The political economy of direct dividend transfers in resource-rich countries : a theoretical consideration

The acceleration of natural resource discoveries across many parts of the developing world has highlighted the urgent need for solutions to the mismanagement of windfalls that has blighted many countries over the past half-century. One proposal involves distributing annually a share of resource rents to citizens in the form of direct dividend transfers. Although many scholars and policy makers have discussed the potential economic and political ramifications of the proposal from a normative perspective, few have analyzed positively the conditions under which such a policy may emerge as a politically rational choice. This policy research paper fills that gap by modeling the decision of political leaders to allocate resource revenues between cash transfers, public goods, power-preserving activities, and personal consumption. The analysis finds first that propitious political conditions, including competitive elections, undeveloped patronage networks, and a high degree of budgetary accountability, increase the share of resource revenues to be spent on citizens'welfare. The paper then shows that a high poverty headcount and inefficient public institutions will each strengthen the political incentive to provide direct dividend transfers relative to public goods. This combination of conditions is rare, which may explain why relatively few countries have implemented or plan to implement direct dividend transfers.