The recent run-up in global food prices is wreaking well-documented havoc throughout the developing world. As prices for major food staples have doubled or tripled over the past 12–18 months, food riots have broken out in more than a dozen countries, and the president of the World Bank has suggested that the rise in food prices will push 100 million people below the poverty line, undoing decades of economic growth almost overnight. FSE’s Peter Timmer calculates that high rice prices alone could cause the premature death of 10 million people in Asia. It is difficult to imagine an issue of more pressing global importance today.

Ongoing FSE research is focusing on which agricultural adaptations should be prioritized, for what crops, and in what locations.Getting prices down out of the stratosphere of course involves understanding what got them there in the first place. And while there is much disagreement over the primacy of different factors, most analysis seems to agree on three important contributors. The first is the recent expansion of biofuels production in the United States and the European Union, which has diverted corn and other grains from traditional feed and food markets into the production of fuel. Turning grain into fuel has been made increasingly profitable by the high and rising price of oil — the second factor in rising food prices — which, in addition to increasing demand for petroleum alternatives, has raised the production costs of farmers, raising transport costs and increasing the price of farm inputs like diesel and fertilizer. Finally, the agricultural and trade policies of various governments around the world have added to the problem, particularly as the nervous governments of a few key Asian rice exporters have attempted to stabilize domestic food supplies by restricting exports, helping send rice prices through the roof.

As these factors have come together in recent months, underwritten by longer-run trends of rising incomes and food demand in the developing world, many analysts have reached for the appealing metaphor of the “perfect storm,” invoking a situation in which everything that could have gone wrong did. But are things really as bad as they might have been?

Perhaps not. The recent spike in food prices saw only a half-hearted contribution from one of the main culprits in past short-run price swings: weather. A bad weather year that harms production in important producing regions often sends prices soaring. One of the best examples is an extreme el Nino event of the sort that occurs roughly once a decade, during which drought cripples rice production throughout much of Southeast Asia. Earlier work by FSE researchers showed that global rice prices can rise 50 percent or more as a result of extreme el Nino events.

The recent food price spikes were certainly not without influence from the weather. For instance, the much-cited long-run drought in Australia — traditionally a large wheat exporter — certainly has put upward pressure on global wheat prices, and there were modest weather-related declines in yield in other parts of the world (such as Russia and Ukraine). On the whole, however, supply disruptions over the past few years have been minor, and favorable weather is expected to result in record harvests for many large food- and feedproducing nations in coming months. But agricultural markets have hardly responded to this good news and prices remain at or near all time highs.

What then might a perfect storm actually look like? Add the effects of climate change to the current mix of biofuels, high oil prices, and trade restrictions, and the recent rise in food prices could be a small measure of things to come. Research is expanding rapidly in the field of climate change impacts, and researchers at FSE are at the forefront of understanding the implications of climate change for humanity’s ability to feed itself. The conventional wisdom has long been that a modest amount of climate change could actually be beneficial for global agriculture, with warming temperatures perhaps lengthening the growing season and expanding the areas in which we can grow crops. But recent work by researchers at FSE and others suggests that climate change could hurt agriculture immediately and, in some places, severely.

The rise in food prices will push 100 million people below the poverty line, undoing decades of economic growth almost overnight. High rice prices alone could cause the premature death of 10 million people in Asia.In a paper published in the January issue of the journal Science, an FSE research team led by David Lobell examined the likely effects of climate change on agriculture throughout the developing world. Combining data from a suite of climate models that simulate future changes in rainfall and precipitation with a host of historical data on climate and agricultural production, Lobell and colleagues found that by 2030 the production of staple crops in some of the poorest parts of sub- Saharan Africa could decline by 30 percent or more in the absence of adaptation, with somewhat smaller declines predicted for much of South and Southeast Asia. Production declines of this magnitude represent monumental declines in welfare for some of the poorest people on earth, the same populations currently being buffeted by high food prices.

Unfortunately, new evidence also questions the ability of higher latitude countries such as the United States to cover the production shortfalls in the developing world. Again contrary to perceived wisdom, this new work shows that climate change could immediately harm agriculture in this country and other large exporting regions, further constraining global supply. Such a climate-induced supply shock, in the context of the recent developments on the demand side for food, could give us a true perfect storm for high food prices. Recent price spikes might only pale in comparison.

