Abstract
This paper discusses the contribution that oil funds can make to the policy challenges facing resource-rich countries. To set the stage, it reviews the potential role of such funds in the broader context of macroeconomic and energy policies – taking into account uncertainty about oil prices, the impact of institutional costs, and problems of organisational design. The paper then highlights the critical role of governance issues in three respects: defining transparently the goals of each fund; communicating these goals to build a constituency of public support; and ensuring the efficient and transparent management of the fund on an ongoing basis. Two recent cases in the Caspian Sea region are then discussed: Azerbaijan and Kazakhstan. In both instances, the paper highlights issues of coordination and efficiency in the investment policies of the funds. While there are attempts to monitor their transparency through public awareness and websites, the author believes that this in itself is no substitute for a comprehensive governance strategy. Moreover, improved transparency can help inform the debate about strategic issues concerning the goals for such funds, and their contribution to the country's development strategy.
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2 The problem of optimal resource allocation was discussed by, among others, Barnett et al. (2002) who considered government spending over time, denoted by t. The key assumption is that oil revenue Z t is certain, constant, and lasts for exactly N periods. The social planner (government) must choose the optimal path of government expenditures G t that maximise the social welfare function discounted over time, subject to a budget constraint and a balance budget condition for government debt.
3 For the definition and discussion of Dutch Disease see Davis et al. (2001), Hausmann and Rigobon (2002), Kalyuzhnova (2002).
4 Barnett and Ossowski (2003) suggest that the existence of an oil fund does not alter the relationship between oil export earnings and government expenditure. They analysed 10 countries with oil funds and 16 without, using the latest oil price upswing 1999–2001. Real expenditure (deflated by CPI) rose on average by 20%–21% in both groups. They did not find a difference between the two groups within these countries. To date the empirical results cannot provide a certain answer to the question.
5 It is important to note that already at the present stage the management of the fund could envisage a longer-term investment horizon and a broader diversification. Although investments in equity instruments involve a higher risk of exposure to short-term fluctuations in market value compared to bonds, historically it has been shown that they have provided a better average return. The idea that returns on equities are higher has taken quite a knock with the experience of the last few years but it still seems to have been true over long enough (20+ years) periods. Whether risk-adjusted returns are higher depends on how big an adjustment you make for risk and that depends on the investor's risk-aversion. Generally only the richest countries (eg Kuwait) invest any more than a very small proportion of their assets in equities.
6 For the definition of BH see IMF, 2004a, 2004b, pp. 50–51.
7 In April 2003, Kazakh National Bank Chairman Marchenko endorsed President Nazarbaev's decision to divert over USD 1 billion from a secret account into the NFRK, telling journalists that ‘this was the right decision from the economic point of view,’ although it may have been flawed from a political or legal perspective (Reuters and Interfax-Kazakhstan, 2003). The Kazakhstani officials claim that almost USD 880 million of the USD 1 billion deposited 5 years ago in Swiss bank accounts was used to pay off pension arrears and support the national budget. Mr Marchenko refused to reveal how much money the government still has in foreign bank accounts on the grounds that it is a state secret.
8 See http://www.dfid.gov.uk.
9 Author's interviews with a number of citizen of Kazakhstan and Azerbaijan in 2002–2003.
10 In January 2006, the third EITI report has been released in Azerbaijan.
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†My sincere appreciation goes to Mark Casson, Jeff Miller and Maria Vagliasindi who made valuable criticism and ideas for improvement. I am grateful for the comments of the anonymous referees. Max Watson's creative suggestions fundamentally improved the quality of the paper.
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Kalyuzhnova, Y. Overcoming the Curse of Hydrocarbon: Goals and Governance in the Oil Funds of Kazakhstan and Azerbaijan. Comp Econ Stud 48, 583–613 (2006). https://doi.org/10.1057/palgrave.ces.8100160
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DOI: https://doi.org/10.1057/palgrave.ces.8100160