Nigeria could benefit from directly distributing its oil revenues to its citizens, which should have a right to an equal share of oil proceeds, according to a working paper prepared by the International Monetary Fund.
Evidence from a cross-section of countries shows that natural resources can have a "seriously detrimental impact on the quality of domestic institutions and, through this channel, on long-run growth," the paper said.
The working paper does not represent official IMF policy, but it is intended to encourage discussion about the topic.
The proposal also could apply to other countries, and in some ways, Venezuela and Iraq might be better candidates for considering the proposal because of lower administering costs in those countries, the paper said.
The authors, Columbia University Economics Professor Xavier Sala-i-Martin and IMF Research Department Advisor Arvind Subramanian, said they realize the practical difficulties of implementing the proposal in Nigeria.
Meanwhile, the proposed solution becomes "more urgent by the prospects of the future exploitation of Nigeria's vast reserves of natural gas. Nigerians celebrate the discovery of these reserves. Sadly, we fear that natural gas may only aggravate and prolong the 'curse,'" they said.
Nigeria has suffered from poor economic performance as "the result of waste and weak institutions over the last 40 years," they said.
"Even with all the difficulties that will no doubt plague its actual implementation, our proposal will, at the least, be vastly superior to the status quo. At best, however, it could fundamentally improve the quality of public institutions and, as a result, durably raise long-run growth performance," the authors said.
Natural resource 'curse'
"Some natural resources—oil and minerals in particular—exert a negative and nonlinear impact on growth via their deleterious impact on institutional quality," Sala-i-Martin and Subramanian said. "The Nigerian experience provides telling confirmation of this aspect of natural resources."
The poverty rate, measured as the share of the population subsisting on less than $1/day, was just under 70%, or 90 million, in 2000 compared with 36%, or 19 million, in 1970. The calculations are based on the World Bank's original definition of the poverty line, which is based on $1/day using 1985 prices.
Meanwhile, the distribution of income also has deteriorated sharply. Over time, the wealth distribution patterns have become more distinct with more people pushed either toward poverty or extreme wealth, the paper's authors said.
In 1970, the top 2% and the bottom 17% of the population earned the same total amount of income. In 2000, the top 2% had the same income as the bottom 55%.
Oil revenue access
Nigeria's politics have been molded by incentives aimed at getting access to oil revenues. Oil wealth conceivably has been squandered, and it also has fundamentally altered governance in Nigeria, the white paper said.
"The Biafran War of the late 1960s was in part an attempt by the eastern, predominantly Ibo region, to gain control over oil reserves. Successive military dictatorships have plundered oil wealthUand stories of transfers of large amounts of undisclosed wealth abroad are legion in Nigeria," Sala-i-Martin and Subramanian said.
A solution would be increased transparency and accountability in the management of oil revenues, they said, adding that the ongoing consolidation of democracy in Nigeria is creating a more promising atmosphere for economic progress. But the transformation of weak public institutions is apt to take a long time after decades of military dictatorships.
Oil revenues for the government have been "regarded as manna from heaven, which tends to undermine the quality of institutions and lower long-term growth prospects. Starting from this premise, the logical conclusion is that the best way to deal with the problem is to transform Nigeria into a 'nonoil' economy. One way to do this is to prevent government officials from appropriating the oil resources directly."
The authors said oil revenues should be distributed directly to the Nigerian citizens. They calculated that each household would receive about $140, which would be $425 in purchasing power parity terms, roughly $760/ adult. With the full exploitation of gas, this could increase to $750/household in purchasing power parity terms, or $1,330/adult.
"In fact, if our proposal were to be implemented, the government would lose all the revenue that it now collects directly from the sales of oil. Although this would seem tragic to some, this is indeed what happens to most governments in the world," they said.
Nigerian authorities wanting to raise resources for public expenditures would have to tax Nigerian citizens and companies as do other governments. Sala-i-Martin and Subramanian contend it's more difficult for government to mismanage tax revenues.
"This would therefore create the right incentives for governance," they said.
Funds for distributing revenue
One way to manage natural resource revenue is to create a fund, but conditions that thwart sound fiscal policy also could undermine the effectiveness of funds. The paper's authors said that principle could be applied to Nigeria.
"The creation of a fund in the spirit of the Alaska Fund, whereby what is distributed to the public is not the oil revenue directly but the income from the fund is not something that we would recommend," they said.
The proposal also could provide a means of debt relief when it comes to international donors, who are concerned that savings from relief might be misused as other public resources have been in the past.
"Under our proposal, the 'savings' from debt relief would also be distributed directly to the private sector, alleviating donors' legitimate concerns and making them more amendable to granting debt relief," the paper suggested.
International oil companies also would have to be willing to cooperate.
"To prevent the government from understating the revenues it has available for distribution, oil companies could independently report the exact amounts they have paid to the government, which could be verified by independent audit. Information on their levels of production and the prices received would help in corroborating government figures," the paper said.