Want to Avoid the Resource Curse? Build a Mineral Permanant Fund
Last week, Pulitzer Prize winning journalist Tina Rosenburg had an op-ed in the New York Times on how countries can avoid the resource curse. While the brunt of the article focused on how unstable countries are vulnerable to building a shared prosperity from their rich natural resources, Rosenburg highlighted Alaska and its permanent fund as an example of how countries can beat the resource curse:
Todd Moss, a senior fellow and vice president for programs at the Washington-based Center for Global Development, believes they might. He points to an unlikely source of inspiration: Alaska. The state of Alaska is bound by law to put at least a quarter of its revenues from oil into the Alaska Permanent Fund, which was established in 1976. The money is invested and each year, every resident of Alaska gets a share of the dividends; for consistency, the amount is calculated using an average of the fund's earnings over the past five years. The dividend check is considered taxable income. Last year, the check was for $878. In 2008, the high point, every Alaskan got $2,069.
These payments stimulate the economy and reduce income disparities. They have contributed (pdf, p. 12) to a large reduction in poverty in Alaskan Natives, the state's poorest group.
But the fund has other benefits. "I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity," wrote Jay Hammond, Alaska's governor at the time. Governments often try to save for lean years by paying a portion of oil revenues into a walled-off, legally untouchable fund. Unfortunately, temptation is often more powerful than the law. Venezuela's oil fund, for example, has been raided (pdf, p 16) by Hugo Chavez, dropping from $6 billion to $3 million in the last decade — during a time of record-high oil prices.
The dividend, by contrast, protects the Alaska Permanent Fund. Hammond's achievement was to "protect against its invasion by politicians by creating a militant ring of dividend recipients who would resist any such usage if it affected their dividends." (See here for a quirky summary of criticisms of the fund. )
Scott Goldsmith, an economist at the University of Alaska, writes that the dividend has some unanticipated consequences. "Some would compare this generation of Alaskans to trust fund babies, because there are no personal taxes and receipt of the dividend carries no public responsibilities, the two together undermine the sense of community that comes from the need to collectively choose and fund public services. They also foster a disconnection between government and residents, leading to a deterioration of the quality of government."
While Alaska is endowed with rich oil deposits that far surpass the value of West Virginia's coal, natural gas, and oil reserves, the strategic importance of creating a permanent fund applies equally to West Virginia. This is especially true since West Virginia, unlike other states, does not own the land or the minerals and has far less control over regulating the extraction of its rich natural resources.
Creating a Future Fund, like the one championed by Senate President Kessler, would go a long way to ensuring that future generations benefit from the mineral wealth of their state. As Rosenburg points out, without a permanent fund, the economic benefit from the natural resource extraction will decline along with the natural resources themselves and could leave our state less prosperous and more vulnerable in the future.
As Victor Hugo noted many years ago, "Nothing is more powerful than an idea whose time has come." The time has come for West Virginia to avoid the mistakes of the past and chart of better course for our future.
For more information on state permanent severance tax funds, see our report.