A primer on how to design Mongolia’s SWF

Frank-Alexander Raabe



Transforming mineral wealth into development:
A primer on how to design Mongolia’s sovereign wealth fund
Prof. Pomfret Central Asian Economies SAIS Bologna Center
May 11, 2012

Submitted by Frank-Alexander Raabe




A primer on how to design Mongolia’s SWF

Frank-Alexander Raabe


      Abstract Mongolia currently experiences a resource boom that bears the potential to catapult the country to the high-income league of nations. This paper suggests that the creation of a sovereign wealth fund is a useful tool to address the inflow of foreign exchange and the multiple development challenges at the same time. In order to identify an optimal design of the sovereign wealth fund in terms of its contribution to development, 12 hypotheses are tested by means of a panel data analysis. This analysis distils the determinants of success in boosting development by looking at the patterns across sovereign wealth funds of 33 countries over 31 years. As a result, this first empirical study on the design of a sovereign wealth fund provides valuable advice on how to carefully design and manage the fund.

Acknowledgements I sincerely thank Prof. Pomfret for his guidance in choosing the topic. As well, I am thankful for his support in developing the methodological approach for the econometric analysis in this paper. Furthermore, I express my gratitude to Prof. Sourdin for her patience and advice in explaining the handling of Stata statistic software. Moreover, I would like to thank my fellow student Kristoffer Bjarkefur for his advice on preparing the data in a suitable format.

Table of contents 1. Introduction: Mongolia’s mineral wealth and development challenge....................3 2. SWFs as driver of development: definition, objectives and development impact ..8 3. Theoretical framework .........................................................................................12 4. Methodology of the empirical study .....................................................................14 5. Results and policy implications............................................................................18 6. Conclusion ...........................................................................................................22 7. References ..........................................................................................................24 8. Annex...................................................................................................................27



Third and most importantly. the investment agreement took effect on March 31. Otherwise there is no other choice than to leave the minerals underground. 2010). 2012). molybdenum. the mine will produce more than 450. major foreign mining companies were discouraged from starting explorations although the country depends on these foreign partners that deliver the necessary mining equipment and technology. this mine contains about 40. 2012. hence close to the large Chinese market (Figure 2. This situation changed in 2009 when the government and the Canadian mining company Ivenhoe Mines in cooperation with mining giant Rio Tinto signed an agreement to explore the Oyu Tolgoi area located in the South Gobi region. retrieved on May 8. annex). the policy environment did not encourage exploitations. The government acquired a 34 percent interest.000 tons of copper and 11. but negotiations with foreign mining companies were delayed by almost 10 years since Mongolia attempted to ensure majority (51 percent) shareholding.ivanhoemines. 2010.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     1. Moreover.5 tons of gold to be exploited. According to Ivenhoe Mines.   2  Source: http://www. In fact. The project is supposed to be worth US$ 4 billion and will account for 30 percent of the country’s GDP. Mongolia’s transformation into a market economy has started only recently.com/s/Oyu_Tolgoi. tin and tungsten. the country missed the opportunity to benefit from the first resource boom of the 21st century. By the end of 2011.   3   . Since Mongolia did not manage to set up an enabling environment that would allow foreign mining companies to invest. frequent natural disasters such as extremely cold winters called dzuds render mining activities difficult. During this rather long transition period. construction works to gear up for exploitation were 70 percent complete.5 million tons of copper and 1437. 550 km south of Ulaanbaatar and 80 km north of the Chinese-Mongolian border. As for total mineral wealth present in Mongolia mining experts assume that minerals worth US$ 1 trillion remain untapped until today as precious metals were identified in over 6171                                                                                                                 1  According to Pomfret (2012). the leading power in the country’s young democratic setting. First. the remoteness of the mining areas impedes the infrastructure development necessary to supply a large mine with water and electricity. Oyu Tolgoi is supposed to be the world's largest undeveloped copper and gold exploitation project.1 Meanwhile.asp?ReportID=379189. the vast mineral resources of this land-locked Central Asian country remained largely untapped. China is already Mongolia’s largest export market and accounts for 70 percent of its total exports (Batchuluun and Lin. but also coal. Once fully developed. Mineral deposits comprise mostly copper and gold. Already in the beginning of the 2000s one of the world’s largest copper and gold deposits was confirmed at Oyu Tolgoi (Pomfret. prices for exported commodities such as copper and precious metals like gold were skyrocketing (Figure 1). while Ivenhoe Mines retained 66 percent interest. There are several reasons.2 The government delivers higher estimates and indicates around 64 billion tons of copper and 1600 tons of gold. This also impacted the exploitation of the country’s abundant mineral resources. resource-rich countries should consider accepting a less favourable deal. slowed down economic reforms liberalizing markets in the 1990s. Acknowledging the huge set up costs that foreign companies have to bear by dint of higher rewards would help to attract foreign direct investment (FDI) into the mining sector. Introduction: Mongolia’s mineral wealth and development challenge While other Central Asian nations rapidly embarked on economic reforms in the aftermath of the Soviet Union’s collapse. the Mongolian People's Revolutionary Party (MPRP). Although the presence of the minerals in the Gobi-desert was well known. why the mineral deposits have not been exploited so far.3 tons of gold annually. Second.

