The news is written by Chen Xixi and modified by Furui cheng
In the ‘International Basic Income Week’, we three sophomores in CUPL (China University of Political Science and Law) organized an online feature academic report about basic income with Furui Cheng, our academic tutor, on September 13, 2020. The participants included some juniors and seniors, and we are all from financial department of the Business School.
The seminar has two main agendas: the first is a presentation of one very good chapter about Social Dividend of Alaska ‘How Alaska helped Staunch be fouling by mismanaged oil wealth: a lesson for other oil rich nations’ in Jay Hammond’s autobiography by Yu Yang, Huang Xinyi, and Chen Xixi; the second is free comments and discussion of the social dividend governance mechanism. Here are the details of the seminar.
Our report has mainly three aspects: the first part is the background, the second part is the operating mechanism, and the third part is some enlightenment for other countries.
Background 1: Alaska is a state rich in natural resources. In the beginning, oil producers mainly focused on some infrastructure projects, which had greatly expanded domestic spending and so caused inflation to soar and left a mountain of debt. So even though Alaska was rich in resources, the life of the poor did not improve at that time.
Background 2: Alaskan fishermen were dissatisfied with the monopoly that the Seattle tycoons actually enjoyed. When they used fishing gear, because this fishing monopoly benefited a few beneficiaries but sacrificed the interests of many people. Therefore, at that time, many fishermen had a very bad life and lacked services. So, there was a proposal to ban fishing nets, but it was overturned because of various unconstitutionality.
Background 3: The bumpy process of the permanent fund project. The first was that a tax system with the Bristol Bay Company as the main concept was proposed at that time. The main content of such a tax system was to deposit taxes in a relatively conservatively managed investment account, and then distributed a new dividend stock to residents every year. But in the end this tax system ended in failure.
Immediately after, two new regulations were proposed for use tax and the abolition of residential business tax. This was considered a transitional measure to compensate fishermen for their losses. Then such a new regulation was approved because it met the expectations of the people. Then, once again proposed to the legislature a tax system with the Bristol Bay Company as the main concept. But it still ended in failure.
And the country did not follow the concept of fair share distribution proposed by Bristol Bay Company to form a single investment portfolio, but formed companies in more than 200 villages and about 14 regions. Besides, the board of directors was composed of local leaders. This made many lawyers and people who made high salaries in the company happy. In the end, many companies were also on the verge of bankruptcy due to the lack of large capital investment, nepotism and rural policies. This model eventually collapsed. In fact, the failure of this model was mainly because his politics was not separated from the economy and so an independent financial operation system was not formed.
Then they further proposed a fair tax system. Its content was to first determine the state’s per capital property value, and then in this community, if there are some people whose revenue generated by the tax are less than they should be, the state will provide funds for the difference. Conversely, if the income generated by the resident’s 3% tax exceeds the excess income, the excess income will be owned by the state. According to such a fair tax system, all places would be levied the same tax, which meant that the impact on everyone is the same, whether it was the poor or the rich. However, such a fair taxation system eventually met with opposition.
Then, they passed the so-called Alaska permanent fund. It just cut the proposed 50% of the oil lease bonus, royalties and severance payment to 25%, and the severance payment, which accounted for about half of the oil wealth income, was canceled and flowed into the general fund instead. In this way, there was no way to form permanent financial assets. This was also the initial establishment of an Alaska permanent fund. Then they proposed dividend plan and annuity account. The main content of these two proposals was to pay dividends according to the length of residence of the residents. They were approved.
Finally, in 1980, the national government allocated funds to establish the Alaska State Permanent Fund. The bill also proposed that the board of directors is independently responsible for the operation of the permanent fund. In 1982, the Alaska State Legislature also passed a resource fund dividend plan, and then such a permanent fund was formally established.
Next, I will talk about the main ideas and governance mechanisms of the Alaska Permanent Fund.
Its main idea is to avoid excessive waste of resources by establishing a permanent fund. Extract a portion of the income from oil proceeds to the descendants of Alaskans, and convert some of the oil income into permanent and sustainable financial assets.
Then keep resource revenue away from politicians to prevent politicians from wasting resource revenue on government operations and investment projects.