Given the imminence and magnitude of the production decline possible and the attendant possibilities for rising food prices and hunger throughout the developing world, FSE researchers are turning from predicting impacts to assessing adaptation options. In particular, ongoing research is focusing on which agricultural adaptations should be prioritized, for what crops, and in what locations. To that end, FSE researchers recently received a $350,000 grant from the Rockefeller Foundation — one of the most important funders of agricultural research — to help the foundation prioritize agricultural investments in sub-Saharan Africa in the face of climate change. With the potentially severe impacts of climate change already on our doorstep, there is little time to lose.

Dr. Alejandro Toledo, former president of Peru, describes his vision as “democracy that delivers.”

“My colleagues and I who have taken the challenge of public life as a vocation and a life commitment,” Toledo says, “cannot but feel concerned about the great challenges faced by our continent where half its population lives between poverty and misery and where inequalities and social exclusion are at their highest.” Toledo has spent the past academic year in residence at the Center on Democracy, Development, and the Rule of Law, applying theoretical rigor to a bold new plan for Latin America and also making a sweeping call to action. At the same time, as Distinguished Visiting Payne Lecturer for the Freeman Spogli Institute, Toledo has shared his vision and his plans for the future with the Stanford community in a three-part special Payne Lecture Series, titled “Can the Poor Afford Democracy? A Presidential Perspective.”

Forty percent of Latin Americans — 230 million people — are trying to survive on less than $2 a day, and 110 million live on less than $1 a day, Toledo is quick to point out. He also notes that income levels do not reflect the “drama of poverty”— things like infant mortality, malnutrition, lack of access to health care and education, and ethnically based social exclusion. Impoverished populations see corruption, exclusion, and economic inequality, and they begin to associate these things with democracy and become impatient with it. Toledo is calling for leaders to have the courage to invest in human development through nutrition, education, and microfinance programs and to make decisions that may not have short-term political benefits. “This is a moment for more leadership and less politics,” he said in January.

With the Global Center for Development and Democracy, the non-governmental organization that he founded, Toledo is organizing a new, broad-sweeping initiative to construct a social agenda for democracy in Latin America for the next 20 years. This Social Agenda for Democracy Initiative will identify specific and measurable goals to demonstrate that democracy is capable of “delivering concrete results to the poor.” To do this, Toledo says, the group of former Latin American presidents, democratic leaders, experts, and exponents of civil society that he is organizing will need to map out an agenda for both stimulating economic growth and reducing inequality and exclusion. Their agenda will be supported by parallel and ongoing efforts to promote and strengthen democratic institutions including judicial systems, freedom of speech, human rights, and the independence of all branches of government.

Toledo’s working group met for the first time on November 26, 2007, at the National Endowment of Democracy in Washington, D.C. The core team is made up of 12 former presidents, including Presidents Vicente Fox (Mexico), Fernando H. Cardoso (Brazil), Carlos Mesa (Bolivia), Ricardo Lagos (Chile), Cesar Gaviria (Colombia), Jose Maria Aznar (Spain), Rodrigo Carazo (Costa Rica), and Ricardo Maduro (Honduras). The group met again in Lima, Peru, on April 25, a meeting that Toledo is particularly excited about. “Our meeting in Lima has special significance for the initiative,” Toledo explains. “First, because the Latin American, Caribbean, and European Union Summit between 60 heads of state was held this year in Lima, just one month later, and second, because the theme of this year’s summit is ‘Poverty, Inequality, and Exclusion.’”

Which is the task that lies before Toledo and his colleagues.

One of the main aims of the Social Agenda for Democracy Initiative is to develop a social matrix to measure progress on key indicators such as economic growth, health, education, employment and salaries, poverty and income distribution, and access to technology. Several working group members reported on May 14 to the Latin American, Caribbean, and European Union Summit on the Social Agenda for Democracy Initiative and their progress in constructing this social matrix — giving the bold plan of this already super-charged group additional visibility and opportunity for capacity building. The group will meet two more times in 2008: in Bolivia this July and again in September in Sao Paulo, Brazil.

