S OV E R EIGN WE ALT H FU NDS IN RESOURCE ECONOMIES INSTITUTIONAL AND F I S C A L F O U N DAT I O N S KHALID ALSWEILEM MALAN RIETVELD SOVEREIGN WEALTH FUNDS IN RESOURCE ECONOMIES SOVEREIGN WEALTH FUNDS IN RESOURCE E CONOMIES Institutional and Fiscal Foundations Khalid Alsweilem and Malan Rietveld Columbia University Press New York Columbia University Press Publishers Since 1893 New York Chichester, West Sussex cup.columbia.edu Copyright © 2018 Columbia University Press All rights reserved Library of Congress Cataloging-in-Publication Data Names: Alsweilem, Khalid, author | Rietveld, Malan, author Title: Sovereign wealth funds in resource economies : institutional and fiscal foundations / Khalid Alsweilem and Malan Rietveld Description: New York : Columbia University Press, [2018] | Includes bibliographical references and index Identifiers: LCCN 2017006011 (print) | LCCN 2017022373 (ebook) | ISBN 9780231544993 (ebook) | ISBN 9780231183543 (cloth : alk paper) Subjects: LCSH: Sovereign wealth funds | Natural resources Classification: LCC HJ3801 (ebook) | LCC HJ3801 A47 2018 (print) | DDC 333.7— dc23 LC record available at https://lccn.loc.gov/2017006011 Columbia University Press books are printed on permanent and durable acid-free paper Printed in the United States of America Cover design: Lisa Hamm Contents Acknowledgments ix List of Tables and Figures xi Introduction PART O N E An Institutional Perspective on Resource Economies and the Role of Sovereign Wealth Funds c h a p t er o n e The Most Disadvantageous Lottery in the World: Historic Controversies Around Natural Resources and Economic Prosperity 11 c h a p t er tw o Getting to Denmark: Institutional and Political Problems of Resource-Dependent Economies 32 c h a p t er t h r ee Guardians of the Future Against the Claims of the Present: Sovereign Wealth Funds as an Institutional Response to the Resource Curse 59 vi Contents c h a p t er fo u r To Be Boring: Institutional Lessons from the Modern Monetary Consensus for Sovereign Wealth Funds 88 PART T W O Rule-Based Fiscal Policies for Sovereign Wealth Funds c h a p t er f iv e It’s (Still) Mostly Fiscal: Simple Fiscal Rules for Accumulating Windfall Resource Revenues in a Sovereign Wealth Fund 115 c h a p t er s ix Integrated Fiscal Rules for Sovereign Wealth Funds: Spending, Saving, and Stabilizing Resource Revenues 136 c h a p t er s e v en Governing the Fiscal Rule: The Design and Institutional Infrastructure of Fiscal Rules for Resource Revenues 156 PART T HR E E The Governance of Operationally Independent Sovereign Investment Institutions c h a p t er eig h t Public Footprints in Private Markets: Institutional Arrangements in Delegated Sovereign Investment Management 175 c h a p t er n in e Shadows and Siren Calls: Rules and Contracts in Delegated Sovereign Wealth Fund Investment Management 206 Contents vii c h a p t er t en Summary 231 Notes 243 References 253 Index 271 Acknowledgments T H E AU T HOR S would like to thank a number of colleagues for their invaluable contributions, support and generosity in sharing their thoughts on sovereign wealth funds, fiscal rules, and the management of resource revenues We started working and researching these topics together in 2013 as part of a research project at Harvard’s Kennedy School of Government We thank Ricardo Hausmann and Eduardo Lora of the Center for International Development, as well as Gary Samore and Graham Allison of the Belfer Center for Science and International Affairs, for their assistance in facilitating our research and for encouraging the engagement of ideas and expertise between scholars from these two centers at Harvard’s Kennedy School We also wish to thank Katherine Tweedie and Hendrik du Toit of the Investment Institute at Investec for their support of that project, as well as Angela Cummine of the University of Oxford for her contribution to the research We have benefited enormously from talking to several renowned experts and practitioners in the field of sovereign wealth management, institutional economics, and the fiscal challenges around the management of resource revenues In this regard, we thank in par ticu lar Gordon Clark, Martin Feldstein, Jeffrey Frankel, Scott Kalb, Leonardo Maugeri, Adrian Orr, Francisco Monaldi, Meghan O’Sullivan, Patrick Schena, Martin Skancke, Ng Kok Song, Ted Truman, John Tichotsky, Craig Richards, Adam Dixon, Ashby Monk, Samuel Wills, Håvard Halland, and Amadou Sy Professor Stanley du Plessis, the dean of Commerce Faculty at the University of Stellenbosch, offered invaluable and detailed comment on large parts of this book Index Page references in italics indicate tables and figures