Weekend Reading

Ashby Monk

I’ve come across a few interesting papers this week that are worth a read (or at least a skim):

First, Jason Hart of the University of Western Australia has a new paper entitled, “Revenue Funds Counteract the Determinants of Dutch Disease: Lessons for Western Australia.” The paper examines the current resource related problems facing Western Australia and draws implications from six countries with commodity funds. Hart shows that SWFs are useful tools for responsible fiscal management (albeit non-essential). He concludes that…

“…the Western Australian government has the opportunity to avoid Dutch disease through a Sovereign Wealth Fund style revenue fund, which can make government revenue from royalties sustainable and reduce the impact of commodity prices on the exchange rate, and in doing so reduce the economy wide adjustments that a volatile exchange rate causes.”

Second, Mehmet Caner and Thomas Grennes have a new paper out entitled “Sovereign Wealth Funds: The Norwegian Experience.” The paper sets out to analyze the performance of the Norwegian Fund and its effects on world capital markets and on Norwegian investors. They conclude that Norway has (basically) become the owner of a publicly managed mutual fund and the “success” of the fund is a function of the risk preference of Norwegian society:

“…whether it has been an effective agent for Norwegians depends partly on the risk preferences of its citizens.”

Finally, Gordon and I released a new paper on the rise of the CIC. We explore the nature of the “deal” that was struck when American markets were opened up to China. In effect, the origins of the CIC can be found, in part, in an American commitment to “normalise” China’s role in the global economy. We’d love to hear your comments. Get it here.

Enjoy your weekend!

3 Responses to “Weekend Reading”

  1. 1 rien huizer April 13, 2010 at 3:38 pm

    This comes across as a little odd: the Dutch people had no problems with the disease (except a few business people and shipyard workers who would have become redundant anyway) but the politicians did. Western Australia would have a very hard time to run a fund with better returns than retiring the state debt. Anyway, these royalties are only around 5% of mining revenues; the corporate tax on the mining companies has the potential to be much higher and goes to Canberra. Plus there are no politicians in WA that would be rewarded electorally for keeping this money away from uses from hip replacements to infrastructure. Think about this proposal and discover a great case study into the impossibility of true SWFs.

  2. 2 Jason Hart April 16, 2010 at 1:10 am

    A wise observation Rien, and I’ve expanded on those points in a new paper submitted for publication. The state has little debt, but it should always be paid off before a fund is set up. This is the main barrier that Canberra faces, which has a prohibitive amount of debt. Aside from their debt, I found the Commonwealth was a much more appropriate level for developing a fund due to the larger revenue accrued. This study however was not focused on the Commonwealth.

    As for the politics, I agree that it goes against the short term interests of current politicians, but that does not mean it is not in the long term interest of the citizens, the state and the country. This also neglects the fact that the state receives very little revenue due to redistribution through GST grants. While it appears that the state is raking in the royalties, they are being siphoned off to other states and this process is poorly understood. There may well be political benefits to highlighting this fact and lodging a solid proposal that would see the revenue stay in the state, but this is only possible if the revenue is locked away in a SWF. There would also be political fodder from reducing risk and volatility in the economy and from working to keep inflation down. Political incentives towards short sighted and decision making is a real problem but other countries have found ways past this barrier, so it is by no means impossible. Difficult and unlikely, but certainly not impossible.

    • 3 Julian Roche April 4, 2011 at 3:10 am

      Hi Jason,

      A great paper, one cavil, You suggest state debt should always be paid off before establishing a SWF. Two points:

      a) A blended equity-debt investment portfolio should definitely outperform a AAA-rated borrower. Free money for WA. Well, if properly managed it would be.

      b) You are ignoring the governance point about binding politicians to investment – in an ideal world, even if a) were not true, yes, pay off debt, but in practice a cross-party binding agreement might well help.

      All the best

      Julian Roche

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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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