Your wealthy aunt makes you a substantial gift. Do you buy a Mercedes, enrol for an MBA or save the money for your children? If you invest it, do you put it in a safe bank account, or speculate on a tech IPO? Do you tell your family members about your good fortune? Do you treat this as a windfall, or assume your aunt’s generosity will continue?
Such questions, on a much grander scale, lead countries to put earnings from oil and other mineral resources into sovereign wealth funds. Revenue Watch, an institute promoting the effective management of mineral resources, released a report earlier this month on making such funds work for citizens.
Natural resource funds, fuelled by the last few years’ commodity price boom, now hold US$3.5 trillion of assets. They are becoming increasingly popular – 30 have launched this century, and at least another 14 are being considered. The Arabian Gulf has four of the five largest – from Saudi Arabia, Abu Dhabi, Kuwait and Qatar – but Norway’s, at $767 billion, is estimated to be the world’s biggest.
States have other considerations beyond those of an individual saver. They have to consider macroeconomic management – a rapid influx of money drives up the exchange rate, making other industries uncompetitive, the famous (and much-misunderstood) “Dutch Disease”. Spending too much sudden wealth domestically leads to inflation, soaring government budgets and public salaries, mismanaged “white elephant” projects and corruption – as in Venezuela and Nigeria, steel plants that cost billions and barely produced an ingot.
Saving funds offshore and releasing them only gradually into the national economy can avoid these problems. Natural resource funds also save for future generations, and can smooth out income when volatile oil prices plunge.
Revenue Watch’s report makes some clear recommendations. Funds should have a clear objective, and rules for deposits and withdrawals. There should be strong independent oversight, with the fund free of political interference. They should issue transparent reports and be regularly audited.
Transparency is important to avoid corruption and mismanagement, and to help citizens assure themselves their national wealth is being used wisely. The overseas recipients of investment overseas may also be suspicious about the motivations of opaque funds. The developed world’s debt crisis may have made it less fussy about where money is coming from, but this will not persist forever.
Natural resource funds are only as good as the systems and political cultures governing them. Norway is legally constrained to withdraw only the income from its fund, so preserving the capital. But the Norwegians have a highly-developed country with a strong tradition of democratic consensus. Other funds, such as those in Iran, Kuwait and Qatar, have signed on to voluntary principles on transparency but provide little information.
Especially in poorer countries, there may be intense public pressure to spend now – on desperately-needed priorities such as hospitals, schools, housing and roads. Theoretical economic perfection is unattainable – fund rules have to acknowledge political realities. An entire election in the south-east Asian nation of Timor Leste was fought on this issue.
The mere existence of such a fund is also a temptation to poor macroeconomic management – the government may raid its coffers to cover over-spending, or borrow against fund assets as Angola did. Russia’s Reserve Fund, which held $150bn in 2009, has been almost entirely drained. It is easy to assume that good times for oil will go on forever while slumps will be short-lived – forgetting the long 1986-1999 period of rock-bottom prices.
The best economists increasingly recommend saving the wealthy aunt’s legacy. But the lucky recipient needs to be realistic about what to do with the money, open with the rest of the family, and self-disciplined in sticking to the plan.
Robin Mills is Head of Consulting at Manaar Energy, and author of The Myth of the Oil Crisis
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