and high income: US$12. a Russian investment bank. This has turned the mining sector into a major driver of GDP (Figure 3). but remains behind Kazakhstan and Turkmenistan as one of the poorest among the Central Asia economies3 (Figure 5). the export revenues generated from mining have the potential to propel the country on a high-growth path. Likewise. the country has the potential to become the next Brunei or Dubai. producing a relief for the shortage of capital (Figure 4) and eventually favouring human development. 80 percent of total export value stems from the natural resources. lower middle income: US$1. Mongolia left the lower income-level fairly recently during the last decade. two other small nations whose economic success depends on natural resources (The Economist. 2012).276 or more.975. maybe decades.2 percent of Mongolians lead a life below the national poverty line.US$3. GNI per capita amounts to US$ 1870. GNI per capita already more than tripled from US$ 640 to today’s level.275. upper middle income: US$3.8 percent of GDP and further expanding. too. The IMF conservatively projects economic growth at 14 percent between 2012 and 2016. This is why Renaissance Capital.976 . In fact.US$12. Compared to the 2004 level.006 . the country classifies as a lower middle-income country.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     sites (Batchuluun and Lin. After the deal concerning Oyu Tolgoi kicked off an unforeseen boom of the mining industry. Thus. 35. Given Mongolia’s low level of development progress. this mining boom could mark the beginning of a development success story. coined Mongolia’s nick-name as “Asian wolf”. foreign direct investment (FDI) has soared. In many ways. the mining boom makes Mongolia resembling Australia in the 1930s (Brian Fisher as quoted in The Economist. Clearly. Given the enormous amounts of untapped natural deposits and the relatively small population of 3 million people. Besides copper and gold other minerals are important. 2010).333 per inhabitant. following the nomenclature for other Asian high-growth countries in the 1990s.                                                                                                                 3 The World Bank categorizes countries as follows: low income: US$1. So. Source: World Bank   4   .005 or less. 2012). as the world’s largest coal reserves are also found in Mongolia’s Tavan Tolgoi mining area (Brookings. 2011). the rapidly growing mining business implies a stellar potential for economic growth in the coming years. However the country still ranks 100 out of 169 countries covered by the human development index (HDI) issued by the United Nations Development Program (UNDP). already reaching a contribution share equalling 21. At current market prices the mineral wealth mentioned above translates into US$ 333.

00   US$   6000. April 1992 .00   2000.00   Apr  92   Feb  93   Dec  1993   Oct  1994   Aug  95   Jun  96   Apr  97   Feb  98   Dec  1998   Oct  1999   Aug  00   Jun  01   Apr  02   Feb  03   Dec  2003   Oct  2004   Aug  05   Jun  06   Apr  07   Feb  08   Dec  2008   Oct  2009   Aug  10   Jun  11   Copper.2010 15   10   GDP.June 2011 12000.    per  troy  ounce   Figure 3: GDP growth and exports (FOB) compared.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure 1: Commodity prices.  per  metric  ton   Source: www.00   4000.00   0.indexmundi.00   10000.com Gold.00   8000. 1981 . in US$. Word Bank   Exports  (FOB)  in  %  of  GDP   5   .  annual  growth  in  %   5   0   30   70   60   50   40   -­‐5   -­‐10   -­‐15   GDP  growth   Exports   20   10   0   Source: World Development Indicators.

6 36. in % of GDP. 1981 .5 847 0.3 9132 0.76 2250 0.74 30.68 40. Word Bank.2 1381 0.3 (2003) 32.9 820 0. United Nations Development Program   6   .65 32.6 28.8 (1998) Kyrgyzstan 5. Word Bank Figure 5: Overview Central Asian economies Mongolia Tajikistan Uzbekistan Kazakhstan Turkmenistan Population (in million) GDP per capita HDI Gini-Index (year of recording) 2.8 (2002) 6.61 30.8 (2003) (2006) Source: World Development Indicators.2010 80   60   40   in  %  of  GDP   20   0   -­‐20   -­‐40   -­‐60   Savings   Investments  (Gross  Fixed  Capital  Formation)   Savings-­‐Investment  Gap   Source: World Development Indicators.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure 4: Savings-investment gap.64 16.4 (2005) 5 3967 0.

6 This proves that there might be a lack of discipline not to use scarce resources for such political purposes. The central issue here is the intertemporal time-preference: Should the government spend the windfall gains now (rentism) or later.   7   . 2004) might increase spending in favour of their constituencies. Taking the leaf out of the book of other resource-abundant countries such as Chile or many Middle Eastern nations. should the government consider conditional cash-transfer programs instead of investment in infrastructure and provision of public services such as health and education? A politically particularly sensitive area of debate is the targeting of such cash-transfers since inequalities have to be taken into account. A part from the government rhetoric.4 Moreover. The possibly emerging Dutch disease refers to an appreciation of the exchange rate due to the capital inflow5. i. Furthermore sharply increasing windfall gains from resource exploitation could lead to a time-inconsistency problem. meaning that targeting of any cash transfers is of eminent importance. In Mongolia. the creation of Mongolian SWF would mark the first time in the nation’s history that citizens would be legally eligible to own a share of the mineral wealth.26). this paper addresses whether a SWF is a suitable instrument to tackle the questions raised above and under which conditions the windfall gains from the resource boom are                                                                                                                 4 5 6 2009 data retrieved from the World Development Indicators database. In fact.36 in Mongolia. to let future generations benefit from today’s proceeds received for resource exports? Apart from this intergenerational problem. In light of these concrete plans to establish a Mongolian SWF. Compared to other Central Asian economies. As elections are coming up on June 28 of this year. history is full of examples of resource curses in resource-rich countries such as in Nigeria. World Bank The foreign currency is used to buy domestic currency and therefore bids up the value of the domestic currency. The most important concern is how to deal with the immediate impact of the imminent inflow of foreign exchange. The cash distribution program is to be financed by a US$250 million pre-payment from the Oyu Tolgoi project (Bloomberg.e. The suggested name “Human Development Fund” also raises hopes that the savings from export revenues will be used for development purposes.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Despite the urgent need to boost economic development and to let Mongolians benefit from the mineral wealth under their feet. the exports proceeds that will soon flood into the country could have some major drawbacks. this is relatively high (Kazakhstan: 0. This also would render attempts for diversification of Mongolia’s economy more difficult. Due to lack of funds. especially the intergenerational challenge. This effect has to be sterilized in order to prevent a high inflation rate. which is estimated to generate US$30 billion in tax revenue over the next 50 years. the cash program has now been scaled back to US$92 per citizen (Brookings. which leads to a loss of competitiveness in other sectors and possibly a Balance-of-Payments (BOP) crisis due to cheapened imports. the latter already stands at 10 percent. as politicians or other elites with de facto power (Acemoglu. Russia or Azerbaijan. in 2008 Mongolia’s parliament agreed on a National Development Strategy that comprises the creation of a SWF. the Mongolian government might consider establishing a sovereign wealth fund (SWF) as a financial instrument to mitigate the problems mentioned above. The Gini-index measuring such inequality stands at 0. increased government spending has been reported as the incumbent government plans to distribute US$ 1060 for every citizen. 2009). 2012). The seed capital is supposed to come from the Oyu Tolgoi project. This would be in line with the government’s aspirations to transform the economy to join the league of developed nations by 2020.

