TCS Daily

From Curse to Cure

By Karol Boudreaux - October 19, 2004 12:00 AM

Americans are accustomed to searching for villains when oil prices rise. Recent spikes in the price of oil to over $50 per barrel can be tagged, in no small part, on a group of gun-toting brigands from the steamy swamps of Nigeria's coast.

These rebels are Nigerian militia members who are threatening full-scale battle if they aren't given greater control over Africa's largest, and the world's sixth largest, crude oil reserve. Though a tentative peace has been reached, it may be only a matter of time before the truce breaks and blood is shed, with serious economic repercussions for the rest of the world. Last week's violence and strikes in Nigeria are evidence of the fragility of this truce.

The unrest stems from the fact that the government of Nigeria owns these massive reserves, not the citizens of the oil-rich Delta region. Oil revenue accounts for approximately 95% of the country's foreign exchange income, generating billions of dollars of income and yet, the people of the Delta (and of Nigeria at large), see vanishingly little benefit from this money. Instead of good schools, well-stocked medical clinics, and comfortable homes, they live with increasing poverty, environmental degradation, and continuing violence.

The Nigerian government has created a revenue-sharing system that distributes some money to officials in oil-producing areas and throughout the country, but this system is widely perceived to be riddled with corruption. Given the on-going threat of oil-related violence, and its potential impact on economies around the world, one wonders if a different alternative exists.

Here's an idea: perhaps BP, Royal Dutch/Shell, ChevronTexaco, Agip and the other major oil companies operating in Nigeria, should demand that the Nigerian government create an accountable and transparent "People's Permanent Fund." If the oil companies take the lead in this effort, they might find themselves in a rather unfamiliar, and perhaps desirable, position: champions of the people of Nigeria.

The idea, based on the Alaska Permanent Fund, would be to provide each and every citizen of Nigeria with a direct claim over a portion of Nigeria's oil revenues, in the form of a check, payable directly to them. The current allocation system would be sidestepped and, one hopes, so too would the rampant corruption that plagues this system. My colleague at George Mason University, Nobel Laureate Vernon Smith, has promoted a similar idea with regard to Iraq and its oil.

Like the Alaska Fund, a Nigerian People's Fund could have both reserved assets: principal; and unreserved assets: realized earnings. Strict limits would need to be placed on the use of reserve assets. In Alaska, reserved assets cannot be spent unless a majority of Alaska's voters approve the outlay. A portion of unreserved assets could be used to pay an oil dividend to Nigerians. Dividend amounts would vary, of course, depending on world oil prices. Since 1982, the first year a dividend was paid in Alaska, dividends have fluctuated from a low of $331 in 1984 to a high of $1963.86 in 2000.

A Nigerian Fund could improve on the Alaska program. For example, it might require that all oil royalty revenue, as well as all revenue generated by the sale of other natural resources, be placed into the People's Fund. This would provide an enormous source of capital for use by Nigerians. Fund dividends could provide an engine for human development and for entrepreneurial activity in Nigeria. Nigerians might also be given tradeable shares in the Fund's unreserved account, providing them with another source of capital. Vernon Smith has noted that the Alaska Fund lacks these characteristics, and so works less optimally than it might.

Why ask the oil companies to take the lead? For two reasons: first, if the Nigerian people are given a stake in the production of oil they are less likely to attack production facilities and steal oil from pipelines -- both serious and costly problems, and second, the companies have the capability to take the argument to the world. The companies could call on NGOs and international organizations to support an effort that would empower all Nigerians -- as opposed to political elites -- with real ownership over their resources.

Such a plan demands a legal framework that imposes real accountability and transparency on Fund managers. There would need to be strict external oversight of Fund activities. Herein lies the problem. The Nigerian public sector is notoriously corrupt and highly unlikely to part with its power to control oil-revenue largesse. Could a Nigerian government agency really operate under these strictures? Almost certainly not in today's world.

Yet, unless some meaningful change is made in the way Nigeria manages oil revenue, violence is likely to continue and oil prices are likely to reflect that instability. Broader ownership rights for citizens, coupled with meaningful accountability, might be Nigeria's best hope for breaking its persistent resource curse; they might also help stabilize oil prices.

Karol Boudreaux is a Senior Research Fellow in the Global Prosperity Initiative at the Mercatus Center at George Mason University.


TCS Daily Archives