Abstract
National oil wealth can be turned from a curse, into a blessing. This requires inclusive economic and political institutions. We propose a citizen ownership plan that could be the catalyst to nudge the oil MENA region to improve its institutional environment. While the plan is a radical departure from the status quo, it is nevertheless the “shock therapy” needed to awaken the region from decades of lackluster growth. Our plan to divert all the oil revenues directly to the citizens is not new. Others have adopted similar partial plans. Alaska distributes the oil royalties from oil companies to its residents.
In MENA, oil revenue currently goes directly to the autocratic governments and is squandered on wasteful spending, defense, and rewarding cronies and elites. If it were distributed to the citizens, then governments would have to tax them as most countries do. Taxing citizens would make governments more accountable to the citizens. What used to be the national oil company would cease to report to the government and instead would report to a board of directors elected by the citizens. This plan could solve the gasoline subsidy problem since citizens may not want to give up some of their oil revenue to subsidize gasoline. The same approach is recommended to the countries with sovereign wealth funds (SWFs).
Natural resources of a nation should belong to the people or citizens of that nation as established by the subsequent covenants of the United Nations Universal Declaration of Human Rights of 1948.
The ideas for the citizen ownership model were first laid out by these authors in “Let it Flow” by Mohammed Akacem and Dennis D. Miller, The Washington Times, Friday, February 21, 2003, and later in several iterations of the idea in unpublished papers and conference presentations. This chapter draws from the following past research, “The myth of the oil curse in Arab oil exporting economies: Evidence from Norway & Singapore,” Singapore Middle East Papers, National University of Singapore, Volume 13, as well as Oil as a Path to Institutional Change in Oil-exporting MENA, in Air and Space Power Journal (ASPJ), Winter 2014.
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Notes
- 1.
Extractive institutions extract incomes and wealth from part of society to benefit another part. Inclusive institutions allow and encourage participation of all citizens in economic and political activities.
- 2.
Sudan and Algeria overthrew despots but not their political systems. The Algerian press covered the resignation of President Bouteflika and its aftermath extensively as well as transition.
- 3.
Perte Kaznacheev argues that “Such an idea takes the common notion that natural resources in the ground ‘belong to the people’ back to its actual meaning.”
- 4.
We note that we are alluding to either a pension plan, a hybrid plan (combination of a pension and a private retirement plan), or a regular retirement plan such as a 401(k). Pension plan costs are forcing a number of states to shift the burden to private retirement plans. New Jersey is one example. See New Jersey Needs a Pension Fix. Is This It? By De Avilla and Gillers (2019).
- 5.
They issue quarterly and annual reports and invite shareholders to attend annual meetings. At these annual meetings, the directors and managers of the oil companies answer questions posed by the share owners, mostly citizens of the United States.
- 6.
The Alaska constitution was amended in 1976 authorizing 25% of the funds collected for the Permanent Fund. The idea is that such funds will be available for future generations for the day when the oil runs out. See https://apfc.org/frequently-asked-questions/#why-did-alaskans-create-the-fund, Alaska Permanent Fund Corporation, accessed on 1 June 2019.
- 7.
For more on the Universal Basic Income, see Francese and Prady (2018).
- 8.
For a summary of their book see http://www.cgdev.org/sites/default/files/21771_CGD_cx_Proof.pdf. They advocate for a “transparent and ring-fenced special fund” which would decide on the allocation of funds between the share that goes to the budget and what goes towards the dividend payments to the citizens. Because of the extent of corruption and waste that has gone on for years in the MENA region and the evidence that we have presented in this book, our model calls for all of the revenue to be distributed to the citizens. The Panama papers and the Paradise papers referred to later in this chapter show that 28% of officials named were from MENA.
- 9.
A candidate to the presidential election in Algeria in January of 2019 stated that the institutions are in a state of putrefaction, a sign of the recognition of the importance of institutions and their impact on the lack of economic growth and development in the case of Algeria. This is consistent with our main argument that institutions matter, and thus addressing the institutional deficit is a must. See Ghediri denonce une putrefaction avancee des institutions, in Liberte, January 28, 2019.