The author identified only two research papers that qualitatively access the development impact of SWFs on the issuer and discuss the general design.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     managed best to spur development. SWFs as driver of development: definition. section 2 presents the SWFs’ general characteristics. However. Section 3. Section 3 introduces the theoretical framework Section 4 explains the methodology. For instance. For this purpose.3 percent. 2009). and invest abroad when foreign prices are higher“. 2009). The total volume of assets managed by SWFs exceeds assets managed by hedge funds (US$ 1. Dewenter et al. (2009) look at 196 purchases and 47 sales of stock by SWFs and find that stock prices rise by 1. development impact and appropriate case studies. The approach described in this agenda contrasts . Today. Allen and Caruana (2008) elaborate on management transparency. SWFs can be defined as follows: “A government investment vehicle which is funded by   8   . the biggest funds comprising 44 percent of total SWF volume are located in the Middle East based on the petrodollars generated by Abu Dhabi. applies these to the case of Mongolia and highlights specific challenges. Mongolia would follow a broader trend. objectives and development impact SWFs are not a new phenomenon. the latter paper analyzes the private equity investment strategies across SWFs and the relationship to the fund’s organizational structure and finds that “they [SWFs] are more likely to invest at home when domestic equity prices are higher. Section 6 concludes. mandate. 2008).9 trillion). SWFs account for almost one third of assets held by sovereigns (Lipsky. nonfinancial market determined. Another 40 mushroomed during the last decade. surveillance and best practices. The first SWF was created by the British colonial administration for Kuwait in order to save the revenues from oil exports for future generations and thereby reduce Kuwait’s dependence on finite fossil fuels. al. Bertolotti et al. However. Other studies deal with investment patterns and internal management structures (Bernstein et.to the best of the author’s knowledge . The first wave took place in the mid-1970s when Singapore’s Temasek holdings and the Abu Dhabi Investment Authority were launched.7 percent upon announcement and sales trigger a drop by 1. none of these papers undertakes a quantitative study looking at past trends of other SWFs in order to draw conclusions on which country-specific. 4 and 5 investigate by means of a panel-data analysis the ingredients for a policy recipe that enhances the fund’s development impact. Dubai. Section 5 presents the results. Until the year 2000 only about 10 SWFs existed. this paper looks at SWFs from another angle. conditions are conducive for the creation and high growth-enabling impact of a SWF. 2. In this sense.g. 2010 or Chhaochharia and Laeven. It examines the development impact on the issuing country and distills by means of a panel analysis determinants that enhance the SWFs potential to boost development. Oman.with the literature on SWFs. Kuwait. According to Jen (2007) from the investment bank Morgan Stanley. Many studies are driven by fears that foreign SWFs could be abused by issuing countries for strategic national goals by purchasing assets abroad and thus exercising economic control over another government.. Since then further SWFs have appeared in two waves. So far research focuses on SWF’s impact on the firms the funds invest in (e. Qatar and Saudi Arabia.

SWFs have no contingent liabilities (Figure 6). sixth. Third. Second. First. official foreign reserves have short investment horizons and a lower tolerance for credit risk. A special provision allows for withdrawals in case of a BOP-crisis when a trade deficit needs to be financed in the short run. In contrast. This is why they are mostly held in sovereign bonds in liquid markets (Jen. although as in the case of South Korea and Norway this can be ambiguous. they are state-owned or -controlled. However. often decades. their risk tolerance is high since. and which manages these assets separately from official reserves”. investments do not need to be 100 percent held in foreign assets. In both countries the fund’s assets could be classified as official reserves. as they are constantly needed for monetary policy purposes such as open market operations (Figure 7). Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional BHD also invest in domestic assets. 2007. in contrast to pension funds. Fifth. Figure 6: Liabilities versus foreign currency exposure Source: Jen. Sarkar (2010) specifies six properties of SWFs. they have long-term investment horizons. 2007). Fourth. Morgan Stanley Research Global   9   .   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     foreign exchange assets. implying that they are exposed to exchange rate risk. SWFs are exposed to foreign currencies. they are managed separately from official reserves.

sterilization is not necessary. SWFs can be designed as stabilization funds insulating the government budget against excess volatility of commodity prices. SWFs are either based on a current account surplus as a result of generation of foreign exchange from commodities exports or on other government revenue-based holdings such as taxes.. First. It also prevents pressures on the central banks balance sheet stemming from currency mismatches if the foreign exchange earned were to be added to official reserves (Das et al. 2007. while the export revenues are directed to the SWF. some   10   . meaning that the proceeds do not enter the domestic economy. In turn. Second. According to Sachs and Warner (2001) resource-abundant countries have consistently lower economic growth rates than developed countries. Morgan Stanley Research Global As for the sources. there is no inflow of capital producing inflationary pressures. Third. The advantage of a SWF here is that export revenue is not converted to local currency. Hence. This shows that it is even more important to save for the future and invest these savings in assets with higher growth rates abroad. 2010). Chile is a prominent example of having a fund to ensure macroeconomic stability.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure 7: Investment horizon versus risk tolerance Source: Jen. In accordance with these general attributes Allen and Caruana (2008) show the plethora of different objectives that can define how SWFs are managed. 2009). pension investments and privatization proceeds (Sarkar. savings funds serve to convert non-renewable resources into a welldiversified portfolio of assets for the benefit of future generations. when preparing for the time after the commodity boom.

