This House would put taxes/revenue from oil into a trust fund independent of politicians influence

The wealth from oil, or other natural resources, holds back democratization as a result of the “resources curse” or “paradox of plenty”. Resources provide money, and money is what is needed to run a security state. When money can come from natural resources there is little need to tax the people, instead it becomes a “rentier” economy where the dictator has resources to buy support without recourse to taxation.[1] It is essentially the opposite of the well-known idea ‘no taxation without representation’; if the money comes not from taxes but from oil what need is there for democracy?

This proposal takes away the option of having access to large oil revenues instead providing only a limited amount to the state rather than the pockets of the dictator. This prevents the buying of key groups such as the army and the policy who can be used to repress the population. It is not by chance that the only countries in the Arab Middle East that could be considered democracies before the Arab Spring never had oil; Jordan and Lebanon.

[1] Michel Chatelus and Yves Scehmeil, ‘Towards a New Political Economy of State Industrialisation in the Arab Middle East’, International Journal of Middle East Studies, Vol. 16, No. 2 (May, 1984), pp.251-265, pp.261-262

The biggest problem African countries face is instability whether from rebellions, coups, international conflicts, or terrorist organisation. The inevitable result is violence. What the population needs is safety to enable social benefits like healthcare and education. Money to pay for an army can therefore be a good thing. A good well paid professional force is needed to ensure stability and prevent conflict. Nigeria for example would surely have split apart without a large army; violence from terrorist groups like Boko Haram is increasing creating Muslim-Christian tensions.(1) Without stability there can be no democracy; votes can’t be held, so financing for stability is a good thing.

Egypt is a good example that shows a well-trained army can work for the benefit of democracy; it first stood aside while the people overthrew Egyptian dictator Mubarak and then stepped in when it was believed Morsi threatened democracy.

(1)     “Nigeria’s troubles ,Getting worse”, The Economist, Jul 14th 2012 http://www.economist.com/node/21558593

(2)    Siddique, Haroon, ‘Egypt army was ‘restoring democracy’, claims Kerry’, theguardian.com, 2 August 2013, http://www.theguardian.com/world/2013/aug/02/egypt-army-restoring-democracy-kerry

Environmental damage is an example of the ‘tragedy of the commons’ where if a resource is not owned by an individual (or is free to all) then it will be overexploited. This is because it is in everyone’s self-interest to use it as much as possible. The result is pollution; politicians and oil companies want to exploit the oil as cheaply as possible so they dump pollution on the local population.

For example, the $19 billion ruling handed down last year by a court in Lago Agrio, a town near Ecuador’s border with Colombia, held Chevron accountable for health and environmental damages resulting from chemical-laden wastewater dumped from 1964 to 1992(1).

Putting oil wealth into a trust fund can help prevent this kind of abuse. There are two reasons for this. First if politicians are not getting an immediate benefit they will be less inclined to overlook pollution and there won’t be money to buy support for drilling and pollution to continue. The second is that since the fund is meant to provide long term benefits and investments one of the things it can be doing is being devoted to cleaning up any pollution that is created thus protecting the future generations.

(1)    Joe Carroll, Rebecca Penty & Katia Dmitrieva ” Chevron’s $19 Billion ‘Disaster’ Gets Hearing”, Bloomberg, 29 November 2012, http://www.bloomberg.com/news/2012-11-29/chevron-s-19-billion-disaster-gets-hearing-corporate-canada.html

This is based on several potentially faulty assumptions first the trust fund may not be aimed at helping to prevent pollution of clean up afterwards; it may simply be given the role of generating the biggest possible return. Second it assumes that politicians see themselves as tied to the people so that they have a reason to prevent pollution, in practice in an autocracy or a faulty democracy this may not be the case. The desire may therefore be to invest as much money as possible in the trust fund and therefore to exploit the resource as fully and cheaply as possible.  Even if the money is going into a trust fund the self interest is in polluting as we should remember that dictators are likely to believe they will still be around to see the benefits in decades to come. 

