## _sdn1405 ## Source details **Canonical URL:** [_sdn1405](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2014/_sdn1405.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2014/_sdn1405.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2014/_sdn1405.pdf.json) --- ### INTRODUCTION - Resource wealth is often associated with weak institutions and poor governance; few countries have managed resource wealth well. - Proposal assessed: direct distribution of natural resource income to the population instead of channeling it through the budget. - Purpose: assess DDMs in light of limited historical experience and best practices in fiscal policy in natural-resource-rich countries. ### THE CASE FOR DIRECT REDISTRIBUTION — Rationale and Mechanisms - Motivations for DDMs: - Break the link between natural resource abundance and rent-seeking behavior. - Reduce discretion of the state over resource revenues and foster accountability. - Behavioral economics rationale: transferring resources to the public and then clawing them back through taxes may change public behavior via reference dependence, loss aversion, and framing. - Political dimension: resource abundance can enable authoritarian rule, reduce need for taxation, and weaken checks and balances. - Economic dimension: Dutch disease dynamics can shift labor and capital to nontraded sectors and erode manufacturing and agriculture. - Variants of DDMs: - Extreme: distribute the entire flow of natural resource revenues to the population. - Partial: distribute a portion of revenue or a portion of investment income (as in Alaska). - Complementary designs: combine DDMs with stabilization mechanisms (e.g., oil fund) or limit scope to investment income. ### KEY QUANTITATIVE FINDINGS AND SCENARIO IMPLICATIONS - Resource revenues averaged 15 percent of GDP in a sample of 34 resource-rich countries during 1992-2009, with a median of around 10 percent of GDP. - World Bank’s World Development Indicators estimate natural resource revenues at 21 percent of GDP on average in resource-rich countries. - Example (Ghana): resource revenues about 5 percent of GDP; income share of the lowest decile is 2 percent, so a universal DDM would raise the income of this group by about 25 percent. - Resource revenues averaged about 84 percent of government spending in resource-rich countries. - Fiscal risk from leakage: - If only 10 percent of the distributed amount is lost, the revenue effort needed to compensate would be significant—about a third of the countries would need to raise their nonresource tax revenues by more than 25 percent. - A loss of 10 percent of natural resource revenues would be equivalent to public health spending in more than 40 percent of the countries in the sample. - The same loss would be equivalent to half of the public spending on education in these countries. ### ASSESSMENT — Benefits and Risks - Benefits proposed by proponents: - Prevent governments from being administratively overextended and vulnerable to rent seekers. - Increase citizen vigilance and accountability because citizens directly perceive a dividend at stake. - Force governments to rely more on taxation, potentially strengthening tax–citizen accountability linkages. - Main risks and limitations: - Extreme full-distribution leaves the state without adequate resources for core activities (basic public goods). - No guarantee the redistribution mechanism would be immune to rent-seeking. - Severe diminution of fiscal policy capacity to manage volatility and intergenerational concerns. - Potential adverse consequences on labor markets from relatively large income transfers to individuals. - Administrative capacity constraints in typical resource-rich developing countries suggest starting small. - Empirical and theoretical considerations: - Few success stories (Australia, Botswana, Canada, Chile, Norway); divergence attributed largely to institutional quality. - DDMs do not necessarily address Dutch disease; many proponents assume private sector savings behavior will not be worse than public sector. ### POLICY IMPLICATIONS AND RECOMMENDATIONS - First priority: - Establish fiscal policy objectives and an adequate fiscal framework to guide saving, investment, volatility smoothing, and exhaustibility issues before considering DDMs. - On extreme full distribution: - The extreme option of distributing all resource revenues is generally problematic and not recommended given tradeoffs for public goods, stabilization, and intergenerational equity. - More modest and pragmatic approaches worth considering: - Replicate or adapt the Alaskan model cautiously; it is innovative but limited in scale and does not bypass state institutions. - Use resource revenues to establish or expand social safety nets and systems of direct cash transfers to the population. - Earmarking a portion of resource revenues for particular cash transfer programs may be justified because it can: - Ensure program sustainability, - Elicit population support, - Increase government accountability for use of resource wealth. - Implementation guidance: - Start small given administrative uncertainties; limited program size helps avoid unanticipated implementation problems. - Consider designing DDMs within a fiscal framework that addresses volatility, intergenerational balance, and exhaustibility by saving some revenues in a resource fund before transferring remaining revenue. - Keep dividend amounts relatively small to minimize labor market distortions