A petrodollar saved

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Sep 4th 2008
From The Economist print edition

As prices fall, can sovereign-wealth funds break the resource curse?


COUNTRIES flush with oil and ore should grow faster than those that are barren. Puzzlingly, they often do not. Natural-resource income is spent rashly or invested at the expense of other sectors of the economy. Governments binge on spending during booms and cut back harshly during busts. These policies exacerbate the economic cycle, and contribute to the paradox of the resource curse.

During the recent commodities’ boom, resource-rich countries have sought to escape the curse by pouring natural-resource income into sovereign-wealth funds (SWFs). By the end of 2007 the funds were worth up to $2.5 trillion. But with oil prices tumbling to below $110 a barrel on September 3rd, their fortunes may be changing. If the rout continues, will the guardians of such rainy-day money be able to keep the politicians’ fingers out?

Natural-resource funds mostly serve one of two purposes. Savings funds, such as Norway’s Government Pension Fund, transfer resource wealth across generations by building portfolios that aim to provide returns long after the oil has run dry. Stabilisation funds, such as Chile’s Economic and Social Stabilisation Fund, smooth out the economic cycle by accumulating revenues from commodity exports when prices are high, and disbursing them when prices drop. Then there are the oddballs; Saudi Arabia plans to set up a state fund to buy farmland in poor countries to meet rising food demand at home.

How can these pools of assets break the resource curse? Transparency matters. Unless the public can monitor a fund’s behaviour, there is no guarantee public money will be invested efficiently. SWFs remain worryingly opaque. A study by Edwin Truman of the Peterson Institute for International Economics, a think-tank, found that ten out of 34 non-pension SWFs did not issue annual reports and 12 were not subject to audits. However, Mr Truman expects scrutiny by Western governments to improve accountability in future.

Co-operation helps. As natural-resource funds proliferate, they will have more opportunities to share expertise and best practices. Qatar and Indonesia, both big gas exporters, announced in August that they would set up a joint $1 billion fund to invest in energy and infrastructure.

Illiquid investments may be a blessing. Savings funds have a rising appetite for less liquid, higher-risk assets such as private equity and property. Illiquid portfolios are more difficult to cash out when the political winds change. Stabilisation funds, which may need to liquidate their assets on short notice, lack that option.

Rules about when governments must make deposits, and when they may withdraw cash, are no guarantee of good behaviour. In theory, Venezuela’s government is obliged to deposit oil revenues into its Investment Fund for Macroeconomic Stabilisation whenever oil rises above a reference price (currently $9 a barrel). In practice, the fund has suffered from frequent rule changes, and would have been abolished if Hugo Chávez’s 2007 referendum had not been defeated. It has seldom received what the rules promised.

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By contrast, Norway’s parliament has discretion over how much revenue the state’s fund will receive, but that has not prevented it from becoming the second largest natural-resource fund in the world, with assets of $396.5 billion. Fiscally responsible governments may not need rules for contributions; irresponsible ones may not heed them.

Rules are useful for governments that are thriftier than Venezuela’s but more profligate than Norway’s, but only if they stick to them. Chile’s commitment to its copper-backed stabilisation fund was tested in July by protests demanding more government spending. An effective natural-resource fund requires a government that can resist both economic populism and kleptocracy. To break the resource curse, in short, one needs the kind of government that money cannot buy.