It is very tempting to recklessly use an unexpected windfall of money immediately. But the best thing to do is to invest for the long term either to build infrastructure that will pay back its cost in future economic growth, or to invest it in funds that will continue paying dividends long into the future. The example of how Britain and Norway spent their North Sea oil revenues is very revealing: “the British governments spent their North Sea winnings on cutting national borrowing and keeping down taxes. Whatever came in went straight into the day-to-day budget. By contrast, for the past 16 years Norway has squirreled away the government's petroleum revenue in a national oil fund”(1) which now has $810 billion in assets, almost twice the country’s GDP, providing 5% returns.(2)

The advantage of such investment is that they will continue to bring income even after the oil is gone. The oil will therefore benefit future generations as well as the current one. A panel of experts which are immune to political influence is the most likely body to think about long-term needs of the country and devise a plan which can ultimately bring income for a long period of time.

(1)    Simon Gompertz “Has the UK squandered its North Sea riches?” , BBC News , 8 October 2012 http://www.bbc.co.uk/news/business-19871411

(2)  Jonas Bergman, “World’s Biggest Wealth Fund Says Record Size Is Posing Hurdles”, Bloomberg, 1 November 2013, http://www.bloomberg.com/news/2013-11-01/world-s-biggest-wealth-fund-says-record-size-is-posing-hurdles.html

Not all politicians are incapable of investing for the long term. After the economic crisis in which the world saw the perils of “living in the moment”, politicians will be more cautious in the way they spend money.  Politicians have in the past been able to build visionary projects such as the EU, or high speed rail, or invest in reducing greenhouse gas emissions; in Europe, domestic greenhouse gas emissions fell by over 15 % between 1990 and 2010, due also to improvements in energy and fuel efficiency, so there is no reason to think they could not do so again.(1)

As a result, we do not need a separate group for taking these decisions for the politicians, as they would do it by themselves.

(1)    European Environment Agency, “Mixed success for European environmental policies”, Spiral, 2012 http://www.spiral-project.eu/content/mixed-success-european-environmental-policies

Having oil does not just provide the money to undermine, or prevent democracy taking hold; it also provides an immense source for corruption. Oil revenues provide a revenue stream that is not dependent on the people but simply upon the global market and oil production. In a country with no checks and balances, accountability or transparency the money will inevitably go to the elite. This is how Equatorial Guinea can be rich while having most of the population in poverty.  Dictator Obiang himself is worth an estimated $700million or the equivalent of about 4% of GDP.(1)

A trust fund can ensure that money from oil goes to the poorest not the richest. It is managed outside the country and away from political pressure. If the government is corrupt and uses the national budget to its own ends the trust fund can provide the dividends as investment in individual development projects to ensure the money is used where it is most needed. All the time it can be transparent to show when and where the government is trying to influence it or get backhanders.

(1) ‘The Richest World Leaders Are Even Richer Than You Thought’, Huffington Post, 29 November 2013, http://www.huffingtonpost.com/2013/11/29/richest-world-leaders_n_4178514.html?utm_hp_ref=tw

Having oil does not just provide the money to undermine, or prevent democracy taking hold; it also provides an immense source for corruption. Oil revenues provide a revenue stream that is not dependent on the people but simply upon the global market and oil production. In a country with no checks and balances, accountability or transparency the money will inevitably go to the elite. This is how Equatorial Guinea can be rich while having most of the population in poverty.  Dictator Obiang himself is worth an estimated $700million or the equivalent of about 4% of GDP.(1)

A trust fund can ensure that money from oil goes to the poorest not the richest. It is managed outside the country and away from political pressure. If the government is corrupt and uses the national budget to its own ends the trust fund can provide the dividends as investment in individual development projects to ensure the money is used where it is most needed. All the time it can be transparent to show when and where the government is trying to influence it or get backhanders.