accountability: for authority, 207; for fiscal rules, 156–157, 171–172; for funding institutions, 229–230; for institutions, 235; for modern monetary institutions, 108–111; for monetary policy, 237–238; in politics, 158, 196–197; in resource dependent economies, 36–37; transparency and, 92 accumulated assets, 116–118; fiscal rules for, 119, 130; returns and, 128; for Saudi Arabia, 130–131 See also simple accumulation rules Acemoglu, Daron, 45–47 active management, 182–183, 187–188, 221–223, 251n3, 252n8 agency, 89–91 agents See principal-agent relationships Age of Discovery, 13 Alaska, 168–172, 200 alternative assets, 251n4 America See United States (U.S.) anchor investors, 99 arbitrage pricing theory, 215–216 Aristotle, 246n10 asymmetrical rules, 133–134 audits, 195 authority: accountability for, 207; delegated authority, 89, 161–162, 238–242; for funding institutions, 197–198; independent authority, 201–203, 208; in institutions, 183–185, 184; in investing, 187–188; in Kazakhstan, 194–195; Kuwait Investment Authority, 61; ownership in, 190–191; politics and, 108–109, 169–170; Saudi Arabian Monetary Authority, 121–122, 124, 249n4 See also delegated authority Auty, Richard, 23 Bank for International Settlement (BIS), 182 banking: Central Bank of Chile, 196–197; credibility of, 92; 272 Index banking (continued) development banks, 64, 65; fiscal rules in, 84–85, 133–134; management and, 111–112; National Bank of Kazakhstan, 194–195; Norges Bank Investment Management, 161, 192–193; in Norway, 65; policy and, 84–85; World Bank, 23, 182, 247n11 See also central banks big push model, for economics, 16, 31 bonds, 213–214 Bottom Billion, The (Collier), 34–35 budgeting: buffer funds for, 169–170; deficits in, 160; for funding institutions, 189–190 business cycles, 52 business targets, 92, 103–104, 159, 227, 248n2 Canada Pension Plan (CPP), 247n7 Canada Pension Plan Investment Board, 247n7 capital asset pricing model (CAPM), 212–218, 223–224 capital spending, on oil, 123, 123–124 Center for International Development, 157 Central Bank of Chile, 196–197 central banks, 63, 64, 65, 92; explicit targets for, 104, 248n2; monetary policy and, 99–100, 192; testing for, 109 See also Saudi Arabian Monetary Authority (SAMA) Chicago Board of Trade, 14 Chile, 204, 237–238, 250n3; Central Bank of Chile, 196–197; economics in, 162–165, 171–172; fiscal rules in, 162–165; funding institutions for, 195–198; operational independence in, 181–182; politics in, 164–165, 239; public footprint in, 190–191; public pension funds in, 197; technocratic expertise in, 7, 162–165, 172; transparency in, 195–198 Chinese model, for economics, 50, 246n9 classic funding institutions, 63, 64 coal, 247n9 coherence, in economics, 55–56 Collier, Paul, 34–35, 82 commitment technologies, 51 commodities: globalization of, 14–16; manufacturing and, 21–22, 26–27, 38–39, 244n5; pricing for, 165 commodity funds, 246n2 commodity super cycles, 17, 18 competition, for exports, 76 conditional resource curse, 28–30 constrained discretion, 92 contingent rules, 92, 105–108, 248n6 contracts: for delegated sovereign investment management, 206–208, 229–230, 240; investment policy statements as, 208–210; for portfolio management, 229–230; in principal-agent relationships, 242; Ulysses contracts, 206–207, 227–229 corruption, 76–77 cost efficiency, 53–54 countercyclical fiscal rules, 124 counterfactual spending, 150 creative accounting, 157–158 credibility: of banking, 92; for modern monetary institutions, 100–103 Index 273 credit, 220 crude oil See oil and gas cycles: business cycles, 52; commodity super cycles, 17, 18; investment cycles, 101–102, 120–123, 121–123, 148, 245n2; procyclical policy, 38–43, 94, 245n2; resource revenue cycles, 141; stock market cycles, 217 deficit biases, 158 deficits, 160 delegated authority, 89, 161–162, 238–242 delegated sovereign investment management: contracts for, 206–208, 229–230, 240; fiscal rules for, 175–177, 203–205, 238–242; investment policy statements in, 208–210; longterm asset allocation in, 210–219, 220, 221; portfolio rebalancing in, 227–229; reference portfolios for, 221–227 demographic pressures, 124–125 dependence, on oil, 122, 122–123, 125, 149 design principles, 52–56, 158–159 developing countries: domestic returns for, 79–80; Dutch disease in, 81; economics in, 19, 20, 42–43; fiscal anchors in, 82; fiscal rules in, 132–133; funding institutions and, 77–83; politics in, 81; public choice factors in, 80–81; resource revenue allocation in, 79; World Bank and, 247n11 development banks, 64, 65 diminishing returns, 218–219 discretion, 105–106 diversification: Dutch disease and, 247n12; of funding sources, 1–2; in