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Direct Redistribution, Taxation, and Accountability in Oil-Rich Economies: A Proposal

Center for Global Development Working Paper No. 281

27 Pages Posted: 23 Feb 2012  

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Gaël Raballand

World Bank; Université Paris I Panthéon-Sorbonne

Tuan Minh Le

World Bank

Date Written: December 20, 2011

Abstract

To enhance efficiency of public spending in oil-rich economies, this paper proposes that some of the oil revenues be transferred directly to citizens, and then taxed to finance public expenditures. The argument is that spending that is financed by taxation — rather than by resource revenues accruing directly to the government — is more likely to be scrutinized by citizens and hence subject to greater efficiency. We develop the case as follows: First, we confirm that public expenditure efficiency is lower in oil-rich countries compared with other developing countries. Second, we develop a theoretical model to explain why citizens’ scrutiny over public expenditure can be increased by transferring oil revenues to citizens and then taxing them. By receiving transfers and then paying taxes, citizens are better informed about the level of government revenue, and they have an incentive to ensure that their taxes are spent on public goods. Third, we show empirically that enhanced citizens’ scrutiny is associated with more efficient government spending decisions and that accountability is stronger in countries that rely more on taxation to finance public spending. We 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: oil, taxation, redistribution of oil revenues, accountability

JEL Classification: Q32, Q33, H20, H23

Suggested Citation

Devarajan, Shantayanan and Raballand, Gaël and Le, Tuan Minh, Direct Redistribution, Taxation, and Accountability in Oil-Rich Economies: A Proposal (December 20, 2011). Center for Global Development Working Paper No. 281. Available at SSRN: https://ssrn.com/abstract=2009385 or http://dx.doi.org/10.2139/ssrn.2009385

Shantayanan Devarajan (Contact Author)

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Gael Raballand

World Bank ( email )

701 18th street N.W.
Washington, DC 20433
United States

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Tuan Minh Le

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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