Direct Payments for Everything

In disaster relief there is increasing use of direct payments to victims. It turns out that the most useful thing you can give to e.g. famine victims in Somalia is small denomination dollars bills, either as grants in acute emergencies, or as cash for work.

This stimulates the local market and avoids the destructive effect of dumping large volumes of food aid on a country. Food aid programs feed the people (after the military has been fed) while destroying the livelihoods of local farmers and traders.

In conservation Paul Ferraro and others have made very good arguments for direct payments for conservation.

Now Martin Sandbu (via Natural Capital) proposes Natural Wealth Accounts, a system in which the income from natural resource exploitation is given directly to citizens. The income is then taxed by the government.

This addresses the Natural Resource Course (see this previous post). There is solid evidence that the Natural Resource Curse undermines a country’s governing institutions and increases corruption, waste, and mismanagement.

Sandbu’s proposal makes sense. But foreign aid, especially balance of payments support, works just like the curse. Why not go one step further and instead of having aid go to governments, just pay people directly, much like Alaska pays its residents?

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3 thoughts on “Direct Payments for Everything

  1. Totally agree with you on this one. The economic mechanisms of both foreign aid and natural resource wealth are very similar.

    However, do you think that this might make foreign aid less accountable (less than it already is) in terms of the fact that donors do not know what the money is being spent on? Furthermore, this does assume that the privatre return to investment is greater than the public one. I’m not too sure which is greater in developing countries and I believe there is mixed evidence for this – this is however key to the NWAs. Also, I don’t think that this will not mitigate the Dutch disease problem in that inflation will inevitably rise as a result of these NWAs.

  2. The private sector is more efficient than the public sector in poor, misnanaged countries. In my experience, subsistence farmers use cash for school fees, food, clothes and agricultural tools. That is probably what you would want an aid program to provide them with anyway, so why no just give them the money?

    You are right, this doesn’t solve the Dutch disease problem. A combination of resource rents and inflation will lead to a lot of housing construction, and a lot af new, large villas, especially if you can rent them out to expats.

  3. All in all, I reckon these NWAs would do a significantly better job than foreign aid. I think that the experiences of Mexico and Alaska show how these schemes can be put into practice. Just as long as the governments don’t massively increase marginal tax rates for everyone, these schemes will be common place soon if the Earth Institute has anything to do with it!

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