- 10.
With barter each party must want what the other wants to trade for.
- 11.
The United Commission that was charged with writing the UN Universal Declaration of Human Rights was chaired by former First Lady Eleanor Roosevelt. See https://www.biography.com/people/eleanor-roosevelt-9463366
- 12.
“Adopted and opened for signature, ratification, and accession by General Assembly resolution 2200A (XXI) of 16 December 1966 entry into force 23 March 1976, in accordance with Article 49,” see http://www.ohchr.org/EN/ProfessionalInterest/Pages/CCPR.aspx
- 13.
“Adopted and opened for signature, ratification and accession by General Assembly resolution 2200A (XXI) of 16 December 1966 entry into force 3 January 1976, in accordance with article 27,” see http://www.ohchr.org/EN/ProfessionalInterest/Pages/CESCR.aspx
- 14.
As mentioned in the text, the statements with identical wording appeared in the public documents emanating from the United Nations, were the International Covenant on Civil and Political Rights (ICCPR 1966) and later the International Covenant on Economic, Social, and Cultural Rights (ICESCR 1966), cited in Wenar (2016 pp 190–191). We used italics to highlight the appropriate part of the covenants.
- 15.
As rich as Saudi Arabia is, it was seeking loans to jump start its economy and achieve the goal of diversifying its economy away from oil. See Jones and Said (2019).
- 16.
It is important to note that while subsidies have been used by several oil-exporting countries, Iran has recently scaled back the program because of its high cost. Oil economies used the subsidies to redistribute the oil wealth, but they do more harm than good to the economy causing misallocation of resources due to the wrong price signals generated by the subsidies. Our proposal offers a much more direct approach by empowering the citizens with a direct oil revenue distribution and thus allowing prices to reflect market forces. For Iran’s recent policy change regarding subsidies, see The Iran Primer: The Subsidies Conundrum, by Semira N. Nikou and Cameron Glenn, August 2015. http://iranprimer.usip.org/resource/subsidies-conundrum
- 17.
http://www.cnbc.com/2016/01/14/saudi-arabia-plans-new-sovereign-wealth-fund-sources-tell-reuters.html, Saudi Arabia’s budget deficit has increased significantly due not only to low oil prices but also to the war in Yemen and the salary increases given to a segment of the public sector when the new king came to power. At the end of 2015, Saudi Arabia withdrew $19 billion.
- 18.
The “rich” are defined as mostly the Gulf Cooperation Council (GCC) members, mainly Saudi Arabia, UAE, Kuwait, and Qatar, while the “poor” mostly Algeria and marginally Libya at least now given the current instability.
- 19.
The term “Seven Sisters” was coined in 1953 by Enrico Mattei, then the head of the Italian state oil company, Eni. The “Seven Sisters” included the following: Anglo-Persian Oil Company, Gulf Oil, Standard Oil of California (now Chevron), Texaco (now merged with Chevron), Royal Dutch Shell, Standard Oil of New Jersey (Esso/Exxon), and Standard Oil Company of New York (Socony—trading as Mobil now part of ExxonMobil). See https://en.wikipedia.org/wiki/Seven_Sisters_%28oil_companies%29
- 20.
Not all of MENA’s countries have no tax or no pressure to tax. Algeria does, for example, and lately Saudi Arabia has considered new taxes as well as a value-added tax (2018).
- 21.
Others have developed a similar idea as our thesis. It is referred to as “oil to cash”; see Moss et al. (2015).
- 22.
Comment by Dr. Emmanuel Egbogah, quoted in an interview posted on NPR “Resource Curse Solution: Give Money Away” June 18, 2010. http://www.wbur.org/npr/127915306/one-way-to-break-the-natural-resource-curse-give-the-money-away.
- 23.
We agree that this must be considered as a second step once the oil citizen ownership scheme ushers some degree of accountability.
- 24.
Many objections have effectively been dealt with in the book by Moss et al. (2015). In this section, we have combined their responses to the objections with ours.
- 25.
For a more informative description of the Grameen Bank, see Moyo (2009).
