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the resource curse
will ordinary iraqis ever see their oil money?

Aminah al-Thahabi
Iraq is on the way to becoming one of the biggest oil exporters in the world. As a nation it earns billions. But many ordinary Iraqis live in poverty. Now calls for a direct cash payout to each citizen are getting…
12.04.2012  |  Baghdad

Iraq\'s oil production facilities are recovering after years of violence and unrest. The state has grand plans for increasing oil exports and the nation should, by all rights, be a wealthy one. But as Baghdad student Istabraq Ghazi strolls the streets, she says she sees absolutely no evidence of that wealth.

“You just need to look at how many beggars there are at traffic lights and junctions to work out what the economic situation is in Iraq,” she says.

For Ghazi, it is clear that the average household income of Iraqis was not sufficient to cover costs. It also seemed clear to her that the government hadn’t spent Iraq’s oil income in a way that served its citizens best. In fact recent statistics from both the United Nations and the Iraqi government itself indicate that anywhere between a quarter and one third of Iraqis live in poverty.

Meanwhile the government has ambitious plans to boost Iraq\'s oil output to 12 million barrels per day by 2017 and although this forecast is considered overly optimistic, there’s no doubt that if things go according to plan, Iraq is well on the way to becoming one of the world’s biggest oil exporters.

So perhaps it’s hardly surprising that calls advocating giving the country’s oil wealth directly to its people are growing louder.

Proponents of what is known as a direct oil dividend argue that direct cash transfers would very quickly eradicate the most severe poverty and would increase loyalty to the state in a country divided – often violently - between various communities, sects and ethnicities.

Critics, however, say that direct cash transfers to the Iraqi people would increase inflation and spur consumption; it would also limit government spending on infrastructure, education and health services.

On the pro-dividend side is the Sadrist movement, which has a very strong Shiite Muslim following. MP Abdel Hussein Resan, a member of the Sadrist movement and of Parliament’s economic committee, said his party favoured an oil dividend because so many Iraqi families lived in a precarious financial situation. Resan pointed out that the average income of many Iraqis had dropped in recent years due to rising unemployment and as higher inflation had eroded their purchasing power.

“Oil income is the first option we should be thinking about,” he said.

In an editorial for influential US website Huffington Post late last year, oil industry analyst Johnny West put it like this: “Why not give petro-dollars back to the citizens? Directly, in cash?”

West argues that if this happened, “poverty could be abolished inside two years, and that, just as important, it would unleash such interest and attention from the public that governance in the oil industry would never be the same again.”

In another study paper, West concluded that, “a dividend, starting at $220 per capita in October 2012 and rising with expanded production, could also cement the affiliation of all citizens to Iraqi territorial integrity, act as a powerful disincentive to secession in oil-producing regions, and create popular pressure among all sections of the population to discourage acts by the ongoing insurgency which disrupt economic reconstruction”.

Basically the idea is that, apart from helping decrease poverty, a direct oil dividend would mean that every Iraqi had a personal stake in keeping the national oil industry going. And that would help combat what’s known as the “resource curse”, the tendency of state-controlled commodity wealth – such as the income from oil, which is Iraq’s main earner - to engender corruption, graft and wasteful government spending.

There is some evidence to support the supporters of an oil dividend for Iraq. Much of it comes from the US state of Alaska, where a comparatively smaller version of such a scheme has been in action since the 1970s. In the past Alaskans have received between US$1,000 and US$2,000 per year from the fund.

Anyone wanting to work out how to overcome the “resource curse” might like to “take a look at the Alaska Permanent Fund, something of a gold standard for transparency and investment smarts in the sovereign wealth fund world,” Bloomberg Businessweek reported in early April.

“In fact, the team in Juneau running the $41.4 billion fund occasionally receives visitors from resource-rich states such as Azerbaijan and Mongolia seeking guidance on managing sovereign wealth Alaskan-style,” the New York-based weekly business magazine noted.

US economist Thomas Palley is another fan of the Alaskan system and the use of a direct oil dividend to combat the “resource curse”.

“Good governance is key to heading off the natural resource curse,” he wrote in 2003 in a paper for the Open Society Institute’s Globalization Reform Project, of which he was director at the time. “However, developing efficient states with good governance takes time, whereas developing oil fields and building pipelines happens rapidly. Oil revenue distribution funds that directly distribute oil revenues to citizens are an important means of addressing this conundrum.”

However not everyone in Iraq is convinced. MP Haitham al-Jabouri, a member of Prime Minister Nouri al-Maliki’s State of Law coalition and of the parliamentary finance committee, argued that a direct oil dividend would deprive the state of income it needed to invest infrastructure and services.

Direct cash payments would just spur inflation and decrease the purchasing power of the Iraqi dinar, local economist Mohammed Abdel Rahman said. Instead he felt money should be invested in strategic projects that could create jobs, enhance the private sector and improve the livelihood of Iraqis indirectly.

And oil industry expert Bassem Abdul-Hadi advised caution, saying that while the Iraqi that some oil income is distributed to the Iraqi people, it was important to work out exactly how best to do this: distribution mechanisms needed study and the state also had to work out how much it needed to maintain its spending.

Abdul-Hadi said that the pros and cons of an oil dividend needed a lot of debate and discussion. Fr the time being, he felt it was better to spend the money on badly needed improvements to infrastructure, such as roading and power supplies.

Back in 2003, Washington-based economist Palley had already suggested a couple of answers to Abdul-Hadi’s questions on distribution.

“An Iraq oil revenue trust fund should directly distribute oil revenues to Iraqi citizens. Thus, rather than saving a share of revenues in a trust fund and building up the fund over time [as they do in Alaska], a significant portion of oil revenues should be immediately and directly paid to Iraq\'s citizens,” Palley wrote.

“In addition, a companion fund should be established that would distribute a share of oil revenues to provincial and local governments. This second fund can ensure a fair regional distribution of revenues, thereby reducing the potential for regional grievances which can lead to civil war. This is a major concern in Iraq which is afflicted by significant regional divisions,” Palley concluded.

In some ways, industry analyst West wrote, the essence of the direct oil dividend was not necessarily even economic. “Their essence is political, in the right way … When there is a crowded football stadium of hard core transparency activists in Iraq - and millions of armchair spectators at home, cheering them on - that\'s when we\'ll see progress on [the] Resource Curse.”

Ordinary Iraqis themselves are divided over whether Iraq should directly transfer some of the country\'s expected oil income to citizens. And some of them had their own suggestions.

College student Sam Ahmed said the best solution might be to put oil money into funds that could be used by anyone over the age of 18. After finishing high school or tertiary education, most young Iraqis found it extremely hard to make ends meet and many ended up abandoning their qualifications or further education and taking casual jobs.

Hossam Mashraq, who graduated from university two years ago, said he would also prefer cash handouts as he no longer trusted the government to provide the citizens with public services. “The news about officials embezzling billions leaves us with no confidence in the government,” he said. “The miserable walk the streets with their garbage. And the standards in hospitals and government health centres make us all lose any hope in the state’s ability.”

Another local, Qasim Ibrahim, said if a direct oil dividend was introduced, that first there should be a better level of awareness and information about the costs of education, health insurance and social security – all of which should be guaranteed by the state.

It’s obvious that how exactly to spend Iraq\'s oil revenues will remain a source of disagreement, both amongst officials and on the streets, for some time to come – especially given the speed at which the Iraqi government solve any problems. So while the government argues on how best to invest the nation’s glorious income, ordinary citizens can only dream of the benefits that black gold can bring, after years of deprivation.

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