The Sovereign wealth fund as a solution to the resource curse

Abstract

Despite rational thinking suggesting that a country rich in resources should have higher socioeconomic growth and development,the results of many resource rich countries have not been encouraging. This phenomenon has been studied widely and has been termed the resource curse and denotes how a country with abundant natural resources tends to have lower economic growth and generally display poorer development levels than countries with fewer natural resources. The Sovereign Wealth Fund (SWF) has been proposed by the International Monetary Fund (IMF) as a tool to curb the resource curse and many resource rich countries have recently started SWFs. The recent activity of SWFs has sparked a lot of interest in this topic but most of the studies conducted to date have failed to determine the effect of the SWF on a country’s socioeconomic development and on its ability to mitigate the resource curse.

This research is unique in that it establishes the impact of the creation of a SWF on the socioeconomic performance of resource rich countries by examining the Human Development Index of these countries. In addition,the research examines the key success factors of a SWF and establishes a framework that can be used to ensure that the SWF is effective.

The study has found that the establishment of a SWF is not a guarantee of success and that governance is the most significant success factor in a SWFs effectiveness. As a result, the SWF is proposed as one solution to the resource curse and a SWF framework is presented with governance as a key success factor.

This research is particularly relevant to the resource dependent economies of Africa that have lagged the rest of the world in many socioeconomic measures such as the Human Development Index and income inequality. The effective deployment of a SWF is one option that these economies can utilise to!ensure that their resource riches are translated into socioeconomic development.