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Finance & Development
A quarterly magazine of the IMF
June 2002, Volume 39, Number 2

Letters to the editor

The controversy over oil funds

I read with interest "Oil Funds: Problems Posing as Solutions?" by Jeffrey Davis, Rolando Ossowski, James Daniel, and Steven Barnett (December 2001). However, despite the substantial empirical and country research that went into the article, I believe that, with the right framework—for example, a cap on all borrowings, prudent liquidity management, and appropriate medium-term expenditure planning—oil funds would serve many public policy objectives. True, an oil fund cannot replace fiscal policy decisions (expenditure smoothing), but the long-term benefits of creating such a fund cannot be ignored. A well-managed oil fund (or any fund that sets aside a portion of surplus government revenues) can only be beneficial, especially in a developing country. Although I am not trying to simplify fiscal problems, the old adage of putting money away for a rainy day holds true even for countries! Any measure that discourages fiscal profligacy and encourages increased government saving can only benefit the country's population. The reason energy funds did not take off or were closed down, as stated in the article, is because of poor governance, corruption, or other such problems. If the choice were between not encouraging the creation of such funds (because of past experience) versus encouraging them, but with a sound framework, I would vote for the latter.

The article also states that stabilization funds may face either continuous accumulation or rapid exhaustion of resources. True, but there is also the possibility that the fund might not even take off if the oil price outturn is much lower than the rules governing the transfer to such a fund. In that case, the government itself may have to borrow to get the fund going from the start!

P. Sudhakar
Adliya, Manama

Jeffrey Davis and Rolando Ossowski reply

Mr. Sudhakar states that the creation of an oil fund would amount to "putting money away for a rainy day," discourage fiscal profligacy, and encourage public savings. We agree with these objectives but question whether a fund would likely contribute to their achievement. Money is fungible, and channeling certain resources into a fund would not prevent governments from spending them—say, by increasing borrowing. Moreover, actual experience with funds suggests that, for the most part, they have not led to more prudent fiscal policy. If governments want to put money away during good times, they can do so without recourse to complicated mechanisms that often turn out to be costly in practice. There may be circumstances when a well-designed fund may help, but the evidence that funds "did not take off" or were "closed down" is surely reason for caution.

Mauritius: A Case Study

Arvind Subramanian's interesting article (December 2001), if anything, understates the uniqueness of Mauritius's achievements: a functioning pluralist democracy, consensual coalition politics, sustainable development, and a model welfare state. It also leaves unanswered the central question: who designed the viable economic strategy and how was the consensus between technocrats, bureaucrats, and politicians achieved in a multiethnic society? Nor does the article identify the key role played by a positive income and prices policy based on large and active trade unions with centralized wage bargaining coupled with price controls on socially sensitive wage-goods, which has helped maintain industrial peace, so vital for successful export performance. While the article rightly points to the role of the Chinese community in attracting investment by Hong Kong entrepreneurs, it overlooks the equally important role of the majority Indian diaspora in developing the offshore financial sector and attracting Indian investment and substantial technical assistance.

The article correctly stresses the role of "strong domestic institutions"—a portmanteau concept covering all non-economic variables—as a major factor in Mauritius's enduring economic miracle, which recalls the memorable observation of the Nobel Laureate Robert Solow. How often all discussions of the sources of growth and development seem to end in a blaze of sociology, which also explains the stubbornly large residuals in all growth-accounting models.

Anand Chandavarkar
Formerly, IMF advisor

Arvind Subramanian replies

Many of the issues raised by Mr. Chandavarkar, including incomes policy, the welfare state, participatory politics, and the diaspora, were described in the article, albeit perhaps not fully enough, given space constraints. A working paper I coauthored with Devesh Roy ("Who Can Explain the Mauritian Miracle: Meade, Romer, Sachs, or Rodrik?" IMF Working Paper 01/116 (Washington, 2000)) contains a more elaborate treatment of all these issues, including the central question of who designed the strategy and how it was arrived at.

We welcome our readers' comments on articles and book reviews. Please send them to the Editor-in-Chief, Finance & Development, or e-mail them to Include your name, address, and, if relevant, professional affiliation. All letters may be edited for style and length.