For Toledo, the link between democracy and social change is palpable — he is both the product of and an advocate for the transformative powers of these two processes. Democratically elected in 2001, Toledo was Peru’s first president of indigenous descent, having grown up in an impoverished and remote Andean village. “For 500 years, someone with my ethnic background was never accepted to be a candidate,” Toledo said in May, in his final Payne lecture. “I was a political intruder in the establishment of politics in Latin America and in Peru.”

In his five-year term as president, Toledo achieved 6 percent average annual growth, increased foreign direct investment by 50 percent, balanced the budget, and brought 25 percent of the population above the poverty line. He also initiated a program called Juntos, or “Together,” a system of conditional, direct cash transfers to female heads of the poorest households. In return for obtaining pre- and post-natal checkups, vaccinating their children, and making sure their children went to school, the women received $30 per month to invest in their economic self-sufficiency. The short-term solution provided by Juntos was initially criticized by the IMF but has been so successful that it is now being evaluated as a policy option by both the IMF and the World Bank and has been continued by the current government.

In his first Payne lecture, held in January, Toledo interwove firsthand observations with quantitative research to support his argument that a reduction in poverty and inequality does not necessarily follow economic growth. While he has “cautious optimism” that Latin America is poised to “make a substantial jump and take a prominent place in the world economy in the next 15 to 20 years,” he said that only an ambitious social agenda to reduce poverty and inequality will stimulate economic growth, strengthen democratic institutions, and consolidate democratic governance in the region.

Having analyzed the relationship between democratic reform, economic growth, and poverty, inequality, and social exclusion in Latin America, Toledo focused his second Payne lecture, in April, on some of the political dynamics in Peru leading up to his election to president. His multimedia presentation included footage of the mass protests that followed Alberto Fujimori’s controversial re-election to a third term in 2000 amid allegations of electoral fraud. Fujimori ultimately agreed to schedule a new election the following year and stepped down as a candidate.

In his third and final Payne lecture, on May 14, Toledo answered the question that served as the organizing principle for the series: Can the poor afford democracy? Yes, he said — but more importantly, “Democracy cannot afford to neglect the poor.”

Like Toledo, former president of Mexico and Social Agenda for Democracy colleague Vicente Fox sees positive economic and social growth for Latin America. He accepted Toledo’s invitation to visit the Stanford community and on March 5 spoke with intensity about Latin America’s prospects for both social welfare and economic well-being in the coming century. Mexico, which Goldman Sachs recently projected to be the world’s fifth largest economy by 2040, was emblematic of this electrifying future, he said. On the one hand, there is great promise for economic growth, stability, and entrepreneurship; and with this great promise, he was careful to note, comes great responsibility for the reduction of poverty and inequality through a “package of powerful social policies.”

Looking ahead, Fox hoped that Latin American democracy would not to be taken for granted; “it has to be nourished, it has to be taken care of, it has to be promoted.” But his outlook for Latin America is that this is a time for its countries to consolidate democracies and freedoms, consolidate economies, and promote new leadership. After years of military dictatorships, corruption, inefficiency, and poor development, “People decided to go for change,” Fox said, “and change is a magic word. It moves people to action.”

Clear evidence suggests the importance of health service provider payment incentives for achieving efficiency, equal access, and quality, including attention to primary, secondary, and tertiary prevention. “Pay for performance” may be on the cusp of significant expansion in Asia, and reform away from fee-for-service has been underway for several years in several economies. Yet despite the policy relevance, the evidence base for evaluating payment reforms in Asia is still very limited.

China in particular has been undertaking significant reforms to its health care system in both rural and urban areas. With the expansion of insurance coverage and need to resolve incentive problems like “supporting medical care through drug sales,” there is an urgent need for evaluating alternative ways of paying health service providers. Evidence from policy reforms in specific regions of China, as well as other economies of the Asia-Pacific, can provide valuable evidence to help inform policy decisions about how to align provider incentives with policy goals of quality care at reasonable cost.

