This paper is a part of “Comparative Analysis and Policy Proposals Aimed at Diversifying the Russian Economy and Enhancing Prosperity” project, supported by the UK Foreign and Commonwealth Office.


The resource curse is a phenomenon that occurs when economies of countries that are rich in natural resources develop more slowly than those of resource-poor countries, or the GDP per capita of resource-rich countries actually shows negative growth. The term resource curse was introduced by the British economist Richard Auty in his book about the development of nations rich in minerals (Auty 1993).1 In 1995, the economists Jeffrey Sachs and Andrew Warner conducted a statistical study showing that, in the long term, nations that draw a large share of GDP per capita from raw material exports have slower growth rates than countries whose raw materials constitute a smaller share of exports (Sachs and Warner 1995).2 Sachs and Warner’s paper gave rise to a whole wave of further studies. The results are mixed; some authors discover the “curse,” while others cannot find any evidence of it.3

Elena Chirkova
Associate Professor in the Finance Division of the Economics Department at the National Research Institute Higher School of Economics in Moscow.


Meanwhile, authors of more recent studies almost unanimously state that even though it’s unclear whether the curse generally menace on average over the group of resource-rich countries, it definitely threatens nations with weak institutions. The goals of this paper are to bring to light the mechanisms of resource abundance’s transmission to resource curse, uncover what are good institutions, summarize the results of studies about overcoming the resource curse, find out which institutions best facilitate economic development, and outline recommendations for creating adequate institutions for resource-rich countries.

Which Resources Create the Resource Curse?

The resource curse is linked to resource rent revenues, which are too easy to get and are spent too irrationally. According to common belief, high resource rent revenues are, first and foremost, created by the oil industry, which is a major cause of the resource curse not only because it can generate large rent revenues, but also because it is the easiest industry on which to impose taxes. And high initial investments create grounds for the domination of state ownership in the industry, which is, in turn, a basis for the creation of a rentier state.

The natural gas industry generates slightly smaller rent incomes, and the extraction of metals yields even less. Sometimes, when the supply of raw materials drops, leading to a price shock, even fishing, agriculture, and wood production can create rent profits. A sharp, twofold-to-fivefold increase in coffee prices in 1976–1978, resulting from the failure of one third of the world’s total crop due to soil frosts in Brazil (Ross 2004), is an example. Tea, coffee, and cocoa are the primary agricultural products that have the greatest capacity to cause price shocks, as their supply is inelastic due to the fact that new plantations take much time to grow.

There is an alternative hierarchy of natural resources based on their capacity to create the resource curse. Boschini, Pettersson, and Roine (2007) claim that mineral resources are especially susceptible to this. Not only do they create high value, but they are also easy to store and transport. In addition, selling them is not a problem. Control over such resources is extremely exciting, as it offers the opportunity to accrue illegal profits with little effort, and it is so tempting that the fight over these resources can end in an armed conflict. By this approach, oil ranks only third, way behind diamonds and  non-ferrous metals. Below oil and roughly at the same level are coffee, sugar, and wood. Agriculture, fish, and meat are extremely low on the list.

On the other hand, as for industrial fish breeding, despite the fact that it is a primary (unprocessed) product, the development of this industry requires advanced logistics and the creation of a high-quality audit system that ensures health and safety compliance. This makes the business much more complex. Modern vegetable farming and flower production also qualify as such industries. Tourism is another rather complex resource-based industry. According to Alan Gelb (2011),one of the first well-known researchers on the resource curse, in this industry, the diversification of resource-based economies is undoubtedly a positive development.

Possible Measures of Resource Dependence and Resource Abundance

Modern economics distinguishes between resource dependence and resource abundance. Not all resource-rich nations depend on their resources. Australia, Canada, the United States, and South Africa are examples of this.

In their classic study of the resource curse, Sachs and Warner suggested that the “share of raw materials exports in GDP” indicator serves as a measure of resource abundance. In this framework, a country is considered resource-rich if the share of natural resources in its exports or budget revenues exceeds 20 percent. This threshold is, for example, used in a study by the International Monetary Fund (Berg and others 2012).

Relatively fresh data (2010) on the share of raw materials in exports in the countries with the highest share of raw materials can be found in an International Monetary Fund publication (IMF 2012). Table 1 provides data on the countries for which natural resources account for more than 80 percent of their export.4 There are at least twenty such countries in the world, and in some of them (East Timor, Equatorial Guinea, and Iraq) the share of natural resources exceeds 99 percent. Botswana, widely considered a country with resource abundance, has a 66 percent share of raw materials exports, Norway has 62 percent, and Russia has 50 percent. There are no estimates for resource-rich Australia and Canada in this study. According to another source (Gelb 2011 estimate), the share of raw materials exports in Australia and Canada was, as of 2009, estimated at 58 percent and 42 percent, respectively.5

The accuracy of measuring resource abundance using the share of natural resources in exports (or GDP) is doubtful. This measure does not take into account the fact that some resource-based economies successfully diversify, and, according to this indicator, transition to becoming resource-poor nations, while others stagnate and remain in the resource-rich category. In this sense, the share of raw commodities in exports or GDP is rather a measure of resource dependence than abundance. In this regard, another measure of resource abundance has been offered: it was suggested to estimate it through the amount of so-called natural capital per capita.

According to the World Bank’s assessment methodology,6 natural capital is composed of mineral reserves, wood, and land resources.7 Mineral resources are composed of energy reserves (oil, natural gas, and coal) and ten basic metals and minerals (bauxite, copper, gold, iron ore, lead, nickel, phosphates, silver, tin, and zinc). The natural capital value is defined as the future natural resource rent, capitalized under a so-called social discount rate, which the World Bank estimates at 4 percent. The forecast time frame, within which the rent is calculated, depends on these resources’ availability (from 17 years for zinc and oil, to 133 years for iron ore, to 178 years for bauxite), but does not exceed 20 years. In other words, it is 17 years for oil and 20 years for bauxite. The natural rent is the economic profit—or, to put it simply, the difference between the revenues from and expenses of developing a resource. The approach is the same for minerals, wood, and land.

In this paradigm, one can calculate resource dependence using the share of natural capital in the country’s total capital, including other material capital and intangible assets.8 Other components of material capital are industrial capital (machinery and equipment), urban land, and net foreign currency reserves. Intangible capital includes human and institutional (or social) capital.

Total capital is evaluated using capitalized total consumption in the future. The discounting horizon is one generation—twenty-five years. The average over the past three years is considered a current estimate.

Future consumption is estimated with the consideration of the savings’ rate: if it is negative, consumption will drop. Industrial capital is estimated by the level of investment received over the past twenty years, adjusted for amortization. The cost of urban land accounts for about 24 percent of industrial capital. The difference between total and material capital is intangible capital. Human capital and institutional capital are not distinguished.

The World Bank used this methodology to conduct large-scale studies of the availability of natural and total capital in different countries in 2006 and 2011—the data are for 2000 and 2005, respectively (World Bank 2006, 2011). Using these World Bank data, it is possible to calculate the share of natural capital in a nation’s total capital. As can be seen in table 2, it can exceed 100 percent, as in the case of Congo—since the country’s total capital is less than its natural capital. Singapore is another extreme case—it has almost no natural capital (only $2 per capita), so the ratio of its natural capital to total capital is close to zero. The shares of natural capital in the resource-rich economies of Australia, Canada, and Norway are below 13 percent. Russia, with its 42.8 percent share of natural capital, looks relatively well off, but it is not really doing better than troubled Venezuela, and it stands well below Guinea and Mongolia in the ratings. Resource-rich Botswana, whose index is better than Norway’s, particularly stands out.

An estimate of the total natural resource rent as a percentage of GDP is currently available on the World Bank’s website for most countries.9 As table 3 shows, the share of the natural rent in GDP of the developed nations (Australia, Canada, and Norway) is not too large. For Norway, it is significantly smaller than the share of raw resource exports in GDP (62 percent and 9 percent, respectively). Botswana, despite the fact that its share of primary product exports in GDP is about two thirds, has a share of natural resource rent of only 2.7 percent of GDP, which is an indirect measure of its development and also reflects the anticipation of a looming resource depletion.

Overcoming the Resource Curse: Successful Nations and Underachievers

When it comes to overcoming the resource curse, economists point to indicators, such as economic growth and diversification, and social indicators, such as the level of development of democracy. Along with this, diversification is not a goal in itself, but it facilitates economic growth, ensures that GDP is maintained at least partially at the same level in case of the depletion of resources, and solves a number of other economic problems.10

Of all the resource-rich nations, Australia, Botswana, Canada, Chile, Malaysia, and Norway are considered to be the most successful ones in terms of their economic growth and diversification of their economies.11 Some researchers extend this list to include Indonesia, Thailand, and Sri Lanka. These Southeast Asian nations have developed exports of light industry products. What makes Chile special is that the country has diversified into fish production and winemaking—industries that are very close to resource industries but demand higher technological skills than agriculture. Today, these countries have a slight percentage of natural capital in total capital and a small share of natural resources rent in GDP (see tables 2 and 4), which shows that they have truly diversified their economies and created (or preserved and multiplied) their intangible capital.

Angola, Bolivia, the Democratic Republic of Congo (known as Zaire from 1971 to 1997), and Venezuela are usually considered to be underachievers. Gabon and Zambia are also on this list.

