Iraqi Oil Trusts - Answering Some Objections:

Jane Galt/Megan McArdle raises some objections to the Iraqi oil trust plan endorsed by Hillary Clinton, Vernon Smith, and yours truly (while accidentally confusing me with Orin Kerr). Some of her points have merit, but all share the common flaw of failing to consider the alternative: largely unrestricted government control of Iraq's oil wealth.

Here are Jane's objections, and my responses:

1) There is no good record of who is an Iraqi, so people will flood across the border to get in on it.

A variety of ID requirements could be set up to deal with this problem. I am not expert enough to determine which is the right approach, but it is neither an uncommon nor a completely insoluble issue. As commenter Lev points out, this issue was in fact handled during the 2005 Iraqi elections by requiring voters to present Saddam-era ration cards as a form of ID.

More importantly, however, the same issue arises with distributing any government benefits that the Iraqi government might choose to create with its oil money if that revenue remains under unrestricted government control. Indeed, the creation of an oil trust would increase the government's incentives to establish at least a moderately effective way to identify citizens, since voters would have an important reason to care about the issue. Will there be some fraud (probably even a lot)? Undoubtedly. But that has to be weighed against the massive corruption that currently exists in Iraqi government and is fostered by the ability of the state to dispense patronage as a result of its unrestricted control of Iraq's oil wealth.

2) The financial infrastructure for distributing the proceeds doesn't exist, i.e. most Iraqis can't cash checks and cash tends to disappear.

This problem, too, afflicts the status quo as well. Any benefits the Iraqi government currently dispenses to the population by drawing on its oil wealth also require the distribution of either checks, cash, or in-kind benefits, all of which require infrastructure to deliver and store. Moreover, it is not completely true that there is no financial infrastructure in Iraq. The CPA was able to help a number of private banks start operations. If necessary, the US or the Iraqi government could arrange to have the money held in Swiss or other offshore bank accounts, with the transaction fees kept low because of economies of scale.

Finally, poor people in underdeveloped nations have a wide range of ways to store money and ensure that it does not "tend to disappear," including community credit unions, communal organizations of various types, and micro-lending organizations such as the ones set up by this year's Nobel Peace Prize winner. These institutions all have flaws and none are as secure as, say, keeping your money at the Bank of America. But it sure beats letting all the money stay in the hands of a corrupt, self-dealing, and often incompetent government.

3) The taxation infrastructure and culture for getting the necessary money to run the government doesn't exist, and the government will quickly run out of cash.

Again, I don't see how this will be less of a problem in the status quo. Moreover, if necessary, the government could simply tax the payments to the Iraqi people before distribution (much like income tax withholding in the US). So long as the tax rate is publicly announced and transparent, this arrangement need not lead to corruption or overtaxation. And it doesn't require any more "taxation infrastructure and culture" than the status quo.

4) It will function as a giant welfare system, undermining civil society. There will be huge incentives to have extra babies.

Since people will get the payments regardless of their other sources of income, there will be little incentive to refrain from working, although I suppose there might be some substitution of leisure for income. Moreover, as a practical matter, Iraq's oil revenues probably won't be great enough to give the average citizen a cushy lifestyle (even by Iraqi standards) by living off oil trust payments alone. When and if jobs become available, there will still be plenty of incentive for Iraqis to work. It is also worth noting that much larger per capita oil trust payments than any realistically likely in Iraq have not led to a "giant welfare system" in Alaska and Norway. Finally, we again have to consider the alternative: if the government retains exclusive control of all oil revenues, it will have tremendous incentives to distribute them in such a way as to create "a giant welfare system" of its own in order to create a class of voters dependent on government largesse and therefore inclined to vote for politicians who will keep the dole money flowing. And that's not even to mention the extensive corruption, nepotism, and ethnic and religious favoritism that currently bedevil the government's allocation of oil funds.

As for the incentive to have extra babies, that may indeed be an issue. But it could be handled simply by reducing payments for children beyond, say, the first two or three. If necessary, the system could even forbid additional payments for children above a certain number.