To illuminate these questions, the Asia Health Policy Program and several collaborating institutions are planning to convene a conference on health care provider payment incentives on November 7-8, 2008 in Beijing. The conference will highlight and seek to distill “best-practice” lessons from rigorous and policy-relevant evaluations of recent reforms in China and elsewhere in the Asia Pacific.

The organizing committee – including health economists from Shorenstein APARC, Peking University, Tsinghua University, and Seoul National University – reviewed submissions in June 2008 and accepted sixteen. The conference papers cover payment issues in Korea, Japan, China, Taiwan, Thailand, Tajikistan, the Philippines, and the US, and the disciplines of economics, health services research/health policy, public health, medicine, and ethics. Topics include institutionalized informal payments; the impact of global budget policies on high-cost patients; public-private partnerships; public-sector physicians owning private pharmacies; evidence-informed case payment rates; payment and hospital quality; bonuses and physician satisfaction; physician prescription choice between brand-name and generic drugs; and differences in pharmaceutical utilization across insurance plans that pay providers differently (fee-for-service versus capitation).

Policymakers from China’s National Development and Reform Commission and Ministry of Health will also speak at the conference. Selected research papers will be published through the Shorenstein Asia-Pacific Research Center either in a special volume or in a special issue of an English-language health policy journal.

By most measures, including Kuwait Petroleum Corporation’s ability to meet its own targets, the enterprise performs poorly.  Many of the problems are traceable to the profound dysfunction and fragmentation of the government, which translate into excessive interference and incoherent governance of the sector.  Government ministers are appointed by the Emir, but then these same ministers face withering scrutiny from the elected National Assembly, encouraging excessively cautious behavior.  Sector strategy reflects the whims of the oil minister, but five different people have held this post since 2000.  Unworkable governance structures inhibit effective strategy and execution: for example, the oil minister may approve a decision in his role as chair of the board of KPC and then overturn it with his ministerial hat on.  Bureaucratic requirements including extreme micromanagement of procurement and a tortuous budget process make it nearly impossible for KPC to run like a normal oil company.  On top of these problematic interactions with government, management and engineering talent within the company itself are generally weak, notwithstanding the presence of some excellent and knowledgeable senior managers.  People are given posts with insufficient experience and knowledge—a reflection of a governance system laden with political interference in the appointment and promotion of personnel and, increasingly, removed from the frontier of the industry.

In recent years these fundamental problems have been disguised by relatively high oil prices.  The small population and large accumulated reserve funds have helped paper over the cracks, and thus these severe problems in the oil sector could persist for a long time without creating a crisis in the country.  At the same time, increasing geological challenges in Kuwaiti fields, popular resistance to more deeply involving international oil companies, and political gridlock that makes it difficult to resolve problems quickly have created a dangerous situation for the sector.  If oil prices slip as the cost basis rises and KPC lags in performance, the problems could unfold quickly in a society where the population has become used to living in a rentier society with extensive and expensive benefits and pension rights.

In Political Change in China: Comparisons with Taiwan, CDDRL's Democracy in Taiwan program marshals commentary from leading experts on what lessons, if any, Taiwan's experience of democratization might hold for China's future. The volume was co-edited by Larry Diamond and includes a chapter by Weitseng Chen, one of CDDRL's 2007-08 Hewlett Fellows.

In their column on National Review on June 24, 2008 called “10 Concerns about Barack Obama,” William Bennett and Seth Leibsohn, begin their list of attacks on Senator Obama by writing that “Barack Obama’s foreign policy is dangerous, naïve, and betrays a profound misreading of history.” In arguing against any engagement with Iran, William Bennett and Seth Leibsohn point out that “Ronald Reagan met with no Soviet leader during the entirely of his first term in office.”

This statement is factually correct. And there was most certainly a big debate within Reagan Administration about whether to talk with the leaders of the Evil Empire. However, Bennett and Leibsohn imply in their piece that this debate was only resolved after the Soviet Union met some preconditions to talks and changed internally, that is after, as they write, that Reagan “was assured Gorbachev was a different kind of leader – after Perestroika, not before.”

