Avoiding the Resource Curse

Ashby Monk

Oxford Analytica published an article on SWF “role models” for its Daily Brief today. (Full disclosure: I wrote it). The short brief discusses the role SWFs play in resolving the resource curse. It was inspired by a post I did on the ‘best commodity funds in the world’ a few weeks ago. Here is an excerpt that explains how SWFs help states overcome the resource curse:

“In order to counteract the ‘resource curse’, many countries have decided — or have been convinced — to set up commodity funds, which are a form of sovereign wealth fund (SWF). Commodity funds offer countries three important benefits:

1. Stabilisation. Academic research shows that commodity price volatility can impinge on growth in resource rich countries. Fluctuating revenues make implementing fiscal policy extremely difficult, especially over the long term. Therefore, managing the volatility of resource price shocks is crucial if governments are to achieve stable consumption. By putting a portion of revenues above a certain threshold into a SWF, and then drawing on the fund when revenues fall below that threshold, the government can smooth market prices over the long term.

2. Sterilisation. SWFs facilitate foreign exchange operations that limit the adverse consequences of unearned resource windfalls; in conjunction with the central bank, sterilisation limits the negative domestic effects of capital inflows. In short, commodity funds help to prevent ‘Dutch Disease’ — a situation in which, due to a heavy dependence on natural resources, an overvalued currency impedes non-primary exports. In booms, the national currency experiences a real overvaluation that results in the weakening of internationally exposed industries. By setting up a SWF, sponsors hope to manage their competitive position in the global economy.

3. Savings. US economist Robert Solow famously asked how much of the world’s endowment of natural resources it is fair to consume today and how much governments should be leaving for future generations. He suggests that while current generations have no obligation to save the physical resources (by leaving them untouched), they do have an obligation to leave future generations the embedded productive capacity that these resources represent. This can be transmitted in the form of technological knowledge or financial resources. Commodity funds can address some of these temporal dilemmas associated with resource wealth.

For the reasons above, commodity funds are being established in many countries. More SWFs were created in 2009 than any year previous.”

Anyway, the larger message of the brief (which I encourage you to go read) was how important good governance is in achieving SWFs’ objectives. The act of creating a SWF is not a sufficient condition to overcome the resource curse; these funds have to be structured appropriately.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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