(1) ‘The Richest World Leaders Are Even Richer Than You Thought’, Huffington Post, 29 November 2013, http://www.huffingtonpost.com/2013/11/29/richest-world-leaders_n_4178514.html?utm_hp_ref=tw

The wealth from oil, or other natural resources, holds back democratization as a result of the “resources curse” or “paradox of plenty”. Resources provide money, and money is what is needed to run a security state. When money can come from natural resources there is little need to tax the people, instead it becomes a “rentier” economy where the dictator has resources to buy support without recourse to taxation.[1] It is essentially the opposite of the well-known idea ‘no taxation without representation’; if the money comes not from taxes but from oil what need is there for democracy?

This proposal takes away the option of having access to large oil revenues instead providing only a limited amount to the state rather than the pockets of the dictator. This prevents the buying of key groups such as the army and the policy who can be used to repress the population. It is not by chance that the only countries in the Arab Middle East that could be considered democracies before the Arab Spring never had oil; Jordan and Lebanon.

[1] Michel Chatelus and Yves Scehmeil, ‘Towards a New Political Economy of State Industrialisation in the Arab Middle East’, International Journal of Middle East Studies, Vol. 16, No. 2 (May, 1984), pp.251-265, pp.261-262

The biggest problem African countries face is instability whether from rebellions, coups, international conflicts, or terrorist organisation. The inevitable result is violence. What the population needs is safety to enable social benefits like healthcare and education. Money to pay for an army can therefore be a good thing. A good well paid professional force is needed to ensure stability and prevent conflict. Nigeria for example would surely have split apart without a large army; violence from terrorist groups like Boko Haram is increasing creating Muslim-Christian tensions.(1) Without stability there can be no democracy; votes can’t be held, so financing for stability is a good thing.

Egypt is a good example that shows a well-trained army can work for the benefit of democracy; it first stood aside while the people overthrew Egyptian dictator Mubarak and then stepped in when it was believed Morsi threatened democracy.

(1)     “Nigeria’s troubles ,Getting worse”, The Economist, Jul 14th 2012 http://www.economist.com/node/21558593

(2)    Siddique, Haroon, ‘Egypt army was ‘restoring democracy’, claims Kerry’, theguardian.com, 2 August 2013, http://www.theguardian.com/world/2013/aug/02/egypt-army-restoring-democracy-kerry

Environmental damage is an example of the ‘tragedy of the commons’ where if a resource is not owned by an individual (or is free to all) then it will be overexploited. This is because it is in everyone’s self-interest to use it as much as possible. The result is pollution; politicians and oil companies want to exploit the oil as cheaply as possible so they dump pollution on the local population.

For example, the $19 billion ruling handed down last year by a court in Lago Agrio, a town near Ecuador’s border with Colombia, held Chevron accountable for health and environmental damages resulting from chemical-laden wastewater dumped from 1964 to 1992(1).

Putting oil wealth into a trust fund can help prevent this kind of abuse. There are two reasons for this. First if politicians are not getting an immediate benefit they will be less inclined to overlook pollution and there won’t be money to buy support for drilling and pollution to continue. The second is that since the fund is meant to provide long term benefits and investments one of the things it can be doing is being devoted to cleaning up any pollution that is created thus protecting the future generations.

(1)    Joe Carroll, Rebecca Penty & Katia Dmitrieva ” Chevron’s $19 Billion ‘Disaster’ Gets Hearing”, Bloomberg, 29 November 2012, http://www.bloomberg.com/news/2012-11-29/chevron-s-19-billion-disaster-gets-hearing-corporate-canada.html

This is based on several potentially faulty assumptions first the trust fund may not be aimed at helping to prevent pollution of clean up afterwards; it may simply be given the role of generating the biggest possible return. Second it assumes that politicians see themselves as tied to the people so that they have a reason to prevent pollution, in practice in an autocracy or a faulty democracy this may not be the case. The desire may therefore be to invest as much money as possible in the trust fund and therefore to exploit the resource as fully and cheaply as possible.  Even if the money is going into a trust fund the self interest is in polluting as we should remember that dictators are likely to believe they will still be around to see the benefits in decades to come. 