In fact, the debate about engaging the evil empire was resolved three years before Reagan met with Gorbachev. The debate and the resolution in favor of talking to the leaders of the evil empires is meticulously chronicled in George’s Shultz’s memoir, Turmoil and Triumph: Diplomacy , Power, and the Victory of the American Ideal (1993). Just the title of Chapter 25, "Realistic Reengagement with the Soviets," underscores how misleading the Bennett and Leibsohn rendition of history is.

When they first came to Washington, many foreign policy advisors within Reagan administration advocated the Bennett and Leibsohn position and did not want to have any contact with the Soviets, even though every American president since the recognition to the USSR in 1933 had met with their Soviet counterparts. When George Shultz became Secretary of State in 1982, he began to challenge this policy of disengagement, arguing that the United States needed to engage both the Soviet leaders but also Soviet society. As he writes in his memoirs about the start of the New Year in 1983, “I wanted to develop a strategy for a new start with the Soviet Union. I felt we had to try to turn the relationship around: away from confrontation and towards real problem solving.” (p. 159) Shultz is writing about his thinking two years before Gorbachev comes to power.

Shultz’s idea for a turn towards engagement met resistance in the Reagan administration. Again, from his memoirs: “I knew the president’s White House staff would oppose such engagement. There was lots of powerful opposition around town to any efforts to bridge the chasm separating Moscow and Washington.” After listing the opponents to direct negotiations, which included Secretary of Defense Caspar Weinberger and CIA head Bill Casey, Shultz affirmed that “I was determined not to hang back from engaging the Soviets because of fears that the ‘Soviet wins negotiations’.” (p. 159). Sound familiar? Instead the word, Iranians, for Soviets and you capture the essence of the debate today.

Shultz, as we all know, won this debate, convincing Reagan about the need to start talking directly to the Soviets (again well before Gorbachev came on to the scene). A subtitle of Chapter 12 of Shultz’s memoir is A President Ready to Engage. (p. 163). In early February 1983, Shultz even floats the idea of meeting directly with Soviet Ambassador Dobrynin for a private chat, to which Reagan responds, “Great”, and then adds “I don’t intend to engage in a detailed exchange with Dobrynin , but I do tell him that if Andropov is wiling to do business, so am I” (p. 164). (Remember Andropov died in 1983 and his successor, Chernenko, also did not serve long as the Soviet leader before dying in 1985. from 1983-1985, there was a real crisis of leadership inside the Soviet Union, a factor that contributed to the lack of direct talks at the highest levels). Speed forwarding again to today’s Iran debate, which presidential candidate sounds more like Reagan?

Shultz’s approach toward engaging the Soviets offers another profound lesson for today’s Iran debate. Shultz never let the negotiations focus just on arms control. That played o the Soviet’s strengths. Rather, he insisted on an expanded agenda that always included human rights and democracy. Again, from his memoirs, "We were determined not to allow the Soviets to focus our negotiations simply on matters of arms control. So we continuously adhered to a broad agenda: human rights, regional issues, arms control, and bilateral issues." (p.267). This same approach is needed for dealing with the Iranian regime today.

Finally, Shultz never saw negotiations or expanding contacts with Soviets and Americans as a concession to Moscow or a signal of legitimacy for the communist dictatorship. In the debate about opening consulates in both countries – a move that some hardliners at the time saw as a sign of weakness – Shultz firmly supported the idea as a change in the American national interest. As he quotes from a memorandum that he wrote in 1982, "I believe the next step on our part should be to propose the negotiation of a new U.S.-Soviet cultural agreement and the opening of U.S. and Soviet consulates in Kiev and New York...Both of these proposals will sound good to the Soviets, but are unambiguously in our interest when examined from a hard headed American viewpoint."(p. 275). Exactly the same could be said about Iran today.

Historical analogies can only go far. Many dimensions of U.S.-Iranians relations differ radically from Cold War relations between the U.S. and the Soviet Union. But when observers do roll them out, getting the facts right should be precondition to the substantive date about their relevance.

WASHINGTON, June 10 /PRNewswire-USNewswire/ -- Leading global development experts today called on Congress and the President to elevate development as a key component of the U.S. foreign assistance system to meet the challenges of the 21st century.