as an established SWF is a signal of fiscal prudence. e. In turn. certainly favours the country’s development as economic agents can plan ahead more reliably. However.g. SWF can boost the transparency of financial policy making and help to fight corruption under the condition that the creation of an SWF entails a clear rules base. few pieces of literature are devoted to the analysis of the SWF’s impact on the issuing country. This may not only spur financial sector development but also have positive spill-over effects into the entire public administration as demonstrated by the case of Singapore. the impact on inflation is more pronounced in commodity-rich countries such as Mongolia as compared with noncommodity based SWFs (Selfin et al. The last category is pension funds to support the budget in serving pension liabilities. a SWF’s administration requires highly skilled and trained finance personnel as well as efficient institutions to cope with the dynamics of international financial markets. Second. This is particularly important for the reinforcement of the private sector growth since entrepreneurs intending to undertake long-term investments rely on a stable macroeconomic environment. The fund could also be tapped in times of weak terms of trade and to reduce dependence on export revenues. Also. Tony Tan managed Tamasek Holdings before becoming President. suggesting that it might be too early to draw final conclusions. (2011) also emphasize the importance of a SWF for development. there are fewer incentives for politicians to use the proceeds for other than development purposes.2011). Aizenmann and Glick (2009) give cause for serious concern that a SWF might decrease the official reserves because governments start to channel a larger share of official reserves into SWFs. foreign investors perceive the country more favourably. most SWF emerged only recently. As far as Mongolia is concerned.. As aforementioned. Norway’s SWF is an example for the latter. As foreign exchange is channelled into the fund. in support of health and education. other funds have a specific development purpose. The reason is that the risk of default is lower as the SWF could always be raided to pay for the foreign debt if a credit event occurred that results in a sharp depreciation of the domestic currency. Abu Dhabi and Qatar run a reserve investment corporation to increase returns on reserves by investing abroad. since it not only transforms finite mineral wealth into financial assts. they report that the negative relation between the presence of an oil fund and the volatility of the exchange rate is statistically weak.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     countries such as China. smoothing the government budget and reducing inflationary pressures. Remarkably. Often. as foreign currency does not flow into the country. since this is the actual purpose of turning illiquid natural resources into liquid financial assets. The SWF’s macroeconomic stabilization function stated above. Fourth. a cornucopia of objectives will apply to its SWF under way. There. The following three hypotheses that are empirically proven by Selfin et al. Furthermore in the short run a SWF prevents a Dutch disease effect. funds are operated with regard to several of these objectives. Third. i. It also is supposed to achieve development objectives by means of a more diversified asset portfolio and higher returns compared to just relying on export revenues to finance development. Shabsigh and Ilahi question this (2007). First. In the long run the accumulated savings of the fund could serve to undertake investments that allow for a transformation of the Mongolian economy once resources are depleted as well as to finance adjustment costs on its development path. this would make those countries’   11   .e. However. this might be specific for this commodity only and therefore not apply to Mongolia because Mongolia does not produce oil. While they find that oil funds are associated with reduced inflation.

during the commodity boom it seems a good idea to put money aside for the rainy day as well as economic and social development in the long run. Nevertheless the flow of FDI also depends on the openness of the economy. a panel regression of the determinants of foreign reserves relative to GDP by Aizenmann and Glick does not confirm that a SWF leads to lower levels of foreign reserves. a higher degree of portfolio diversification can be achieved reducing the volatility of the funds’ return on investment. a larger investment portfolio yields higher absolute returns. quantitative studies have not been produced yet. it is imperative to look at past trends of other SWFs and distil insights applicable to the design of the planned Mongolian SWF. This gives rise to the first hypothesis: 1) A more open economy increases the SWF’s performance.g. In order to satisfy the information needs of Mongolian policy makers and answer the questions raised previously. the absence of capital controls. is there a relationship between the income level achieved upon the creation of the fund and its performance? For instance. The existing literature covers some qualitative assessments of SWFs’ management only and will be referred to in section 5. This implies that the fund’s development performance increases with the size of assets managed by the fund. In turn. However. a more open economy is more likely to generate a surplus and hence foreign exchange to be channelled to the SWF. As outlined above. low-income countries such as   12   . The second hypotheses is derived from this: 2) The SWF’s performance is dependant on the size of assets. Next. e. Therefore. As demonstrated by this overview of recent literature. Since the establishment of a SWF depends on a current account surplus. However. it might be difficult to withdraw the committed capital as fast as necessary.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     financial system less resilient when a crisis requires extraordinarily huge amounts of domestic currency in short time. As the SWF aims at long term investments. The identification of such pre-established conditions that lead to a high-performing SWF can be best studied when looking at the patterns of SWF performance across those countries that already established a SWF. several hypotheses will be tested with regard to these enabling conditions. 3. Theoretical framework The starting point to draw these conclusions is to ask which conditions need to be set up to render the SWF effective in terms of enabling development. In the following the performance of the SWF is judged by this effectiveness. Knowing these determinants and magnitudes of influence would allow Mongolian policy makers to tailor make the design of the Mongolian SWF to the country’s developmental challenges. the literature keeps policy makers in the dark about which variables determine a SWF’s effectiveness in contributing to development and to which extent a SWF can spur development. Creating a SWF makes even more sense for Mongolia in light of rising commodity prices (Figure 1). the existence of a SWF attracts foreign investors as the fund signals fiscal discipline. Likewise. Empirical. when more foreign exchange is available for the fund.

