Sala-i-Martin, X & Subramanian, A. (2003) ‘Addressing the Natural Resource Curse: An Illustration from Nigeria’

In Precept 7 a major trade-off that arises when government seeks to foster domestic investment is whether to use revenues for current expenditure or invest them in the future. As a general principle, the Precept recommends for a substantial proportion of revenues to be saved, combined with moderate immediate consumption. The paper provides insights into the latter approach.The paper provides a case study of Nigeria’s oil sector, finding that it has a systematic and robust negative impact on growth via the effect upon institutional quality. Thus, the huge sums of revenue Nigeria gained have been either wasted or fallen pray to corruption. As a means of mitigating this problem the authors suggest that the government no longer manage oil revenues, rather these should be directly transferred to citizens, rendering Nigeria a ‘non-oil’ economy. Revenues for social expenditure would then have to be raised through taxation of citizens and companies. Such taxes would be less subject to corruption and create the right incentives for governance (also through creating a state-society revenue bargain). The paper also deals with practical considerations in applying such direct cash transfers:

  • - Firstly, it is argued that due to the possibility of a fiscally induced fertility boom, revenues ought to be transferred to adults. Thereby the incentive to have children in order to receive those revenues is reduced.
  • - Secondly, as shocks of commodity market price volatility would be born by the citizens, rather than the government, the authors recommend for a fund to be established to manage revenue flows. However, the conditions that thwart sound fiscal policy are also likely to undermine the effectiveness of a fund (see Precept 8 for more detail).

Access the article here.