- 26.
See Box 5.1 entitled “Empirical Evidence of a Social Contract,” (Moss et al. 2015, p 83).
- 27.
Oil dividends distributed to the citizens will be taxed like any income in other countries.
- 28.
The limited debt markets in most of the MENA countries will limit the ability to borrow large sums for big projects. Once the CEP is fully implemented, it is more than likely that the citizens would diversify their investments and invest either their existing wealth or their oil revenue shares overseas. This could force the governments to attempt to borrow from multilateral institutions or foreign banks.
- 29.
As an example, ARAMCO was able to raise 12 billion dollars through a bond issue. See Saudi Aramco Raises $12 Billion in Debut Bond Sale, by Jones et al. (2019).
- 30.
For more on tribalism in Iraq, see Chua (2018a). For tribalism in general, see Chua (2018b).
- 31.
The combined market capitalization as of the end of 2018 of Abu Dhabi, Dubai, and the Saudi stock market is just slightly higher than that of Singapore, a city state with no resource wealth but a hub of Asian finance. Equity markets in MENA have a long way to go to the reach maturity of other emerging economies (World Federation of Exchanges 2019).
- 32.
As explained in Chap. 3, the rentier effect is where governments get so much revenue from oil that they don’t have to tax their citizens, which leads to lack of accountability, corruption, and many other problems.
- 33.
The proposed plan stresses the payment to the citizens by a citizens’ board that would replace the national oil company. Of course, the disbursement will be net of what is needed for the national oil company to stay in business and continue to explore for oil and other related operations. This is no different than what a private oil company would do except that now the owners are the citizens.
- 34.
Other types of tax changes that would be inappropriate for their analysis would be: (a) Countercyclical. In this case, spending and tax changes are negatively correlated, which would appear to refute the starve the beast hypothesis, but this would be an unfair test, because the purpose of countercyclical tax reductions and spending increases are to stimulate the economy, not to starve the beast. (continued on the next page)
(b) Deficit reduction, which may be accomplished by tax increases and/or spending cuts, which are negatively correlated, and which would appear to refute the starve the beast hypothesis but also would be an unfair test, because the purpose of tax increases is to reduce the deficit, not to increase spending
- 35.
George W. Bush used this argument, but his administration ended up increasing spending, contrary to the Republican platform.
- 36.
The United States is a good example with national debt about $23 trillion dollars including intergovernmental debt as of October 2019. See http://www.usdebtclock.org/. That is, for now the United States can borrow. However, there is the possibility that one day when there is an auction of US debt, no one bids on it. The probability of this occurring is not significant now, but it is not zero either.
- 37.
While several countries in MENA do have a tax system, members of the GCC do not have much of a tax system, at least not yet.
- 38.
A potential problem with the starve the beast model as applied to MENA is that governments can possibly borrow internationally from banks or from multilateral institutions. However, while this may limit the checks imposed by our revenue distribution model, oil MENA countries could face resistance from lenders once these countries no longer have direct access to the oil revenues to use as a collateral for future debt servicing.
- 39.
Getting the government to give up this power is covered in the next chapter.
- 40.
A simple approach is for the “new” citizen-owned oil company to post the daily oil production and the revenue received that is available to anyone including noncitizens. Currently, the production data is available with some lag and published by several organizations such as OPEC, the IEA, etc. OPEC members are known to cheat and produce more than their allotted quota, so they do not have an incentive to fully disclose their production data in real time. However, the proposed oil company fully owned by the citizens will not face these constraints and should have no problem posting all this data online.
- 41.
Two steps to prevent such “tyranny of the majority” might be to require (1) supermajority votes (i.e., 60–70% majority votes) rather than simply majority votes and (2) restrictions on the number of votes any one group can have. There should not be a restriction on the number of shares any one group can have; otherwise large groups would get less shares per person than small ones.
- 42.
An exception is the GCC, the Gulf Cooperation Council (Saudi Arabia, Kuwait, UAE, Oman, Bahrain, and Qatar) where equity markets are relatively far more advanced that in the rest of MENA.
- 43.