The international and domestic challenges of the 21st century -- including transnational threats such as economic instability, terrorism, climate change, and disease -- cannot be met with a foreign assistance apparatus created to confront the challenges of the 20th century, said the experts in a report released today. The report, New Day, New Way: U.S. Foreign Assistance for the 21st Century, contains various proposals of this coalition of experts, the Modernizing Foreign Assistance Network (MFAN).

Foreign assistance and other investments in developing countries are vital tools for strengthening U.S. foreign policy, restoring American global leadership, and fighting global poverty, said MFAN co-chair Steve Radelet of the Center for Global Development. Foreign policy experts on both sides of the political aisle now recognize the importance of strong foreign assistance programs. But they also recognize that our foreign assistance programs are out of date and badly in need of modernization to meet the challenges of the 21st century.

The report lays out the importance of foreign assistance as a foreign policy tool which includes defense, diplomacy, and development. It makes the case that it is in the countrys national interest to elevate development assistance and makes specific recommendations such as better accountability, a national strategy for the coordination of the entire U.S. foreign assistance system, and making development a sustainable piece of Americas long-term investments overseas.

"By giving development a seat at the foreign policy table we can narrow the gap between the world's haves and have nots, tackle the challenges posed by climate change, the global food crisis, and the world's weak and failing states and, most importantly, strengthen the moral foundation from which we lead, said MFAN co-chair Gayle Smith of the Center for American Progress.

The report was released today during the launch of MFAN in Congress. Speakers included Rep. Howard L. Berman, chair, House Foreign Affairs Committee; Rep. Nita Lowey, chair, State and Foreign Operations Subcommittee; and Sen. Chuck Hagel, member, Senate Foreign Relations Committee.

Members of MFAN include: Steve Radelet (Center for Global Development), Gayle Smith (Center for American Progress), Brian Atwood (Hubert H. Humphrey Institute of Public Affairs, University of Minnesota), David Beckmann (Bread for the World), Lael Brainard (Brookings Institution), Larry Diamond (Hoover Institution, Stanford University), Sam Worthington (Interaction), Francis Fukuyama (The Paul H. Nitze School of Advanced International Studies, Johns Hopkins University), Carol Lancaster (Mortara Center for International Studies, Georgetown University), George Ingram (Academy for Educational Development), Larry Nowels, Charles MacCormack (Save the Children), Michael A. McFaul (Center on Democracy, Development and Rule of Law, Stanford University), Ray Offenheiser (Oxfam America), Stewart Patrick (Council on Foreign Relations), and William Reese (International Youth Foundation).

Just look at the number of construction cranes around you and you’ll immediately know that you have landed in a petrostate. What’s special about the Caspian oil giant Kazakhstan is the fact that there are two types of cranes—the idle ones and the busy ones. This becomes nowhere more apparent than in the country’s new capital Astana. The idle cranes stand on private construction sites and the busy ones on public construction sites.

Kazakhstan is probably one of the countries worst hit by the global credit crunch. After years of aggressive borrowing on international markets Kazakh banks have had to pull the plug on many domestic projects after their own cash stream evaporated and it became clear that they would need to settle most of the $14 billion in scheduled principal repayments on external debt this year. The International Monetary Fund (IMF) had been warning about the unsustainability of the ever growing debt ratio for the past two years, but to little avail. Growth rates above 9 percent for the past seven years and great future prospects thanks to ever expanding oil production earned Kazakhstan a credit rating of “stable” from Standard & Poor's rating agency. Now, the bubble burst, the S&P rating turned “negative”, and the private cranes stopped.

The busy cranes—in contrast—run 24/7. No effort is spared to make sure that the fancy new government building, the pavement, the flower-adorned square will be finished in time for the highlight of the year: the birthday of both the President Nursultan Nazarbayev and the capital on July 6 (their 68^th and 10^th, respectively). This simultaneity is no coincident. Astana is largely Nazarbayev’s creation. It was him who anointed the city in the middle-of-nowhere the new capital of the young Republic, who chose its no-nonsense name (“Astana” literally means “capital”), and who caused its population to triple. The upcoming celebrations almost turned into a Nursultan & Nursultan party. If Mr. Sat Tokpakbaye and his fellow parliamentarians had gotten their way, the capital would yet again have undergone a name change—this time to honor its creator more explicitly by endowing it with the President’s first name (there is already an oil field named after him). But out in his modesty, the President declined. With his proposal Mr. Tokpakbayev, achieved the near-impossible: to distinguish himself by loyalty in a Parliament whose members all come from the same Nur-Otan party.

