How Should States Distribute Resource Revenues

1
How Should States Distribute Resource Revenues?

• Michael Ross
• UCLA Political Science
• December 10, 2004

2
Overview

• Which revenue system works best?
• Specialized Funds
• Federal Arrangements
• Direct Distribution
• General Revenues
• How can any of these be protected - from
  corruption, patronage, and misuse?

3
My Main Arguments

• There is no evidence that any of these
  institutions helps developing states manage their
  resource revenues
• Dont promote any single type of revenue
  distribution system
• Instead, establish international rating system of
  oil states, and reward good performers and
  penalize laggards.

4
Specialized Funds features

• Goal is savings, stabilization, or both?
• How are funds accrued?
• Can the fund itself make expenditures?
• How is the fund governed?

5
Specialized funds record

• Many studies of failures (Gelb 1988, Schiff and
  Valdes 1992, Karl 1997, Collier and Gunning
  1999)
• Davis et al. (2003) no evidence that funds
  improve fiscal policies.
• Even in Norway and Chile, no evidence that the
  creation of funds influenced fiscal performance.
• Governments readily gain access to assets that
  are nominally independent.

6
Some perverse effects

• Can make revenues less transparent and more
  susceptible to patronage/corruption
• Intertemporal transfer of assets from prudent to
  imprudent governments?

7
Federal Tax/Revenue Sharing

• Do subnational governments simply receive
  transfers, or do they actually administer
  taxes/royalties?
• How much fiscal autonomy do subnational
  governments have?

8
Advantages of centralized revenue management

• Central governments are better equipped to handle
  volatility, uncertainty
• Can use revenues countercyclically
• Can better administer complex taxes
• Can make equity-enhancing transfers across
  regions

9
How do federal arrangements perform?

• No systematic evidence

10
Direct Distribution

• Works well in Alaska, Alberta
• Advocates claim
• Keeps part of oil revenues out of hands of
  politicians
• Second-best method for handling volatility
• Gives citizens a greater incentive to monitor
  government performance.

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Direct Distribution worries

• In developing states where rule of law is weak
  why would these be more stable and less corrupt
  than specialized funds?
• Complex to administer and guard vs. fraud
• Some will see as unfair
• Could promote decentralized rent-seeking
  organizations protection rackets, etc.

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How can any of these institutions be protected?

• Very hard for governments to bind the hands of
  their successors
• Intertemporal savings plans are especially
  fragile Example of US government.
• Best performing oil states 1970-2000 monarchies
  and stable dictatorships, which rely on stable
  leadership, not institutions.

13
Oil/Mineral Dependence and Changes in
Child Mortality, 1970-2000  
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First suggestion

• We should not promote a one-size-fits-all
  institutional fix for oil-exporters
• There is too much variation among oil states
• There is too little evidence that any of these
  institutions has a positive effect
• Some reforms can have perverse effects.

15
Second suggestion

• Set out basic guidelines on
• Transparency, independent audits,
• Freedom from political interference,
• Distributional fairness,
• Converting oil revenues into public goods.
• Rate the annual performance of oil states, based
  on these criteria
• Reward good performers and penalize laggards
• Tie rankings to loan guarantees from ECAs
• Encourage oil firms to pressure laggards.

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Summary

• There is little reason to think that
  institutional reform will lead to better revenue
  management
• A system of performance-based rankings is worth
  considering.