Sovereign Wealth Funds in Theory and Practice

Abstract

Are natural resources a curse or a blessing? The answer may depend on how natural wealth is managed. By transforming a temporary windfall into a permanent stock in the form of a sovereign wealth fund, resource-rich economies can avoid volatility and Dutch disease effects, save for future generations, and invest locally. We review the theory behind these resource funds and explore the empirical evidence for their success. Our review is complemented by case studies that highlight some of the more nuanced features, behavior, and effects of resource funds. While the theoretical research highlights the situational success of funds, empirical examinations are minimal. We discuss possible reasons for this gap in the literature and, in doing so, highlight some of the challenges associated with empirical research in this area and discuss possible paths forward.