Given their significant level of oil and gas revenues for over three decades,
there can be little debate that the oil exporting countries of the Persian Gulf
have failed economically. Their average annual per capita economic growth was
negative from 1975 to 2002 and has only become positive and high since 2002
because of booming energy markets, underscoring their continued dependence on
oil and gas.
At the same time, depletable oil and gas reserves, the underlying source of all
wealth in the region and the birthright of all current and future citizens, has
resulted in anything but equity among the
citizenry. While oil has supported government revenues, economic failure and
social injustice has become all pervasive.
It is time for a change while oil and gas reserves last. Comprehensive
sovereign wealth funds, or SWFs, will afford these countries the means to
achieve superior economic and social results. SWFs will take easy money away
from the hands of governments and of rulers, military expenditures, waste and
corruption are likely to be reduced and there will be better chance of adopting
and implementing rational economic policies.
At the same time, equal annual real payouts to each citizen today and over time
will support equity across generations, while promoting more rational
consumption patterns because citizens will be free to do what they wish with
their income instead of governments and rulers spending it on their behalf and
to preserve their own power. In this way SWFs could have an all-encompassing
impact on economic developments and on the lives of citizens in the Persian
Gulf.
Looking at the spectrum of countries, we saw in Part I of this article that in
Kuwait, Qatar and the United Arab Emirates, such funds would make each and
every family rich beyond belief while limiting the benefits of the ruling
classes. In Saudi Arabia, and to a lesser degree Iraq, payments from an SWF
could make a significant contribution to the income of average families while
again reducing the benefits of the rulers in Saudi Arabia and the emerging
elite in Iraq.
In the case of Iran, the payment, though smaller, will make a difference for
the average family and reduce corruption and the take of the elite. All of this
will be most effective if it is supported by an effective income tax system and
a period of transition as government oil revenues are reduced.
These changes, though at first blush purely financial in nature, will go a long
way towards promoting more democratic governance and social harmony in the
region that is today in social turmoil. Rent seeking rulers and their "hangers
on" would have less incentive and ability to keep a tight grip onto power,
possibly opening the door to democratic reform. The disenfranchised masses
would reap equitable direct benefits from oil and gas revenues and might become
less militant. Such a change would be a breath of fresh air in a region of
absolute rule and general dissatisfaction.
We now turn to some of the operational, social and economic issues surrounding
SWFs. The operational features are needed to make comprehensive SWFs deliver
the hoped for results.
Ownership: Unambiguous confirmation of ownership is a critical element
for the long-run success of SWFs. There must be no doubt that these funds
belong to the country and thus to its citizens, and are not even partially the
private treasure chest of rulers or senior government officials.
Administration: The operations of the SWF must be totally transparent. A
Fund needs to have clear independence and authority with respect to investment
decisions and general management. The SWFs administrators must have direct
reporting lines to the governing board, and their employment/succession,
performance and compensation be determined solely by such a board. The
administration of the SWF and the formal processes it adopts should not be a
part of the civil government structure, be reliant on any government entities
nor have any connection to ruling families and elites. Accordingly, the
government will not have real or ostensible authority over the SWF's
management.
Governance and control: A fundamental concern with the establishment of
an SWF is its governance structure. There needs to be integrity among those who
can influence strategy and financial performance. The governance body (possibly
a board of directors not dissimilar to a modern corporation) should be
comprised of individuals with a balance of skills, experience, and independence
appropriate for the management of the SWF. Mandatory and periodic disclosures
with respect to the SWF's balances, investment policies and results, flow of
funds, material matters, and even personal financial disclosures of the board
members would instill public confidence (and international confidence, see
below) and minimize potential malfeasance. Further, the rights of citizens, the
SWF’s beneficiaries, need to be clearly articulated and upheld. Effective
internal control mechanisms must be put in place to ensure the proper
functioning and governance.
Beneficiaries: It seems reasonable that only citizens should be the
beneficiaries of any payout from the SWF as the oil belongs to citizens of all
generations. The definition of "citizen" is itself a complex topic. For
instance, in most countries a non-citizen spouse of a citizen could elect for
citizenship status. If that were the case, would the spouse who was recently
granted citizenship be entitled to the same payout from the fund in the same
manner as the indigenous? What about extended families of the spouse? A
pertinent question is whether payouts should be given to adults only? If
payouts are given to all citizens regardless of age, is it reasonable to assume
that a minor would be sufficiently responsible? Should the payment then be made
to the parent or the guardian of a minor? If yes, then such a policy could
encourage population growth (and the more children one has the larger the share
of the fund's payout).
On the other hand, if the first payment (representing the accumulated annual
payouts from the prior 16 or 18 years) to a citizen is set contemporaneous to
the attainment of adulthood, would that expectation of such a financial
"windfall" create moral hazards and result in unintended waste? For the purpose
of our illustrative calculations reported in Part I, we assumed that annual
payouts are made only to those over 18 years of age.
Moral hazards and conditionality: Given the moral hazard issue
identified above, one could argue for instituting compensating factors that
would serve to minimize unintended consequences. Specifically, the first
payment from the SWF could be tied to some socially acceptable (or desirable)
criteria. For instance, for those in 18-to-30 age bracket, the first and
subsequent payouts could be made conditional to the citizens' achieving a
minimum level of educational proficiency, or indeed, for having a history of
productive and legal employment if not attending school. Such a condition would
encourage literacy amongst the populace and could support economic growth.
Another condition that could be attached to a citizen's right to receive
current and future payouts from the SWF is the maintenance of a clean civilian
record. Depending on the nature of the offense, a felon may forfeit his or her
right to further payouts from the fund (The money that would have been paid out
to felons may instead be re-directed to law enforcement bodies and also to
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