investing, 228; for long-term allocations, 216 domestic economic development, 74–76 domestic returns, 79–80 durability, in economics, 54–55 Dutch disease, 42–43, 94, 243n3, 245n3; in developing countries, 81; diversification and, 247n12; in history, 20–22; prevention of, 76; in scholarship, 232–233 Economic and Social Stabilization Fund (EESF), 162–165 economic arrangements, 89–90 economic prosperity, 11–12, 30–31 economics: in Alaska, 168–172, 200; big push model for, 16, 31; capital asset pricing model in, 212–218, 223–224; Center for International Development for, 157; in Chile, 162–165, 171–172; Chinese model in, 50; of coal, 247n9; coherence in, 55–56; cost efficiency in, 53–54; dependency in, 121–123; in developing countries, 19, 20, 42–43; discretion in, 105–106; durability in, 54–55; forward and backward linkages in, 16; Great Moderation in, 93–94; growth regressions in, 24, 244n10; history of, 11–12, 14–17, 37, 91–92, 233; incentive compatibility in, 56; institutional change in, 43–46; KopitsSymansky framework in, 165, 169–170; k-percent rule in, 105; monetary policy in, 96–97; negative feedback models for, 274 Index economics (continued) 35–36, 43; in New Mexico, 167, 169; Nigeria in, 38, 40; in North Dakota, 167–169, 200; oil in, 22, 39–40; political science and, 25–26; postwar development economics, 14–20, 18, 20; receptiveness in, 54; rent-seeking in, 13; resource-based economics, 234; resource wealth in, 24–25; in scholarship, 15–19, 18, 28–30, 32–34, 43–46, 245n7; of simple savings rules, 125–130, 126–130; Singer-Prebisch thesis in, 17, 19, 143n2; social conflict and, 49; stability in, 54–55; stages-ofgrowth theory in, 15–16; strategic asset allocation in, 190, 194; Structure and Change in Economic History (North), 245n6; in Texas, 166–167, 169, 198; theory in, 219; underperformance in, 20–22; in U.S., 176; variable bias in, 25; in Wyoming, 167, 169, 171–172, 200, 237–238, 250n3 See also macroeconomics; New Institutional Economics economics of governance, 44–45 education See scholarship endogeneity, 26–28, 245n12 the Enlightenment, 12–14 equations, for integrated fiscal rules, 143–146 escape clauses, 249n1 ex ante commitments, 100 explicit targets: for central banks, 104, 248n2; for modern monetary institutions, 103–104; for policy, 92 export competition, 76 external audits, 195 external governance, 185–186 extractive institutions, 30, 47 factor-based reference-portfolio approach, 225 factor screens, 218 Fama, Eugene, 215–216 feeding frenzy, 35 fees: for management, 251n3, 252nn8–9; for performance, 221 fiscal anchors, 82 fiscal appropriation, fiscal financing, 36–37, 236–237 fiscal rules: accountability for, 156–157, 171–172; for accumulated assets, 119, 130; asymmetrical rules, 133–134; in banking, 84–85, 133–134; in Chile, 162–165; criteria for, 159; for delegated sovereign investment management, 175–177, 203–205, 238–242; in developing countries, 132–133; Fiscal Responsibility Law, 162; flexibility for, 171; for funding institutions, 6–7, 105–108, 115–116, 125–130, 126–130, 134–135, 209, 236–238; in globalization, 230; governments and, 109–110; for income streams, 136–137; institutional mandates compared to, 111–112, 237–238; for institutions, 154–155; for Kazakhstan, 141; Kopits-Symansky framework for, 165, 169–170; for long-term allocations, 146–147, 209–210; for management, 143, 235–236; in Norway, 160–162; policy for, 133–134, 211–212, 234–235; rebalancing in, 210, 228–229; for resource revenue, 157–160; Index 275 rule-based policymaking in, 248n4; for Saudi Arabia, 128; scholarship on, 100–102; for structural balance approaches, 139–140; Structural Balance Rule, 162–165; symmetrical rules, 133–134; for transfers, 129; in U.S., 166–171 See also integrated fiscal rules; monetary policy fiscal stabilization, 67–68 fixed percentage transfers, 117, 119 foreign exchange reserves, 5, 63, 64, 65 French, Kenneth, 215–216 Friedman, Milton, 78, 93, 95, 105–106, 250 “From Oil to Equities” (Kjaer), 71, 72–73 Fukuyama, Francis, 32, 50, 246n11 funding institutions: accountability for, 229–230; active management for, 182–183, 187–188, 221–223, 251n3, 252n8; authority for, 197–198; benchmarks for, 221–227; bonds in, 213–214; budgeting for, 189–190; Canada and, 247n7; for Chile, 195–198; contingent rules for, 248n6; corruption in, 76–77; definition of, 1–2, 61–63, 64, 65–66, 247n5; delegated authority in, 89, 161–162, 238–242; developing countries and, 77–83; fiscal rules for, 6–7, 105–108, 115–116, 125–130, 126–130, 134–135, 209, 236–238; functions of, 66–71, 70, 72, 74–77; funding sources for, 2, 3–5, 60; governments and, 98–100; growth of, 60; income generation and, 71, 72, 