Natural Resource Funds: Their Objectives and Effectiveness

Abstract

This study aims to examine the effectiveness of natural resource funds in resource-rich countries according to funds’ objectives via an econometric method using panel data (ordinary least squares estimator with fixed-effect model and Poisson pseudo-maximum likelihood estimator). The main contribution of this study is demonstrating fund-specific evaluation. To this end, it classifies funds into three types based on their objectives—stabilization, investment, and savings funds—and evaluates the effectiveness of each fund type by each criterion corresponding to an objective. The econometric estimations identify the effectiveness of stabilization funds in reducing the volatility of government expenditure and the primary balance, as well as the effectiveness of investment funds in increasing investment rates. They also confirm the facilitation of funds’ effectiveness under a combination of funds’ operations and high governance. The econometric analysis also shows that the operation of stabilization funds reduces the volatility of government expenditure by 13.6%, and their operation under high governance reduces it by 33.2%; meanwhile, the operation of investment funds increases the investment rate by 9.8%, and their operation with high governance raises it by 46.8%. Their practical implications are that the fiscal smoothing under stabilization funds provides a counter-cyclical buffer to mitigate commodity price shocks, thereby contributing to macroeconomic stabilization, and that the increase in investment rates under investment funds alleviates the Dutch disease effect, thereby sustaining economic growth.