The Democratic Republic of Congo, formerly a Belgian colony, gained independence in 1960. The country has deposits of diamonds and is one of the world’s top cobalt and copper producers. It also extracts oil and natural gas. However, between 1960 and the present, it has shown an average GDP per capita growth rate of -1.7 percent, and its overall indicator has dropped by 60 percent. The dictator Mobutu Sese Seko, who ruled the nation in 1971 to 1997, performed the worst. In this period, the country’s GDP per capita was decreasing on average by 4 percent annually (while it had been growing even during the civil war, in the first years after independence). Now, the Democratic Republic of Congo is one of the poorest countries in the world; in 2015, its GDP per capita stood at $456. The dip in GDP per capita was caused by the country’s rapid population growth; between 1960 and 2015, it had a nearly fivefold (4.8) increase,—16 million to 77 million. Angola, a former Portuguese colony, proclaimed independence in 1975. From that moment until 2002, the country was mired in a civil war. The earliest GDP per capita data available date back to 1986, and Angola looks moderately well off, with its 1.3 percent annual growth. But it is worth considering the following points. First, between 1976 and 1985, its GDP was likely to have shrunk considerably. Second,  the 1986 level was exceeded only in 2006 (1993 was the very bottom when it made up only 65 percent of the 1986 level). Economic growth has been an impressive 5.5 percent per year since 2003, but this growth started from a very low level.

As for Bolivia, its average growth rate of 1.1 percent since 1960 had gradually stagnated by 2002, when its annual GDP growth was only 0.5 percent. After 2003, its growth was quite rapid, with an average rate of 3.3 percent.

Progress was not sustainable in all countries. Now, Venezuela, with its zero GDP per capita growth since 1961, is considered to be an underachiever, but certain early studies of the resource curse consider it to be a successful nation. This was linked to the fact that in 1958, Venezuela transitioned to a democratic regime and became the most advanced Latin American nation in this regard. Dunning (2008) called Venezuela in the 1970s an “oasis of democracy.” The country even granted asylum to exiles from other nations when democratic regimes on the continent were falling. The same period coincided with the peak in oil prices and economic prosperity: GDP per capita in real terms peaked in 1977 and has not been surpassed yet. The drop of oil prices in the 1980s, along with the nationalization of the oil industry in 1976, resulted in a decrease in oil incomes. Things had gone so bad that in 1992, Hugo Chávez led a failed military coup. After 1998, when he came to power legally, there was a gradual waiving of democratic and market values at the same time the country’s economy position worsened.

Another example is Indonesia, which used oil incomes quite efficiently in the 1980s and the 1990s. But modern scholars, speaking of Indonesia, remark that the emergence of authoritarian regimes sooner or later leads to high corruption (Gelb 2011).12 That being said, Indonesia still does not have problems with growth rates; in the 2000s and the 2010s, the country has been growing even faster than before.

Mechanisms for Transforming Resource Abundance Into the Resource Curse

Usually, the mechanisms involved in the transition from a state of resource abundance to resource curse are divided into two large groups: macroeconomic and political-economic factors. The first group includes “Dutch disease,” a term from economics used to describe the situation when a national currency strengthens due to the export of resources at high prices, which decreases the profitability and competitiveness of other industries. High prices for primary products make investing in the processing sector unprofitable in comparison with the extractive sector. In the meantime, there are advantages to both diversification and the development of the processing industry. As was mentioned above, long-term GDP growth is higher in countries with diversified economies. Second, diversification smooths out volatility. Third, it stimulates employment. This last point is especially important for nations with fast-growing populations; even though the extractive industry creates a large share of GDP, it provides a relatively small percentage of the employment opportunities needed by an economically active population. For instance, in Botswana, the processing industry created 40 percent of GDP, but only 4 percent of the country’s jobs, from the beginning of the 1980s through the early 2000s (Iimi 2006).

However, the claim that diversification in the processing industries helps increase economic productivity would be stretching the point. Some authors think that the extraction industry and even agriculture cope with it well because nowadays they may involve the use of very high technologies.

Dutch disease usually leads to price distortions in national economies. Prices of goods that were imported, or ones that were produced internally but compete with imports, do not grow, while prices of the goods and services that do not compete with imports grow sharply. First and foremost, it concerns residential real estate.

In addition to high prices for commodities, their volatility is also frequently considered a separate reason for the resource curse. Certain papers (in particular, those by van de Ploeg and Poelhekke 2009; Leong and Mohaddes 2011; and Cavalcanti, Mohaddes, and Raissi 2012) state that fluctuations in prices for commodities—which in turn cause currency exchange rate fluctuations—influence growth rates more than resource abundance. Their authors think that resource abundance may contribute to the problem as well, but the negative effect of volatility can outbalance it. It is instinctively clear that volatility is a serious economic problem for resource-based economies. In the case of Nigeria, a drop in oil prices from $150 to $50 per barrel means a 50 percent contraction in GDP (Gelb and Grasmann 2010). Also, volatility is thought to cause spikes in capital and labor flows across sectors of the economy, something that involves higher transaction costs.

Meanwhile, a theory introduced in the 1950s that predicted a long-term downward trend in primary products prices has not been backed up by  further developments. The problems of resource-dependent nations cannot be linked to price trends.

The second group of factors is linked to state governance. Resource abundance stimulates rent-seeking activity, which is associated with corruption and voracity,13 and makes political repression and armed conflicts more likely. Economists agree that in nations with poor institutional development, resource abundance leads to autocratic institutions and even anarchy, characterized by the impossibility of guaranteeing property rights. Large rents create a prize so valuable for those who have come to power that it could lead to intense fights for power and armed conflict. For instance, the civil war in the Belgian Congo after it gained independence in 1960 was linked to the struggle of copper-rich Katanga Province (later named Shabu) to secede from the new country. Similarly, one of the causes of the civil war in Angola was the struggle for control of oil-rich Cabinda Province.

Rentier State

Describing the situation in Iran during the rule of Mohammad Reza Shah Pahlavi, the Iranian economist Hossein Mahdavy (1970) introduced the notion of a rentier state. A rentier state appears when most of the GDP is generated through natural rent, which is characterized by large volumes, volatility, geographic concentration (which facilitates maintaining control over the rent), and government control.

A possible consequence of being a rentier state is the growth of budget expenses during a boom, up to a level at which can’t be absorbed (in particular, the quality of public investment drops) and maintained during a downturn. Such expenses can include:

  • artificially high pensions (compared with the financial resources of the budget or pension funds);
  • bloated salaries in the public sector—in particular, in the police and the army;
  • payments to a growing number of government employees;
  • large investments in infrastructure projects; and
  • energy subsidies (one of the most popular ways of distributing natural rents).

Funding irrationally high employment in the public sector and inflated pensions and salaries is considered to be a politically attractive way of distributing natural rents. These are an indirect way of bribing voters in order to win the next election (Robinson 2006). The conclusion that resource booms can lead to inflated wage expenses was made by the authors of relatively early studies (Gelb 1988; Gelb, Knight, and Sabot 1991; Bates and Collier 1993; Auty 2001). They discover this effect in Ecuador, Mexico, Trinidad and Tobago, Venezuela, and Zambia. Medas and Zaharova (2009), after studying the period of high oil prices in the mid-2000s, came to the conclusion that oil prices had led to rises in public sector salaries in Algeria, Azerbaijan, Iraq, Nigeria, Trinidad and Tobago, Venezuela, and Yemen. According to Moss, Lamber, and Majerowicz (2015, 65), in East Timor, where 50 percent of the population live on $1.25 per day, the minimum pension amounts to $276. Such pensions reflect the military’s capability of destabilizing the situation in the country rather than economic reality. According to the World Bank’s calculations, up to 80 percent of the Gulf nations’ citizens were employed in the public sector during the 1990s (World Bank 2004, 98).

Regarding the growth of public employees’ salaries, the case of Brazil is particularly emblematic. The Petrobras oil company is obliged to distribute 3 percent of its revenues to municipalities. This distribution depends on the locations of oil deposits and transportation infrastructure and the number of residents. These payments account for up to 30 percent of municipal budgets’ revenues. Caselli and Michaels (2009), who studied how oil revenues affect the population’s well-being, came to the conclusion that oil incomes had led to the growth of municipal servants’ average living space without corresponding growth among the rest of the population, and to more frequent mentions of cases of corruption in municipalities with large production levels.

According to Gelb (1988), investments in infrastructure projects can be lost due to the fact that during a downturn there could be no money to maintain them, which makes them amortize faster.

The cost of energy subsidies is astonishing, but still they are extremely widespread. Almost all Latin American countries subsidize electric power. Venezuela subsidizes gasoline. In Turkmenistan, residents use free electric power, and natural gas is extremely cheap. Saudi Arabia subsidizes electric power and drinking water. In 2003, when oil was relatively cheap, energy subsidies made up 21.7 percent of Iran’s GDP; in 2008, they increased to 30 percent.14 In Nigeria in 2011, subsidies amounted to 25 percent of budget expenses. Water and power subsidies cost the Saudi Arabian budget $20 billion and $13 billion in 2011, respectively. In Egypt in 2011, subsidies for oil products made up 7 percent of GDP and 25 percent of the budget (Moss, Lamber, and Majerowicz 2015, 94). Oil subsidies are often not reflected in the budget; in Algeria, Azerbaijan, Bolivia, and Nigeria, they are paid from the profits of oil companies (Medas and Zaharova 2009).

Energy subsidies not only divert budget resources that could have been used for other purposes, but they also distort the market prices in the country, lead to excessive and wasteful consumption of energy;15 these subsidies are also regressive as they usually cover the consumption of the rich, who tend to waste more energy.16 One of the most odious examples is the construction of large private swimming pools with natural gas heating in Ecuador, a country where energy spending is among the highest in the world and amounts to twice the size of the whole education budget (Sinnot, Nash, and de la Torre 2010, 31).