7) The SWF’s impact depends on the health level of the workforce. This gives rise to the following two hypotheses: 4) Strong rule of law improves the SWF’s development impact. Should the SWF’s performance depend on a country’s level of human development. since developing countries usually suffer from weak institutions it seems plausible that a certain income threshold as a proxy for efficient institutions is required before starting a SWF. What’s more. For instance. due to high HIV levels in Africa a large part of the population there cannot take advantage of new jobs created if money was withdrawn from the fund and invested in the economy. So. this also could be approximated by the amount of official development assistance that a country receives. even when taking advantage of the savings accumulated by the SWF it might take generations until manufacturing industries are created that allow for a higher growth path. In line with Sachs and Warner’s (2001) argument that commodity-based economies enjoy lower growth rates.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     the Republic of Congo could not benefit from the fund’s savings as much as countries on a higher income level. As introduced earlier. a fund can be commodity or non-commodity based. The lower the level of human development. Managing such a fund requires a well-educated and trained workforce. the third hypothesis is: 3) The higher the income level the more a country benefits from its SWF. Hence. The reason is that low-income countries’ economies are mostly based on subsistence agriculture. This leads to the hypothesis: 8) The higher the aid received. the fund’s profile itself could influence the performance. For the same reason a more sophisticated and better enforced rule of law and low corruption levels should have a positive effect on a SWF. Also the SWF is likely to perform better when the population is healthy. This results in two hypotheses: 6) The SWF shows better performance when education levels are high. 9) The commodity-based SWF’s have a smaller development impact.   13   . the following hypothesis will be tested in order to determine whether this difference in commodities versus non-commodity based growth matters. High corruption and weak rule of law probably leads to higher political discretionary power over the fund. a higher level of human development as defined by Sen and Haq (1990) could lead to higher development effectiveness of the SWF. In this sense a SWF might require the attainment of a certain threshold of economic development. the more aid is usually required. the lower the level of development and likewise the impact of the SWF. Populist spending policies at the expense of the SWF’s savings do not favour development. Besides these conditions related to a country’s state of development in general. 5) The lower the perceived corruption the better the SWF’s performance Besides economic development. Otherwise the fund might suffer from mismanagement or theft by corrupt government officials.

However. 2003). Another advantage is that a panel analysis avoids unobserved heterogeneity and reduces collinearity since the degrees of freedom increase (Hasio. Also. i.   14   . the age of a SWF could matter for its performance since SWFs that were established decades ago have probably accumulated larger savings and are managed in a more professional manner. Besides the nation-wide corruption levels captured by hypothesis 4). due to the long-term investment horizon of SWFs. This is why 168 observations are finally left. 2003). the transparency of the fund’s management itself should lead to a better performance. a panel data analysis is the appropriate tool to account for time. For instance. However.7 The panel used for the analysis is unbalanced. Texas and Alaska that all have oil-funds. Finally. The advantage of a panel analysis is that it takes the influence of observations in the previous periods on current observations into account. as long as observations are missing randomly and not systematically. In order to obtain representative results the list comprises developed as well as developing and emerging market countries. Since no data could be retrieved for the regressors “rule of law” and                                                                                                                 7 Originally this list also included the US federal states Alabama. Thus: 11) An increased SWF’s transparency leads to higher performance. 4. The following hypothesis can be derived: 12) SWFs of different regions perform systemically different. data required for the subsequent analysis is not available on the state level.e. Since the change in the SWF’s performance as a reaction to the conditions hypothesized in section 3 occurs time-delayed. As emphasized in section 3 the performance refers to the SWF’s potential as a driver of economic development. with the dependant variable being the SWF’s performance from 1980 to 2010.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Moreover. The rationale for employing a panel data analysis is the following. there is no severe implication for the quality of the results (Hasio. Also a panel analysis allows exploring better whether the proposed linkages are representative and significant for a large sample. The hypothesis is therefore: 10) The older the fund the higher is the development impact. The panel consists of 33 countries that established their SWF between 1953 and today (Figure 8: overview SWFs). Higher public disclosure standards that hold the managing institution accountable puts pressure on management to perform better and prevent theft. older funds are more likely to already have yielded returns that can be invested domestically for development purposes. meaning that not for all cross-sections the observations are available for the same periods due to lacking data. the study has to account for social. income levels as well as education and health care provision is systematically lower in Africa. Methodology of the empirical study The hypotheses presented in section 3 are tested using a panel data regression. cross-country-cross-sectional-OLS regressions. cultural and economic peculiarities in different regions that could influence the performance of a SWF.

a separate regression named “reduced set” was run in order to consider the systematic lack of data. the HDI is a widely used measure of well-being. In the first step the performance measurement is derived. Admittedly. ln_gdp. The first step requires a regression of a variable measuring development on a set of explanatory variables. The regression function estimated is: ln_gdp = ß0 + ß1*gdp_l5ct + ß2*health_expct + ß3*edu_expct + ß4*health_educt + (1) ß5*trade_gdpct + ß6*aidct + ß7*corruptionct + ß7*africadct + ß8*latamdct + ß9*asiadct + εct (c:  country-­‐cross-­‐section. due to lack of data for many years and countries in the panel. The initial challenge in this analysis was the measurement of the SWFs’ performance in driving development. which is applied with a lag of five years since changes in current GDP are likely to depend on past economic growth. The second step is the actual regression to identify the determinants of a SWF’s performance. World Bank   15   . But due to data availability GDP is still used. this residual could capture other factors than the SWF. As for the first step in this procedure. As a result of this lack of data.                                                                                                                 8 Developed by Sen and Haq in 1990. but due to lack of data to measure the SWF performance directly this concern has to be neglected. The essential qualities of human life are firstly a long and healthy life measured by life expectancy at birth. literacy and education. It therefore serves as an indicator for a country's development progress. The index takes the measurement of the average achievements in these three core areas of human development (Sharma and Gani. Although being too narrow for the multifaceted process of human development economic growth functions as a proxy for development. the residual. The indicator captures improvements in life expectancy. although it does not take non-residents’ state of well-being into account. In the next step UNDP calculates an index for each of the three qualities. The HDI is then composed by the three indices with a weight of one third each. a decent standard of living is measured by economic growth represented through GDP per capita. entitlements and choice (Sen and Haq (1990) as quoted in Sharma and Gani. As a result of a Hausman-test specification test.  t:  time)   The first explanatory variable is GDP9. It would be intuitive to assume that this performance is best proxied by the return on the SWFs’ investment (ROI). Thirdly. a two-step procedure is applied. However. Though. secrecy or simply because they are not publicly listed. the development variable originally chosen was HDI8. 2004). serves as a proxy for the impact of a SWF. It is worth noting that in contrast to human development economic growth does not capture the notion of freedom. 9 Source: World Development Indicators. data on the ROI of individual funds are not published either due to lack of reporting. whereas economic growth is just a mere means of human development instead of an end in itself.e. the difference between the predicted value from this regression and the actual value of the development variable. a fixedeffects model applies.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     “health expenditures” for the time prior to 1996. Economic growth is measured by GDP. i. secondary and tertiary gross enrolment ratio. Consequently. Secondly knowledge and education is included and approximated with two-thirds weight by the adult literacy rate and with one third by the combined primary. Actually the GNP should be utilized instead of the GDP since the GDP also takes into account the non-residents. 2004). while a value between zero (lowest) and one (highest) indicates the performance. GDP is expressed in logarithmic form. using HDI would have reduced the number of observations even further in this unbalanced panel. In the second step the residual is regressed on a series of independent variables in accordance with the hypotheses of section 3.