UPDATE: Jane comments: "I think it's a fine idea . . . I was just wondering what the objections might be." In fairness, I should have mentioned that her original post was ambiguous as to whether she supported Iraqi oil trusts or not. However, my purpose was less to engage in a debate with Jane than to address the types of objections that might be raised against the Iraqi oil trust proposal. And the points Jane makes are certainly important ones to consider.

Related Posts (on one page):

  1. Iraqi Oil Trusts - Answering Some Objections:
  2. Oil and Iraqi Federalism - Where Hillary Clinton and I agree:
Jane Galt (mail) (www):
I think it's a fine idea . . . I was just wondering what the objections might be.
10.14.2006 1:02am
With respect to the ID issue, hasn't that already been addressed by the voting that took place? If memory serves, the "papers" required to allow a person to vote were the Saddam ration cards, that everyone was required to have and that served essentially as a national ID card. Why not just build on that existing system.

Why is having extra babies a problem? It will just begin to replace the million or so Lancet says have died since 2003.
10.14.2006 1:06am
Roger Schlafly (www):
Why are those the only alternatives? Maybe the USA or Haliburton or some other private corporation could own and run the oil fields.
10.14.2006 1:49am
Tom Holsinger (mail):
Given Iraqi corruption, this is probably the means which will lose the least amount to the politically connected.
10.14.2006 2:01am
Speaking the Obvious:
JG: "It will function as a giant welfare system, undermining civil society. There will be huge incentives to have extra babies."

I recall development economist, the late Lord Peter Bauer, making the point that people in poor countries don't have many children because they are stupid or because they don't know where children come from, but because they rationally anticipate that not all will survive childhood. Similarly, I've heard that in the Middle Ages in England it was commonplace for many sons to get their father's name, to increase the chance for the name to survive another generation.

Applying the same reasoning, I think to the extent Iraqis are having more children now then they have in prior generations, it might have to do with the many children who died under sanctions in the 1990s, and the many who die now from the chaos we have wrought. I doubt very much it has anything to do with expected financial gains from anticipated government largesse.
10.14.2006 2:37am
I don't understand Ilya's response to #3 (regarding taxation). The Iraqi government's budget now is financed almost exclusively by oil revenues, right? Any oil revenues that are distributed directly to the people will not be available to the government. Hence, the government will either have to make up the revenue through some other means (some other form of taxes) or will have to cut their expenses. Presuambly the government does not want to cut its expenses - it already has far more problems to address than means to address them - so where does the extra revenue come from?

Ilya's "solution" of withholding doesn't make any sense to me, at least for the foreseeable future. Now, the Iraqi government takes 100% of the oil revenue, right? Under the proposed trust fund scheme, presuambly some percentage of the oil revenue will go to the fund and the remainder would go to the government. The fund would then pay out money periodically (and I guess the withholding scheme would be that some percentage of these payments would be withheld and given over to the government). But, at least for the foreseeable future, the amounts paid out by the fund could not possibly be larger than the amount of oil revenue paid into the fund (since the fund needs to build up, right?). Accordingly, the withholding payment could not be as large as the amounts the government would be losing from the diversion of funds into the trust fund.

Perhaps Ilya can expand on his thoughts a bit?
10.14.2006 11:16am
Josh_Jasper (mail):

1) There is no good record of who is an Iraqi, so people will flood across the border to get in on it.

Because living in a civil war zone is *worth* those extra dollars? What an idiotic idea. There's already a mass exodus from Iraq to escape violence. You think a few extra dollars is going to change people's minds?

2) The financial infrastructure for distributing the proceeds doesn't exist, i.e. most Iraqis can't cash checks and cash tends to disappear.

Our fault for fucking up reconstruction.

3) The taxation infrastructure and culture for getting the necessary money to run the government doesn't exist, and the government will quickly run out of cash.

Our fault for fucking up reconstruction.

4) It will function as a giant welfare system, undermining civil society. There will be huge incentives to have extra babies.

I really wish Jane had to live life as an average Iraqi for about a year.
10.14.2006 11:21am
Justin (mail):
4) It will function as a giant welfare system, undermining civil society. There will be huge incentives to have extra babies.

Nothing, nothing to conservative liberterians, is as sacred as very basic theoretical economics. Certainly not common sense, nor facts.
10.14.2006 12:49pm
Harry Eagar (mail):
Jane, one objection would be the experience of Nauru.
10.14.2006 2:03pm
How about we try some simple math as an objection to the oil trust idea?