72–73; institutional mandates for, 93–96; institutional separation for, 183–186, 184, 188–191, 189; integrated fiscal rules for, 136–137, 141–151, 150, 154–155; investment cycles for, 101–102; Investment-Income Funds for, 141–143, 153–154; for Kazakhstan, 194–195; management of, 183–191, 184, 189, 231–232, 250n3; modern monetary consensus for, 88–89, 91–92, 111–112, 235; moving-average rule for, 126–127, 127; natural resources for, 95–96; for New Zealand, 201–203; operational independence for, 177–183, 203–204; permanent funds and, 166–171, 198–201; policy and, 83–86, 84, 103–104, 130–134; politics for, 147–148, 175–177, 180–181, 185; portfolio management for, 206–207; as power brokers, 248n1; principalagent relationships in, 89–91, 183–184, 210; private equity for, 223–225, 228–229; public investment in, 76–77, 97, 213; public pension funds and, 250n2; public policy and, 90; public savings in, 68–71, 70; resourcecurse hypothesis and, 59–61, 60, 82–87, 84, 232–236; resource revenue allocation for, 116–118, 119, 120; Saudi Arabia in, 120–125, 121–123; in scholarship, 1, 6–7; stability and, 67–68; Stabilization Funds for, 141–143, 153–154; stock market for, 212–214; transparency in, 246n3; for U.S., 198–201, 239–240; wealth transformation and, 71, 72, 72–73; windfalls for, 156–157 See also delegated sovereign 276 funding institutions (continued) investment management; modern monetary institutions; Norway funding rules, 198 funding sources: commodity funds, 246n2; diversification of, 1–2; fiscal appropriation as, 5; foreign exchange reserves as, 5; for funding institutions, 2, 3–5, 60; minerals as, 3–4; oil as, 3–4, 160; phosphates as, 3; public lands as, 3; public revenues as, 5; for U.S., 250n2 gas See oil and gas Gelb, Alan, 23–24 globalization: of commodities, 14–16; fiscal rules in, 230; industrialization and, 17–19; innovation in, 29; loans in, 41–42; nontradable sector in, 21; Norway in, 222–223, 228, 247n8, 251n5; oil in, 61–62, 67–68, 127–128, 150–151, 215; portfolio management and, 126; tradedgoods sector in, 21 goal dependence, 239 governments: fiscal rules and, 109–110; funding institutions and, 98–100; investing and, 153–154, 177, 196–198; macroeconomics and, 46–48, 51–52; management and, 153; policy and, 83–84, 84, 244n8, 249n5; politics and, 166–167; portfolio management for, 154; pricing and, 118; property rights and, 49–50; in resource dependent economies, 36–37, 41–42, 143–148; spending by, 131–132, 132; transfers for, 117; in U.S., 178 See also Chile Index grabber-friendly institutions, 30 Graham, Benjamin, 212 Great Moderation, in economics, 93–94 growth regressions, 24, 244n10 Hamilton, James, 39 Hirschman, Albert, 15–16 Homer, 206 Hume, David, 12–13 illiquidity, 219, 220, 221, 223–225, 228–229, 242 incentive alignment, 50–51 incentive compatibility, 56 income generation, 71, 72, 72–73 income streams, 136–137 independent authority, 201–203, 208 See also operational independence indexes, for investing, 125–126 industrialization, 17–19 Industrial Revolution, 12–14 inflationary biases, 96–97, 128–129 innovation, 29 institutional arrangements See fiscal rules institutional change: in economics, 43–46; politics and, 46–48 institutional complementarity, 55 institutional explanations: for natural resources, 28–30; in scholarship, 25–26, 91–92 institutional framework, 83–86, 84 institutional mandates: fiscal rules compared to, 111–112, 237–238; for funding institutions, 93–96 institutional problems, 34–43 institutional quality, 244n11 institutional separation: external governance for, 185–186; for funding institutions, 183–186, Index 277 184, 188–191, 189; internal governance for, 187–188; for operational independence, 183–191, 184, 189; policy boards for, 186; supervisory councils for, 186 institutions: accountability for, 235; authority in, 183–185, 184; design principles for, 52–56, 158–159; extractive institutions, 30, 47; fiscal rules for, 154–155; grabber-friendly institutions, 30; incentive alignment for, 50–51; institutional explanations, 25–26, 28–30, 91–92; investing for, 176–177, 208–210, 212; mechanistic strategies for, 105–108, 136; monetary policy for, 102–103; natural resources and, 33, 232; policy and, 85–86; politics for, 49–50, 94, 97–99, 153, 233–234; property rights for, 48–49; reforms for, 2, 5, 231–232; resource dependent economies and, 48–52; for resources, 2, 5–6; in scholarship, 157–158; for sovereign investment portfolios, 7–8; stability for, 51–52, 57, 95–96, 137, 234–235; total-portfolio approach for, 224 See also modern monetary institutions; New Institutional Economics insurance, self, 247n10 integrated fiscal rules: equations for, 143–146; framework for, 