THE GULF'S BLACK
TREASURE Islamic tools to the
rescue
This is the 15th article in a special
series on oil and the Persian Gulf. For previous
articles, please see the foot of the page.
As we have said again and again in this
series of articles, oil could have been, and
should have been, a blessing in the Middle East
but it has turned out to be more a curse.
Why has the economic and political
development of in these oil-exporting countries
been so dismal? The "oil curse" has had many
tentacles. With vast oil revenues, the temptation
to rob the citizenry has been irresistible for
rulers, and the elite - the family and friends of
the rulers, cronies, senior military and anyone
who had even a remote opportunity to enrich
themselves.
To differing degrees in all of
these oil-exporting countries, those in
power (family and other
undemocratic rulers):
Have used oil revenues to buy short-run
support for their regime with their citizenry
through subsidies, handouts and other benefits;
Have bought the services of important
lobbyists (ex-senior government officials and
corporations) in the United States and Europe to
back their rule;
Have wasted billions on imported arms to buy
foreign support, arms that most likely would be
used against their own people;
Have impeded the development of viable
institutions, especially the rule of law that
could check their plunder; and
Have robbed their countries for personal
enrichment to an extent that may be turn out to be
unparalleled in the history of man - but leaders
around the world, including those at the
International Monetary Fund and the World Bank,
say nothing.
As the rulers impeded the
development of effective institutions, they paid
little notice to the fact that institutions are at
the foundation of sustained economic development
and growth, and in particular the development of a
thriving private sector.
The implications
of economic failure in the region are most visible
and ominous in high unemployment. Years of
corruption and plunder at the expense of
development and growth are coming home to roost;
sub-par economic growth over decades and change in
age structure present the more populous countries
with an unemployment problem that is a ticking
bomb for the foreseeable future.
What can
they do? The oil exporters should, without delay,
re-orient the role of oil in their economies. In
all these countries, oil resources belong to the
state and are, in turn, the birthright of current
and future generations. Oil does not belong to
rulers to generously "share" with citizens. The
state has the responsibility to preserve equal
benefits from all exhaustible resources for all
generations.
Oil is an important part of
these countries' stock of capital and its
depletion should be replaced by capital of another
form to preserve the rights and benefits of
current and future generations. In the case of
Islamic communities, this must be done in such a
way that all citizens - current and future
generations - benefit equally; just as we should
consider ourselves stewards of our environment so
that those who follow us can enjoy the same, so
should we also take care of exhaustible resources
for the equal benefit of all generations.
As a rule, oil revenues should not finance
consumption, public or private. If the oil is used
to finance consumption, then eventually the
country's economy will fall off the cliff when oil
runs out, that is, with a gross domestic product
of zero.
Using oil revenues to finance
consumption is detrimental, but what about
building infrastructure and developing industries
to provide jobs now and in the future? If a
government selects infrastructure projects and
industries to develop, will they be the most
needed ones? Won't those who get construction
contracts benefit more from oil funds than the
rest of the citizenry? And if all revenues are
used now, will future generations receive their
fair share of benefits from oil depletion?
The role of the government should be
reduced; a healthy private sector should be
encouraged and nurtured; and the government should
rely on taxes to finance its activities-something
it would have to earn by developing a healthy
private sector economy.
There is only one
efficient and just way to manage oil depletion and
its associated revenues. First, wean the
government from oil revenues over a period of say
10 years (a period of time to develop an efficient
and equitable tax system to provide revenues for
the government). Place oil revenues into a
well-managed sovereign wealth fund (SWF) and give
an equal real payout directly to each citizen,
today and for all time. The management of such a
fund must be transparent and outside of the
personal control of the rulers and must be
designed to afford appropriate incentives to
individuals to live productive lives and to
contribute to economic and social prosperity.
This may sound like a difficult task, but
it is not. The real payout could be readily
calculated and updated, as a moving average, to
reflect changes in the oil and gas markets and
population. Such an approach would reduce wasteful
government expenditures, be they subsidies or
military expenditures. These could no longer be
financed by easy money. Individuals would be in a
position to spend their money as they wished, thus
this would be the most efficient way to transfer
benefits to the citizenry, as done partially in
Alaska.