And gas as well. For some countries like Qatar, revenue from natural gas represents the bulk of their earnings.
- 44.
As the Panama papers have shown, from the list of the 32 world leaders that were named, 9 are from the Arab world or 28% of the total. The presence of oil riches in most of these cases facilitated the transfer of funds. A redirection of the oil revenues and the accumulated funds in the SWFs will help bring transparency to the flow of these monies and ultimately more accountability. See https://panamapapers.icij.org/. The Panama papers investigation won the Pulitzer Prize for uncovering the stashing of funds in shell companies. See https://www.icij.org/blog/2017/04/panama-papers-wins-pulitzer-prize/
- 45.
We submit that taking care of future generations is extremely important from the standpoint of equity and fairness. However, the nature of our plan and the need to remove the government and its agencies as quickly as possible from the control of these funds as well as experience of these governments with illicit capital flows, corruption, waste, etc. force us to choose among the least bad options. The Panama papers and the Paradise papers are proof of the extent of the theft of public funds. https://www.icij.org/investigations/paradise-papers/
- 46.
As we alluded to earlier that governments can easily take over the funds from the SWFs or from the oil revenues, we suggest that leaving their foreign currency funds inside the MENA banking system opens itself to the same risk, regardless of how low it is. The example cited from Saudi Arabia is telling when even a country with very liberal rules when it comes to capital flows suddenly clamps down.
- 47.
In addition, the Panama papers have shown that a considerable number of senior officials, relatives, and members of royal families from MENA had offshore accounts. While that in itself may not indicate illegal activity, it speaks to the lack of transparency and accountability noted here (ICIJ 2019).
- 48.
Even the multilateral institution report avoids a discussion of who really owns the source of the SWFs’ funds. However, Leif Wenar (2016, pp 190-207) addresses the issue by invoking the concept of the popular resource sovereignty.
- 49.
After the Arab Spring, the oil MENA region entered into a period of unchartered waters made worse by global oil markets softening and posing a challenge to their public finances. In addition, the war in Yemen; the unsettle state of affairs in Syria with the US, Russia, Turkey, Iran, and Saudi Arabia engaged with their support of various factions; and finally Israel’s prime minister warning Iran about a possible strike will certainly give an incentive to anyone with surplus funds to park them overseas. Long before, this trend is and has been the norm as the global investment of Prince Alwaleed bin Talal show. See Kirkpatrick (2017).
- 50.
We are not suggesting that some of those who were arrested in Saudi Arabia were either innocent or guilty, but the absence of due process does not give confidence to either domestic or foreign investors to consider committing funds in the Saudi economy. Moreover, the Panama papers and the Paradise papers have documented the many shell companies that royals both in Saudi Arabia and the rest of the MENA region used to park funds.
- 51.
- 52.
We should note that some of the oil MENA countries do have income tax, corporate tax, etc., but what we mean is that disengaging from the oil sector on the revenue side will force these countries to rely more on the economy to generate the revenues, and as such they have an incentive to foster an environment that is conducive to faster economic growth. This we believe helps the transition, albeit slow, to inclusive institutions that is central to their success.
- 53.
This pension fund is now worth $1,000,000,000,000 by Ivana Kottasova, CNN business, September 19, 2017.
- 54.
As of June 2, 2019, the Algerian Constitutional Council decided to cancel the presidential elections that were due to be held on July 4.
- 55.
The first president of the United States, George Washington (1732–1799), and the ancient Roman dictator, Cincinnatus (519 BC–430 BC), are exceptions. Both are remembered for their similar uniqueness, i.e., surrendering power voluntarily. Though there is some historical dispute about this concerning Cincinnatus. See the following link about Cincinnatus: https://en.wikipedia.org/wiki/Lucius_Quinctius_Cincinnatus. Accessed 1 Feb 2019
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Akacem, M., Miller, D.D., Faulkner, J.L. (2020). Oil as a Path to Institutional Change in MENA. In: Oil, Institutions and Sustainability in MENA. Springer, Cham. https://doi.org/10.1007/978-3-030-25933-4_9
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