141–143, 237; for funding institutions, 136–137, 141–151, 150, 154–155; policy and, 151–154; for resource revenue, 138–141; for Saudi Arabia, 147–151, 150; for spending, 142, 146–147, 149–150, 150 intergenerational equity, 94–95, 247n9, 250n2 internal governance, 185–188 International Forum of Sovereign Wealth Funds, 247n6 International Monetary Fund (IMF): for policy, 115–116, 133; on politics, 188–190, 189; for resources, 138–140 International Working Group of Sovereign Wealth Funds, 62–63 investing: authority in, 187–188; demographic pressures in, 124–125; diversification in, 228; governments and, 153–154, 177, 196–198; independent authority for, 201–203; inflationary biases in, 128–129; for institutions, 176–177, 208–210, 212; macroeconomics and, 234; operational independence for, 238–239; outperformance in, 221–222; policy in, 251nn1–3; politics and, 178–183, 198–201; portfolio management and, 216, 221–227; in Saudi Arabia, 121; scholarship on, 110–111; spending and, 161–162; stock market for, 125–126; in U.S., 212–213; variation in, 211 investment cycles, 245n2; for funding institutions, 101–102; for oil, 120–123, 121–123, 148 investment horizons, 209, 215, 224 Investment-Income Funds: for funding institutions, 141–143, 153–154; as permanent funds, 249n1; in Saudi Arabia, 148–152; transfers to, 145–148 investment policy statements, 208–210 Johnson, Simon, 45–46 278 Kazakhstan, 204; authority in, 194–195; fiscal rules for, 141; funding institutions for, 194–195; transparency in, 239 Kimmitt, Robert, 175–176 King, Mervyn, 88 Kjaer, Knut, 71, 72–73, 102–103, 223 Kondratiev cycles See commodity super cycles Kopits-Symansky framework, 165, 169–170 k-percent rule, 105 Kuwait Investment Authority, 61 Lewis, Arthur, 15–16 liquidity, 219, 220, 221, 223–225, 228–229 loans, in globalization, 41–42 lobbying, in politics, 179 long-term allocations: bad outcomes and, 217–218; diversification for, 216; fiscal rules for, 146–147, 209–210; returns and, 217–218; risk-factor models for, 214–216, 218–219, 220, 221; risk tolerance for, 216–217; in scholarship, 210–212; stability for, 140–141; traded asset classes in, 212–214 long-term investment: in portfolio management, 240–241; of public savings, 68–71, 70; risks for, 153–154, 215–216 See also Chile low-equilibrium conditions, 47 macroeconomics: governments and, 46–48, 51–52; investing and, 234; policy for, 88–89; scholarship for, 252n7; stability in, 38–43, 51–52, 57, 67–68 management: active management, 182–183, 187–188, 221–223, 251n3, 252n8; banking and, Index 111–112; fees for, 251n2, 252nn8–9; fiscal rules for, 143, 235–236; of funding institutions, 183–191, 184, 189, 231–232, 250n3; governments and, 153; in Kazakhstan, 194–195; of natural resources, 248n13; Norges Bank Investment Management, 161, 192–193; policy for, 202–203; of resource revenue, 7–8, 34–43, 138–141; sovereign wealth management, 70, 70–71 See also delegated sovereign investment management; portfolio management manufacturing, 21–22, 26–27, 38–39, 244n5 market portfolios, 214 market volatility, 216–217, 219, 220, 241–242 mean-variance analysis, 214–215 mechanistic strategies, 105–108, 136 mercantilism, 247n10; history of, 12–14; New York Mercantile Exchange, 14 minerals, 3–4 modern monetary consensus, 88–89, 91–92, 111–112, 235 modern monetary institutions: accountability for, 108–111; contingent rules for, 105–108; credibility for, 100–103; explicit targets for, 103–104; operational independence in, 96–100; policy objectives for, 93–96; transparency for, 108–111 modern portfolio theory, 213–214 momentum, 219, 220 monetary policy: accountability for, 237–238; central banks and, 99–100, 192; in economics, 96–97; flexibility in, 108; for Index 279 institutions, 102–103; Saudi Arabian Monetary Authority for, 121–122, 124, 249n4 moving-average rule, 126–128, 127–128, 249n6 moving-average transfers, 117–118, 119 multidimensional risk tolerance, 219, 241 National Bank of Kazakhstan, 194–195 natural resources: conditional resource curse in, 28–30; economic prosperity and, 11–12, 30–31; for funding institutions, 95–96; history of, 12–22, 18, 20; institutions and, 33, 232; management of, 248n13; resource-curse hypothesis for, 22–28; scholarship on, 231–232; volatility of, 244n4, 245n2 natural wealth, 13–14, 47–48 negative feedback models, 35–36, 43 New Institutional Economics, 44–46; cost efficiency in, 53–54; development in, 245n13; incentives in, 50–51; politics in, 55; in scholarship, 246n8 New Mexico, 167, 169 New York Mercantile Exchange, 14 New Zealand, 204, 207, 225, 239; funding institutions for, 201–203; Norway compared to, 203 Nigeria, 38, 40, 250n3 See also oil and gas nonresource