Increasing Public Expenditure Efficiency in Oil-Rich Economies: A Proposal

26 Pages Posted: 20 Apr 2016

See all articles by Shantayanan Devarajan

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Tuan Minh Le

World Bank

Gaël Raballand

World Bank

Date Written: April 1, 2010

Abstract

This paper proposes that, to increase the efficiency of public spending in oil-rich economies, some or all of the oil revenues be transferred to citizens, and fiscal instruments such as taxation be used to finance public expenditures. The authors develop the case as follows. First, they confirm the well-known result that public-expenditure efficiency is lower in oil-rich countries compared with other developing countries. Second, they show that this efficiency gap is associated with differences in accountability to citizens of government's spending decisions. They find that various measures of accountability are systematically weaker in oil-rich countries. They attribute this difference to the fact that oil revenues typically accrue directly to the government, unlike tax revenues, which pass through the hands of citizens. Third, they show that, controlling for a number of factors, accountability is stronger in countries that rely more on direct taxation to finance public spending. They conclude that accountability, and hence public expenditure efficiency, can be increased by transferring oil revenues to citizens and then taxing them to finance public spending. The paper reviews existing schemes that redistribute oil revenues to the population, such as the Alaska Citizen Fund, to assess the feasibility of a modest proposal in African countries. The authors conclude that, while it may be difficult to implement such a proposal in existing oil producers, there is scope for introducing it in some of Africa's new oil producers.

Keywords: Subnational Economic Development, National Governance, Public Sector Economics, Public Sector Expenditure Policy, Debt Markets

Suggested Citation

Devarajan, Shantayanan and Le, Tuan Minh and Raballand, Gael, Increasing Public Expenditure Efficiency in Oil-Rich Economies: A Proposal (April 1, 2010). World Bank Policy Research Working Paper No. 5287. Available at SSRN: https://ssrn.com/abstract=1597537

Shantayanan Devarajan (Contact Author)

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Tuan Minh Le

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Gael Raballand

World Bank ( email )

1818 H street N.W.
Washington, DC 20433
United States

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