Source: The Worldwide Governance Indicators.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Originally.  t:  time)   In addition to the regressors included in the first regression. Trade is measured as the sum of FOB exports and imports12 despite of the concern that trade volume is also driven by the competitiveness of a country or distance to market. but again data availability would have led to too few observations. since paying bribes increases transaction costs in an economy. The primary regression function estimated before controlling for various variables looks like this: resid(ε) = ß0 + ß1*gdpct_l5 + ß2*health_expct + ß3*edu_expct + ß4 * health_educt ß5*trade_gdpct + ß6*aid + ß7*corruptionct + ß7*africadct + ß8*latamdct ß9*asiadct + ß10*size_assets_gdpct + ß11*ruleoflawct ß12*corruption_assetsizect + ß13*corruption_commodityct ß14*commodity_ruleoflawct + ß15*commodity_metalsdct ß16*linaburgmodellct + ß17*10yrct + ß17*20yrct + εct + (2) + + + + (c:  country-­‐cross-­‐section. This would have led to fewer observations due to the nature of the unbalanced panel. In addition year-specific dummies are created to control for special events in single years such as coups undermining the political stability or recessions. Health and education expenditure10 as a share of GDP not only reflect the public services provided in key areas for development. several other SWF-specific variables in line with the hypotheses put forward are included in the second step. Finally. An indicator framing the rule of law was not included. As this regression is just the first step. The aid as share of GDP frames the effect of official development assistance provided. this reduction in observations deteriorates the quality of the results by generally increasing the standard errors14. three zero-one dummies capture special regional characteristics in Africa. lags were supposed to be constructed for all regressors. Latin America and Asia. they also stand for lagged HDI11 which could not be included due to data availability. An interaction term combining both of these variables is introduced next in order to increase the explanatory power of the model. Having obtained the residual as a proxy for the SWF’s performance in the first step. the asset                                                                                                                 10 11 12 13 ibid ibid ibid According to the World Bank. the indicator “[r]eflects perceptions of the extent to which public power is exercised for private gain. including both petty and grand forms of corruption. 15  Source: Sovereign Wealth Fund Institute   16   . 2011 Update. since data is only available starting in 1996. The asset size15 as a share of GDP is the 10th variable added. in the subsequent step the error-term is regressed on variables possibly impacting the SWF’s performance. This is not acceptable because the standard error of the residual term should be as small as possible εct. Since data only is available for the current asset size managed by each SWF. A corruption13 indicator reflects the efficiency of institutions. as well as "capture" of the state by elites and private interests”. The openness of the economy is proxied by the trade volume to GDP. World Bank 14 Increasing the number of observations decreases the standard error of the independent variables assuming that the variation of the newly added observations equals the variation of the previously included observations.

High corruption levels exist in politico-social environments in which theft and opaque activities of the fund are not considered problematic. A minimum of 8 points is required for an adequate transparency. Furthermore the regressor commodity_metalsd is a dummy for the type of source of funds17. interaction terms are introduced: “commodity_ruleoflaw” is entered to control for the possibly opaque management of resource-based funds. What matters more. This implies that the relative magnitude of the asset size in comparison to the asset size of other funds does not change because the underlying determinants remain constant. These factors are less likely to change over time.” . 2011 Update. World Bank 17 Source: Sovereign Wealth Fund Institute 18 19 ibid Source: The index is based on ten principles depicting SWF transparency to the public (Figure 8. In turn. this variable “[r]eflects perceptions of the extent to which agents have confidence in and abide by the rules of society. it is worth noting that the performance of                                                                                                                 16  According to the World Bank. and the courts. The reason is that the risk for politically motivated spending of the fund’s savings is lower in a democracy because voters hold politicians in check. Circumventing the data availability problem this way certainly misses out on the change of the asset size over time. Due to the varying degrees between different political systems and the various forms of sub-categories of political systems it is difficult to determine whether a country’s political system qualifies e. Source: Sovereign Wealth Fund Institute   17   . In contrast to financial sources such as pension payments. property rights. is the fact that the rule of law is systematically higher in certain political systems such as in democracies. For the same reason “corruption_commodity” helps to investigate whether officials are more corrupt if the fund was commodity-based. When assuming that the relative size of each SWF as compared to all SWFs’ assets did not change and assuming that the current relative size of each SWF’s assets was similar in the past. A variable accounting for the rule of law16 mirrors the political system. Two other dummies reflect the age of the fund18.19 Besides regional dummies as in the previous regression. The variable “linaburgmodell” is the transparency index invented by Linaburg and Maduell.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     size is assumed to be time-invariant. Source: The Worldwide Governance Indicators.g. the surpluses depend on further factors such as the size of the economy and its competitiveness. for instance because it is easier to manipulate export receipts. though. “corruption_assetsize” helps to identify a connection between the size of assets and the level of corruption. annex). However. Since feedback linkages cannot be taken account in a panel data analysis they are not considered here. year-specific dummies allow controlling for the volatility of SWFs’ returns. whether it is founded more than 10 or more than 20 years ago. corrupt behavior might be facilitated in case of commodities. The dummy equals 1 if the export revenues put into the fund stemmed from commodities and 0 otherwise. this time it does not reflect the level of corruption in the entire economy. the asset size is mostly determined by an economy’s ability to generate current account surpluses that are channelled into the fund. especially in developing countries. as a fully-fledged democracy in accordance with Western standards. and in particular the quality of contract enforcement. Each principle adds one point of transparency to the index rating. However. as well as the likelihood of crime and violence. Finally. which could be well influenced by stock-market volatility if a fund invested in corporate shares. Intuition suggests that the incentive for officials to be corrupt is the higher the more is at stake. the assumption of a time-invariant asset size is justifiable. Instead it measures the discipline the fund is managed with. Corruption is included again. the police. Nevertheless.