current balance rules, 140 nontradable sector, 21 Norges Bank Investment Management, 161, 192–193 North, Douglass, 30, 44–45, 245n6, 245n13 North Dakota, 167–169, 200 Norway, 7, 30, 57, 204, 237–238; banking in, 65; fiscal rules in, 160–162; in globalization, 222–223, 228, 247n8, 251n5; New Zealand compared to, 203; policy in, 66–69, 73, 85, 102–103, 171–172, 191–194, 192–193; politics in, 239; public footprint in, 190–191; Saudi Arabia compared to, 124; strategic asset allocation in, 194; transparency in, 191–194 Norway Government Pension Fund Global, 160 Nurske, Ragnar, 15–16 Odyssey, The (Homer), 206 oil and gas: capital spending on, 123, 123–124; in economics, 22, 39–40; “From Oil to Equities” (Kjaer), 71, 72–73; as funding sources, 3–4, 160; in globalization, 61–62, 67–68, 127–128, 150–151, 215; investment cycles for, 120–123, 121–123, 148; in Kazakhstan, 194–195; oil dependence, 122, 122–123, 125, 149; price shocks for, 20, 170; revenue for, 121, 129, 129; spending and, 237; super tankers for, 14; taxation of, 168–169; in transfers, 162; volatility for, 123, 123–124; wealth transformation from, 71, 72, 72–73; in Wyoming, 250n3 See also Norway; Saudi Arabia Oil Windfalls: Blessing or Curse? (Gelb), 23 operational costs, 226 280 Index operational independence, 111–112; in Chile, 181–182; for funding institutions, 177–183, 203–204; institutional separation for, 183–191, 184, 189; for investing, 238–239; in modern monetary institutions, 96–100; for savings, 176; transparency and, 235 Origins of Political Order, The (Fukuyama), 246n11 outcomes, bad, 217–218 outperformance, in investing, 221–222 ownership, in authority, 190–191 paradox of plenty, 11 pension reserve funds, 64, 65 performance fees, 221 permanent funds, 166–171, 198–201, 239–240, 249n1 permanent-income financing, 138–139 Philips curve, 96 phosphates, Physiocrats, 12–13 Plato, 246n10 policy: banking and, 84–85; discretion in, 142; explicit targets for, 92; for fiscal rules, 133–134, 211–212, 234–235; funding institutions and, 83–86, 84, 103–104, 130–134; governments and, 83–84, 84, 244n8, 249n5; institutions and, 85–86; integrated fiscal rules and, 151–154; International Monetary Fund for, 115–116, 133; in investing, 251nn1–3; for macroeconomics, 88–89; for management, 202–203; in Norway, 66–69, 73, 85, 102–103, 171–172, 191–194, 192–193; policy boards, 177, 186; politics in, 186–191, 189; for portfolio management, 238–239; procyclical policy, 38–43, 94, 245n2; professional boards for, 179–180; public policy, 90; for reference price transfers, 132–133; rule-based policymaking, 248n4; for savings, 131–132, 132, 152, 160–161; targets for, 159; for trade-offs, 151–152; for transfers, 118, 133 See also fiscal rules; monetary policy policy objectives, 93–96 Political Order and Political Decay (Fukuyama), 32 political science, 25–26 politics: accountability in, 158, 196–197; authority and, 108–109, 169–170; in Chile, 164–165, 239; creative accounting in, 157–158; in developing countries, 81; for funding institutions, 147–148, 175–177, 180–181, 185; government and, 166–167; incentive compatibility in, 56; institutional change and, 46–48; for institutions, 49–50, 94, 97–99, 153, 233–234; International Monetary Fund on, 188–190, 189; investing and, 178–183, 198–201; lobbying in, 179; in New Institutional Economics, 55; in Norway, 239; The Origins of Political Order (Fukuyama), 246n11; in policy, 186–191, 189; Political Order and Political Decay (Fukuyama), 32; public footprint in, 188–191, 189; public support and, 152, 177; resource dependent economies and, 32–34, 56–58; in U.S., 166–171 Index 281 portfolio management, 97–98; contracts for, 229–230; factor-based reference-portfolio approach for, 225; for funding institutions, 206–207; globalization and, 126; for governments, 154; investing and, 216, 221–227; long-term investment in, 240–241; market portfolios in, 214; modern portfolio theory in, 213–214; operational costs in, 226; policy for, 238–239; reference portfolios in, 207–208, 210; scholarship for, 200–201; targets in, 227; totalportfolio approach for, 224; Ulysses contracts in, 227–228 See also risk portfolio rebalancing, 227–229 postwar development economics, 14–20, 18, 20 power brokers, 248n1 Prebisch, Raul, 15, 17 price shocks, 20, 170 price stability, 92, 95, 100 price-to-earnings ratio, 250n1 pricing: for commodities, 165; governments and, 118; moving-average rule in, 249n6 principal-agent relationships, 248n2; contracts in, 242; in funding institutions, 89–91, 183–184, 210 private equity, 223–225, 228–229 procyclical policy, 38–43, 94, 245n2 professional boards, 179–180 property rights: governments and, 49–50; for institutions, 