One of the rarely mentioned manifestations of a rentier state is the artificial stimulation of import substitution; domestic production facilitates employment. The accumulation of large debt during a boom period could become another problem for resource-rich countries, as their budget policies are too pro-cyclical and the government spends even more than it earns, using loans to fund the deficit. This effect was discovered by Reinhart and Reinhart (2008) for nations with low incomes. According to them, the growth of borrowing during a boom period increases the odds of declaring a default when the price drops; the state not only increases borrowing itself but also guarantees private debt.

All these imbalances—an inflated public sector and subsidies—slow down economic growth. Economic agents refocus on unproductive activity in search of rent instead of engaging in creative activity.

Aside from economic imbalances, rentier states have problems with the functioning of civil society, which are caused, among other factors, by the fact that the government collects budget revenues from the extractive sector through direct participation in it (dividends), taxation of companies, and export duties. The governments of oil-rich Algeria, Oman, Kuwait, and Iran receive no more than 10 percent from the taxation of goods and services, compared with 25 percent in Jordan, Lebanon, and Tunisia, where there are no oil deposits (Moss, Lamber, and Majerowicz 2015, 45). A case in point is Saudi Arabia, which dismantled its taxation system after introducing an oil embargo in 1973: and canceled most taxes borne by the country’s citizens and residents. Specifically, Riyadh offered five-year tax holidays for foreign companies, which were then extended; canceled income taxes for citizens and foreign workers; terminated the country’s private social insurance system and created a public one instead; canceled zakat, a tax to support the poor and finance the spread of Islam; canceled indirect taxes; canceled fees for pilgrims going to Mecca; and canceled the country’s road tax (Chaudhry 1997).

In Alaska, taxes for residents are negative, considering payments from the fund (Dunning 2008, 46). Low taxes and the lack of a need to collect them from the population and small businesses are considered to lead to a failure of public servants’ accountability before voters. In his memoirs on creating the Alaska Permanent Fund, ex-governor Jay Hammond regrets that he did not block the decision to cancel the state’s income tax, which was made by its residents in a 1980 referendum. Looking back, Hammond mocks the situation: “Residents of Alaska were thinking with their purses, not their heads” (Hammond 2012, 24). Now, he believes it would have been better to keep the tax but boost the payments to residents from the fund at the expense of reducing transfers for financing the budget.

Hootan Shambayati (1994) argues that rentier states experience low social pressure aimed at improving economic policy since low taxes and generous social programs remove the stimulus to raise economic issues away from the opposition. A similar situation is under way in Russia, where the opposition does not have particular economic demands. Certain authors even claim that countries receiving most of their earnings from oil tend to violate human rights more often and are even engaged in repression (DeMeritt and Young 2013).

Alan Gelb comes to the conclusion that the key issue today is how rent revenues are spent. His main recommendation for resource-rich nations, made back in 1986, is that the growth of expenses, caused by price booms, should be more moderate than it is in practice (Gelb 1986). This conclusion is still important. Accordingly, good institutions are ones that do not allow natural rent to be wasted inefficiently.

What Are Institutions and High-Quality Institutions?

One of the most famous researchers on institutions, the Nobel Prize winner Douglas North (1991, 1), in his keynote article “Institutions,” gave the following definition: “Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, and property rights).” According to North, institutions determine the spectrum of choice of economic agents, transaction and production costs, and the profitability and practicability of one type of economic activity or another. Institutions shape the system of economic incentives and specify the direction of economic changes—growth, stagnation, or a downturn.

With regard to institutions, the circulation of elements appears in the following way: those having formal political authority create economic institutions, which in turn determine the distribution of resources, which leads to real political authority (which could be different from formal authority). Theorists of institutions maintain that economic and political institutions influence each other if a small group holds a monopoly on political power, in which case the property rights of all the rest cannot be well protected. On the other hand, if economic institutions lead to an unequal distribution of resources, political institutions cannot be democratic.

Economic institutions are, first and foremost, entities that determine property rights and that regulate the execution of contracts, interactions between economic agents, and barriers to entry. The main political institutions are considered to be the form of the government, limitations on the behavior of politicians and elites, the separation of powers, and the right to vote (in a democracy). The level of corruption is also considered an institution, but it is hard to tell whether it is a political or economic one (the PRS Group, which publishes the International Country Risk Guide, considers the level of corruption to be a political institution). Empirical studies generally use indexes as a measure of institutional development. Appendix 1 contains brief descriptions of several indexes that assess institutions. Table 5 sums up which indexes assess which institutions. Regarding table 5, it is important to mention that aside from bankruptcy and labor laws, antitrust regulations also fall into the category of institutions and are responsible for organizing interactions between economic agents. However, none of the indexes rates the quality of antitrust regulation.

Even for a single country, scores may differ significantly according to different indexes. Russia is a good example. Its Doing Business score in 2016 stood at 73.218—ranked 39 in the world, only slightly below Japan.17 In the meantime, the Corruption Perceptions Index ranked Russia 119 out of 169.

Some researchers have drawn from indicators such as the share of the population speaking English or another major European language and even a country’s distance from the equator (Alexeev and Conrad 2009; Arezki and van Ploeg 2007). These measures of the quality of institutions are dubious from a theoretical point of view, even though they sometimes prove to be statistically significant.

Which institutions can be considered good? The answer lies in the methodology of calculating indexes that assess the quality of institutions.

Protection of Property Rights

The International Property Rights Index (IPRI) can be used as a measure of the security of property rights.18 Its Legal and Political Environment subindex includes factors like independence of the judicial system (from the government and business), the rule of law, political stability, and control over corruption. Its Physical Property Rights component is affected by factors like protection of physical property, registration of property, and ease of access to funding. And its Intellectual Property Rights component comprises intellectual property protection, patent protection, and violations of intellectual property rights.

Economic Openness

The Freedom of Trade subindex of the sub-index Index of Economic Freedom co-published by the Heritage Foundation and the Wall Street Journal can be considered a measure of market openness.19 It is calculated using two factors: the average level of customs fees, and other trade limitations. The other limitations indicator, in turn, consists of six components:

  • limitations on quantity: import caps, export restrictions, embargoes and bans, and barter trade;
  • price limitations: antidumping and compensational duties,20 as well as taxes collected when goods cross the border;
  • regulatory limitations: licensing, sanitary regulations, safety standards, packaging and marking requirements, advertising requirements, protection of trademarks;
  • investment limitations: restrictions on exchanging currency, financial control;
  • customs limitations: requirements to make deposits, custom valuation procedures, customs classification, customs clearance procedures; and
  • direct government intervention: subsidies and other help, industrial policy, government funding of research and development, technological policies, taxes and social policy, competition policy, immigration policy, government procurement policy, state trading, state monopolies, exclusive franchises.

For calculation purposes, the maximum tariff was set at 50 percent, which means that it is so prohibitive that its further increase has no effect.

The freedom to trade internationally subindex of the Fraser Institute’s Economic Freedom Index, which also can be used as an index of economic openness, comes, first and foremost, from such an indirect indicator of trade freedom as the ratio of export import duties (in absolute terms) to international trade turnover.21 Countries where the ratio stands at 15 percent or above receive the worst scores; this shows that the 15 percent level is very high. This is followed by the average level of customs duties (50 percent is the threshold level for the worst rating); mean average deviation from the average level of duties—the bigger it is, the worse (25 percent is the threshold deviation for the worst rating); and regulatory restrictions on international trade, black market exchange rates, and control over the movement of individuals and capital.


The PRS methodology describes what is meant by corruption.22 According to PRS, illegal payments and bribes that emerge due to export and import licenses, exchange controls, tax assessments, police protection, and loans are the most common forms of corruption. Besides these things, the authors of the methodology also consider excessive patronage, job reservations, the “favor-for-favors” approach, funding political parties, and suspiciously close ties between politicians and businesspeople to be corruption. For obvious reasons, factors that determine corruption are extremely hard to quantify, so all the indexes are merely perception indexes, and the methodology for calculating them, in the best of cases, contains a list of surveyed organizations.

Political Institutions

From the variety of political institutions, it makes sense to pick the one causing the most profound effect on fighting the resource curse, according to studies. This is Voice and Accountability, which has a subindex in the World Bank’s Worldwide Governance Indicators. It has many components, starting with democracy indicators (freedom of the press, confidence in honesty of elections, freedom to leave the country, and so on). The following components have closer ties to fighting the resource curse: favoritism, personal interest, reliability of data on the state budget and state-run companies, reliability of economic and financial statistics (for instance, price indexes and foreign trade data), reliability of state-owned banks’ accounts, public communication of the state economic policy, and degree of transparency in public procurement.

The guarantees of executing contracts institution will not be described, as none of the possible quantitative measures reflect it fully, touching upon just one of the aspects.

An important element of understanding institutions is the distinction between institutions and policies. One viewpoint is that an institution is different from a policy because it is something more long-term and sustainable. An institution is what makes individuals accept one policy or another. For instance, advocates of this viewpoint consider the World Trade Organization to be an institution that affects economic openness. Following North’s definition of an institution, the rate of tariffs is an institution as it is the rate that helps determine the level of economic openness. Below, speaking about how institutions affect the ability to overcome the resource curse, a line is not drawn between different mechanisms of this influence—such as institutions, politics, and instruments—as this is not essential from a practical point of view.

The Resource Curse’s Dependence on the Quality of Institutions and Economic Policy

Over the past fifteen years, social scientists have been actively researching the interconnection between resource abundance and the quality of institutions. Moreover, their analyses have considered both how abundance affects institutions and how institutions affect the emergence of the resource curse.