The results are reported in the annex (Figure 9).1 percent level in the random-effects model.5 to +2. also in order   18   . As hypothesized. either fixed. indicating a highly corrupt environment. which shed light on the determinants of a SWF’s performance. On a scale from -2. since such liberalizations might have sideeffects on the inequality and income levels of the poor.6 percent of the variation of the SWF-performance. as the country would benefit from the fund already from the beginning on. so that the impact of these dummies cannot be observed in a fixedeffects model. In combination with the other dummy variables defined as independent variables they effectuate multicollinearity. Despite the insignificance revealed in this study it probably is a good idea for Mongolian policy makers to aim for a highly transparent SWF. asset size is significant at the 0. The asset size of a SWF enters significant at the 5 percent level and negatively in both the fixed. 2007). However. Both rule of law and corruption are very problematic issues in Mongolia. This might be because secrecy plays an important role for the performance of the SWF and would justify not publishing any information on investment returns and strategies as most funds chose to do. the proxy for the SWF’s performance. Again. when accumulated savings are still low. 5.1 percent level. Results and policy implications Running the above-specified regression yields several findings. The same is true for corruption. Similarly.5. The reason is that R-squared is highest in the random model. Moreover. non-commodity) prove insignificant. Lagged GDP is significant at the 1 percent level in “reduced set” and at the 0. This is good news for Mongolia.or random effects model. This insight could also explain why the variable measuring the transparency of the fund. Surprisingly.71 in the World Bank’s assessment. The regression on the residual. lagged GDP has a positive impact on the SWF’s performance. shows no significance. In the “SWF variables only” regression. Although the result of the Hausman test suggests a fixed-effects model the results of the random-effects model seem more useful.and random-effects models. rule of law is assigned a value of -0. reveals that the trade volume is significant at the 1 percent significance level. A Hausman test has been conducted to determine the preferred model. linaburgmodell. a fixed-effects model automatically creates dummy variables that are needed in order to differentiate the cross-sections. This is in line with the first hypothesis and suggests that Mongolia should further commit to liberalizations of trade and financial flows on its trajectory towards a market economy. As for corruption. also the interaction terms combining corruption with the asset size and the source of funds (commodity vs. The caveat remains that this suggestions is associated with a better performance of the SWF only. the country scores 3 out of 10 total points on Transparency International’s corruption index. Accountability and transparency prevent misuse not geared towards development and a lack of integration with the fiscal and monetary framework. this implies that rule of law is rather weak in Mongolia. meaning that the regressors described above together explain 92. rule of law and the associated interaction terms are not significant in any of the regressions.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     a SWF also influences the explanatory variables such as economic growth and rule of law as outlined in section 2. this contrasts with the need for accountability (Truman.

Secrecy as a recipe for success might only work for funds from middle. Hence. unless there are qualified Mongolians. the impact of human development as approximated by education and health levels remains ambiguous. is a mere input variable and does not say anything about the effectiveness of those expenditures in achieving higher education levels. this habit could be extended from the private sector to the state-owned investment vehicle in order to overcome a possible shortage in skilled human resources. Official development assistance enters negatively and is significant at the 1 percent level in both random-effects regressions. The fact that the interaction term of education and health enters positively. In fact Chile already established a second fund.1 percent significance level in combination with health expenditures. the commodity-based SWF could be complemented by a noncommodity based fund later on. since procedures guaranteeing the success of the SWFs are less likely to be deviated from and reflect a prudent management of the fund. refusing hypothesis 7. external managers could be hired until Mongolians receive finance training required to run the fund. The earlier the fund has been established the higher its positive impact on development. at the 0. This would make sense if increased current expenditure on public health services required a substantial part of the earned foreign exchange so that less currency was available to be put into the fund. implies that an omitted variable renders the interaction of both significant and positive.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     to spur the improvement of the rule of law in other sectors of the economy. While the older SWF is based on copper. Also if money was spent on primary education. Hence hypothesis 6 that higher education levels improve the fund’s performance thanks to more skilled management does not hold. In fact. Secrecy also might apply to funds already established long time ago. Development achievements in terms of education levels do not enter significantly. This should. Due to the country’s comparative advantage in raw material production. however. The reason could be that education expenditures. This suggests that. At the same time health expenditures itself have a significantly (0. seem to have a negative impact.1 percent significance level in the random-effects “reduced set” regression. although health expenditure enters negatively and education expenditures are not significant. the insignificance of both variables might stem from the fact that high income-countries such as Singapore. not be a cause for concern since the amount of aid provided to Mongolia will eventually level off while the country climbs the income ladder. Hiring foreigners for these specialized tasks worked well in the past as shows the case of Peter Morrow. education expenditures enter positively at the 0.1 percent significance level) negative impact. Nevertheless. the newer one is a savings fund for pensions and invests abroad. Younger funds. The dummy accounting for the SWFs established more than 20 years ago enters positively. Therefore. the analysis yields a very clear picture. If the source of the current account surplus is based on a commodity. Australia and Norway as well as countries with old funds such as Kuwait and Saudi Arabia were included in the panel analysis. Mongolia does not have a choice of an alternative source for its SWF. however. former CEO of Mongolia’s Khan Bank. However. As for the age of a SWF. here used as a proxy for education levels. The 10-year   19   . where corruption is usually not an issue and the rule of law strong. there is most likely no impact on the SWF performance because the management of the fund requires highly skilled finance specialists. This confirms hypothesis 8. this has a significant (at the 1 percent significance level) negative impact on the SWF’s impact on development.to high-level income countries.

