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Date: Tue, 10 Jun 2003 10:29:42 -0400
Subject: [libnetd] Liberty: -- Issues -- An Oil-for-People Program
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An Oil-for-People Program:
How to ensure that Iraqis enjoy their nation's wealth

by Susan Lee
 
Oil matters to everybody. But oil really, really matters to Iraq. And
it matters beyond the fact that oil constitutes Iraq's largest
national asset. Properly handled, the organization and disposition of
Iraq's oil wealth can be the driver for everything from the sublime,
like democracy and a market economy, to the gritty, like paying down
Iraq's debt and rebuilding its infrastructure. No surprise, then, that
the blabocracy is already generating proposals at top speed.      

The most fruitful way to think about Iraqi oil is in two parts--how to
handle this asset to realize as much revenue as possible, and who gets
that revenue.

Getting the most money from oil means selling, or privatizing, it. And
getting the most money from selling means having an open auction with
as many bidders as reasonably possible. M.A. Adelman explained how to
do this in The Wall Street Journal on April 2. Under his scheme,
producing oil fields would be divided by reservoir and prospective oil
deposits would be divided into the smallest manageable tracts. The
resulting plots would be sold at an open auction. Not only would such
a division promote maximum competition, but the existence of a larger
number of smaller plots would give local entrepreneurial talent an
opportunity to bid.         

The answer to the second question--who gets the money from the
sale--should be a slam-dunk. Since the oil belongs to the Iraqi
people, they (and not the government) should be the direct
beneficiaries. Essentially, then, the problem becomes how to privatize
the revenues from the sale.

The best scheme would satisfy the following requirements:
Participation should be as broad as possible to include every Iraqi
citizen; property rights should be constructed to allow the proceeds
from the sale of that property to go directly to citizen-owners;
transaction costs should be low; prices should reflect the most
efficient price that a developed market can offer; and prices should
be readily available so citizens can make informed decisions. The last
two conditions require that the market should be deep, continuous and
transparent.        

Sound too pie-in-the-sky for a country that has been deprived of
working financial markets for decades? Not really, thanks to a clever
idea put forward by economists Terry Anderson and Vernon Smith (who
won the Nobel Prize for Economics in 2002) and statistician Emily
Simmons. In a paper written for the Cato Institute in 1999, the
authors outlined a scheme to privatize federally owned land in the
U.S., but the idea can easily be used as a template for Iraqi oil.      

Using their scheme, the Iraqi government would award, to each citizen,
certificates representing a claim on the nation's oil wealth. These
certificates would resemble a no par stock certificate and function as
the currency for oil purchases. If the land already producing oil is
worth $100 billion as observers estimate, then each Iraqi would
receive certificates worth roughly $4,000. Since that figure is about
double the annual wage of a middle-class Iraqi, awarding 10, or even
100, certificates per citizen would make sense in terms of personal
asset management.        

At any rate, the total amount of certificates would represent all the
oil land--productive and prospective. These certificates would be
alienable--that is, they could be freely traded or transferred.
Trading and price discovery could be facilitated by listing the
certificates on a stock or commodities exchange. The exchanges, of
course, would be free to create futures and options markets in these
certificates. The certificates would retain their value until the last
inch of oil land is surveyed and auctioned.       

The actual mechanism would look something like this: As the oil land
is surveyed and divided into discrete units, an open auction for the
deeds of each unit would be held. The deeds won by auction would be
paid for in certificates. Buyers of the deeds--anyone from an Iraqi
citizen to a giant oil company--must pay with certificates purchased
on the market either before or right after the auction. (The existence
of a futures or option market would allow potential buyers to hedge
their purchases.) Holding a rolling auction--probably over several
decades--has several virtues. The economy avoids the inflationary
impact of a huge, sudden capital inflow; certificate holders can time
their cash flow by deciding whether to sell early in the process or at
the end of the auction period; and prices for individual certificates
could be kept low by declaring "stock splits."            

Of course, there will be some Iraqis who are missed during the
registration period and don't get certificates. Since they still have
a claim on the oil wealth, Vernon Smith suggests the creation of a
reserve so that certificates can be awarded as these people present
themselves.    

This proposal cuts out the government and thus reduces opportunities
for waste, graft and corruption. And it has a giant bonus. Since the
government is going to need money to rebuild infrastructure and pay
down debts, it will have to recapture some of the oil wealth through
taxation. And taxpayers, in a democracy, tend to be vigilant. A ruling
party that abuses the power of the purse will be turned out of office.
     
The combination of the Adelman and Anderson-Smith-Simmons schemes
solves all the big issues in an elegant fashion. It would transfer
ownership in a way that guarantees oil resources are put to their
highest use, while paying full value directly to the Iraqi people--and
it is fair and democratic. All blabocratic schemes ought to be
measured against it.     


-----
Source: WSJ (April 30, 2003)


Archive: http://www.liberty-news.com/newsletter.html
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Quote:
- Perhaps the removal of trade restrictions throughout the world would
do more for the  cause of universal peace than can any political union
of peoples separated by trade barriers. -Frank Chodorov, writer
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