Beginning in 1976, Alaska’s referendum decided to set up a permanent fund to allocate at least 25% of the state’s oil resources and related income to the permanent fund, stipulating that the legislative department has full power to dispose of the income of the permanent fund, but the capital of the permanent fund, the legal department must keep it intact.
Then, in 1978, the legislature decided to establish two corporate entities, the Alaska Enterprise Investment Corporation and the Alaska Permanent Fund Corporation. The Alaska Enterprise Investment Corporation mainly creates short-term benefits for Alaskan citizens and provides financing support for small and medium-sized production-oriented private enterprises and community development projects. Alaska permanent fund company has a large amount of income into the account, but the type of investment it can be given strict restrictions, that is, the prudent investment rules of the common law are used to guide investment. Then it was stipulated in the 1980 bill that 50% of the income from the leasing of mineral resources should be invested in the fund.
The establishment of a permanent constitutional amendment stipulates that at least 25% of the royalties from all natural resource income owned by the state shall be placed in the fund, and the fund shall only be used for investments that can bring asset returns. The implementation of the withdrawal rules means approximately 10% of oil revenue is placed in the fund, and other insignificant mineral revenues are also included. In addition to the royalty savings provided by the constitutional amendments, the size of the fund also increases with legal appropriations. The annual savings make up for the depreciation of the true value of the fund due to the effect of inflation.
Finally, the management of the fund belongs to an independent company, led by a carefully calculated board of directors, and is focused on maximizing the financial returns of the fund. The company’s operations are independent of state revenues and have not been involved in any disputes involving the optimal use of funds. The decision is controlled by the legislature.
The then Governor of Alaska, Jay Hammond, suggested that the annual income of the fund should be distributed according to the requirements of an Alaska Corporate Plan. Citizens of Alaska can enjoy the income of the fund every year. The distribution standard depends on the residence period of Alaska up to 25 years. Residents who live for one year can enjoy a share, and residents who live for two years can Get two shares, and so on. Half of the income of the Alaska Fund is equally distributed to each resident each year. In order to make the program sustainable, the Alaska permanent fund dividend is paid in the form of ordinary income rather than fund income. Citizens of Alaska can get a corresponding share from the permanent fund dividend distribution every year. This fund is composed of public oil revenues. As the fund appreciates, the scale of annual dividends also increases.
If other countries want to apply this model of Alaska, the government should consider the following three questions according to its own situation. One is whether the government has to decide whether to collect rents on privatized resources, and the second is whether the government has to decide whether to create a permanent fund. Third, the government has to decide whether to distribute dividends and what proportion of the proceeds will be used for dividends.
Next, I will take Iraq as an example to talk about how to extend the permanent fund to other countries. Historically, every revolution in Russia, China, France, and the United States was triggered by the gap between the rich and the poor. Take Iraq as an example Under Saddam’s rule, the upper-class lives are rich, the bottom lives are dirty, oil wealth makes a few people fat, but most people are still starving. Transferring part of the country’s oil wealth to citizens and reducing the gap between rich and poor may help prevent further chaos.
What should Iraq do? Alaska’s permanent fund has some major shortcomings, and Iraq should avoid repeating the same mistakes. For example, the dividend plan of Alaska failed to deposit all the state government income that Alaskans received from oil wealth into the people’s account, and did not use their income for other purposes than dividends. Instead, most of it went to the state government. When oil prices rose, the state government succumbed to the interim bill to abolish income taxes and squandered oil revenues. Therefore, the Alaska government today is facing a serious crisis and deficit gap. Iraq should handle this income more appropriately and deposit it in the people’s account or other purposes, instead of spending it lavishly by the government.
How should China learn from the Alaska permanent fund model? China’s resource-abundant regions can establish a distribution model similar to fund management to effectively manage resource returns, so that they can continue to increase in value. Fund income can be managed through investment companies for investment management, which can increase the value of the fund and turn the fund into a sustainable financial asset. The supervisory body of the fund can be supervised by another financial institution or such as the central bank. The account of fund income is open to residents of resource-based areas by investment companies on a regular basis.