With regard to the effect of the curse on institutions, there is a theoretical basis to assume that it must be taking place. For instance, a rentier state has fewer incentives to invest in an efficient tax system, which in turn can make economic performance indicators worse and contribute to the growth of authoritarianism. The increase may be caused by rent-seeking behavior.

Studies of how resource abundance/dependence influences institutions in a general sense can be divided into three groups:

  • the effect on corruption;
  • the effect on political institutions (level of development of a democratic/authoritarian regime); and
  • the effect on political stability and the likelihood that armed conflicts will arise as an extreme form of political instability.

The results of studies the effect of resource abundance on democracy and conflicts are mixed. For example, Arezki and Brückner (2009) discovered that it had a negative effect on political freedom, but a positive one on civil rights.

The results of studies of how resource abundance affects corruption are a bit more consistent, although there are also studies that failed to find any connection. In research by Arezki and Brückner (2009), the effect on corruption measured by the PRS corruption index is backed up with data from thirty-one oil-extracting countries in between 1992 and 2005.  Busse and Gröning (2013), studying the effect of resource exports on corruption for 129 nations in 1984 to 2007, find a positive correlation. Kotsadam and colleagues (2015) studied corruption in Africa at a subnational level, using data from 1975 to 2013. The study, which was conducted for 500 mines across thirty-three countries, showed that mines had been opened more frequently in less corrupt areas, but, as production began, the areas were becoming more corrupt than average. The aforementioned study of Brazil (Caselli and Michaels 2009) clearly suggests that corruption is more widespread in the oil-producing regions of the country. Economic underdevelopment in Sicily (Italy’s poorest region) has been traditionally explained by the presence of the Mafia, while the power of the Sicilian Mafia is generally linked to the poor protection of property rights on the island. However, Buonanno and coauthors (2012) add that the formation of the Mafia in the 1880s occurred during years when large deposits of sulfate, Sicily’s main export commodity, were discovered on the island. Moreover, the Mafia was more active in municipalities with larger deposits of sulfates.

Since most researchers still think that resource abundance can aggravate the quality of institutions, they are especially important for oil-extracting nations (Qureshi 2008).

As for the reverse effect—how institutions affect the resource curse—almost all researchers lean in favor of the conclusion that natural wealth is not something inherently bad and that it facilitates economic growth if there are strong institutions in the country. But it can cause the curse if the institutions are weak.

The authors of a frequently cited study—Mehlum, Moene, and Torvik (2006)—divide institutions into two categories: those that benefit manufacturers and lead to a situation when manufacturing and rent seeking are complementary activities, and those that benefit grabbers; in the latter case, production and rent-seeking are competing industries. The authors of this study showed that the resource curse exists only in countries whose institutions are poorly developed. The growth of GDP per capita from 1965 to 1995 was estimated in  forty-two countries. The authors used the PRS index as a measure of institutional development, according to which Canada (0.97), Norway (0.96), and Australia (0.95) showed the highest level of institutional development and Bolivia showed the lowest (0.23).23

Qureshi (2008), using data from 1970 to 2006, studied the effect of the quality of institutions on the competitiveness of the economies of African oil-extracting countries south of the Sahara. He showed that these countries lag behind other oil- producing countries in diversification and their share of the global economy. Poor development of transportation infrastructure and a low quality of institutions were cited as the reasons for this lag (the Doing Business Index was used).

Leong and Mohaddes (2011), while studying the 1970–2005 period, discovered the negative effect of the volatility of commodities’ prices on the growth of GDP per capita and the positive effect of institutions on this growth. According to them, nations with good institutional development can mitigate the negative effect of the resource rent’s volatility. They used the Fraser Institute’s Economic Freedom Index as a proxy indicator of institutional development. The study was carried out in 112 countries.

Boschini, Pettersson, and Roine (2007) discovered a nonlinear relationship between the influence of resource abundance on GDP growth; it is negative when the level of institutional development is low, and there is no curse observed when the level is high. The study was conducted for a selection of eighty developed and developing nations using data from 1975 to 1998. The Polity 2 rating of democratic development as of 1975 was taken as a measure of institutional development.

Béland and Tiagi (2009), using the Fraser Institute’s Economic Freedom Index, found that countries with an index higher than 5.43 gain from the abundance of mineral resources. This threshold value is lower than the average world score of 5.89. In order to gain from resource wealth in general, a country needs to have a rating of above 6.89; only nine resource-dependent nations have attained this. The study was carried out for twenty-six resource-dependent countries using data from 1970 to 2006.

There are also case studies devoted to separate countries. Acemoglu, Jonson, and Robinson (2002), and a slightly more recent IMF study (Iimi 2006), both focusing exclusively on Botswana, analyze the success story of this country, one of the world’s richest in resources. As of 2002, it was exporting $2 billion worth of diamonds, copper, gold, and other natural resources, while all the world’s natural resource exports amounted to $700 billion. In other words, this tiny country accounted for 3.5 percent of the world’s total exports. The share of resources in Botswana’s exports amounted to 80 percent, but the diversification of its economy was quite high (Iimi 2006). Meanwhile, according to Acemoglu, Jonson, and Robinson (2002), when it gained independence in 1966, Botswana had only 12 kilometers of asphalt roads, twenty-two citizens with higher education degrees, and 100 middle school graduates. At that time, cattle breeding was the economy’s only industry. However, from 1965 to 1998, Botswana’s GDP per capita grew 7.7 percent per year, and its GDP per capita based on purchasing power parity reached $5,800 in 1998 ($3,070 without purchasing power parity adjustment), which is three times higher than average African levels.24 Acemoglu has come to the conclusion that institutions facilitated the success of Botswana.25 As for the formalization of the research, he used the Political and Risk Services and the Polity IV indexes of protection from expropriation risk. Iimi (2006) research highlighted the following four aspects of Botswana’s institutional organization: accountability of the authorities before the people and their appointment by election; the government effectiveness;26 and long-term relations between the authorities and the private sector, particularly a long-term validity (up to twenty-five years) of diamond-mining leases and an anticorruption policy.

As the empirical studies discussed here have shown, institutions matter. A crucial question is which institutions a resource-abundant nation should have in order to avoid falling into the “curse” category.

Institutions, Policies, and Tools That Mitigate the Resource Curse

Keeping in mind what was said above regarding the mechanisms of resource abundance’s transition to the resource curse, it is possible to single out three main goals of policies that are aimed at releasing a resource-dependent country from the curse:

  • diversification of the economy;
  • efficient spending of budget funds; and
  • smoothing out volatility.

Alan Gelb (2011) divides the policies of resource-rich nations into horizontal and vertical policies. According to him, a vertical policy facilitates the development of particular sectors of the economy, and a horizontal policy leads to macroeconomic stability and openness and equally facilitates the development of all industries. Investment in infrastructure and human capital are considered examples of a horizontal policy.

Summing up the various studies of how institutions and economic policies affect the extent of an economy's resource curse, we can highlight the following factors that facilitate beating the resource curse.

Strong Property Rights Protection

When property rights are well protected, economic agents can invest in industries with low returns. When they are protected poorly, only a rent-based economy can do reasonably well as companies, extracting the natural rent, can afford to pay criminal groups, private militias, or even rebel armies (Ross 1999). Moreover, when property rights are protected poorly, the threat of nationalization materializes. The idea of nationalizing oil companies seems especially attractive during a period of high oil prices.

High Economic Openness

Economic openness is crucial to overcoming the resource curse. From the viewpoint of institutions and economic policy, a fully open economy is one that has no trade barriers and no barriers for labor and capital flows.27 Resource-dependent nations face temptations to resort to administrative measures, like introducing import caps, setting a fixed exchange rate, and introducing restrictions on exchanging the national currency into hard currency. Arezki and van Ploeg (2007) showed that the resource curse is most intense in nations where state monopolies control the majority of raw materials exports and where the black market exchange rate differs from the official exchange rate by over 20 percent. In these countries, customs duties are on average higher than 40 percent, and at least 40 percent of imports are carried out under quotas. According to the authors, import substitution policy is also restrictive.

As noted above, the freedom of  trade subindex of the Wall Street Journal and the Heritage Foundation’s Index of Economic Freedom, or the Fraser Institute’s freedom to trade internationally subindex of the Economic Freedom Index, can be used as measures of economic openness. Table 7 has data on these indexes for a number of resource-based economies. For comparison, in 2016, Hong Kong, Liechtenstein, Macao, Singapore, and Switzerland had the same maximum actual value on the freedom of trade subindex, which is 90 percent. The Maldives had the minimal actual value of 47.8 percent (North Korea was not rated). A curious fact is that Brunei’s Freedom of Trade Index score is quite high. The Fraser Institute assesses the freedom of international trade as very high in Singapore (9.43 points), Hong Kong (9.36 points), Ireland (8.73 points), and the Netherlands (8.65 points). Iran has the minimal value of 2.97 points.

High Government Accountability, Budget Transparency, and State Decisionmaking

The IMF’s Guide on Resource Revenue Transparency (IMF 2007a) provides the big picture of the best transparency practices. It describes a state’s resource management rights, tax legislation and practices, disclosure of information, principles of budgeting, and many other transparency regulations. Appendix 2 to this document has a more detailed list of its clauses.

Chile is usually cited as an example of a transparent user of resource export revenues (Sinnot, Nash, and de la Torre 2010, 27). Both benchmark figures needed to calculate the budget; what the GDP should equal according to the trend, and what the equilibrium price of copper is, are calculated by independent experts hired from the financial sector, think tanks, universities, and mining companies.

Size of Exports-Sector Companies

The size of companies in the exports sector is not an institution in itself, but it is influenced by antitrust legislation, which is one of the components of institutions responsible for the interactions of economic agents.

