Africa’s natural resource revenue for all: The Alaska Permanent Fund Dividend model

Development experts often explain the poor economic and governance performance of many African countries by the “resource curse.” The associated rent-seeking behavior of unaccountable leaders looking for easy money rather than developing productive industries could be reversed with effective policies that ensure that natural resources work for all citizens. One model—the Alaska model—offers a viable solution to ensure equitable economic growth, combining a conducive environment for wealth creation with efficient management and fair redistribution of profits made from natural resources.

The Alaska model has two main components, the Sovereign Wealth Fund (SWF) and the Permanent Fund Dividend, the latter of which is most innovative in that it ensures that all eligible residents of the state of Alaska receive a share of the benefits realized by the Alaska Permanent Fund through direct cash transfer. The Alaska Permanent Fund is a (Alaskan) constitutionally established fund with its endowment deriving from natural resources that manages a proportion of natural resource revenues to benefit current and future generations. A total of $22.4 billion was paid through the Alaska Permanent Fund Dividend to eligible citizens between 1982 and 2015, and the Alaska Permanent Fund Dividend market value is over $64.7 billion (as of February 28, 2018). Given these successes, African countries could learn a great deal from the Alaskan experience to ensure that natural resource revenues are more transparently managed and beneficial to all.

What, then, can Africa learn from Alaska?

The natural resource curse in Africa

Too often are resource-rich countries economically ill managed and face extreme poverty, drastic inequality, and excessive dependence on commodity prices. The vast majority of poor, resource-rich, least-developed countries are located in Africa—notably Angola, Chad, Democratic Republic of the Congo, Equatorial Guinea, Guinea, Sierra Leone, South Sudan, Sudan, and Zambia.

With a few exceptions, these countries also have low levels of economic freedoms, political rights, civil liberties, and Human Development Index scores. The levels of corruption and rent-seeking behaviors are high, with elites using government funds to sustain a clientelist network and maintain political and economic domination. Some of these countries struggle with violent armed conflicts, as well as terrorism, and recurrent rebellions and coups related to the control of natural resources revenues. While the majority of the population is deprived, leaders in some of these countries live in ostentatious opulence.

Not all African resource-rich countries suffer in these ways: As a contrary example, Botswana, which has managed its natural resources comparatively well and ensured a better standard of living for its population, is outperforming most of these other countries in terms of levels of poverty, education, stability, economic freedom, corruption, and human rights, among others (with $14,663 gross national income per capita, a 19.3 percent poverty rate, and 68 years life expectancy).

Exporting the Alaska model to Africa

Rather than keeping revenue from natural resources and keeping expenses exclusively at the discretion of the executive power, African countries could adopt the Alaska model of transparent and efficient management and redistribution of revenues from natural resources. Unlike the idea of universal basic income (discussed by Shanta Devarajan in his Foresight Africa 2018piece), the Alaska Model has an additional mechanism that could make a huge difference for African countries. Instead of having the government transfer all the oil revenues directly to all citizens, tax them, and use the revenues from taxation to finance public goods, as in the universal basic income model, in the Alaska Model, part of the revenue is directly spent by the government and another part is invested in the SWF. Here, it is not the revenue itself that is transferred to citizens, but the dividends generated by the SWF’s investment. Oil revenues, then, are not directly transferred to citizens, but rather a portion of the profit from oil investments is. Not intended to provide a “livable” income, this model is simply a direct profit-sharing mechanism with all citizens, not of current oil revenues, but of profits generated by the endowment.

Alaska, which became a U.S. state in 1959, is resource rich (with fur, fish, gold, timber) and, in 1968, discovered an estimated 9.6 billion barrels of oil. An unexpected $900 million, an amount worth nine times the state’s annual budget at this time was generated from the Prudhoe Bay Oil and Gas lease sale. Given the tremendous new source of revenues, the state created the Alaska Permanent Fund, which received its first deposit in 1977. Specifically, the law states that at least “25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.” In 1982, the first Alaska Permanent Fund Dividend check was issued. This visionary decision has helped the fund grow to up to $64.7 billion with annual dividends distributed to the state’s citizens. Notably, this model also stresses transparency as the state releases an annual report to disclose the revenues, profits, dividends, their calculations, payments made, and criminal investigations for fraud, among important details.

By ensuring long-term investment for future generations while broadening the benefits and sharing a proportion of the profits to all its citizens through direct cash transfer, Alaska’s Permanent Fund and its Permanent Fund Dividend may be a suitable model with which to approach the resource curse in Africa’s resource-rich, least developed countries and address the “paradox of plenty.” The success of such a fund is not just the redistribution of natural resource profits, but also the transparency that such a distribution will require, and the improvement of the associated governance processes. In fact, reducing the discretionary power of leaders in allocating the revenue from natural resources will reduce unaccountable governance, rent-seeking practices, and corruption.

The time is now to make African natural resources work for all its citizens.

Sources: Brookings | JIC Media