d all agree that big, creative and innovative ideas from the policy community are desperately wanting. On cue, enter the Center for Global Development and its “Oil to Cash” initiative.

I have to say, I’m a fan of this initiative. Here’s a blurb:

“CGD is expanding work on one policy option that may address the root of the resource curse and help to foster a social contract in resource-rich countries: direct distribution of revenues. Under this proposal, a government would transfer some or all of the revenue from natural resource extraction to citizens in a universal, transparent, and regular payment. Having put this money in the hands of its citizens, the state would treat it like normal income and tax it accordingly—thus forcing the state to collect taxes and fueling public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.”

The concept of cash transfers is not altogether new, but the CGD’s approach here is compelling. In effect, they want to end the (many) problems associated with rentier states by putting the cash in the hands of the people and then taxing these individuals to fund government expenditures. In general, the idea is to create accountability.

So, your question at this point should be the following: Are these guys saying that SWFs should be dismantled in favor of cash transfers to citizens? That’s good question. And the answer is ‘no’. (I think.) Recall that SWFs have a variety of benefits to resource economies, such as preventing Dutch disease and facilitating intergenerational savings. Indeed, Alexandra Gillies’ new CGD paper recognizes this, noting that cash transfers can’t be viewed in a vacuum. Instead, she suggests that this policy would have to fit in with the existing tools used to manage the many macroeconomic problems associated with resource wealth.

So, I interpret the CGD initiative as being more about re-tasking SWFs than about dismantling them. Indeed, the idea is to change these funds from political tools to fund government spending into social tools to fund people.

Todd Moss and Lauren Young offered the following analysis back in 2009:

“In Alaska, the Permanent Fund was set up almost immediately after oil was discovered in the 1970s as an investment base that would produce revenue even as future oil production decreased. The Fund’s principal cannot be spent without amending the state’s constitution by a majority vote of the population, and it must invest outside Alaska to help stabilize the state’s income. One of the immediate stimuli for the Fund was the public belief that Alaskan politicians had wasted a $900 million payment for exploration rights on unsustainable government programs. In 1982, the government instituted the Permanent Fund Dividend (PFD) program, a regular cash transfer of the Fund’s interest earnings to state residents, to give Alaskans an individual interest in protecting the fund (Fasano 2000). In recent years households have been receiving about 6% of their income on average from the PFD, as about US $1 billion per year is distributed among 600,000 citizens (Goldsmith 2002). The PFD is now a regularly anticipated component of household income, and most politicians consider it ‘political suicide to suggest any policy change that could possibly have any adverse impact today, or in the future, on the size of the PFD’ (Goldsmith 2002). The dividend has been ‘extremely successful in creating a political constituency for the Permanent Fund that did not previously exist’ (Goldsmith 2002).” (emphasis added)

In short, the idea is transform ‘sovereign wealth funds’ into a sort of ‘citizen wealth fund’ (or a hybrid of the two) by establishing some non-governmental liabilities that foster accountability. And, moreover, by creating watchdog citizens who, in theory, have a stake in the resource wealth of the nation and depend on the natural resources for their personal wellbeing, the dividend becomes a useful tool to prevent mismanagement of resource revenues.

It’s a cool idea that I hadn’t previously given much thought to. To be sure, I have plenty of questions about feasibility, implementation, governance and design. After all, it takes a special kind of government to do this (‘Hey, good idea. Let’s put these assets in the hands of the people!’). But (!), some countries are looking into the idea (e.g. Bolivia, Timor-Leste and Mongolia). Anyway, I’m sure the ‘Oil to Cash‘ program exists to answer some of these hard questions, so I’ll keep my eye out for some more working papers!

2 Responses to “The Coming Rise of ‘Citizen Wealth Funds’?”

  1. 1 Andrew Rozanov November 11, 2010 at 3:28 pm

    One of the problems with directly distributing excess commodity revenues to citizens in the form of individual pay checks is that it offsets some of the anti-Dutch Disease effects of SWF saving and management… Perhaps a better way of aligning interests, getting citizen buy-in and increasing transparency and accountability would be to create DC-type individual savings accounts, which every citizen can monitor, but neither spend nor borrow against until retirement…

  1. 1 Australia’s SWF Debate Mark II « Oxford SWF Project Trackback on December 1, 2010 at 10:28 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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