Michael Shafer (1994) suggested that the existence of the resource curse depends on how the exports sector looks; it is either a small number of big companies, with high barriers to entry and specific assets, or the opposite—many small firms, with low barriers to entry and less specific assets. In the first case, industries will find it harder to deal with sectoral crises and will be actively seeking help from the state during a downturn, as it is easier for a few big players to collaborate than many small ones. Shafer cites coffee plantations in Costa Rica (a fragmented industry), tea plantations in Sri Lanka (large plantations are more efficient in the case of tea), and copper production in Zambia as examples.

The specificity of assets is determined by nature and cannot be affected, unlike the sizes of companies in the industry, at least partially. The Russian oil and natural gas industry is an example of this. It is a concentrated industry, and its concentration is increasing. The effects are like those described by Shafer. In 2014, Rosneft requested 2 trillion rubles from the Russian National Welfare Fund. Other oil and natural gas companies—including NOVATEK and, a year later, Gazprom Nefteprom Salavat, Gazprom’s subsidiary—laid claims to the money from the fund. Breaking down the big companies of its oil and natural gas industry, primarily Gazprom, would help Russia beat the resource curse more easily.

A Strong and Efficient Private Sector

If the private sector is strong and efficient, economic agents will suffer losses that are too great when refocusing on extracting natural rent during a boom period, so they will not do it. A theoretical model that proves this is given by Baland and Francois (2000). Hence, it is best to reduce the share of the public sector in the economy and minimize the risk of nationalization in resource-dependent nations.

At the same time, no clear correlation has been found between the existence of the resource curse and whether state or private capital controls the country’s extractive industry. For instance, the Norwegian company Statoil is owned by the state, 50 percent of Botswana’s diamond mining company Debswana belongs to the state (De Beers Group owns the other half). The Chilean copper mining company Codelco is a product of nationalization and is controlled by the state. Botswana, Norway, and Chile are some of the most successful nations with resource-based economies.

Flexibility of Fiscal Policies and Moderate Taxation of Natural Rent

The threat of nationalization is particularly strong if fiscal policy is not flexible and most of the natural rent remains in private hands. In Russia, the taxation of oil revenues is very flexible; export duties and the tax on the production of mineral resources varies depending on oil prices and the difficulties of extraction. Export duties, in particular, can hover between about $0 and $500 per ton. But still, the YUKOS oil company did not avoid quasi-nationalization in 2007, when prices were high.

As for the taxation level of a sector that creates natural rent, taxes that are either too high or too low are bad. Excessively high taxes reduce the motivation to invest, while too low taxes create incentives for fast regime change and nationalization during a period of high prices.

Countercyclical Fiscal Policy

Countercyclical fiscal policy is the most important thing that facilitates the smoothing out of volatility. A budget policy is called countercyclical when the government spends less than it earns in the “fat” years, and spends more than it earns in the “lean” ones. Introducing fiscal rules that regulate the amount of the budget deficit, as well as the distribution of the state’s revenues from natural resources facilitate this. A good review for 2005 is given by the IMF (2007b). A couple of examples follow.

In Norway, there is a “bird-in-the-hand” budget rule. It was adopted in 2001 and states that the budget’s structural deficit must not exceed 4 percent of the fund’s ,assets, which is its forecastable long-term profitability in real terms. This means that only 4 percent of the fund’s total assets can be withdrawn to fund the budget deficit (the deficit can be bigger).

Chile conducts a successful countercyclical budget policy; see the detailed description by Frankel (2011). It was the best economy in Latin America during the twentieth century. After the start of economic reforms, Chile’s GDP per capita increased from 10 percent of the U.S. level in 1984 to 20 percent in 2010 (Frankel 2011). The country’s economy is quite diversified; according to Frankel (2011), copper exports account for only 16 percent of the budget, 10 percentage points of which are revenues from the state-controlled company Codelco, with the remainder coming from the imposition of taxes on private companies. From 2003 to 2007, there was a strong budget surplus due to abnormally high copper prices.

Since the 2000s, Chile has been applying the so-called structured budget rule, according to which all budget revenues are divided into structural income and cyclical income. The forecast for structural income is made according to the total output trend, and that for cyclical income is based on price forecasts.

Initially, when the rule was introduced, a one percent surplus of the budget was set as a goal. Extra funds were supposed to be directed toward funding pension liabilities, servicing foreign debt, and recapitalizing the central bank, which had accumulated a capital deficit, helping the country’s banking system in the 1980s. The target level of the surplus was reduced to 0.5 percent in 2007, and to 0 percent in 2009. Under this rule, the government can draft a deficit-ridden budget only in two cases: when GDP is below its historic trend value, meaning that the economy is in a recession; or if the copper price drops below the average level of the last ten years. If the expenses are such that the target deficit level has been surpassed, they will be reduced. As a result of introducing this rule, Chile received an A sovereign credit rating by 2006. In 2007, Chile became a net lender; and in 2010, it achieved an A+ rating. By 2008, the country had reduced its debt to 4 percent of GDP and accumulated 12 percent of GDP in its sovereign wealth fund.

One of the tools of countercyclical fiscal policy is hedging resource export revenues. Mexico has been hedging its oil revenues since the early 1990s. Hedging policy is discussed at the same time with the budget, thus guaranteeing certain revenues. The hedging price is set at a level corresponding to the budget rule of the next tax year. The difference in earnings goes into the Oil Income Stabilization Fund, created in 2000, which supplements the budget if its revenues fail to reach the level set by the budget rule. The central bank carries out the hedging. Put options are bought exclusively for Maya oil, which is extracted in Mexico, not for more popular grades of oil, such as Brent or West Texas Intermediate. A committee appointed by the finance minister runs the fund.

Broad Public Understanding of the Need to Save for the Future

Norway is usually cited as an example of a nation that has reached a popular consensus regarding the creation of a sovereign wealth fund for future generations—see, for instance, IMF (2003). The second well-known example of such an institution is the Alaska Permanent Fund, which was created well before Norway’s Government Pension Fund Global (formerly the Government Petroleum Fund) and served as its prototype. However, this poses the question of where such an institution is possible and how it can be created. It can be assumed that a consensus on this issue is possible only in countries or regions with high GDP per capita. According to Auty and Gelb (2001), the creation of sovereign wealth funds is most successful not just in rich countries (or regions), but also in countries (regions) with strong individualistic traditions. Back then, the main precedents for the creation of sovereign-like funds were set by Alaska; Alberta, Canada; and Norway, which meet this definition. In the mid-2000s, during a time of high prices for natural resources, the decision to create sovereign wealth funds was made by many oil-extracting Arab countries and even some Asian countries, like Singapore, that hardly qualify as nations with strong individualistic traditions. Today, experts hold the viewpoint that nondemocratic regimes tend to save incomes in future-generation funds more easily.

Due to the fact that stabilization funds and future-generation funds are very widespread and efficient tools for mitigating the resource curse, and their organization and operation have many nuances, a whole section is dedicated to their creation and activity.

Stabilization Funds and Future Generation Funds

Along with introducing fiscal rules, resource-rich nations create funds that collect part of their revenues by selling resources. The following factors are cited as the goals (benefits) of creating such funds:

  • macroeconomic stability (smoothing out budget revenues);
  • creation of savings for the future;28
  • increase the transparency of managing oil revenues;29 and
  • revision of budget spending.

Funds can be divided into two types—stabilization funds and future-generation or sovereign wealth funds. Stabilization funds are aimed at smoothing over the budget revenues in the short and medium terms, whereas sovereign wealth funds aim to do this in the long term. Stabilization funds can be spent not only on stabilization, but also on increasing the value of the nation’s human capital and on the improvement of its institutions. In fact, the goals of medium-term stabilization and saving for the future can both be reached through a single fund, as in Norway.

Sovereign wealth funds are usually created by countries and regions with extremely high incomes from raw materials exports. Stabilization funds that are aimed at mitigating short-term fluctuations in filling up the budget may be created by nations that are not very rich or by countries with relatively modest natural rent.

Certain funds, like the one in Alaska, focus on cultivating broad support for their existence and activities, while others focus on achieving particular  socioeconomic goals, such as fighting poverty or reducing the national debt (for example, in Azerbaijan, Chad, and Ecuador).

According to an IMF study carried out almost at the peak of oil prices, as of 2007, twenty-one of thirty-one oil-extracting nations had created funds, although this was sometimes done under pressure from international organizations (IMF 2007a).

Examples of Sovereign Wealth Funds and Stabilization Funds


In 2000, Algeria created a fund—to manage its budget revenues. As of today, all revenues coming from oil sold at more than $37 per barrel go into the fund. The fund’s money is kept in dinars in an account in Algeria’s central bank. In 2000, the country’s budget surplus amounted to 9.7 percent of GDP, 5.6 percent of which ended up in the fund. In 2005, the fund’s assets amounted to 24.4 percent of GDP; and in 2009, to 43.1 percent. According to the top management of Algeria’s central bank, the creation of the fund made it possible to achieve the following goals: strong growth of nonresource industries, from 5 to 6.3 percent per year in 2002–2008 to 9.3 percent in 2009; control over inflation, even in 2008; a trade surplus and, at the same time, payments on foreign debt, which was reduced from 57.9 percent of GDP in 1999 to 2.7 percent in 2009; and the creation of reserves, which reached 43.1 percent of GDP in 2009 (Laksaci 2011).

