Reverse the Curse

LAND MATTERS

Larry Diamond and Jack Mosbacher (“Petroleum to the People,” September/October 2013) rightly observe that the coming oil boom in Africa is, paradoxically, a frightening prospect for the continent’s poor and marginalized. If the so-called resource curse holds, this new surge of easy money will indeed “poison the prospects for development,” fueling corruption, inflation, and authoritarian regimes. The authors’ proposed solution, however, falls short. Diamond and Mosbacher suggest that governments could reverse the curse by distributing oil revenues directly to the people as taxable income. But doing so would not address the fundamental issue that gives rise to the resource curse in the first place: weak land rights.

Most developing countries still rely on legal frameworks that were originally established for colonial-era exploitation. These laws, many of which are still in place today, vest all natural resources -- and often the associated land, too -- in the state. This means that individuals or communities that own land do not own the minerals, petroleum, timber, water, or other resources attached to it. The state retains that privilege, and it profits from resource extraction by granting licenses and concessions to private firms. Locals thus have little say in contract negotiations and rarely see any of the profits. To further complicate matters, most property ownership, especially in Africa, is not legally recognized, even after generations of traditional use -- making it easier for the government to remove people living in the way of extractive activities.

This setup contrasts markedly with the legal frameworks that govern landownership in those developed countries that have harnessed their natural resources to build strong economies, large middle classes, and democratic societies. In the United States, resource rights attach to individual landownership. In no case does the government automatically own what lies on or underneath privately owned land. The state instead gains revenue from taxing the incomes of landowners and of the companies that help them extract their land’s resources.

The United States has extended the benefits of landownership to many indigenous communities, and the results have been impressive. In Alaska, some 110,000 shareholders of 12 for-profit native corporations now own entitlements to more than 40 million acres of land. Those ownership rights have encouraged the shareholders to carefully manage their resources, and in 2010, their collective revenue exceeded $8 billion, providing cash dividends that totaled nearly $170 million. That translates into significant tax revenue that the state and federal governments can use to provide services to others. And the businesses that the corporations operate have provided thousands of jobs and internships.

In some developed countries, such as Canada and Norway, the government still owns or controls a large share of the natural resources. But in those states, the resources tend to be located either offshore or in sparsely inhabited interiors. They also represent a complimentary source of government revenues.

The United States provides a better model for developing countries. Individual resource rights there underpinned the development of democratic institutions and a diversified economy. By expanding the the tax base, landownership gave citizens a stronger stake in local governance and gave the government the capital to provide needed services. Because both the risks and the benefits of resource extraction were tied to landownership, individuals and communities could weigh the tradeoffs of extraction. And the government assumed a more natural role as regulator.

Although the grand solution proposed by Diamond and Mosbacher would improve on the status quo in developing countries, it would at the same time undercut the principle that strong property rights are critical to sustainable economic growth. A cash-for-petroleum scheme would provide equal levels of income to all people, regardless of who carries the brunt of the burden. Yet the destruction and pollution of land disproportionately hurts the communities that inhabit it. In South Sudan, for example, the seasonal grazing lands of the Nuer and Shilluk tribes have been turned into oil fields. And in Nigeria, the communities that live in the Niger River delta have had to suffer the consequences of oil spills from offshore rigs. Yet under a cash-for-petroleum scheme, they would not be entitled to the compensation they deserve.

Linking resources to land in these countries would prove difficult but not impossible. Any attempt to provide more cash to those adversely affected, however, would be virtually impossible without first establishing who has rights to what resources. The first step, then, is to legally recognize the long-standing claims of individuals and communities to the land they already live on. In such countries as Afghanistan and Indonesia, this would also mean recognizing customary or traditional landownership systems and enshrining these communal arrangements in law. To spur this change, Western development assistance must promote local landownership, linking trade agreements, aid budgets, and loans to the recognition and protection of land rights. Over the long term, governments should continue to encourage a careful transition from state ownership to individual and community resource ownership.

Empowering locals to manage resources, generate revenue, and contribute to the tax base would minimize the effects of the resource curse while avoiding the pitfalls of Diamond and Mosbacher’s cash-for-petroleum scheme. Doing so would address the root cause of the curse, not merely its symptoms.

KAROL BOUDREAUX is Director for Investments in Property Rights at the Omidyar Net­work. Follow her on Twitter @KarolBoudreaux.

TIERNAN MENNEN is Founder and Executive Director of the Hakí Network and Director for Land Resource Rights at Chemonics International. Follow him on Twitter @TiernanMennen.

DIAMOND AND MOSBACHER REPLY

There is no magic bullet for avoiding the resource curse, and so we welcome Karol Boudreaux and Tiernan Mennen’s response. Even our own proposal -- a far-reaching oil-to-cash scheme, in which natural resource profits would be distributed to citizens as taxable income -- would have to be complemented by radical efforts to increase the transparency of government budgets and revenues. And numerous other reforms are also worth considering. One former president of a mineral-rich developing country told us that he would like to require extractive industries to make payments directly to the people in the communities that inhabit the land they are extracting from. This would not strengthen citizenship the way direct taxation would, but it would get resource revenues directly to the people.

Certainly, Boudreaux and Mennen are correct that justice demands that the people who live on resource-rich land should enjoy both a political right to have a large say in whether the mineral wealth will be extracted at all and an economic right to a disproportionate share of the income from that wealth, given that they will bear more of the social and environmental costs of extraction.

But their proposal poses some practical and moral dilemmas. First, much of Africa’s newly discovered oil, particularly in West Africa, lies offshore, and so much of the revenue will accrue to the government -- and then to government officials -- regardless of any changes in land rights. Second, given that where mineral wealth lies is an accident of nature, it is unclear who should be considered the owners of that wealth: the people who by chance live on top of it or the broadest segment of humanity that could reasonably lay a claim to it -- that is, all of a country’s citizens.

In addition to strengthening land rights, Boudreaux and Mennen want to give effect to these claims by granting ownership of the subsurface and other resources to the communal or individual landowners. This proposal would leave two problems, however. First, once the revenue flows to a community, there is no good way to ensure distributive justice within it. To be sure, the people of Nigeria’s oil-rich but now environmentally devastated Delta region have seen tragically little benefit. But this is not because money has not flowed to them. In fact, they have received vast and disproportionate amounts of the revenue, as Nigeria’s oil-producing states retain 13 percent of oil revenues off the top. The core problem is bad governance at every level. It is not only presidents and federal ministers who have stolen from the Nigerian people but also state governors and local officials. Recognizing communal rights to natural resources would not serve justice unless the revenue flowed directly to the people, which is hardly guaranteed.

Second, giving ownership of the subsurface and other resources to private landowners could trigger extensive land grabs in badly governed states, as the rich and powerful pushed ordinary people off their land in order to seize the wealth on and underneath it. This possibility underscores why the issue of land rights is so important, but it also suggests that distributive justice might be better achieved by establishing that natural resources belong not to the state or to any particular individuals but to all the people of the country.

We say “might” for a reason. Ultimately, what mineral-rich, poor countries most need now is an open, far-reaching policy debate. It is possible to know what has not worked in the past, but not to predict what will work under different circumstances in the future. We suspect that in most African countries, where land rights are flawed or nonexistent and tribal institutions have mingled in complicated ways with colonial legal systems, oil-to-cash programs would offer an efficient and achievable path to addressing the resource curse. But each society must weigh its own options. Policy innovation is sorely needed, and in that spirit, we welcome this latest contribution to the debate.