and risks of insufficient provision of public services. - Consider conditional transfers (e.g., vaccination records, school attendance) to increase incentives for the poor to invest in themselves. ### BOX 3 — The Dividend Distribution in Alaska (Key Features) - Established in 1976 after Alaskan residents endorsed a constitutional amendment. - Amendment requires that “at least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.” - Fund invested in a diversified portfolio domestically and internationally; does not invest in economic or social development projects. - Legislature may spend realized Fund investment earnings, but not the principal. - Alaska Permanent Fund Corporation (APFC) created in 1980 manages assets; board structure: - Six-member board appointed by the Governor of Alaska. - One seat statutorily assigned to the Commissioner of Revenue. - One seat to a cabinet member. - Four seats reserved for public members who serve staggered, four-year terms. - Annual spending limited to about 5 percent of the Fund’s total market value. - Fund has earned an average annual return of over 10 percent; spending rule characterized as relatively conservative. - Dividend calculation uses the average of the Fund’s income over the previous five years to smooth payments. - Dividend history (1982 through 2009): checks ranged from US$336 to $2,069 per adult resident (about 3-6 percent of per capita income). - Dividend distribution in practice: about 50 percent of the annual returns generated on the accumulated financial assets are distributed. - Eligibility: adults meeting residency requirements and not convicted or incarcerated in the relevant year; payments require annual application. - Key takeaways: - Alaska provides a relatively small dividend, preserves capital, and operates within a strong institutional framework. - Limitations: amounts transferred are relatively small; strong institutions underpin the system; Alaska does not have an income tax so certain accountability mechanisms cannot be tested there. ### BOX 4 — Are Resource-Rich Governments Bloated or Starved? (Key Findings and Recommendations) - Sample size: 35 countries. - Total expenditures to GDP averaged 28 percent during 2000-13. - Median spending is about 27 percent of GDP. - Dispersion: - Government-spending-to-GDP ratios around 40 percent: Angola, Brunei, and Norway. - Government-spending-to-GDP ratios below 20 percent: Cameroon, Indonesia, and Sierra Leone. - Institutional correlation: - Norway has the largest government spending in the sample and the strongest institutions. - Sierra Leone has one of the smallest governments and relatively weak institutions. - Heterogeneous patterns noted: some weak-institution countries have large governments (Angola, Equatorial Guinea); some stronger-governance countries have small governments (Indonesia, Peru, United Arab Emirates). - Risks of establishing DDMs outside the budget; extrabudgetary funds (EBFs): - EBFs in OECD countries manage about 20 percent of government outlays; this practice is not recommended for countries lacking strong governance and financial management systems. - OECD practice: EBFs are well integrated into the budget process. - Developing countries practice: EBFs often use an array of arrangements, sometimes without a clear economic or legal identity. - Designing DDMs to mitigate concerns: - Be modest with respect to the size of the dividend payment. - Channel resources through the budget or save some revenues in a resource fund before transferring to the private sector. - Minimize labor supply distortions by keeping dividend amounts relatively small or limiting coverage, recognizing trade-offs with accountability aims. - Conclusions and policy recommendations: - General skepticism about large-scale DDMs that seek to bypass the state: large-scale direct distribution of resource wealth has not been tested anywhere in the world. - Alaska is the only well-known DDM example; its payments are small and supported by strong institutions. - Priorities before direct redistribution: - Decisions on the appropriate fiscal framework for resource-wealth management should precede any discussion of direct redistribution. - Policymakers need an appropriate institutional setting so that fiscal policy supports macroeconomic stability and development objectives. - Decisions on how much to save and invest, how to smooth revenue volatility, and how to deal with exhaustibility issues should precede any discussion of direct distribution. - Against extreme full distribution: - Not appropriate due to risks of rent-seeking, insufficient resources for core activities and basic public goods, political infeasibility, and labor market consequences. - Support for modest, phased approaches: - Merit in modest DDM schemes that replicate the Alaskan model or develop/expand cash-transfer systems. - Start small given administrative capacity and logistical concerns. - Use of resource revenues for social protection and investment: - Resource revenues should be either invested (transforming natural wealth into physical assets and human capital) or “consumed” in a way that reduces poverty and increases overall welfare of the poor. - Earmarking a portion of resource revenues to specific cash transfer programs seems reasonable to gain popular support—proper management is needed to avoid pro-cyclicality. - Conditional transfers tied to human-capital interventions are preferable to unconditional transfers. *International Monetary Fund — DIRECT DISTRIBUTION OF RESOURCE REVENUES: WORTH CONSIDERING? (EXECUTIVE SUMMARY)* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### _sdn1405 - EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### INTRODUCTION - Resource wealth is often associated with weak institutions and poor governance; few countries have managed resource wealth well. - Proposal assessed: direct distribution of natural resource income to the population instead of channeling it through the budget. - Purpose: assess DDMs in light of limited historical experience and best practices in fiscal policy in natural-resource-rich countries. ### THE CASE FOR DIRECT REDISTRIBUTION — Rationale and Mechanisms - Motivations for DDMs: - Break the link between natural resource abundance and rent-seeking behavior. - Reduce discretion of the state over resource revenues and foster accountability. - Behavioral economics rationale: transferring resources to the public and then clawing them back through taxes may change public behavior via reference dependence, loss aversion, and framing (Box 2). - Political dimension: resource abundance can enable authoritarian rule, reduce need for taxation, and weaken checks and balances. - Economic dimension: Dutch disease dynamics can shift labor and capital to nontraded sectors and erode manufacturing and agriculture. - Variants of DDMs: - Extreme: distribute the entire flow of natural resource revenues to the population. - Partial: distribute a portion of revenue or a portion of investment income (as in Alaska). - Complementary designs: combine DDMs with stabilization mechanisms (e.g., oil fund) or limit scope to investment income. ### KEY QUANTITATIVE FINDINGS AND SCENARIO IMPLICATIONS (Box 1 and related text) - Resource revenues averaged 15 percent of GDP in a sample of 34 resource-rich countries during 1992-2009, with a median of around 10 percent of GDP. - World Bank’s World Development Indicators estimate natural resource revenues at 21 percent of GDP on average in resource-rich countries. - Example (Ghana): resource revenues about 5 percent of GDP; income share of the lowest decile is 2 percent, so a universal DDM would raise the income of this group by about 25 percent. - Resource revenues averaged about 84 percent of government spending in resource-rich countries. - Fiscal risk from leakage: - Even if only 10 percent of the distributed amount is lost, the revenue effort needed to compensate would be significant—about a third of the countries would need to raise their nonresource tax revenues by more than 25 percent. - A loss of 10 percent of natural resource revenues would be equivalent to public health spending in more than 40 percent of the countries in the sample. - The same loss would be equivalent to half of the public spending on education in these countries. ### ASSESSMENT — Benefits and Risks - Benefits proposed by proponents: - Prevent governments from being administratively overextended and vulnerable to rent seekers. - Increase citizen vigilance and accountability because citizens directly perceive a dividend at stake. - Force governments to rely more on taxation, potentially strengthening tax–citizen accountability linkages. - Main risks and limitations: - Extreme full-distribution leaves the state without adequate resources for core activities (basic public goods). - No guarantee the redistribution mechanism would be immune to rent-seeking. - Severe diminution of fiscal policy capacity to manage volatility and intergenerational concerns. - Potential adverse consequences on labor markets from relatively large income transfers to individuals. - Administrative capacity constraints in typical resource-rich developing countries suggest starting small. - Empirical and theoretical considerations: - Few success stories (Australia, Botswana, Canada, Chile, Norway); divergence attributed largely to institutional quality. - DDMs do not necessarily address Dutch disease; many proponents assume private sector savings behavior will not be worse than public sector. ### POLICY IMPLICATIONS AND RECOMMENDATIONS - First priority: establish fiscal policy objectives and an adequate fiscal framework to guide saving, investment, volatility smoothing, and exhaustibility issues before considering DDMs. - Extreme option of distributing all resource revenues is generally problematic and not recommended given tradeoffs for public goods, stabilization, and intergenerational equity. - More modest and pragmatic approaches worth considering: - Replicate or adapt the Alaskan model cautiously; it is innovative but limited in scale and does not bypass state institutions. - Use resource revenues to establish or expand social safety nets and systems of direct cash transfers to the population. - Earmarking a portion of resource revenues for particular cash transfer programs may be justified despite conventional objections to earmarking, because it can: - Ensure program sustainability, - Elicit population support, - Increase government accountability for use of resource wealth. - Start small given administrative uncertainties; limited program size helps avoid unanticipated implementation problems. ### CONCLUSIONS - DDMs merit consideration but should be subordinate to establishing sound fiscal frameworks. - Modest, well-designed distribution mechanisms or targeted cash-transfer programs funded by resource revenues offer potential benefits while mitigating major fiscal and macroeconomic risks. - Caution is warranted regarding