A chronic budget deficit after 2011 resulted in the assets of Algeria’s sovereign wealth fund being reduced from 26.5 percent of GDP in 2015 to 16 percent in 2016. However, the central bank’s reserves are still large, and the national debt level is low. Yet a very high budget deficit (around 16 percent of GDP in 2015 and 2016) and a trade balance deficit should lead to further contraction or even exhaustion of the fund in the years to come. This can be compared with Russia, where, according to the Russian central bank’s data, the national welfare fund amounted to less than 7.7 percent of GDP at its peak in 2009. Moreover, it’s possible that its investments are irrecoverable, i.e. the fund has been depleted.30


The Norwegian sovereign wealth fund was created in 1990, twenty-one years after oil deposits were discovered in the country. It took some time for the Norwegian government to arrive at the idea. According to Ekeli and Sy (2011), in the 1970s and the 1980s, Norway had been experimenting with reducing the age of retirement, subsidizing agriculture, and reducing taxes, and it ran a budget deficit. In 1986, this deficit was reduced, and interest rates were nudged up to curb the growth of lending. High interest rates led to a banking crisis, the nationalization of three out of four of the country’s biggest banks (two were subsequently privatized), and record unemployment in 1990.

As was mentioned above, the government can retrieve only the revenues of the fund, not its capital. It is linked to the fact that, because of the country’s aging population, the fund’s assets may be needed to fund pension programs in the future. All the fund’s resources have been invested in foreign assets. Some 60 percent of the fund is invested in stocks, 35 percent in bonds, and 5 percent in real estate. From 1998 to 2015, the nominal returns in the currency basket of the fund’s investments amounted to 5.6 percent, and the real returns were 3.7 percent. As of December 2016, the estimated value of the fund’s assets stood at $873 billion.


In 1969, Alaska, a U.S. state with a population of 300,000 at that time, received its first big oil revenues of $900 million (the equivalent of $5.9 billion today). The money was spent on infrastructure and social projects. It was expected that big revenues would continue to come in every year in the future. The state’s authorities realized that it made sense to invest part of the assets in a fund. So the Alaska Permanent Fund was created in 1976, when the construction of an oil pipeline was completed in the state. At the moment of its establishment, the fund was supposed to accumulate 25 percent of all royalty-type payments, payments for renting land with deposits of resources, and the authorities’ income from production-sharing contracts. The first installment was made in 1977 and amounted to $734 million.

The fund is composed of principle and earnings reserves. The principal cannot be distributed. Earnings reserves can be taken out for any social purposes. The fund invests in a wide range of instruments: stocks, various kinds of real estate, bonds, and raw materials . The fund’s asset value currently amounts to $55 billion. In 1980, a regional dividend program was begun, according to which an equal amount of dividends is to be paid to each resident of the state once a year. The first $1,000 payment was made in 1982. The payments reached their highest level in 2008 and 2015, when they amounted to $2,069 and $2,072, respectively. In 2016, the fund paid out only $1,022 (the higher payments that the fund could afford were blocked by the governor).


Up to 75 percent of all Canadian oil and natural gas is produced in the province of Alberta (population: 3 million). Two-thirds of the province’s land is publicly owned, and 80 percent of oil deposits are located on this land. Alberta’s fund was created in 1976 with three goals: to create savings for the future, bolster and diversify the economy, and raise the quality of life in the province. Until 1983, 30 percent of oil revenues were directed into the fund. This share was reduced to 15 percent in 1984–1987; and after that, payments to the fund were stopped. The local bureaucracy managed the fund. Most investments were made in local projects, many of which were of public importance. Until 1995, the fund had been investing in art galleries, parks, hospitals, and theaters, as well as in supporting research. Many commercial investments turned out to be unprofitable. No strict rules were set for payments from the fund, and no payments were made until 1983. Then, they started and were approximately equal to the fund’s nominal returns. Since 1995, this practice has been suspended. In 1997, the investment priorities of the fund changed. Now, 35 to 65 percent of the fund’s resources must be invested in bonds. The fund’s goals have also changed to supporting the budget, maximizing long-term profitability, and improving the public’s understanding of the fund’s activity.

Describing this situation, Moss, Lamber, and Majerowicz (2015, 149) came to the conclusion that the fund’s initial configuration was not the best it could be. Because the fund’s goals were not clearly designated, the fund was making too many different investments and was under the influence of political priorities.31 Also, it was unclear how the efficiency of the fund’s activity was being measured under such conditions.

A professor at the University of Alberta, Allan Warrack (2005), who assessed the fund’s activity in 2005, came to the conclusion that the fund was fighting the resource curse well only at the beginning—that is, from 1976 to 1982—and that its subsequent activity could be described as just satisfactory. Warrack also points out the fund’s low profitability.

By comparing the activity of funds in Alberta and Alaska (Warrack considers the latter much more efficient), the author concludes that independent trustees must manage the fund. Ideally, this principle should be enshrined in the constitution, and the process of formulating the fund’s policy must be open. He suggested that up to one-third of oil royalties should be directed into the fund, which is arguably too much for nations with lower per capita oil revenues. Proposals regarding the distribution of the fund’s assets are more universal, in order to maintain the value of these assets in real terms. To achieve this, a maximum of 5 percent, and ideally 4 percent, of the fund’s assets must be distributed every year, half of which should be allocated directly to the residents of the country (or region).


Botswana’s Pula Fund was created in 1994. It is formally a sovereign wealth fund. Two-thirds of it belongs to the Botswana government, and one-third belongs to the country’s central bank. Initially, up to 40 percent of tax revenues from the sale of diamonds went into the fund. The goal of creating the fund was to substitute the country’s depleting natural resources and smooth out market fluctuations. The withdrawal of funds to finance the development of infrastructure was banned. The fund only invests in securities—that is, stocks and bonds denominated in foreign currencies. The initial plan was that foreign professionals would manage the fund. The peak of the fund’s value (51.6 billion pulas, or $6.7 billion) was reached in 2008. In recent years, it was shrinking on average, despite growing revenues from the exporting of diamonds. The government used the “money box” in 2002, 2003, 2005, 2008, 2012, and 2015. The head of the central bank cited a number of reasons for dipping into the fund: the need to finance state employees’ pensions, make budget deficit payments and to increase the central bank’s reserves, as well as the desire to avoid unpopular decisions such as raising taxes, canceling free education, and freezing wages in the public sector (Konopo and others 2016). According to the Botswana central bank’s financial reports, the fund’s assets were valued at 32 billion pulas ($3 billion) as of September 2016.

The fund’s management is not particularly transparent. The names of the experts who manage the fund are not disclosed. There are no asset management specialists among the persons who became known to the public (a local economist specializing in labor economics, and an Oxford University professor of African studies). According to Konopo and colleagues (2016), the principles upon which withdrawals from the fund and the spending of these resources are executed are not publicly announced. The goals of many large withdrawals were not declared.

Despite the fact that Botswana is one of the most graphic examples of a country successfully fighting the resource curse (and the only such country in Africa),principles for managing its fund—goals of withdrawals, and a lack of transparency—look rather like the goals of a rentier state with weak institutions.


Australia created a sovereign wealth fund in 2006 with one distinct practical purpose: to fund the underfinanced pension expenses of the state beginning in 2020. Contributions amounting to 62 billion Australian dollars were made in 2006–2008 amid high prices for raw materials. There were no contributions afterward. The fund’s goal is to achieve high profitability (6.9 percent in nominal terms, or 4.5 to 5.5 percent above the consumer inflation rate) with a reasonable risk. The fund has been investing in a wide range of financial instruments. Its profitability amounted to 7.7 percent over 10 years, surpassing the goal that was set. As of June 30, 2016, the fund’s assets amounted to about 123 billion Australian dollars ($91 billion). There have been no withdrawals so far.


In 2005, Qatar created the Qatar Investment Authority, a state-owned holding company that can be classified as a sovereign wealth fund. The fund has been investing abroad and in national assets, with the exception of the energy sector. It invests in the stocks of listed and closed companies, bonds, real estate, real assets (raw materials and the like), and derivatives. As of 2016, an independent assessment of the fund’s assets amounted to $335 billion. The fund itself does not publish data on the valuation of its assets and revenues.

Based on this assessment, it is worth highlighting the following main factors that affect the fund’s role in overcoming the resource curse:

  • the fund’s target expenses;
  • the size of the fund;
  • rules governing contributions to the fund and withdrawals from it and size of the fund;
  • investment instruments and directions of investments;
  • institutions that protect the fund’s assets; and
  • management of the fund.32

The Funds’ Target Expenses

Classic target expenses of sovereign wealth and stabilization funds are:

  • payments to citizens of the country / residents of regions (dividends from natural rent);
  • funding of payments to future generations, mostly pensions;
  • funding of infrastructure and social projects; and
  • funding the budget deficit.

None of these targets is more important or attractive than the others. The scale of expenses is the issue. Funding of the budget deficit must be carried out in a rigid framework, limited by the deficit-to-GDP ratio and the amount of withdrawals from the fund. Otherwise, the hydra of a rentier state raises its head. Botswana’s example is alarming, as the country has almost drained the fund, spending the money on its current budget needs. Funding of infrastructure and social projects, which are often sunk costs, should not lead to the shrinking of the fund’s capital in real terms.

With regard to target payments, it is necessary to distinguish between fair and efficient solutions. Equal payments to all residents of the country or region are considered fair, but not necessarily efficient.

Rules for Funds’ Contributions and Withdrawals

In 2007, the IMF carried out a large-scale study of the rules according to which money is contributed to stabilization and sovereign wealth funds in oil-extracting countries (IMF 2007b). It found that there are three approaches:

  • dependence on revenues from oil trade or oil prices (Algeria, Iran, Libya, Mexico, Russia, Trinidad and Tobago, and Venezuela);
  • a fixed share of revenues, regardless of oil prices (Equatorial Guinea, Gabon, and Kuwait); and
  • dependence on a budget deficit (East Timor and Norway).

