How to Use Oil Revenues Efficiently

Abstract

Oil-rich countries systematically misallocate public expenditures relative to non-oil countries--by favoring consumption over capital, and within consumption, inefficient subsidies and public-sector wages over targeted transfers. Furthermore, for given levels of expenditure, value-for-money is considerably less in oil-rich countries. This paper argues that the reason for this inefficiency is that oil revenues go directly to the government without passing through the hands of the citizens, as is the case with tax revenues. As a result, governments in oil countries are less accountable for public expenditure, which leads to inefficient spending. To improve public-spending efficiency, we propose that all oil revenues be distributed directly to citizens, and the resources that government needs be raised through taxation. We show that such a scheme improves the efficiency of public spending. We consider possible obstacles to such a reform and show that they have been overcome by technology, politics, and global events.JEL Classifications: H2, H5, O13, D8

Social Contracts for Development: Bargaining, Contention, and Social Inclusion in Sub-Saharan Africa

“…First, citizens would have a better idea of how extensive the revenues are. Second, because expenditures are being financed from their tax payments, citizens may have greater incentive to scrutinize these expenditures (Devarajan 2017).…”

From fiscal stabilization to economic diversification: A developmental approach to managing resource revenues

“…Devarajan 2019). Direct distribution through cash transfers, subsidies, or tax breaks would improve accountability (by encouraging citizens to monitor resource income and forcing government to rely on normal taxation for revenues) as well as widen the opportunity for citizens to invest in human capital to complement resource wealth, rather than concentrating access to capital within a small elite (Devarajan 2019;Gelb and Grasmann 2009). In the most direct forms of redistribution to citizens, the government retains neither macroeconomic nor microeconomic control over spending (Collier et al 2010).…”

Further attempt to explain the oil curse mechanism using a debt overhang concept

“…Despite large volume of spending on subsidies and transfers, the oil-rich countries struggle to meet consumers' demand with an adequate output. For instance, despite spending substantial subsidies in energy, the oil-rich countries in the Middle East and Africa face higher power outage per month resulting in a greater loss of value, compared to nonoil-rich countries (Devarajan, 2018). Similarly, the increase in oil revenue is associated with an increase in inefficiency of health sector of oil dependent countries while undermining their capacity to achieve full potential life expectancy (Keller, 2020).…”