full-scale distribution of resource revenue flows due to fiscal, institutional, and labor-market consequences. *International Monetary Fund — DIRECT DISTRIBUTION OF RESOURCE REVENUES: WORTH CONSIDERING? (EXECUTIVE SUMMARY)* ### Box 3. The Dividend Distribution in Alaska ### Box 3. The Dividend Distribution in Alaska ### Overview - The Alaska Permanent Fund was established in 1976 after Alaskan residents endorsed a constitutional amendment. - The amendment requires that “at least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.” - The Fund is invested in a diversified portfolio of assets, domestically and internationally, and does not invest in economic or social development projects. ### Legal and institutional framework - The legislature may spend realized Fund investment earnings, but not the principal. - Realized earnings consist of stock dividends, bond interest, real estate rent, and the income made or lost by the sale of any of these investment assets. - The Alaskan legislature bears ultimate responsibility for the program. - The Alaska Permanent Fund Corporation (APFC), created by the legislature in 1980, manages the assets of the Alaska Permanent Fund. - APFC oversight: - Six-member board appointed by the Governor of Alaska. - One seat statutorily assigned to the Commissioner of Revenue. - One seat to a cabinet member. - Four seats reserved for public members who serve staggered, four-year terms. - The board appoints an executive director, who manages a staff of about 35. ### Fund management, governance, and transparency - The APFC is described as a model of transparency with strong checks and balances, internal governance rules, independently audited accounts, and detailed disclosure of financial information. - Annual reports are published by both the APFC and the Department of Revenue. - The Alaska Department of Revenue manages the dividend program, including determining eligibility criteria and distributing the dividends. - Qualified residents must submit an annual application to the Department of Revenue, and the list of all applicants is published on the department’s website. ### Spending rule, returns, and dividend calculation - Under the current system, annual spending is limited to about 5 percent of the Fund’s total market value. - Given that the Fund has earned an average annual return of over 10 percent, this spending rule is characterized as relatively conservative and is described as more conservative than the approach followed by Norway. - The dividend distribution is calculated each year by using a formula that seeks to smooth out payments. The formula is computed by using the average of the Fund’s income over the previous five years. ### Dividend amounts, eligibility, and administration - From 1982 through 2009, dividend checks have ranged from US$336 to $2,069 per adult resident (about 3-6 percent of per capita income). - The Fund’s distribution policy in practice: - Annual spending is limited to 5 percent of market value. - The actual distribution of dividends is about 50 percent of the annual returns generated on the accumulated financial assets (noted elsewhere in the text as a characteristic of the Fund). - Dividend eligibility is relatively broad: - Adults are eligible provided they comply with certain residency requirements and are not convicted or incarcerated in the relevant year. - Payment is not automatic; residents must apply each year. ### Key takeaways on applicability and limitations - The Alaska example illustrates a DDM (direct distribution mechanism) that provides a relatively small dividend, preserves capital, and operates within a strong institutional framework. - Limitations noted: - The amounts transferred in the Alaskan case are relatively small compared to what some literature suggests feasible for DDMs. - The system is underpinned by strong institutions, making it difficult to generalize lessons to resource-rich developing countries with weaker institutional settings. - Alaska does not have an income tax, so the argument that clawing back dividends through taxes could strengthen accountability cannot be tested there. *Source: Alaska Permanent Fund Corporation and Department of Revenue of Alaska.* ### Box 4. Are Resource-Rich Governments Bloated or Starved? ### Box 4. Are Resource-Rich Governments Bloated or Starved? ### Size of government in resource-rich countries: empirical findings - Sample size: 35 countries. - Total expenditures to GDP averaged 28 percent during 2000-13. - The median spending is about 27 percent of GDP. - Large dispersion across countries: - Government-spending-to-GDP ratios around 40 percent: Angola, Brunei, and Norway. - Government-spending-to-GDP ratios below 20 percent: Cameroon, Indonesia, and Sierra Leone. - Institutional correlation noted: - Norway has the largest government spending in the sample and the strongest institutions. - Sierra Leone has one of the smallest governments and relatively weak institutions. - Heterogeneous patterns: - Some countries have relatively large governments despite weak government effectiveness indices (e.g., Angola and Equatorial Guinea). - Others have relatively small governments despite relatively stronger governance (e.g., Indonesia, Peru, and the United Arab Emirates). - Interpretation: Some resource-rich countries may have overstretched spending capacity; in others, reducing government size by moving resources to the private sector may harm optimal provision of public goods. ### Risks of establishing