48–49 Public Choice Theory, 45–46, 81 public exchanges, 251n5, 251n6 public footprint, 188–191, 189 public investment: in funding institutions, 76–77, 97, 213; in resource dependent economies, 37–38 public lands, public pension funds, 177–183, 197, 250n2 public policy, 90 public revenues, public savings, 68–71, 70 public spending: intergenerational equity and, 94–95; in Saudi Arabia, 124–125, 151; trade-offs and, 237 public support, 152, 177 rebalancing rules, 210, 228–229 reference portfolios, 207–208, 210, 221–227 reference price transfers, 118, 119, 120; policy for, 132–133; savings and, 129–130, 129–130 reforms, 2, 5, 170–171, 231–232 rent cycling, 37 rent-seeking: in economics, 13; in resource dependent economies, 35–36 reserves, 247n10 resource-based economics, 234 resource-curse hypothesis, 34, 244n6; empirical evidence for, 24–28; endogeneity and, 26–28, 245n12; forms for, 22–23; funding institutions and, 59–61, 60, 82–87, 84, 232–236; for natural resources, 22–28; in scholarship, 11–12, 19, 30–31, 56–57, 101 resource dependent economies: accountability in, 36–37; fiscal financing in, 36–37, 236–237; governments in, 36–37, 41–42, 282 Index resource dependent economies (continued) 143–148; institutional change and, 43–48; institutional design principles for, 52–56; institutions and, 48–52; politics and, 32–34, 56–58; procyclical policy for, 38–43; public investment in, 37–38; rent-seeking in, 35–36; volatility in, 38–43, 140 resource intensity measures, 27 resource revenue: allocation of, 151–152; in Chile, 162–165; cycles of, 141; fiscal rules for, 157–160; integrated fiscal rules for, 138–141; management of, 7–8, 34–43, 138–141; in Norway, 160–162; ring fencing for, 182; stability for, 138; taxation and, 167; transfers of, 159–160; in U.S., 166–171; windfalls and, 137, 242 resource revenue allocation, 79; for funding institutions, 116–118, 119, 120; savings and, 131–132 resources: institutions for, 2, 5–6; International Monetary Fund for, 138–140; scarcity in, 48–49; in scholarship, 56–58; windfalls in, 5–6, 20, 31, 132, 233–234 resource value chain, 246n1 resource wealth: in economics, 24–25; in scholarship, 26–28 return objectives, 209 returns: accumulated assets and, 128; diminishing returns, 218–219; volatility and, 217–218 revenue, 236–237; for oil, 121, 129, 129 ring fencing, 182 risk: for long-term investment, 153–154, 215–216; multidimensional risk tolerance, 219, 241; risk-factor models, 214–216, 218–219, 220, 221, 241–242; risk-factor theory, 223–224; risk of depletion, 121–122; risk tolerance, 209, 216–217; stock market and, 252n7; volatility and, 223 Robinson, James, 45–47 Rosenstein-Rodan, Paul, 15–16, 234 Ross, Stephen, 215–216 Rostow, Walt, 15–16 rule-based policymaking, 248n4 rules: asymmetrical rules, 133–134; contingent rules, 92, 105–108, 248n6; countercyclical fiscal rules, 124; funding rules, 198; k-percent rule, 105; nonresource current balance rules, 140; rebalancing rules, 210, 228–229; simple savings rules, 125–130, 126–130; symmetrical rules, 133–134 See also fiscal rules; integrated fiscal rules; monetary policy; policy; simple accumulation rules Sachs, Jeffrey, 24–26, 30–31, 244n7 Santiago Principles, 62–63 Saudi Arabia: accumulated assets for, 130–131; fiscal rules for, 128; in funding institutions, 120–125, 121–123; government spending in, 131–132, 132; integrated fiscal rules for, 147–151, 150; investing in, 121; Investment-Income Funds in, 148–152; Norway compared to, 124; public spending in, 124–125, 151; savings for, 134; spending by, 131–132, 132; Stabilization Funds in, 148, 151–152 Saudi Arabian Monetary Authority (SAMA), 121–122, 124, 249n4 Index 283 savings: escape clauses in, 249n1; operational independence for, 176; policy for, 131–132, 132, 152, 160–161; reference price transfers and, 129–130, 129–130; resource revenue allocation and, 131–132; at risk of depletion, 121–122; for Saudi Arabia, 134; spending and, 150, 150, 163–164, 236–237; stability and, 209; in U.S., 166 scarcity, 48–49 scholarship: business cycles in, 52; Dutch disease in, 232–233; economic arrangements in, 89–90; economics in, 15–19, 18, 28–30, 32–34, 43–46, 245n7; economic theory in, 219; on fiscal rules, 100–102; funding institutions in, 1, 6–7, 180–183; institutional explanations in, 25–26, 91–92; institutions in, 157–158; on investing, 110–111; long-term allocations in, 210– 212; for macroeconomics, 252n7; on natural resources, 231–232; New Institutional Economics in, 246n8; for portfolio management, 200–201; public pension funds in, 177–183; reserves in, 247n10; resourcecurse hypothesis in, 11–12, 19, 30–31, 56–57, 101; resources in, 56–58; resource wealth in, 26–28 