The proceeds of this resource fund can be used for the following investments. The first is the investment in human capital, through fund income to increase the level of human capital investment, promote the accumulation of human capital, increase the investment in education funds in resource-based areas, and cultivate technical and professional talents. Increase the supply of human capital and attract and retain senior talents through preferential conditions. The second is investment in technological innovation. Resource-based regions have a single industrial structure, are highly dependent on resources, and have relatively weak technological innovation capabilities. Fund proceeds are used to support technological innovation in resource-based regions. The third is the investment in urban infrastructure, using fund proceeds to invest in infrastructure in resource-based areas, especially urban infrastructure. The last is to support the development of private enterprises. Fund proceeds are used for investment in private enterprises in resource-based areas, encourage and support the establishment of private enterprises, and implement preferential policies for private enterprises.
In fact, the Alaska dividend model has many applications in various countries. I think the social dividend practice in Alaska has a general enlightening significance for the management of public resources. In fact, Venezuela, Brazil, South Africa, Israel and New Mexico in the United States have all advocated the establishment of social dividend like Alaska. Europe has a stronger movement to promote social dividends, which they like to call “basic income.”. The British government has officially run the children’s trust fund in 2004 to establish a capital account for every child born after January 1, 2004. In fact, many rural areas in China have implemented the community stock cooperation system for many years, which is the “local social dividend” based on the value-added income of collective land. In fact, the system conditions for implementing social dividend in China are more favorable than those in many countries, because we have a large proportion of public assets, and we do not need to make many complicated tax designs like other countries.
Alaska’s social dividend practice is very important, not only because it is so far the only real human social policy on the way, not just as an experiment, but has been implemented for almost 40 years! Its implication to future public policy and the use of public resources may have similar importance to land revolution.
Why establish a social dividend fund? And how? What is the difference between this kind of funds and others in the aspect of governance mechanism? How to ensure the sustainability of the funds? How to decide the priority between Dividend and public services? How to avoid the expropriation of the capital and its revenue by different interest groups? And so on. In the process of answering these questions, we are doing this work in the context of reforms in the political, economic, legal, social and cultural spheres.
As undergraduates, I hope you are aware of the frontier issues, reflect on the classics, and foster the ability to change the status quo.
Jay Sterner Hammond (July 21, 1922 – August 2, 2005) was an American politician of the Republican Party who served as the fourth Governor of Alaska from 1974 to 1982. Hammond was born in Troy, New York and served as a Marine Corps fighter pilot in World War II with the Black Sheep Squadron. In 1946, he moved to Alaska where he worked as a bush pilot. Hammond served as a state representative from 1959 to 1965 and as a state senator from 1967 to 1973. From 1972 until 1974 he was the mayor of the Bristol Bay Borough. In 1974 he was elected governor of Alaska. He oversaw the creation of the Alaska Permanent Fund in 1976, which, since the early 1980s, has paid annual dividends to Alaska residents. From 1985 to 1992 he hosted a television series called Jay Hammond’s Alaska. He wrote three autobiographies. This article is a short introduction of his last book.
Petroleum is the devil’s excrement, warns Juan Pablo Pérez Alfonso, a Venezuelan founder of OPEC. Waste, corruption, consumption, and failing public services are repeated curses in oil rich countries. But Alaska managed to avoid much of the befouling of “devil’s excrement” by actions that served to at least halfway pin on a “diaper.”
Article 8, Section 8, of Alaska’s constitution states: “The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the state, including land and waters, for the maximum benefit of its people.” This clause prompted Hammond to attempt to assure that all Alaskans received a discernible share of those benefits and to avoid the common past practice of selectively benefiting the favored few at the expense of the many. This battle to avoid selective benefit still continues today.
Before the permanent fund dividend, Hammond had tried several ways to comply with the mandate of the aforementioned constitution, but all fell flat. His first attempt was to abolish fish traps in the Bristol Bay Borough in 1965. A whopping 97 percent of the fishing payday made within the boundary went to others and local residents got but a paltry 3 percent! He proposed a use tax to be paid by all fishermen on their catch. To offset the impact on local fishermen already paying high property taxes, he proposed to putting tax money into a conservatively managed investment account, then each year issuing residents one new share of dividend-earning stock. He called the concept “Bristol Bay, Inc.” The word “tax” made most Alaskans oppose it.