Let's say Iraq has 25 million people. For every $1billion of oil sales you would have $40 to give to the people if we ignore administration costs and corruption.

For perspective on what $40 represents for an average Iraqi, a google search found a CSMonitor article from Sept 06 which says "the average monthly wage is less than $200."

So $40/month actually seems a reasonable amount, small enough not to be a work-disincentive but large enough to keep people feed.

Now for math problem number 2, look up a Brookings report on how much oil revenue Iraq has had. Page 30

Excluding the oil-price-surge months of this summer, $1billion/month represents 50-80% of ALL oil revenues for Iraq.

So reconstruction of items such as electric and sewage treatment plants, salaries for police, soldiers, doctors and teachers, all the other public sector works and all the other public sector jobs would be left with as little as 20% of the budget?

The oil trust idea, with everything else the Iraqi government has to do at this point, doesn't seem viable to me unless:

1. They double Saddam era production. They've been hovering around 80-90% of it and it's a very long list of hypotheticals (decreased violence, increased foreign investment, near total prevention of terrorist attacks on oil infrastructure) to reach a point of saying an oil trust fund will help them significantly increase production.

2. A smaller amount such as $10 or $20 per month is enough to soothe anger and fears.

3. They are geting over $70 a barrel. I'm selfish enough to admit I much prefer oil under $30 a barrel. (To be more accurate I prefer nuclear/alternative energy pushing oil under $10 a barrel.)

Just the math alone is a strong argument against the idea without even getting into unintended consequences such as the militias now being indirectly funded by the Iraqi government or that families who previously had almost nothing could becoming targets of criminals and kidnappers. Plus $40 a month does not seem like it would be large enough to satisfy ex-Saddamites or patch over decade and century long ethnic blood feuds.

Having said all of that, I keep hearing the US spends a billion a week on Iraq, so if someone suggested, why not spend an extra billion a month for six months to give every Iraq $40 'bribes' to be nice and stop killing each other to see if we can reduce violence enough to get our troops home, at this point I think it'd be worth a try.
10.14.2006 3:44pm
David Maquera (mail) (www):
I think we should appoint Chalabi trustee of the Iraqi Oil Trust. After all, Chalabi is an honorable man!
10.14.2006 3:48pm
Jay Myers:
They currently have a system in Kuwait that is similar to what you prescribe. You can get some idea of the benefits and drawbacks simply by observing the impact it has had on Kuwaiti society.

From what I have read of the country, almost no Kuwatis work and many are illiterate. Work is done by foreigners, with the dirtiest and most menial labor being reserved for Palestinians, who are not allowed to bring their families to live with them.

Distributing the oil wealth in this way has certainly not facilitated the Westernization of Kuwait. More liberal people might not worry at the importance of that until they reflect that Westernization is the primary source for women's rights in the world. Indeed, with the profits of Kuwait's black gold flowing into his pockets, a muslim man can afford to indulge his dreams to live like a sheik. What sheik would stand for having a wife who was independant and a person in her own right rather than a piece of chattel?

An additional worry about the Kuwaiti system is that it has rendered them completely incapable of acting in their own defense. Iraq is surrounded by dangerous neighbors and must be able to stand on its own without the US military constantly saving them as we have had to do with Kuwait.

Finally, recieving a portion of Iraq's oil revenues (when it finally begins to have some again) would certainly help fund insurgents and terrorists. Those who support such things would have a lot of money with which to so do and those who don't support such things would be easy targets for extortion and kidnapping. "I don't believe you are a good Muslim, Bob. Do you know what happens to bad Muslims? Of course you can prove to me that you're a good Muslim by sending money to this account."
10.14.2006 4:25pm
markm (mail):
The Kuwaiti example does not apply. Iraq doesn't have anywhere near enough oil revenue that, split up evenly, it would enable Iraqis to quit their jobs and hire foreign servants. However, if it's not split up evenly through some plan like this, there's no doubt enough for a number of government officials to live in luxury and hire foreigners to do their work...
10.14.2006 8:33pm
Brian Macker (mail) (www):
How about paying the US taxpayer back first.
10.15.2006 3:54pm