self-insurance, 247n10 simple accumulation rules, 116; fixed percentage transfers in, 117, 119; moving-average transfers in, 117–118, 119; reference price transfers in, 118, 119, 120; for revenues, 236–237; transfers in, 133 simple savings rules, 125–130, 126–130 Singer, Hans, 15, 17 Singer-Prebisch thesis, 17, 19, 243n2 Slyngstad, Yngve, 102–103 Smith, Adam, 11–13 social conflict, 49 sovereign investment portfolios, 7–8 sovereign investors, 63 sovereign wealth management, 70, 70–71 spending: caps for, 164; counterfactual spending compared to, 150; by governments, 131–132, 132; integrated fiscal rules for, 142, 146–147, 149–150, 150; investing and, 161–162; oil and, 237; by Saudi Arabia, 131–132, 132; savings and, 150, 150, 163–164, 236–237 See also fiscal rules stability: Economic and Social Stabilization Fund for, 162–165; in economics, 54–55; funding institutions and, 67–68; for institutions, 51–52, 57, 95–96, 137, 234–235; for long-term allocations, 140–141; in macroeconomics, 38–43, 51–52, 57, 67–68; price stability, 92, 95, 100; reforms for, 170–171; for resource revenue, 138; savings and, 209; for transfers, 160–161; volatility and, 152 Stabilization Funds: for funding institutions, 141–143, 153–154; in Saudi Arabia, 148, 151–152; transfers to, 144–148 stages-of-growth theory, 15–16 284 Index stock market: cycles in, 217; for funding institutions, 212–214; for investing, 125–126; price-toearnings ratio in, 250n1; public exchanges and, 251n6; risk and, 252n7 strategic asset allocation (SAA), 190, 194 strategic tilting, 226–227 strong-form formulations See resource-curse hypothesis structural balance approaches, 139–140 Structural Balance Rule, 162–165 Structure and Change in Economic History (North), 245n6 super tankers, for oil, 14 supervisory councils, 186 Svensson, Lars, 105 symmetrical rules, 133–134 targets, in business: explicit targets, 92, 103–104, 248n2; for policy, 159; in portfolio management, 227 taxation: of oil, 168–169; resource revenue and, 167 Taylor, John, 105 technocratic expertise, 7, 158 See also Chile testing, for central banks, 109 Texas, 166–167, 169, 198 theory: arbitrage pricing theory, 215–216; in economics, 219; modern portfolio theory, 213–214; Public Choice Theory, 45–46, 81; stages of growth theory, 15–16 Tobin, James, 60 total-portfolio approach, 224 tradable risk factors, 219, 220 traded asset classes, 212–214 traded-goods sector, 21 trade-offs: policy for, 151–152; public spending and, 237 transfers: fiscal rules for, 129; for governments, 117; to InvestmentIncome Funds, 145–148; oil in, 162; policy for, 118, 133; of resource revenue, 159–160; in simple accumulation rules, 133; stability for, 160–161; to Stabilization Funds, 144–148 transparency, 159; accountability and, 92; in Chile, 195–198; in funding institutions, 246n3; in Kazakhstan, 239; for modern monetary institutions, 108–111; in Norway, 191–194; operational independence and, 235 typology, of sovereign investors, 63 Ulysses contracts, 206–207, 227–229 underperformance, in economics, 20–22 United States (U.S.), 204–205; economics in, 176; fiscal rules in, 166–171; funding institutions for, 198–201, 239–240; funding rules in, 198; funding sources for, 250n2; governments in, 178; investing in, 212–213; politics in, 166–171; public pension funds in, 250n2; savings in, 166 See also specific states value, 219, 220 variable bias, 25 variation, in investing, 211 volatility, 94; in markets, 216–217, 219, 220, 241–242; of natural resources, 244n4, 245n2; for oil, 123, 123–124; in resource Index 285 dependent economies, 38–43, 140; returns and, 217–218; risk and, 223; stability and, 152 voracity effect, 35 Warner, Andrew, 24–26, 30–31, 244n7 weak-form formulations See resource-curse hypothesis wealth transformation, 71, 72, 72–73 Williamson, Oliver, 44–45 windfalls: for funding institutions, 156–157; Oil Windfalls: Blessing or Curse? (Gelb), 23; resource revenue and, 137, 242; in resources, 5–6, 20, 31, 132, 233–234 Wiseman, Mark, 228 Woodford, Michael, 105 World Bank, 23, 182, 247n11 Wyoming, 167, 169, 171–172, 200, 237–238, 250n3 .. .SOVEREIGN WEALTH FUNDS IN RESOURCE ECONOMIES SOVEREIGN WEALTH FUNDS IN RESOURCE E CONOMIES Institutional and Fiscal Foundations Khalid Alsweilem and Malan Rietveld Columbia... ix Integrated Fiscal Rules for Sovereign Wealth Funds: Spending, Saving, and Stabilizing Resource Revenues 136 c h a p t er s e v en Governing the Fiscal Rule: The Design and Institutional Infrastructure... 184 189 SOVEREIGN WEALTH FUNDS IN RESOURCE ECONOMIES Introduction T H I S BO OK OF F E R S an analysis of sovereign wealth funds as institutions for managing resource revenues The increasing appeal