It is very tempting to recklessly use an unexpected windfall of money immediately. But the best thing to do is to invest for the long term either to build infrastructure that will pay back its cost in future economic growth, or to invest it in funds that will continue paying dividends long into the future. The example of how Britain and Norway spent their North Sea oil revenues is very revealing: “the British governments spent their North Sea winnings on cutting national borrowing and keeping down taxes. Whatever came in went straight into the day-to-day budget. By contrast, for the past 16 years Norway has squirreled away the government's petroleum revenue in a national oil fund”(1) which now has $810 billion in assets, almost twice the country’s GDP, providing 5% returns.(2)

The advantage of such investment is that they will continue to bring income even after the oil is gone. The oil will therefore benefit future generations as well as the current one. A panel of experts which are immune to political influence is the most likely body to think about long-term needs of the country and devise a plan which can ultimately bring income for a long period of time.

(1)    Simon Gompertz “Has the UK squandered its North Sea riches?” , BBC News , 8 October 2012 http://www.bbc.co.uk/news/business-19871411

(2)  Jonas Bergman, “World’s Biggest Wealth Fund Says Record Size Is Posing Hurdles”, Bloomberg, 1 November 2013, http://www.bloomberg.com/news/2013-11-01/world-s-biggest-wealth-fund-says-record-size-is-posing-hurdles.html

Not all politicians are incapable of investing for the long term. After the economic crisis in which the world saw the perils of “living in the moment”, politicians will be more cautious in the way they spend money.  Politicians have in the past been able to build visionary projects such as the EU, or high speed rail, or invest in reducing greenhouse gas emissions; in Europe, domestic greenhouse gas emissions fell by over 15 % between 1990 and 2010, due also to improvements in energy and fuel efficiency, so there is no reason to think they could not do so again.(1)

As a result, we do not need a separate group for taking these decisions for the politicians, as they would do it by themselves.

(1)    European Environment Agency, “Mixed success for European environmental policies”, Spiral, 2012 http://www.spiral-project.eu/content/mixed-success-european-environmental-policies

Having oil does not just provide the money to undermine, or prevent democracy taking hold; it also provides an immense source for corruption. Oil revenues provide a revenue stream that is not dependent on the people but simply upon the global market and oil production. In a country with no checks and balances, accountability or transparency the money will inevitably go to the elite. This is how Equatorial Guinea can be rich while having most of the population in poverty.  Dictator Obiang himself is worth an estimated $700million or the equivalent of about 4% of GDP.(1)

A trust fund can ensure that money from oil goes to the poorest not the richest. It is managed outside the country and away from political pressure. If the government is corrupt and uses the national budget to its own ends the trust fund can provide the dividends as investment in individual development projects to ensure the money is used where it is most needed. All the time it can be transparent to show when and where the government is trying to influence it or get backhanders.

(1) ‘The Richest World Leaders Are Even Richer Than You Thought’, Huffington Post, 29 November 2013, http://www.huffingtonpost.com/2013/11/29/richest-world-leaders_n_4178514.html?utm_hp_ref=tw

Having oil does not just provide the money to undermine, or prevent democracy taking hold; it also provides an immense source for corruption. Oil revenues provide a revenue stream that is not dependent on the people but simply upon the global market and oil production. In a country with no checks and balances, accountability or transparency the money will inevitably go to the elite. This is how Equatorial Guinea can be rich while having most of the population in poverty.  Dictator Obiang himself is worth an estimated $700million or the equivalent of about 4% of GDP.(1)

A trust fund can ensure that money from oil goes to the poorest not the richest. It is managed outside the country and away from political pressure. If the government is corrupt and uses the national budget to its own ends the trust fund can provide the dividends as investment in individual development projects to ensure the money is used where it is most needed. All the time it can be transparent to show when and where the government is trying to influence it or get backhanders.

(1) ‘The Richest World Leaders Are Even Richer Than You Thought’, Huffington Post, 29 November 2013, http://www.huffingtonpost.com/2013/11/29/richest-world-leaders_n_4178514.html?utm_hp_ref=tw

A country’s resources should be used democratically. The resources that are found under the soil belong to the nation and therefore they should be used for the benefit of the people. Even where there is private ownership extending to mineral and energy resources it is the responsibility of the owners to use those resources for the good of the nation. The only way for this to happen is if there is a democratically accountable body in charge of the funding; this has to mean a democratic parliament.