With passage of the Alaska Native Claim Settlement Act (ANCSA) in 1971, Alaska’s aboriginal peoples were accorded 44 million acres of land and $900 million by the U.S. Congress. Hammond proposed again to follow the Bristol Bay, Inc. model to manage ANSCA grants: create a conservatively managed investment account and spin off equal dividends to every Alaska Native. This account was proposed to be managed by professionals under counsel supplied from an elected advisory board of Natives representing every Native group in Alaska. People would have the opportunity to lift themselves up by being stockholders, providing themselves with the means (along with the responsibility) to use it for their collective best interests. Hammond’s proposal failed in the face of obstructions by lawyers, financially and politically powerful Natives, and other local forces.
His third attempt was to assure that the more affluent rural areas with a sufficient tax base help fund government services the same way as urban centers are required to do. Under his proposed statewide property tax, affluent municipalities, such as the North Slope Borough with high oil property values, would have to assume more of their local government service costs than would those that were virtually destitute. That proposal also fell flat on its face. Unfortunately, inequitable taxation continues to contribute to Alaska’s urban/rural divide.
In another effort to reduce crippling costs of services to hundreds of economically unviable communities – many of which were not connected by roads and lacked adequate housing, schooling, and basic services – he proposed to provide population centers with the greatest economic potential with topnotch schools and other services as a means to encourage migration from other communities. Once again the proposal fell flat.
After becoming governor in 1974, he proposed that 50 percent of all mineral leases, bonuses, royalties, and severance taxes be deposited into a conservatively managed investment account. Each year one-half of the account’s earnings would be dispersed among Alaskan residents, each of whom would receive, annually, one share of dividend-earning stock. The other half of the earnings could be used for essential government services.
Hammond had many reasons for creating such an investment account to which all Alaskans would be shareholders:
To encourage contributions into the investment account and to protect against its invasion by politicians.
To transform oil wells pumping oil for a finite period into money wells pumping money for infinity.
To pit collective greed against selective greed.
To eliminate the magnetic attraction for others from elsewhere who might otherwise be inclined to flock to Alaska in order to get big money in a short term.
To instill a sense of ownership in all Alaskans that would incline them to support healthy resource development and resist unhealthy versions that would damage the environment or otherwise.
To eliminate controversial state expenditures for such things as abortions or family planning. Individuals wishing for these services could pay for it from their dividends or utilize free ultrasound or abortion assessment services.
To promote these concepts, fashioned after his failed Bristol Bay, Inc. proposal, Hammond created “The Alaska Public Forum”. Fortunately, this attitude came in the wake of a $900 million windfall in 1970 from leases issued in Prudhoe Bay which had been “blown” in the eyes of many people. To their credit, however, a sufficient number
of legislators were successful in passing legislation creating what they termed “The Alaska Permanent Fund.” This statute at least created a semblance of Alaska, Inc., but fell far short of what Hammond had hoped for.
For more detailed information about the book, please click here.
Many thanks for Russell Ingram’s reviewing and editing.
There are three steps in the plan. By 2020, the Chinese government expects its companies and research facilities to be at the same level as those in leading countries such as the United States. After another five years it is aiming for a breakthrough in aspects of AI that will drive economic transformation. Then by 2030 China aims to become the world’s premier artificial intelligence innovation center, establishing the key fundamentals for a great economic power.
However, rapid development of AI solutions is not without its drawbacks. In June, Kai-Fu Lee, the chairman and chief executive of one of China’s leading venture capital firms Sinovation Ventures and the president of its Artificial Intelligence Institute, expressed concerns about the downsides of AI, particularly the potential for mass unemployment. He raised basic income as a feasible solution.
According to Kai-Fu, the AI products that now exist are improving faster than most people realize and promise to radically transform our world, not always for the better. They will reshape what work means and how wealth is created, leading to unprecedented economic inequalities and even altering the global balance of power.
He highlighted the challenges brought about by two specific developments: enormous wealth concentrated in relatively few hands and vast numbers of people out of work.
