Weekend Reading

Ashby Monk

Much of the reason commodity-based SWFs have grown so popular over the past decade stems from the sincere hope – especially in the developing world – that these funds will help the sponsoring country overcome the resource curse. Too often, the discovery of natural resources is not the good news it appears to be, as resource-rich countries will often underperform their resource-poor counterparts on a variety of economic and social indicators. The basic idea is that SWFs could be one component (albeit not a panacea) in a broader package of reforms that could help resolve this paradox.

This is actually part of the reason I became intrigued by these funds in the first place! So I was quite interested to read Yudi Bagattini’s paper entitled “Political Economy of Stabilisation Funds: Measuring their Effectiveness in Resource-Dependent Countries.” It’s quite good. Here’s a blurb:

“This paper seeks to make a meaningful contribution to the literature on the use of stabilisation funds in resource-dependent countries, by proposing a new manner by which to measure their effectiveness. Since the 1950s, over 30 countries have used these instruments to stabilise resource revenues into their budgets to avoid the resource curse and Dutch disease and/or to save income from non-renewables. As has been documented by case studies, these countries have had a mixed record in attaining their goals…This paper is novel in that it aggregates quantitative results of fund performance through the compilation of a new database of detailed fiscal indicators for, put together through the extraction of data from hundreds of IMF documents containing official government data. The cross-country analysis of fiscal performance provides a new direction for the measurement of the effectiveness of stabilisation funds and the underlying political economy reasons for their success or failure.”

And, so, what does Yudi find?

“First, stabilisation funds matter. Although there is no a priori economic reason to create one, their presence leads to better fiscal outcomes. Second, the governance of stabilisation funds is the most important factor in determining their success. An independent civil service is positive for success, while open and regulated political systems are actually found to be detrimental, contrary to what the literature assumed. Finally, the rules of the stabilisation fund are also crucial. Discretion over resources is negative for success, while earmarking is positive. This means that these funds work best when they are relatively rigid and less susceptible to capture by politicians.”

So Yudi is arguing that sovereign funds help as long as they are well designed and governed? Wow. I couldn’t agree more. I am literally presenting a paper in Manila next week at the Asian Development Bank entitled “The Design and Governance of Sovereign Wealth Funds: Principles and Practices for Resource Revenue Management.” My message: These funds can help in the right circumstances and with the appropriate design and governance, but they aren’t the one and only answer. They have to be a part of a broader reform package and focus on governance.

The only critique I’d offer to Yudi is on the definition of stabilization funds. Yudi thinks a stabilization fund is not a sovereign fund, which sort of contradicts the IMF definition. Moreover, his dataset uses many of the biggest SWFs in the world, so it’s not quite clear why he goes out of his way to say he’s not talking about SWFs. He is.

In any case, it’s an interesting paper. Read it here.

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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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