The last approach is the least common one.

The question of how rigid the rules of making contributions to the fund should be is subject to debate. Rules that are too tough can contradict the actual situation with the budget. It is desirable that they be established in a way that excludes the temptation to change or bypass them in either rich or poor years. There are many counterexamples. For instance, according to the IMF (2007b):

  • In the 1980s and 1990s, when oil prices were relatively low, Alaska, Alberta, Oman, Papua New Guinea, and others changed the rules for contributing money to the funds.
  • Venezuela changed the conditions under which its fund was operating a few times, and terminated it in 2000.
  • Mexico completely exhausted its oil fund in 2002.
  • Ecuador and Papua New Guinea called their funds malfunctioning and closed them.
  • Kazakhstan, Russia, and Trinidad and Tobago changed the rules for contributing money to their funds due to rising oil prices in the 2000s.
  • In Bahrain and Libya, the rules have allowed the discretionary transfer of money from the funds into the budget.
  • Gabon has not been sticking to the rules it initially set up for its fund.
  • Algeria, which has been transferring all revenues coming from the sale of oil at over $19 per barrel, did not change the rules in the 2000s but bypassed them instead. It issued debt that was serviced by the resources of the oil fund.

As for the volume of withdrawals, reasonable rules are different for sovereign wealth and stabilization funds. A good practice for a sovereign wealth fund is to keep up the volume of withdrawals that allows it to preserve the capital of the fund, meaning that withdrawals must be limited to the fund’s actual income. The volume of withdrawals must also depend on the fund’s goals. If the goal is to finance pensions for future generations, it must amount to zero until a certain date.

There are various possible approaches to calculating the volume of a stabilization buffer (IMF 2012). The amount depends primarily on the volatility of oil prices and the permissible level of the budget deficit.  Bartsch (2006) calculated the necessary level of a stabilization fund using Nigeria as an example. He assumed that the country needed to have at least $14–$16 billion in its fund.33

Investment Tools and Options

The investment tools that a fund’s mandate allows it to use should depend on the fund’s goals; a stabilization fund should invest in more liquid and reliable instruments, and a sovereign wealth fund can afford investment in less liquid assets, such as real estate, or more volatile ones, such as stocks, in order to boost the long-term profitability of its investments. Given that investments in local infrastructure projects rarely pay off, they cannot be considered investments at all.

The second element of investment policy is the industrial direction of investments. A ban on investments in the raw materials sector that dominates the national economy is the best practice. In this regard, a positive example is Qatar, whose sovereign wealth fund is not allowed to invest in raw materials. The investment policy of Azerbaijan’s state oil fund raises doubts, as it was, in particular, spent on funding Azerbaijan’s share in the Baku—Tbilisi—Ceyhan pipeline project and currently funds the country’s shares in the TANAP natural gas pipeline, a “modern drilling platform in the Caspian Sea” and the Turkish oil processing complex known as Star. Is it using the funds obtained as a result of fighting the resource curse to create a resource curse?

The third aspect of investment policy is the choice of a geographical market for investment. Mandates prohibit many funds from investing inside a country. It is usually linked to the small size of the domestic financial market compared with the size of the fund (Norway is an example) and the lower risk of foreign financial instruments compared with domestic ones, which is especially true for resource-rich nations, the prices for the assets of which fluctuate along with the prices of raw materials. Meanwhile, experts usually criticize the funding of foreign investment projects as they do not create industrial capital inside the country. Azerbaijan’s participation in the construction of an oil refinery in Turkey does not seem too practical from this viewpoint. Social investments in other regions, such as the above-mentioned loan that granted money from Alberta’s fund to Canadian provinces below the market rate, are even more dubious.

The principles that determine the creation of a fund for current payments of dividends to citizens of the country or residents of the region should also be mentioned. According to Moss, Lamber, and Majerowicz (2015, 60–61), who elaborate on the oil-to-cash format of programs, these principles are:

  • ideally, dividends must be of the same amount for all citizens of the country, as its resources belong to the people;34
  • dividends must be paid on a regular basis;
  • dividends must be calculated according to clear and transparent rules; and
  • dividends must be linked to the fund’s revenues.

Moss, Lamber, and Majerowicz (2015) rank Russia sixteen on the list of twenty-five candidate nations for the creation of oil-to-cash programs.

Institutions That Protect Funds’ Assets

As experience shows, without strong institutions that protect funds’ assets, politicians can use them to benefit their own interests. The case of Chad is particularly blatant. To get access to the World Bank’s funding in order to create an oil pipeline stretching to the coast of Cameroon, the country created a fund under its guidance. The World Bank demanded that 10 percent of the fund’s contributions be saved for future generations; 80 percent went to high-priority projects in health and education; 5 percent went to the development of one of the country’s provinces; and only 15 percent were directed at the budget’s overall spending. The fund was managed by international experts, and its assets were kept in a London bank account. As soon as the first oil money was received, Chad started to breach the World Bank’s conditions. In particular, it used the fund to buy new military equipment for the army. Chad repaid the World Bank’s credit before maturity so that the institution would not prevent it from improper use of the fund’s resources (Eifer et al., Gelb, and Tallroth 2002; Moss, Lamber, and Majerowicz 2015, 98).

The fund’s assets are better protected if the rules of its organization and use are spelled out in the country’s constitution and the fund is governed by experts who are independent from the government, usually foreign specialists with a good reputation.

Fund Management

Management of a fund by experts who are independent from a country’s government, such as foreign experts, is considered the best practice. It is not enough for the experts to be foreign citizens; the managers of a fund must also be professionals in managing assets. For example, information on managers of Botswana’s Pula Fund that was leaked to the media makes it possible to suspect the country of breaching this principle.


Resource-dependent countries experience specific economic problems. Due to the volatility of global raw materials prices, these countries’ GDPs are too volatile. Their economies are poorly diversified because industries with a low labor intensity dominate, which creates employment problems. As the flow of resource rent is relatively easy to control, the state relies less on taxes paid by the population, which leads to a system with low accountability of government institutions. As a result, the windfall profits that fall on a nation during a boom period are spent inefficiently in the best case and are often distributed unfairly.

The institutions (or their effects) that help overcome the resource curse include strong protection of property rights, high openness of the economy, a strong and efficient private sector, a competitive exports sector (with many small and medium-sized businesses), and a government that is highly accountable. They affect the resource curse positively for the same reasons that they facilitate the development of any economy.

In addition, fiscal politics, though formally not considered an institution, has a special importance in resource-dependent nations. Its instruments can be very efficient in fighting the resource curse. In order to avoid the threat of nationalization, in one extreme case, and a high budget deficit, in another extreme case, taxation should be moderately heavy; but at the same time, fiscal policy should be flexible—that is, the taxation of the raw materials sector and budget revenues must be linked to the prices of raw materials. Budget policy should also be countercyclical; the state should spend less than it earns in “fat” years and do the opposite in “lean” years.

Excessive revenues received during a boom period must be accumulated in stabilization and future-generation funds under strict rules and with clearly designated target expenses, investment instruments, directions of investment, and other principles of fund management, as well as the rules for withdrawing funds.

There are two kinds of practical tasks in a nation’s economy: tasks with a known solution, and tasks that need experimentation to find a solution. Overcoming the resource curse falls into the first category. Creating institutions and implementing policies and tools that facilitate economic growth and diversification are tasks within the power of any nation at any level of economic development, if there is the political will. The task of building this political will belongs to the second type of task.


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Appendix 1: Possible Measures of Institutional Development

Political and Risk Services Indexes

A commercial organization named Political and Risk Services (PRS) has been issuing the International Country Risk Guide since 1980. The document assesses country risks from the perspective of the five following factors: the rule of law, bureaucratic quality, corruption in government, the risk of expropriation, and government repudiation of contracts. The PRS country risk index assumes values from 0 (the lowest institutional development) to 1.

The World Bank’s Doing Business Index

The Doing Business index has been calculated by the World Bank since 2003 and assesses the simplicity of doing business. Assessments for 190 nations are currently available. The index includes such indicators as the ease of starting a business, dealing with construction permits, getting electricity, registering property, getting credit, and also protecting minority shareholders’ rights, the existence of trade barriers for exports and imports, bankruptcy procedure (not only legislation, but also the percentage of repaid loans are taken into account), the tax system, and the execution of contracts. The World Bank publishes not only an overall rating, but also ratings according to each of these factors. The scale assumes values from 0 (the worst result) to 100.

The Fraser Institute’s Economic Freedom of the World

The Fraser Institute’s Economic Freedom of the World Index considers five indicators of economic freedom: the size of government—expenditures, taxes, and companies; the legal system and property rights; access to sound money; the freedom to trade internationally; and the regulation of credit relations, labor relations, and business. It has been published since 1996. Since 1970, data have been available for every five years; and since 2000, they have been available for each year. The index can assume values from 0 (absence of economic freedom) to 100 (complete freedom).

The Index of Economic Freedom

The Index of Economic Freedom is co-published by the Wall Street Journal and the Heritage Foundation, a Washington-based think tank. In 2016, it included 186 nations. It is calculated using four indicators: the rule of law (property rights protection and the absence of corruption); limitations on the government’s actions (fiscal health and government spending); regulatory efficiency (business, labor, and monetary freedom); and market openness (trade, investment, and financial freedom). The countries are ranked on a scale from 0 (the lowest freedom) to 100.

