Changes in oil prices are concerning to many Americans, but for Alaskans these shifts take on a special meaning: the size of an annual check in the mail. Alaskans receive this yearly gift because of a policy called the Alaska Permanent Fund (APF), which invests 25 percent of the state’s annual oil revenues in a diversified portfolio that pays dividends to Alaskan residents. This innovative system may explain how Alaska has avoided the resource curse of oil-rich areas, while countries such as Nigeria have failed to translate oil wealth into economic development. If modified to fit nations like Nigeria, the APF could be a new policy solution for Nigeria’s petroleum problem and unlock the country’s enormous potential for sustained economic development.
There are many theories that attempt to explain Nigeria’s enduring poverty, but none have gained as much traction as the concept of the natural resource curse. This phenomenon occurs when valuable resources – usually oil or diamonds – counterintuitively reduce economic growth and increase inequality. Typically, resource-cursed states experience high economic growth during commodity booms, but because growth is entirely dependent on commodity prices, the economy is extremely volatile. The reliance on a single natural resource causes governments to overspend during booms and make cuts during busts to cope with deficits. This extreme fluctuation in spending strips countries of the possibility of stable, long-term growth. Even worse, the resource curse often contributes to government corruption, autocratic regimes, and civil unrest.
The story of oil discovery in Nigeria epitomizes the resource curse. When oil was first discovered, Nigeria enjoyed the benefits of increased export revenue, with GDP per capita rising from $104 to $871 between 1962 and 1980. However, due in part to government corruption and poor fiscal policy, Nigeria was unable to establish macroeconomic stability, and when the world price of oil came tumbling down in 1986, Nigeria’s bust began. Incomes and living standards fell so far that by 1993 GDP per capita had tumbled back down to $153. Nigeria’s government failed to harness resource wealth to create sustained development and was beset with internal corruption caused by rent-seeking, a phenomenon wherein public officials manipulate policy to increase their personal wealth during a resource boom. Between 1960 and 1999, over $380 billion in government money was wasted or stolen, and Nigeria ranks 136th out of 176 countries on Transparency International’s corruption index.
In addition to these corruption challenges, Nigeria has suffered from what is known as Dutch disease. The condition arises when exporting resources leads to an increased flow of foreign currency, causing exports in other sectors to become uncompetitive. The incentive to invest in oil also shifts production away from other uncompetitive but potentially more sustainable sectors, leading to a simplification of economic activity and volatile growth in GDP closely associated with commodity prices. Today, the Nigerian government depends on oil revenues for as much as 80 percent of its budget, which makes the Nigerian economy extremely vulnerable to fluctuations in crude oil prices. For example, the 2014 decline in crude prices caused GDP to flip from growing 6.8 percent in 2014 to contracting 2.2 percent in 2016. And although they bear the cost of the environmental and social externalities of oil extraction, the inhabitants of the Niger Delta, where much of the country’s petroleum is found, have not seen a dime of the trillions of dollars that oil has brought to Nigeria.
Recognizing this, the government has previously attempted to address the problems of oil dependency. In 2004, Nigeria established an Excess Crude Account (ECA) to try to insulate its budget from the effects of volatile crude prices. Excess crude revenues were invested in the ECA, and the returns were spent in times when crude prices were low to make up for budget deficits. However, the balance of the ECA became just as volatile as oil prices. In 2011, the ECA was replaced with a sovereign wealth fund to better manage excess crude revenues in a diverse portfolio of investments. Unlike the Alaska Permanent Fund, however, Nigeria’s fund gives spending power and the responsibility of development to the corruption-riddled government instead of distributing money directly to the people.
Resource-rich states around the globe have already experimented with different policies to address the resource curse, ranging from pension payouts in Bolivia to transfers to poor families with children in Mongolia. However, none have been as effective and efficient as the Alaska Permanent Fund, a direct distribution mechanism (DDM) through which a portion of oil revenues are distributed to the people. The logic of the fund is not only that paying a dividend raises incomes and reduces poverty, but also that the higher incomes are spent in various sectors of the economy, stimulating diverse economic activity. Alaska’s success is due in part to the comparatively robust economy of the United States, which grants it a more stable currency and a drastically higher average income than Nigeria. Still, the Alaska Permanent Fund has been hugely successful, growing from $734,000 in 1977 to $53.7 billion in 2015. The per person dividend, which was $2,072 in 2015, is a major source of income for the 20 percent of Alaskan households earning $35,000 or less yearly, bringing in over $8000 for a family of four. In fact, the International Monetary Fund recommends using Alaska as a model for modest direct distribution in resource-cursed countries, as long as dividends are small and supported by strong institutions. Creating a trust controlled by an independent manager would protect the revenue from state and local officials, thus limiting the potential for corruption.
Recently, the Nigerian President’s special adviser on petroleum, Emmanuel Egbogah, hinted at a prospective plan to distribute oil revenues directly to communities. However, it would be unrealistic to assume that a policy implemented in Alaska could be seamlessly replicated in Nigeria. Nigeria is the most populous country in Africa, while Alaska is one of the least populous states in the US, and, unlike Nigeria, does not have to deal with fluctuating exchange rates or one of the world’s most significant corruption problems. There are some concerns that a DDM in Nigeria might be at risk of embezzlement, similar to the looting of Venezuela’s sovereign wealth fund by its president or the use of Chad’s oil fund to buoy the defense budget. The funds in those countries, however, are different from the type recommended for Nigeria. Such funds do not pay dividends to citizens, which improves democratic accountability and forces transparency by giving citizens a personal stake in the management of resource revenues.
For a DDM to work, there needs to be an investment fund, a system to identify dividend recipients, and a mechanism for transferring payments. Nigeria already has an independently managed sovereign wealth fund which could be transformed into a DDM by amending its charter to provide for the payment of an annual dividend. Furthermore, recent developments in biometric data by the Nigerian government have made the process of identifying recipients much more realistic by giving the government a more accurate way to create a database of citizens and correctly determine individuals’ identities. The transfer of payments presents the biggest obstacle to implementing a DDM in Nigeria, given that most people in Nigeria do not have a bank account. However, about 9 in 10 do have a mobile phone, meaning that a dividend transfer system could be achieved through mobile banking, similar to other African cash injection programs that operate through cell phones. The Nigerian sovereign wealth fund could finance the development of such a system, and would certainly see its investment pay off in long-run growth.
Just as Alaska’s Permanent Fund has been successful in broadening the economic base to protect against the resource curse, a similar fund could offer Nigeria the same benefits. Paying dividends to Nigerians could stimulate economic activity in many sectors, decreasing poverty and buffering the economy against the natural resource curse. Nigeria has enormous potential for development if it can translate its resource wealth into economic prosperity. A fund to distribute wealth directly to the people could go a long way in unlocking that potential.