Putting the money in an ‘independent fund’ is not very accountable. Even if it is independent there is no saying what the money will be used for, or that the fund is not really designed to funnel money back to a few individuals. 

Politicians only think about themselves and only for the short term looking for re-election. The result will be the money used for populist measures even if it is not sustainable. The example of Greece proves this idea, as there public sector wages rose 50% between 1999 and 2007, despite having a deficit (1). Everyone wants more money, so will vote for such measures. They don’t think about the question of how that money will be acquired in the long run so will go for unsustainable policies that kick the problem to future generations. Only an independent body will be immune to short-termism.

(1) ‘Eurozone crisis explained’, BBC News, 27 November 2012, http://www.bbc.co.uk/news/business-13798000

When it is politicians who control both the investment and the amount funds being returned from that investment then they have an incentive to encourage more investment. They will want more exploration to find more resources, they will promote technological advances to be able to extract more from the same fields, and they will be willing to grant more production licences.

If on the other hand the money goes into a trust fund then the government and parliament has little incentive to encourage the market and every incentive to hold it up. The oil only provides a risk; unpopularity due to environmental impacts without any benefit in return.

The result will be that the costs of drilling will be seen in the environmental damage it causes while communities do not get any of the benefit as the money is being squirreled away ‘for the future’.  This is hindering the market and so reducing the economic benefits to the country.

Is it better that money should be wasted immediately or should the return be spread out? Any prudent population would choose the latter. Most populations are wary of untrammelled exploitation of natural resources of the kind being promoted for fear of the devastating environmental impact.

Recent failures of big companies to protect the environment, like Chevron(1), only add to this discontent and lack of trust.  The case of Rosia Montana Gold Company which wants to get a permit to mine for gold in Romania is also very illustrative. Following the request of this company to exploit certain mountainous areas in the Carpathian, a series of nation-wide protests have emerged. Thousands of people from across the nation are going out on the streets on a weekly basis to protest against this project.(2)

An independent fund won’t disincentivise investment; money will still be returned to the nation’s treasury to be used by politicians but because it takes longer to flow into the treasury there is less incentive for reckless investment that disregards the people’s will.

(1)     “Chevron's Toxic Legacy in Ecuador”, Rainforest Action Network, http://ran.org/chevrons-toxic-legacy-ecuador

(2)    Vlad Ursulean “Stopping Europe's biggest gold mine”, Al Jazeera, 27 Nov 2013 http://www.aljazeera.com/indepth/features/2013/11/stopping-europe-biggest-gold-mine-20131117102859516331.html

Let us not forget that in most of the cases when we talk about oil revenues, we are talking about very large sums of money, which can have an immense impact on the budget.

In countries where oil already contributes to the budget any change could be immensely disruptive to the government’s ability to deliver services. If we take Venezuela as an example oil revenues account for 25% of GDP (1), with government expenditure of 50% of GDP (2) any drop in oil revenues would have an immense impact upon social policies such as education, health and welfare. For those where the funding would be new that country would be foregoing a potentially transformative sum of money that could help to eliminate poverty or provide universal healthcare and education.

Such a drop in funds flowing into the government would also have a huge impact on politics; politicians would block the implementation of a proposal that takes away so much revenue. If it did happen the independent fund would simply get criticism heaped on it as an excuse for why services can’t be improved.

(1)    Annual Statistical Bulletin 2013, ‘Venezuela facts and figures’, OPEC, 2013, http://www.opec.org/opec_web/en/about_us/171.htm

(2)    2013 Index of Economic Freedom, ‘Venezuela’, Heritage Foundation, 2013, http://www.heritage.org/index/country/venezuela

The change need not be dramatic; it need not apply to all oil revenues at once. For example only revenues from new fields could go into the independent fund while existing revenues to the government are maintained. Services therefore won’t need to undergo contraction.

The impact on politics would also be minor; people elect those who get things done not those who blame others for their problems.  Moreover all of the politicians will have the same constraint of a lack of funds so no single party will have an unfair advantage.