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The discovery of concentrated natural wealth—such as oil, gas, diamonds, or gold— should be a tremendous benefit for a country. But far too often it is instead associated with poverty, economic stress, and poor governance. Similarly, the discovery of concentrated natural wealth can be a tremendous opportunity for foreign firms with the technical expertise, experience, and capital to exploit those resources. But far too often, companies become embroiled in local politics, accused of not contributing enough to the country, and criticized for not creating enough economic opportunities for the broader population.
Many companies have tried to overcome this problem through strategies of denial or deflection. Some firms contend that they are a private firm without public responsibilities; they pay royalties and taxes, they employ local nationals, they serve their shareholders in a manner that is proper for a foreign firm. This strategy often does not work, especially in low-income countries. Instead, foreign firms are exposed to high and usually shifting expectations, powerless to influence the use of funds paid to the host government, and limited in capacity to do much more to directly and visibly benefit the population. The incentives for the firm are to minimize exposure to local demand and, even if the firm wanted to encourage better outcomes, the government stands between the firm and the population.
Other firms, including those who have found the denial and deflection strategy insufficient, have attempted a modest approach to tackle the symptoms of underdevelopment. This may include funding high-profile projects, making contributions to charitable funds unrelated to the core business, or other efforts to show the government and the population the positive contributions of the company to national goals. These efforts are sometimes more successful, but have three obvious shortcomings. First, the company’s development efforts can wind up raising expectations and encouraging an ever-rising list of special requests. Second, such efforts pull the company further from its core business and into activities that are beyond the mandate and core skills of the firms. Finally, such efforts can have the opposite effect of that intended by entangling the company even further in local political matters.
This paper presents a third option that may, under certain circumstances, solve this problem for citizens, governments, and companies: direct cash dividends.
Section two summarizes the dynamics of the resource curse, with special attention to the welfare and governance effects. Section three explains the concept of direct dividends and section four covers some of the potential benefits of cash. The final section concludes with why this approach might be especially useful to international firms in the extractive industries.