Weekend Reading: New Research

Ashby Monk

In the spring I wrote a background paper for the Asian Development Bank with Adam Dixon on how sovereign funds could help countries manage their resource revenues. I’ve finally gotten around to loading it up on SSRN. Apologies for the delay. Anyway, our paper is entitled “The Design and Governance of Sovereign Wealth Funds: Principles & Practices for Resource Revenue Management.” It was actually a lot of fun to write, as Adam and I really dug into the design features that (we think) make sovereign funds effective. Here are some blurbs:

“There is no such thing as a cut and paste blueprint for a best-practice SWF the world over. The highly idiosyncratic nature of each country’s specific circumstances means that every country needs a practical design that will work within the constraints of the given environment. So, while a plethora of potential SWF sponsors have been making pilgrimages to Oslo to learn how to set up a “successful sovereign fund” in the image of the Government Pension Fund – Global, there is nothing to suggest the Norwegian SWF will match up with other countries’ local characteristics. In fact, the politicized nature of the investment decision-making process in the GPF-G is probably inappropriate for most developing countries even if it works extremely well in the Norwegian case (see Clark and Monk 2012). As Frankel (2010, 31) points out, “Norway’s legal system puts few restrictions on what policy-makers can do, and the fund is managed with political objectives that go unnoticed when held up as an example for developing countries to emulate.” In other words, the institutions and norms in developed economies are different from those in emerging and developing economies. So, while there is much to be learned from other countries’ experiences with SWFs, what works in Norway won’t necessarily work in Nigeria, and what works in Alaska won’t necessarily work in Angola. Moreover, there is nothing to suggest that developed economies are the only countries capable of setting up effective SWFs. To the contrary, Botswana, Timor-Leste and Trinidad & Tobago have all established successful commodity funds in the developing world. It all depends on matching the organization with the environment. As such, in conceptualizing a specific SWF design, drawing some guiding principles and practices from ‘exemplars’ is perhaps more useful than specific policy prescriptions derived from success stories.

Successful design principles embrace, at the most fundamental level, the local economic geography by seeking to harness the local benefits and overcome the local constraints to create a best-practice investor that can operate in global financial markets. Indeed, at the global level, the fund has to be capable of responding to the challenges faced by all investors operating in global financial markets. This means managing risk and uncertainty across a variety of spectrums in a dynamic environment. As such, the SWF design spectrum will converge towards ‘best practice’ at the level of the fund that operates globally, while the local inputs can vary widely.”

Anyway, I hope the paper is of use. Enjoy your weekend!

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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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