The idle and the busy cranes both stand for different answers to petrostates’ most burning policy question—how to best use the ballooning governmental revenues from the thriving oil and gas sector. Save or spend?—is the 500 billion dollar question (to take the value OPEC earned from net oil export in 2007). Kazakhstan, like 23 other oil and gas producing countries, followed the IMF’s advice and established an oil fund with the goal of sterilizing, stabilizing, and saving governmental oil revenues. The so-called National Fund of the Republic of Kazakhstan (NFRK) has accumulated more than $26 billion in the eight years since inception, and the total value of all oil-related funds around the world is estimated to surpass the astronomical sum of $2.300 trillion. While the theoretical logic underlying the creation of oil funds is compelling, their actual track record in achieving macroeconomic stability and fair intergenerational income distribution is more mixed. As a number of recent studies demonstrate (e.g. Shabsigh and Ilahi 2007; Usui 2007), oil funds are no substitute for the strengthening of all institutions involved in the revenue management and budgeting process. Strong expenditure and deficit control mechanisms are indispensable because such richly endowed funds make it easier for the government to borrow money on international financial markets whereby the fund acts--explicitly or implicitly—as a collateral, which in turn undermines the fiscal prudence that the fund was meant to ensure in the first place. More indirectly, the accumulation of large sums of money creates a moral hazard problem also with respect to private sector spending. The temptation is huge for private (and state-owned) companies to take overly risky decisions in the hope that the oil fund will bail them out in case their speculations turn sour. When oil fund assets correspond to more than a quarter of the country’s GDP—as it is the case in Kazakhstan—this temptation is hard to resist. Recent demands by Kazakh banks to dip into the NFRK for alleviating their liquidity problems provide just one case in point, and the national oil company KazMunaiGas may soon follow suit.

However, spending, rather than saving, does not provide a panacea either and is fraught with its very own set of problems.

First, governments of oil rich countries faces a challenge similar to that of rich parents who want to raise their children to become productive members of society. As the US billionaire investor Warren Buffet was once quoted saying: “a very rich person should leave his kids enough to do anything but not enough to do nothing.” Political scientists refer to this concern as the risk of a growing “rentier mentality” (Beblawi 1990), i.e. the tendency of citizens in petrostates to expect the government to solve all their problems rather than relying on their own initiative. The resulting societal dependency may actually suit governments very well since who will bite the hand that feeds him/her? Innovation and entrepreneurship are undermined and undemocratic structures perpetuated. Second, pro-cyclical spending of highly volatile oil revenues results in a series of negative macroeconomic consequences ranging from soaring inflation, exchange rate appreciation, and a further accentuation of the crowding-out of private investments. Finally, a massive explosion in government revenues (e.g. the newly introduced oil export tariff alone is expected to add another $1.5 billion per year) makes it close to impossible for the governmental apparatus to identify and supervise a sufficient number of new spending projects with a satisfactory social return. The floodgates are wide open to white elephant projects, mismanagement, and corruption.

The Kazakh government is acutely aware of this dilemma. Like all other oil producing nations around the world, Kazakhstan is desperately trying to navigate safely between Scylla (saving) and Charybdis (saving). As a possible solution to this dilemma a number of scholars and activists are now proposing the direct distribution of oil revenues to all citizens (and thus the ultimate owners of a country’s natural resource endowment), thereby empowering them to decide for themselves how they want to spend the monetized share of their subsoil assets.

The only real world examples of direct distribution arrangements can be found in the US state Alaska and the Canadian province Alberta. This option has also been proposed for Nigeria (Sala-i-Martin and Subramanian 2003), Iraq (Birdsall and Subramanian 2003; Palley 2003; Sandbu 2006), and Kazakhstan (Makmutova 2008).