Part of the solution to the loss of jobs will involve educating or retraining people in tasks where AI performs poorly. These include jobs that involve cross-domain thinking such as the work of a trial lawyer, however, retraining displaced workers to perform these highly skilled tasks will not be feasible in most cases. There is more scope for people to occupy lower-paying jobs involving the nuanced human interaction that AI struggles to perform, such as social workers, bartenders and concierges. But here too there is a problem: how many bartenders does society really need?
The solution to the problem of mass unemployment, Kai-Fu suspects, will involve “service jobs of love.” These are jobs that AI cannot do, that society needs and that give people a sense of purpose. Examples include accompanying an older person to visit a doctor, mentoring at an orphanage and serving as a sponsor at Alcoholics Anonymous – or, potentially soon, Virtual Reality Anonymous for those addicted to their parallel lives in computer-generated simulations. In other words, the voluntary service jobs of today may turn into the real jobs of the future. Other voluntary jobs may be more professional and therefore higher-paying, such as compassionate medical service providers who serve as the human interface for AI programs that diagnose cancer. In all cases, people will be able to choose to work fewer hours than they do now.
In order to pay for these jobs, it will be necessary to take advantage of the enormous wealth concentrated in relatively few hands.
Kai-Fu Lee writes:
“It strikes me as unavoidable that large chunks of the money created by AI will have to be transferred to those whose jobs have been displaced. This seems feasible only through Keynesian policies of increased government spending, presumably raised through taxation on wealthy companies.
As for what form that social welfare would take, I would argue for a conditional universal basic income: welfare offered to those who have a financial need, on the condition they either show an effort to receive training or commit to a certain number of hours of “service of love” voluntarism.
To fund this, tax rates will have to be high. The government will not only have to subsidize most people’s lives and work; it will also have to revenue previously collected from employed individuals.”
Shenzhen is one of the four current first-tier cities in China, and the other three are Beijing, Shanghai and Guangzhou. In February 2017, Shenzhen Innovation and Development Institute, a famous think tank founded in 2013, issued an “Outline of Shared development in Shenzhen”, which calls for a social dividend program in a package of reform measures.
Shenzhen is the first Special Economic Zone in China. In 1980, it was a poor rural area with 30,000 people. But now, more than 30 years later, it has a population of almost 20 million, with 11.9 million local permanent residents. Its total GDP is similar to Hong Kong, one of China’s Special Administration Regions. Shenzhen citizens’ per capita GDP was US $25,400 in 2015, and it is stepping into global middle developed cities. “The Sharing Shenzhen” is a new strategy after the previous “The Speed Shenzhen” and “The Quality Shenzhen”.
Although Shenzhen’s nominal per capita GDP is similar to that of South Korea, its per capita disposal income is only half of the latter’s. At the same time, the housing price in Shenzhen is double that of South Korea. Most people are living in substandard conditions, especially those 8 million non-permanent residents who have been totally excluded from the local social security system. Furthermore, no matter their income levels or social security levels, there are big gaps among even permanent residents. The Gini coefficient in Shenzhen per capita income is almost 0.5.
Shenzhen is thus facing a very big challenge of adjusting income structures to achieve social justice. Twenty Suggestions for “The Sharing Shenzhen Outline” include:
One billion tax relief program, to help enterprises and people;
To continue to raise the minimum wage;
To raise working income and expand the proportion of middle-income workers;
To improve the salaries and benefits of civil servants, so that the city managers can share the fruit of urban reform and development;
To establish state-owned capital dividend fund, letting all the people share the results of reform and development of state-owned enterprises;
To restart the “common prosperity” plan, to reduce the gap between permanent residents and the immigrants;
To raise and expand the minimum guarantee income system, to cover the whole population;
To expand the social assistance system to the medium income families including the immigrants;
To establish a more equitable social security system covering the immigrants;
To put the non-household residents into the housing security system, to achieve the safe living dream for everyone;
To establish the welfare and service system for the elderly;
To establish the universal social welfare and relief policies, so that Shenzhen’s warmth and sunshine can reach all children;
To develop social charity system;
To reduce the subway and bus fares;
To promote equal employment;
To promote fair education;
To reform the expensive medical system;
To relax the conditions of household registration, to make more people permanent residents;
To control and reduce the high housing prices, to make young people full of hope and dream;
All residents to enjoy the right of participation in social management and assume the obligations.
