Over at the Guardian’s development blog, Madeline Bunting discusses [5] the growing popularity of conditional cash transfers (CCTs) [6] in emerging economies and the development community [7].
What does this have to do with natural resources? A great deal, it turns out. The use of CCTs in resource rich countries is illustrative of the importance of an over-arching view of the whole decision chain pertaining to natural resources – from exploration to expenditure – and the need for such a view to earn the support of an informed social consensus.
Governments with windfall revenues, for example from oil extraction, may be well positioned to develop innovative or ambitious programs of social protection or transfer. Indeed, governments should seek to maximise the benefits to its citizens of such resource wealth, and some form of direct transfer may be an effective means of doing so.
Take Mexico, for example, where government obtains 40% of its revenue from oil. In 2009 Mexico garnered $5bn [8] from a hedge targeted at the oil price used in overall government budget estimates. Designed as an insurance mechanism, with Mexican officials careful to avoid gambling – or appearing to gamble - with the national patrimony, the amount dwarfed the expenditure ($3.6bn [9]) on the country’s own CCT, a central component of its Oportunidades [10] program. Oportunidades reduced the incidence of illness amongst 1-5 year olds in the 25% of Mexican families [11] covered by the scheme by 12% and increased the mean growth rate of children between 12 and 36 months by 1cm.
It’s not merely the cash amounts that link successful hedging, or natural resource windfalls generally, to successful CCT schemes. Bunting points out that the success of Bolsa Familia in Brazil was bolstered by the legitimacy it achieved in the eyes of the majority of Brazilian taxpayers, mostly non-beneficiaries, both through the transparency of its administration and the fact that the economic pie as a whole has been growing over the years of the program’s operation. To this we might add the importance a stable as well as a growing ‘pie’: countries that have received a sudden natural resource windfall or are reliant on resource revenues can help avoid the zero-sum, short-term political economy inimical to successful cash transfer programs by using means such as the Mexican hedge, or other forms of smoothing, to counter price volatility. The hedge helps – both politically and economically - to guarantee the stream of revenues necessary to invest in human capital or meet urgent human needs.
It is relatively easy to recommend conditional cash transfer programs in states that are as developed as Mexico and Brazil. But what about countries that may lack existing, affordable channels for social transfers? It’s not necessarily the case that such innovations cannot be adapted to these environments. A new influx of revenues such as those associated with commodity price spikes or a new resource discovery provide an opportunity for innovating in previously poor institutional environments. Such opportunities are also the occasion for technical assistance from the developed world or the contracting out of certain functions to trusted partners of host governments. The infrastructure for a conditional cash transfer system can provide the basis for increasing the accessibility of everyday financial services of other kinds, with profound benefits to the private institutions of a developing economy, as well as the public fiscal balance. Technological innovation has reduced the cost of basic banking and communication services, whilst pilot schemes linking immunization drives to census recording and biometric identification hint at further positively reinforcing components of a virtuous cycle that can be sparked in previously unpromising environments.
It may be desirable to redistribute some natural resource revenues on a conditional basis and some on an unconditional basis (as with oil revenues in Alaska [12], for instance), and then – somewhat counterintuitively – tax back [13] some of that distributed income. Many of the iniquitous consequences of the resource curse are the result of an overdependence of a gatekeeper state on resource revenues alone. Dividend-and-tax allows peoples not only to take ownership of their country’s natural resources, but of their own governments too.
The unconditional variant of CCTs, otherwise known as direct dividends, may be an appropriate tool in resource rich states, not least since citizens have a claim of ownership over resource rents. For more information on implementation of direct dividends see the Charter fact sheet [14] and the recent paper by Paul Segal [15].