The government would be forced to
become more efficient and accountable because it
would have to rely on taxes for revenues, as do
most countries. Rulers and their cronies would
lose access to oil revenues and would have to find
productive work instead of corrupt rent-seeking
activities that impede the development of good
institutions, a pre-requisite for sustainable
private sector growth.
There are of course
a number of operational issues with such a fund.
It seems reasonable that only citizens should be
the beneficiaries of any payout from the fund as
the oil belongs to citizens of all generations. A
pertinent question is whether payouts should be
given to adults only? If payouts are given to all
citizens regardless of age, is it reasonable to
assume that a minor would be sufficiently
responsible? Should the payment then be made to
the parent or the guardian of a minor?
If
yes, then such a policy could encourage population
growth (and the more children one has the larger
the share of the fund's payout). On the other
hand, if the first payment (representing the
accumulated annual payouts from the prior 16 or 18
years) to a citizen is set contemporaneous to the
attainment of adulthood, would that expectation of
such a financial "windfall" create moral hazards
and result in unintended waste?
Given the
above moral hazard, one could argue for
instituting compensating factors that would serve
to minimize unintended consequences. Specifically,
the first payment from the fund could be tied to
some socially acceptable (or desirable) criteria.
For instance, for those in 18-to-30 age bracket,
the first and subsequent payouts could be made
conditional to the citizens' achieving a minimum
level of educational proficiency, or indeed, for
having a history of productive and legal
employment if not attending school.
Such a
condition would encourage literacy amongst the
populace and could support economic growth.
Another condition that could be attached to a
citizen's right to receive current and future
payouts from the fund is the maintenance of a
clean civilian record.
A potentially
interesting application of the fund is to explore
a design to mimic the role that social security
plays in the wealthier countries. Thus, payouts
could be higher when a citizen reaches a certain
given (retirement) age. These and other features
could have a significant effect on a number of
related factors, such as birth rates. For our
limited illustrative purposes here, we assumed
none of the above-mentioned options.
An
obvious attack on any scheme is that individuals
would become lazy, would not work and in the
process society would become less productive.
While this is a legitimate concern it need not
become a fact of life. If governments develop
effective institutions, adopt rational and
consistent economic policies and generally provide
a supportive business climate, citizens will be
more motivated (and will have the resources) to
invest and invigorate private sector growth. At
the same time the eligibility to receive payments
from the fund could be tied to definable,
objective and socially desirable achievements.
From an efficiency standpoint, it is more
efficient to give each individual the same fixed
real sum of money every year than to indirectly
give him or her the same amount by means of
various subsidies. The reason is simple. All
individuals would not want the same subsidies. One
may want food and shelter, while another may want
clothing and healthcare.
What if social
and private returns diverge significantly? The
social return to certain infrastructure and other
inputs such as education are so high that a dollar
spent on these increases the welfare of society by
more than the aggregate welfare of all current and
future generations by dividing up this dollar
between all current and future members of society.
The point is that if we had all such
information and could make such interpersonal
welfare judgments, it is possible that individual
transfers may not always be the socially optimal
solution. But even the provision of
infrastructure, such as a roads, from oil revenues
could be questioned as future generations may
benefit less (if the road would not exist in the
future) or more (if the road results in
significant economic boom in the future).
To adjust for economic and social
distortions, these countries desperately need an
effective system of taxation. In Islam, taxation
by the state to fulfill social requirements is
clearly envisaged and endorsed. Yet none of the
Persian Gulf oil exporters have an effective
income tax system to address social and economic
needs.
If these major oil exporters want
to re-orient their economies, then such a
fundamental turnaround is the best way forward. It
would show the citizenry that they are willing to
truly reform; to share the wealth of the country
equitably; to address corruption at its roots; and
to establish a system that would provide financial
support equitably to all, while supporting a
private sector that could create badly needed
employment opportunities.
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