For the specific suggestion No. 5, the outline suggests Shenzhen should learn from Singapore, Hong Kong and Macau to give citizens a social dividend from the city’s fiscal surplus. In 2015, Shenzhen had 918.1 billion yuan [US $135.9 billion] total assets of state-owned enterprises, 461.6 billion yuan [US $68.3 billion] net assets, and 36 billion yuan [US $5 billion] profit. In addition to the corporate tax, the municipal government should get their net profit of 12.7 billion yuan [US $1.88 billion] per year as shareholders. Based on the average dividend payout ratio of Chinese listed companies, at least one third of the annual net profit could be distributed in cash as social dividend among all the residents. Given present figures, that would be 1,000 yuan [US $148] every two years for every resident. While this dividend might appear small, it is just a very conservative part of the net profit, and we can expect an increase in the future.
In the above description, Shenzhen is basically China’s miniature. The whole country faces similar problems and situations. So this plan captured the national attention after its announcement. Additionally, the director of the Shenzhen Innovation and Development Institute, Zhang Siping, is the former deputy mayor of Shenzhen city itself, and many councilors of the Institute are formerly from government sectors. They know the real crux of the city’s development, and they are making a fair plan out of their offices. This is another reason why “The Sharing Shenzhen Outline” is so striking in China.
In fact, China has not only local but also national state-owned enterprises, and the latter ones have much bigger profits. “The Sharing Shenzhen Outline” mentions only the former. All Chinese people could expect to get a national dividend plus a local one in the future.
The government of the Macau Special Administrative Region (SAR) in China has announced the “Wealth Partaking Scheme 2017” (WPS), under which local permanent residents are entitled to receive a small annual unconditional basic income of 9,000 patacas [US $1,128 (1)] and non-permanent residents 5,400 patacas [US $672]. With the Administrative Regulation No. 18/2017, the scheme came into effect on 6th June 2017, and its implementation officially started on 3rd July.
Since 2008, the government of the Macao SAR has given an annual state bonus to its all citizens. The WPS 2017 is very similar to the 2016 one. This year, there are 638,600 Macau permanent residents entitled to WPS, and 62,000 non-permanent residents. The total budget for the WPS 2017 is 6,080 million patacas [US $757 million].
Recipients must have been holders of valid or renewable Macau SAR Resident Identity Cards as of December 31, 2016 to be entitled to receive the cash premium, according to a statement from the Financial Services Bureau (DSF). Holders of a valid or renewable Macau SAR Resident Identity Card who are currently residing abroad will be granted the cash premium, provided they can prove that they are unable to renew their Macau SAR Resident Identity Card due to being either bedridden or completely or partly paralyzed. Those who submitted the relevant documentation and were granted the cash premium in the previous year may be exempted from document resubmission if the Social Welfare Bureau (IAS) concludes that no new evidence is required.
A direct bank transfer will be arranged for those who are receiving financial assistance or senior citizen subsidies from the IAS, according to the statement. The same will apply to retired civil servants receiving a retirement pension and other persons receiving such a pension for the family of the deceased. Most of the rest of the populace will be awarded the cash premium through a crossed check via mail. The crossed check can only be deposited into the payee’s account. In this way, the DSF notes that even if one receives a check addressed to another, it cannot be cashed.
A different procedure applies to beneficiaries under the age of 18. They will each receive a check made payable either to themselves or their parents, which may be deposited either into the beneficiary’s account or the account of one of their parents.
In addition to the WPS state bonus, the Macao SAR government has injected an annual capital into all qualified Provident Fund Individual Accounts since 2010. Provident fund individual accounts are provided to Macao SAR residents of the age of 22, and they are used to receive the “incentive basic fund” and “special allocation from budget surplus”. No formalities are required for the individual accounts of those who are already on the list of special allocation from budget surplus, which is 7,000 patacas [US $872] for 2017. Individuals who are entitled to the allocation of funds for the first time will also be allocated the incentive basic fund of 10,000 patacas [US $1,245].