While direct distribution arrangements may mitigate some of the problems highlighted above, they have to be greeted with some degree of caution. High levels of corruption and patronage-driven politics not only undermine the effectiveness of top-down development projects but can also jeopardize the fair distribution of oil revenues. Furthermore, even if every entitled citizen does receive his or her share of oil revenues, the long-term impact on a country’s economic development may be small or possibly even negative because of increased inflation and spending on unproductive goods and services imported from abroad. These considerations are not of particular relevance in the two existing examples of direct distribution of oil revenues. Alaska and Alberta both enjoy a relatively good record in fighting corruption and in observing the rule of law. They are both part of a larger, highly developed economy which helps to mitigate inflationary pressure and the risk that citizens will spend most of their additional income on goods imported from abroad. But the picture looks very different in most other oil dependent countries.

One possibility for addressing the risk that directly distributed oil revenues will be spent unproductively is to combine the direct distribution scheme with certain conditions that are intended to encourage citizens to invest in ways that boost their own productivity. This approach has so far not been discussed in academic or policy circles, but the conditional distribution of oil revenues (CDOR) offers the potentials of marrying the merits of two programs that are generally considered to be successful, namely the direct distribution of oil revenues and conditional cash transfer programs employed throughout the world to fight poverty in a more targeted and bottom-up fashion. A whole range of different design options are compatible with this overarching concept. CDOR schemes do not have to adopt the exclusive pro-poor focus of conditional cash transfer programs. In fact, both in Alaska and in Alberta oil revenues are deliberately distributed in an income-blind manner, staying true to the logic that citizens are entitled to a share of oil revenues in their capacity as the ultimate owners of these resources. Also in contrast to most existing conditional cash transfer programs (e.g. Oportunidades in Mexico), the conditions attached to the direct distribution of oil revenues would probably be primarily linked to the use of these revenues rather than some pre-qualifying behavior (e.g. taking infants to regular health check-ups). Eligible spending areas would be selected based on their potential to maximize productivity gains and could include education, health, energy efficiency, start-up capital for small enterprises. Additional design options worth examining include the saving and pooling of CDOR money, which would allow citizens to realize a medium to larger scale common project within the approved spending priorities. For instance, the most promising strategy for greater productivity in Kazakhstan’s agricultural sector lies in the creation of larger units (co-operatives, publicly traded agricultural complexes), and specific incentives may therefore be built into the CDOR scheme to promote such a move away from subsistence farming.

The conditional distribution of oil revenues under any of these design options presents a promising discussion platform for a new initiative the World Bank announced in April 2008—tentatively labeled EITI++. This initiative is meant to help resource rich countries to “manage and transform their natural resource wealth into long-term economic growth that spreads the benefits more fairly among their people”, by focusing not only on the transfer of oil revenues from companies to governments (as does the “original” Extractive Industry Transparency Initiative (EITI) of 2002) but also on the generation, management, and distribution of oil revenues. The transparency mechanism of double disclosure pioneered by EITI could thereby be used to ensure that all citizens receive the share of oil revenues they are entitled to. Transparency could be further enhanced by tools currently developed by the Google Foundation’s Inform & Empower program.

The implementation of the CDOR scheme could build directly upon the experience gained under conditional cash transfer schemes, including the scientific testing of its effectiveness in a randomized experiment setting. The bottom-up development philosophy underlying the conditional distribution of oil revenues ties nicely in with other approaches to strengthen the consumers of public goods and services that have gained currency over the past decade (e.g. vouchers for health and education services).

With this sketch of a conditional distribution of oil revenues scheme in my pocket (and and unconditional love for the kicking baby in my belly) I navigated my way through yet another construction site to see Mr. Kuandyk Bishimbayev, one of Kazakhstan’s young and rising stars (now the head of the so-called “Division of Socio-Economic Monitoring” within the Presidential Administration). During our meeting I got the impression that my enthusiasm for this novel approach to oil revenue management proved contagious, and since my return to Stanford I have rolled out my networking machinery to spread the virus among my academic colleagues. The time is certainly ripe. With oil prices set to remain high for the foreseeable future Kazakhstan and all other petrostates cannot afford to miss this historic opportunity to promote the diversification of their economies and to create the foundation for a future where oil may lose its dominant position to alternative sources of energy.