Since You Asked

A terrific windfall for the big spenders

Kuwait’s debt plan illustrates oil’s mixed blessings, says Tim Harford

‘Kuwait is considering plans for a $6bn consumer debt write-off that would be the latest mass official bailout of Gulf citizens who have broken the region’s harsh debt laws and sometimes ended up in jail.’

Financial Times, February 7

I know George Osborne likes to talk about paying off the nation’s credit card, but this is something else.

It’s a bit more literal. It may not happen, though: much the same plan was tabled three years ago and it went nowhere. That said, some Gulf states do seem to have their share of spendthrifts. One bank official in the United Arab Emirates complained that “many people don’t know how to use the credit card . . . They treat it as free money.”

If the government swoops in and pays off the bill then treating it as free money seems a sensible approach. It’s unfair on people who saved money instead of spending it.

Yes, it’s a dreadful way of dealing with consumer debt. You can see such bailouts sow the seeds for future problems. Not that we can feel too smug in the UK. If you want to talk about moral hazard and bailouts, just look at the banking system of the western world. And if you want to fret about savers being penalised while borrowers are coddled, quantitative easing and the Funding for Lending scheme are pretty effective at that. Kuwait might be talking about rescuing its debtors; in the UK, it’s the official policy of the fiscal and monetary authorities.

Can we just get back to chuckling at foreigners? That feels a little more comforting.

The Gulf states do have a tricky problem, it must be said. All that oil and gas isn’t necessarily an advantage. Economists and political scientists even talk about the “resource curse” – the idea that striking oil might do more harm than good.

Why would that be?

There are various theories. One is that the oil exports cause the exchange rate to appreciate, and that makes it unprofitable to develop alternative export industries. If a country’s exporters begin making bicycles, they may learn to make cars. If they do some software outsourcing, that may develop into a large industry. But if the country’s main export is oil, it’s going to be hard to learn to do much except spend the cash.

Doesn’t sound too bad.

No – until the oil runs out or the oil price collapses, and you have no plan B. And even while the oil money flows in, it may be unevenly distributed and corrosive to the political system – which is a second reason why oil may be bad news. It’s a great prize for an unelected ruler, a wonderful help to anyone who wants to stay in power. You get economies built on patronage – or worse, corruption – rather than economies in which entrepreneurs are rewarded.

Is there an alternative, then? Norway seems to be doing just fine.

Norway has the world’s largest sovereign wealth fund – more than $650bn, according to the SWF Institute. Such funds are very sensible, like everything else in Norway. They spread the resource windfall out over a longer period, rather than just blowing the cash on a single generation. If the money is invested outside the country, they also prevent the woes of exchange rate appreciation. Unfortunately simply deciding to have an SWF is no guarantee of good sense. The fund’s controllers must resist the temptation to build record-breaking skyscrapers in the middle of low-rent deserts – or indeed, the temptation to pay off everybody’s credit cards every few years. No doubt this is easy if you happen to be Norway.

Is there an alternative to the alternative?

Another possibility is to take the oil revenue, divide it up equally and pay the cash into each citizen’s bank account every year. If the government needs revenue it must then tax the citizens and develop an accountable tax-collecting civil service. The system is more transparent. Citizens may even be more sensible with the money than the government is. For instance, during the coffee price surge of the late 1970s, most African governments grabbed the windfall revenues through taxation, if they did not already own the coffee industry outright. The revenues were rarely well spent. But in Kenya, the money stayed in the private sector and coffee farmers saved the money, having deduced that coffee prices wouldn’t stay high forever.

Sounds great.

Quite so, and I am sure ruling families across the Gulf will implement this policy shortly after the turkeys vote “yes” in the great Christmas referendum.

Also published at ft.com.

9th of February, 2013Since You Asked • Comments off