Opinion: A Latin Solution To An African Problem

Fifteen years ago, Mexico did something that, until then, only rich countries had dared to do – it began to transfer cash directly to its poor.  The payments were conditional: Recipients had to help themselves by keeping their children in school and vaccinating them. Today, about 70 developing countries have followed the example, and most evaluations show that the idea worked.  But direct cash transfers can be more than a smart way to deliver social assistance. In fact, they can provide Africa with a neat solution to its most urgent problem:  how to handle its massive commodity bonanza.

High prices and vast discoveries of oil, gas and minerals are turning the continent into a   giant boom town.  Big money is beginning to flow into governments’ coffers.  The risk that the new money might be wasted – or stolen – is big.  The best way to hedge that risk is to upgrade public institutions, such as budget, investment and anti-corruption offices. But that will take time.  What can be done in the meantime?  Transfer part of the money directly to the people – universally and uniformly, the same sum to each person, rich or poor.  Call them “direct dividend transfers.”
Why would you do that?  Will this not mean less money for schools, clinics, and roads? Not necessarily. In fact, direct dividend transfers can lead to less poverty, less corruption and more public services.
First, poverty.  If a typical African government (think Gabon’s) distributed, say, a tenth of its hydrocarbon or mineral revenues, each of its citizens could get about  $100 per year. That might not be much for the well-off; they might not even bother to collect it.  But it would be a huge help for poor households – a day-and-night difference in their efforts to climb out of poverty. Optimally, one would like to focus the transfer only on the poor – and away from the rich. But, in most places, that would prove politically complicated, if not impossible. And, anyway, the rich are very few in Africa.
Second, less corruption.  The best way to understand why direct dividend transfers can make governments less corrupt is with a hypothesis. Say that you get home tonight and your spouse is waiting for you with a surprise gift – a brand-new Ferrari.  That would probably make you very happy. But soon you would ask yourself: “Where did the money come from? I didn’t know we had that kind of cash.”   The same will happen to people if their government suddenly gives them, say, 10 percent of its mineral revenue – they will want to know what the government is doing with the other 90 percent!
You would create a “scrutiny effect,” a popular interest in how the bureaucracy manages the national treasury. In technical parlance, you would have fostered the “demand for good governance.” (By the way, if you are getting a cut of the profit from your country’s gas industry, would you insist on its nationalization or on its efficiency? Would you want it run by politically appointed public employees or by profit-driven private managers?)
Third, more public services. A big argument against direct dividend transfers is that they would leave less money for a government to invest in “public goods” – such as primary education, basic health and crime prevention. Point taken. But whether that happens depends on how much revenue the government already is receiving. If your country is so poor that the state is unable to provide much in terms of services (think of newly independent South Sudan), you might not want to take money away from it.
But how about countries in which the government has, for decades, appropriated all the revenues from commodities – billions upon billions of dollars – and has, by and large, wasted them? Will sharing part of those revenues with people reduce the quantity of public services, or will it reduce waste? Look at most hydrocarbon-rich economies, and you will get the answer.
So the idea of adapting Latin America’s social transfers into Africa’s dividend transfers could work in theory.  But can it work in practice? After all, Africa is not Alaska, where oil dividends have been distributed to residents since the early 1980s.  Well, the necessary technology is getting better and cheaper by the day – it costs only about $4 to biometrically identify someone. And with the viral growth in the use of magnetic cards and cellular telephones across the developing world, making payments is a non-issue.   More to the point, about 30 African countries already operate more than 100 cash-transfer programs as part of their social policies.  It is now a question of linking those transfers to the source of income from which they are paid, and of extending them to everyone. Of course, sitting governments have little or no incentive to do that – they would lose the power to decide who gets how much.
More likely, direct dividend transfers will be championed by opposition politicians in democracies holding elections (“Vote for me, and the oil is yours.”). In other words, the time is coming – in Africa and elsewhere.

Marcelo Giugale

Marcelo Giugale is the World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa, and formerly held the same post for Latin America. He holds doctorate and master’s degrees in economics from the London School of Economics.
You can follow Marcelo Giugale on Twitter at:  @Marcelo_WB

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