The International Property Rights Index

The IPRI was developed by the Property Rights Alliance and has been published since 2007. It includes three components: legal and political environment, physical property rights, and intellectual property rights. The authors of the index currently rate 128 nations. The index can assume values from 1 (worst protection) to 10.

The Corruption Perceptions Index

The Corruption Perception Index has been published by Transparency International since1995. Assessments for 168 nations are currently available. The index is premised on a poll of analysts from different institutions, including the World Bank, the Swiss nongovernmental organization World Economic Forum, the Economist Intelligence Unit think tank, the U.S. nongovernmental organization Freedom House, Political Risk Services, and the African Development Bank. The countries are ranked from 0 (high level of corruption) to 100 (very clean).

The World Bank’s Worldwide Governance Indicators

Since 1996, the World Bank has been assessing the quality of public administration, using six parameters: voice and accountability; political stability and the absence of violence; government effectiveness; regulatory quality; the rule of law; and сontrol over сorruption. The index assumes values from 0 (the lowest level) to 100.

Gurr’s Polity IV

The Polity IV data series—backed by the Center for Systemic Peace, founded in 1997—assesses the democratic development of nations. Factors like the openness and competitiveness of elections, citizen participation in politics, and the accountability of authorities affect the score. Such key components of institutions as the rule of law, which is very important for economic development, are not considered. The index assumes values from –10 to +10. Values below –6 correspond to authoritarian regimes, and those above +6 correspond to democracies. Scores have been available since 1800. The index is named after Ted Robert Gurr, a political scientist who started calculating it in the 1960s.

Appendix 2: Summary of the IMF’s Guide on Resource Revenue Transparency (IMF 2007a)

  1. The government’s ownership of resources in the ground should be clearly established by law and the power to grant rights to explore, produce, and sell these resources should be well established in laws, regulations, and procedures that cover all stages of resource development.
  2. The government’s policy framework and legal basis for taxation or production-sharing agreements with resource companies should be presented to the public clearly and comprehensively.
  3. Fiscal authority over resource-related revenue and borrowing is clearly specified in the law. Legislation should require full disclosure of all resource-related revenue, loan receipts, liabilities and asset holdings.
  4. Government involvement in the resource sector through equity participation should be fully disclosed and the implications explained to the public.
  5. Arrangements whereby international or national resource companies undertake social or environmental expenditure or provide subsidies to producers or consumers without explicit budget support should be clearly defined and described in the budget documentation.
  6. Arrangements to assign or share resource revenues between the central and subnational levels of government should be well defined and explicitly reflect national fiscal policy and macroeconomic objectives.
  7. The budget framework should incorporate a clear policy statement on the rate of exploitation of natural resources and the management of resource revenues, referring to the government’s overall fiscal and economic objectives, including long-term fiscal sustainability.
  8. Mechanisms for coordinating the operations of any funds established for resource revenue management with other fiscal activities should be clearly specified.
  9. The investment policies for assets accumulated through resource revenue savings should be clearly stated.
  10. All transactions related to resource revenue, including transactions through resource funds, should be reported to the public.
  11. The (primary) non-resource fiscal balance should be presented in budget documents as an indicator of the macroeconomic impact.
  12. The government’s published debt reports should identify any direct or indirect collateralization of future resource production.
  13. Government should report all its financial investments.
  14. The risks associated with resource revenue, particularly price shocks, should be disclosed.
  15. Receipts and expenses of resource revenues must be subject to audit.
  16. Tax administration should be conducted to ensure that taxes from resource companies are collected.
  17. International and national resource companies should fully comply with internationally accepted standards for accounting, auditing and publication of accounts.
  18. A national audit office should report regularly to the legislature on the revenue flows between international and national companies and the government.

Elena Chirkova is an associate professor in the Finance Division of the Economics Department at the National Research Institute Higher School of Economics in Moscow.


1 The word “curse” was used separately with the same meaning before. For instance, a 1988 study of the efficiency of using oil revenues by Alan Gelb, a World Bank staff member, was called Oil Windfalls: Blessing or Curse? See Gelb (1988).

2 The share of exports in the study was measured for 1971, the growth from 1971 to 1989. The authors controlled factors affecting GDP growth: its per capita level, trade policy, efficiency of the government, share of investment in GDP, and so on. Even with these factors considered, they found an inverse relationship between growth and resource endowment.

3 Indirect evidence of the fact that the existence of the curse is not a conventional viewpoint among economists is the fact that the leading economic dictionary, The New Palgrave Dictionary of Economics does not have an article named “Resource Curse,” while there is an article named “Dutch disease” (this term is disambiguated in the paper later).

4 The source does not have information for a range of countries, usually referred to as resource-rich—for instance, Afghanistan, Ghana, Kyrgyzstan, Mozambique, and Tanzania.

5 In this study, energy, wood, and agricultural goods were also included in raw materials exports, aside from mineral deposits.

6 Described in detail in World Bank (2006, appendix 1).

7 Land resources include agricultural land and natural reserves and do not include urban land.

8 As the resource curse, if it exists, is usually caused by mineral reserves and to a much less extent by resources like timber reserves or fertile soil, estimated natural resources reserves, rather than the total amount of natural capital, can be used as a measure of resource abundance. See a breakdown for separate countries in World Bank (2006, appendix 2).

9 The calculations were carried out using the same methodology as described by the World Bank (2006), as in earlier estimations of natural capital, based on rent evaluation.

10 Long-term GDP growth in nations with diversified economies is higher, according to Gelb (2011). The fact that successful countries tend to diversify is statistically reflected in, for example, Baland and Francois (2000).

11 Despite the fact that Botswana has achieved success in democratic development and has an extremely high rate of economic growth, this country has one of the world’s most unequal distributions of incomes. Its Gini ratio has traditionally exceeded 50 percent. (In 2014, the maximum Gini ratio amounted to 53.4 percent. A 2014 estimation for Botswana is unavailable.)

12 The Corruption Perceptions Index (see the description in the paper later) of Indonesia is quite low—36 out of 100 points.

13 The term voracity effect was introduced by [Tornell, Lane, 1999] who gave such a vivid name to large discretionary budget spending during the resource boom period in rentier states.

14 In 2010, Iran started cutting subsidies and introduced direct electronic money transfers to the households as compensation.

15 When the subsidies were active, up to 50 percent of oil was consumed in Iran internally. In Indonesia, consumption amounted to 100 percent (Gelb and Decker 2011).

16 According to the World Bank’s data, in 2007 in Ecuador, the average amount of gas subsidies for a family from the lower quintile of income amounted to $173, while for an upper-quintile family it stood at $1,053 (Sinnot, Nash, and de la Torre 2010, 30). In the case of petrol subsidies, the situation might be even worse, as they are allocated to car owners. In Egypt, for instance, the richest 20 percent were getting 93 percent of petrol subsidies (Moss, Lamber, and Majerowicz 2015, 94).

17 New Zealand has the highest value, 87,

18 See descripton and methodology of calculation here:

19 See methodology of the index’s calculation here:

20 Extra import subsidies on goods produced with the use of government subsidies

21 See methodology of calculations in the appendix to the 2016 annual report (Gwartney 2016).

22 See

23 The year when the data was collected was not mentioned.

24 According to the author’s calculations based on the World Bank’s data, Botswana’s GDP growth from 1961 to 2015 amounted to an impressive 5.4 percent. GDP per capita in 2015 made up $6,360 (almost $15,000, based on purchasing power parity). The year 2011 was the peak—$7,504 (in current dollars).

25 Answering the question of how the country managed to create adequate institutions, they point out such factors as ethnic homogeneity, quite soft colonial regulations (since Britain was not particularly interested in the country due to small populations and the lack of resources—diamonds were discovered later), which have not broken tribal institutions, the national elite’s focus on creating institutions, and the personal qualities of the national leader.

26 The author states that Botswana in particular uses the self-disciplining Sustainable Budget Index, according to which part of all incomes from extracting mineral resources should be directed into funding investment and education and healthcare. Also, the country has created a state investment fund called the Pula Fund, which makes only long-term investments and is managed under the principles of transparency and accountability. As is shown in the paper later, the country has turned away from these rules.

27 Openness also presupposes large shares of imports and exports in GDP, but it is not an institution.

28 Some authors in this connection speak about transformation of a non-renewable resource into a renewable one.

29 In this context, the IMF means direct increase of transparency, but the creation of a broader taxation base in the long term through payments of the fund, which, in turn, should lead to higher accountability of the country, is also routinely mentioned in regard to creating funds.

30 See

31 An example of a similar effect is given by Warrack (2005). In 1976, when separatists came to power in Quebec, the financial market perceived it as a negative signal and interest rates for borrowings increased in all Canadian provinces. In 1977, the fund provided a credit to Newfoundland, Canada’s poorest province, at a rate corresponding to the lowest borrowing rate among Canadian state-run companies, Ontario Hydro in this case. Soon, other provinces requested similar credits. They were provided to six provinces before 1982. Residents of Alberta, who started paying more on mortgages because of growing inflation, were unhappy with the decision.

32 A detailed list of best sovereign wealth fund management practices can be found in the document called “Santiago Principles,” signed by many sovereign funds (International Working Group of Sovereign Wealth Funds 2008).

33 During the high oil prices period, Nigeria created several funds, but they were mostly used by politicians in their personal interests. Extra Crude Account, created in 2004, finally accumulated $30 billion by the end of 2005, $12 billion of which was used for the redemption of the country’s debt to the Paris Club. In 2007, the country new leadership got their hands on the fund and it was exhausted by 2010 (Moss, Lamber, and Majerowicz 2015, 59).

34 The United States is the only country in the world where natural resources can be owned privately.