BY:SCOTT LUO/SEPT 6,2011

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(CNN) -- In the aftermath of the 42-year rule of Moammar Gadhafi, the world is left wondering whether the bloodiest conflict in the popular unrest that has swept the Arab World will signal the rise of democracy in Libya or a descent into chaos.

A group of economists is proposing one solution to help a strong Libya emerge from the smoldering ruins of civil war: Give all Libyans direct annual payments from oil revenue.

Call it the 'Alaska solution.'

"In 1982 then-governor Jay Hammond of Alaska said, 'Look, there is no check or balance on our use (of state oil revenue)," said Todd Moss, a senior fellow at the Center for Global Development in Washington. Hammond started a program to give residents annual checks from the state's petroleum fund. "That held Hammond and all his successors into account."

Libya is a textbook example, Moss said, of what is known as the "resource curse" - countries whose economies depend on oil, gas or other natural resource exports. It's sometimes known as "the paradox of plenty" - rather than create an economic boom, export cash from resource-rich nations often flows directly to corrupt leaders while most the population doesn't share in the wealth.

How to handle a sudden burst in commodity wealth is an issue that echoes around the globe, from the huge copper and coal mines plumbed in Mongolia, to the offshore gas fields in Ghana and vast tracts of lithium deposits in the Andes Mountains of Bolivia.

"Of course you have corruption, but I think the key thing about understanding how the resource curse works is it impedes economic and political development," said Arvind Subramanian, a senior fellow at the Peterson Institute of International Economics in Washington.

Resource curse in the Arab World

Research shows the more a nation's economy is dependent on export of natural resources, the less that nation's economy is likely to grow, says Ragnar Torvik, an economist at the Norwegian University of Science and Technology. "But it's a chicken and the egg question- is it natural resources that cause this low growth, or some bad economic and political conditions as a result of just specializing in natural resources?" Torvik said.

The unrest in the Arab world demonstrates the resource curse at play. "Why was the population (of Libya) not able to get rid of Gadhafi by their own, as they did in Egypt and Tunisia? One likely part of the answer is that the oil revenues in Libya is much more important than in Tunisia and Egypt, which gives the ruler a much wider menu of political choices to fight the democratic demands from the population," Torvik said.

"And why was the response in Saudi Arabia to hand out large sums of cash to the people? Presumably this was not because suddenly that they cared more about the people - the more likely answer is that this was a move to maintain political power and avoid demands for democracy," Torvik said. "So I think indeed the varieties of experience in the Middle East in the last months have much to do with oil revenues."

Major natural resources aren't necessarily a national curse. A recent survey of the 10 most livable cities by the Economist Intelligence Unit is dominated by cities in Canada and Australia - nations that both have booming commodities exports. While sub-Saharan countries like Nigeria and Congo have had moribund economic growth despite resource riches, diamond-rich Botswana is the fastest growing economy in Africa.

"Here in Norway we are one of the largest oil and gas exporters in the world; I can observe that in Nigeria oil has been bad, but in Norway it is good," Torvik said.

A key difference between nations that do well with natural resources and those that are "cursed" depends on the strength of government institutions before nations strike underground wealth, economists say. Botswana is one of the few sub-Saharan nations with a parliamentary system of government. Norway had 200 years of democracy before its off-shore oil industry took off in the 1970s.

Instead of giving direct payments to citizens, Norway has plowed all its oil revenues into a public fund for use in education or other public works. "We use 4% of the fund every year, the ambition is you don't eat the principal but live off the interest," Torvik said.

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