DDMs outside the budget; extrabudgetary funds (EBFs) - Establishing DDMs outside the budget entails significant risks. - Extrabudgetary funds in OECD countries manage a large share of resources—about 20 percent of government outlays—but this is not recommended for countries lacking sufficiently strong governance and financial management systems. - OECD practice: EBFs are well integrated into the budget process. - Developing countries practice: EBFs often use an array of arrangements, sometimes without a clear economic or legal identity. ### Designing DDMs to mitigate concerns - General design principle: be modest with respect to the size of the dividend payment. - Designing a DDM within a fiscal framework: - Address volatility, intergenerational balance, and exhaustibility by saving some revenues in a resource fund before transferring the remaining revenue, or part of it, to the private sector through a DDM. - Consider arrangements consistent with an appropriate fiscal framework where all or part of the resources is channeled through the budget. - Addressing labor supply concerns: - Minimize labor market distortions by keeping the dividend amount relatively small. - Limiting coverage to those employed would reduce the impact (though they would likely cut back on their hours worked). - These choices imply moving away from a simple DDM and highlight the trade-off between efficiency and a larger “endowment effect” to foster accountability. - Government size and provision of public services: - Choice of government size depends, among other factors, on efficiency losses associated with collecting taxes. - DDMs impose a constraint as resources are transferred to the private sector and then clawed back, inevitably involving efficiency losses. - The risks of insufficient provision of public services would be ameliorated by considering a relatively small dividend payment. - Footnote: Despite this, the authors are sympathetic to the argument that DDMs might be a tool to “starve the beast” for cases where the government has become too large. ### Conclusions and policy recommendations - General skepticism about large-scale DDMs that seek to bypass the state: large-scale direct distribution of resource wealth has not been tested anywhere in the world. - Alaska is the only well-known DDM example; its payments are small and supported by strong institutions. - Priorities before direct redistribution: - Decisions on the appropriate fiscal framework for resource-wealth management should precede any discussion of direct redistribution. - Policymakers need an appropriate institutional setting so that fiscal policy supports macroeconomic stability and development objectives. - Decisions on how much to save and invest, how to smooth revenue volatility, and how to deal with exhaustibility issues should precede any discussion of direct distribution of resource revenues to the population. - Against extreme full distribution: - The extreme case of directly distributing all resource revenues to the population is not appropriate. - Risks: mechanism of redistribution could be affected by large-scale rent-seeking; the state could be left with insufficient resources to provide core activities and basic public goods; political infeasibility where incumbents have no incentive to implement DDMs; labor market consequences of large transfers. - Support for modest, phased approaches: - Merit in more modest DDM schemes that either try to replicate the Alaskan model or seek to develop (or expand) the system of cash transfers to the population. - Start small given uncertainties about administrative capacity and logistical concerns; limited size helps avoid unanticipated implementation problems. - Use of resource revenues for social protection and investment: - Using resource revenues to establish or expand social safety nets and systems of direct cash transfers seems reasonable. - Although revenue earmarking is generally undesirable because it reduces budget flexibility, earmarking a portion of resource revenue to specific cash transfer programs seems reasonable to gain popular support—proper management is needed to avoid pro-cyclicality. - Resource revenues should be either invested (transforming natural wealth into physical assets and human capital) or “consumed” in a way that reduces poverty and increases overall welfare of the poor. - Recognition that current generations are likely to be poorer than future ones (IMF, 2012). - Eligibility criteria: making transfers conditional on interventions that increase incentives for the poor to invest in themselves (e.g., vaccination records, school attendance) seems superior to unconditional transfers. - Role of public and private sectors: - Government role: design a strong fiscal framework, including an efficient fiscal regime without loopholes to maximize resource revenues without creating disincentives for production. - Private sector role: help extract resource wealth efficiently and sustainably, and pay royalties and corporate taxes due. - A portion of resource revenues could finance public goods and direct transfers (modest DDM or social safety net) to enhance households’ incentives to demand more accountability from government and firms in the natural resource sector. *Source: Box 4, "Are Resource-Rich Governments Bloated or Starved?", DIRECT DISTRIBUTION OF RESOURCE REVENUES: WORTH CONSIDERING?, International Monetary Fund.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2014/_sdn1405.pdf_