IPD AI

The Political Economy of Natural Resource Revenue Funds

01/01/2007
Working Paper

In this paper we argue that the economic case for putting in place natural resource funds (NRFs) does not provide a sufficient rationale for establishing these institutions. The importance of funds, we argue, lies in the effects that their existence has on political actors. By providing guarantees to governments that future governments will be constrained in their expenditure decisions, present governments can choose better policy options.

For these effects to work, withdrawals from funds should be made using institutions that represent the interests of diverse political constituencies, withdrawal procedures should provide for high levels of transparency—in particular by operating through a unified budgetary process, by using a balance of rules and discretion, by public reporting of payments, holdings and investments, by insulating the management of funds from political processes, and, in cases where domestic institutions are weak, by importing institutional strength from overseas. For many of these desiderata, we suggest, a market exists for the establishment of professionally run natural resource fund schemes by third parties.