How to halve world poverty – ignore J. Paul Getty

November 10, 2010

     By Duncan Green     

An intriguing new paper from Paul Segal at the University of Sussex kicks off with a great quote from Mr Getty “The Paul Segalmeek shall inherit the Earth, but not its mineral rights”. Segal wonders what might happen if governments defied that prediction, and just handed over the income from oil, mining etc directly to poor people as unconditional cash transfers to all citizens (i.e. a universal benefit).

He calls the scheme the Resource Dividend (RD) and actually it may not be that crazy or utopian – Alaska has been doing it for years, handing over $600-$1500 a year to every Alaskan citizen, and Iran is currently considering introducing such a system to pay out $60 per person per month. When Britain first discovered North Sea oil, two FT journalists, Samuel Brittan and Barry Riley wrote, “The simplest and also the wisest answer to the question ‘What should we do with the state’s oil revenues?’ is ‘Give them to the people’”.

Why now? Segal argues that ‘two developments make its more general application particularly relevant today. First, resource nationalism and resource ownership rose in importance amid the dramatic rise in resource prices up to mid-2008. Second, the first Millennium Development Goal, adopted by the United Nations in 2000, is to halve global poverty at the $1 a day line from its 1990 level by 2015. I estimate the global impact of the policy on poverty and find that if enough poor countries were to adopt the RD then it would be sufficient to achieve the first Millennium Development Goal: extreme global poverty would be cut by half.’

Segal calculates the impact using World Bank data on resource rents and $1.25 a day poverty, for two different cases. In the first, governments simply replace the lost revenue with taxes on non-poor people. In the second, everyone, including those below the poverty line, pay taxes proportional to their post-RD incomes (so the impact on poverty is slightly reduced). The overall results are shown in the table.

Segal table

He sets out the advantages of an RD scheme:

“First, it would substantially reduce poverty. Second, by being levied only on rents, the scheme implies none of the economic distortions or efficiency loss that other redistributive schemes may risk. Third, it provides an incentive to informal workers and individuals with little or no formal interaction with the state to register with the fiscal system. Finally, there is a moral and legal argument that by the nature of rents, no individual has a special claim to them, so the only morally defensible distribution is an equal distribution.” Universal benefits are also relatively simple to administer (no means testing) and the RD has an automatic stabilizer quality, as food prices tend to vary with oil and minerals, so the increased RD would cushion people during food price spikes.

In volume terms, the RD would come in at under 6% of GDP in most countries – less than the cash benefits in the EU15 (6.6%). It’s like a jump start to a welfare state.

He contrasts the simplicity and ready-to-go nature of the RD with the complexity of boosting economic growth – the standard recipe for reducing poverty. The RD scheme does not require growth, or even new taxes – merely the redirection of existing resource rents to poverty reduction.

Interestingly, even countries not known as major commodity exporters would benefit. India, where poverty now affects nearly half a billion people despite high growth rates, would see poverty fall from 42% to around 20%, even though its RD would amount to just $2.90 per person per month.

The obvious flaw is political – why would governments do it, especially if they have to replace the lost revenue with more unpopular taxes? Segal briefly considers this, arguing that “Incumbent governments are likely to be reluctant to give up an easy-to-collect source of revenue. One can imagine it being proposed in a democracy by an opposition party in order to get elected, or by a government (democratic or not) that decided that such a popular measure may increase its chance of political survival.”

November 10, 2010
Duncan Green