This could be connected to the weakness of institutions or the generally lower level of development in those regions. in the following the empirical findings are complemented by the literature on the management of SWFs.   20   . the mandate for disclosure needs to be balanced with the secrecy that seems to enhance the fund’s effectiveness in spurring development. This explanation would be in tandem with the long investment horizons of SWFs.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     dummy is significant at the 0. Nevertheless. mismanagement of Nauru’s fund in combination with an undiversified portfolio with most investments in luxury real estate resulted in a depletion of the fund’s resources by 90 percent compared to the beginning of the 1990s. If well designed and integrated with the government’s budget. Nauru on the other hand also created a SWF in 1968 based as well on phosphate. once the country achieves higher income levels. While the results stated above provide valuable advice for the creation of the Mongolian SWF. This example underlines that the effectiveness of a fund can be largely impeded due to institutional weakness. The money spent on creating the SWF obviously is not available for other development-related expenditures. In 2006 the fund entered receivership due to poor management (Lerner). Some of the alternative developmentenhancing investments are probably more urgent in the short run such as provision of quality education. Based on the regression results in this study. The lesson to be drawn for the creation of the Mongolian SWF is that its establishment will pay off in terms of a development progress in the long run only. especially underperforming asset management and inadequate controls. Instead of limiting the fund to financing the government budget. Kiribati established a SWF in 1956 to save the proceeds from mining phosphate. this finding hinges on the condition of a sophisticated design and integration with the budget. Since the management quality is less easy to measure quantitatively. Since mining stopped in 1979 the fund has been prudently managed so that the interest payments today represent 30 percent of government revenues.1 percent level in the random-effects regression. Hence the negative result would not be representative as a SWF’s impact can be measured in the long-run only. Hence. Le Borgne and Medas (2007) conduct a study on SWFs of Pacific island nations. These mechanisms need to be complemented by reliable reporting. In this regard. its performance clearly also depends on the internal management of the fund. An alternative explanation for the negative impact of the younger SWFs is that the lag between the establishment of a SWF and its development impact takes more than ten years. but should not prevent the Mongolian government from creating a SWF due to SWFs’ function as driver of longrun development progress as described in section 2. it will be difficult to hold management accountable. Without public disclosure of the fund’s investments and strategies. Lipsky (2008) suggests that the operations of the SWF must be well integrated in the overall monetary and fiscal framework in order to avoid parallel budgets. SWFs fostered a sound fiscal framework. especially when established as a separate entity as opposed to a department in the treasury or central bank. In fact. A lack of these investments could therefore impact the SWF’s development performance negatively. the assets were used as collateral for granting loans or financing fiscal deficits without monitoring by financial authorities. The reason is probably that the establishment of a SWF entails set-up costs. Latin American and Asian countries are negative at various significance levels. which is not always the case as the contrasting cases of Nauru and Kiribati show. The region specific dummies representing the development impact of funds established by African. sound oversight mechanisms should be established in Mongolia.

Mongolia’s current account should soon turn positive again. Though. Lipsky’s (2008) recommendations on the management of SWFs are in tandem with this finding. the State of Alaska. the practical implementation of the fund should be reconsidered. Furthermore. As far as the withdrawal rules for Mongolia’s SWF are designed currently. in anticipation of export revenues to be generated. in its quest to smoothen the budget. these authors overlook the savings function of a SWF that is supposed to serve future generations. Norway. if the ROI of these assets was higher than the revenues that could be generated directly by selling the minerals. fiscal discipline and the institutional set-up in general. the mechanism suggested could lead to a fast depletion of the fund.e. money would still be withdrawn. the current account is negative (Figure 10). guarantees a better management of the fund. due to the mining boom and still elevated levels of commodity prices. as happened in 2008 in the case of copper (Figure 1). the Parliament approved a provision that allows withdrawing a certain amount of money from the SWF. Griffith-Jones and Ocampo are right in asserting that the transformation of the mineral wealth into financial assets makes sense only. Besides a strong capacity to access investment risk appropriately. Like in the case of central banks. The Chilean SWF is created to smooth government expenditures across the business cycle (Lipsky. This is necessary in order to channel foreign exchange into the SWF. Kuwait and Oman and their impact on fiscal management. Lipsky (2008) opines that funding and withdrawal rules need to be well-designed and names the Chilean SWF a recipe for success.   21   . the Parliament passed a law creating a mechanism for saving surplus revenues from mineral export revenues when market prices are high in order to withdraw currency when prices fall. In 2009. In addition the internal governance structures should clearly define the responsibilities and relationships between the government -bodies involved in the SWF's administration. In addition. in particular those prone to discretionary political power. independence from other government bodies. i. Lipsky (2008) emphasizes the importance of institutional independence. In addition. 2008). In case of Mongolia. Looking at SWFs from Chile. his study reveals that the greatest challenges for a SWF are adhering to established rules. Should commodity prices fall suddenly. the fund will not be immune against misuse. not a percentage of the fund’s value. However. Hence.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Fasano (2000) confirms the important role that management and discipline play in increasing the funds effectiveness. It is this second provision that could have negative repercussions. This means that possible investment targets of the fund should be identified abroad and their ROI compared to export revenues before the fund is created. creating a SWF makes sense only in case the current account is positive.

Clear rules concerning funding and withdrawal as well as the political independence of the SWF help to protect the SWF’s management from such politically motivated behavior. The fund needs to be carefully managed taking into account the following findings: A more open economy increases the fund’s contribution to development. Patience is required.   22   . if the boom is well managed given the country’s various development challenges. in % of GDP. As politicians generally do not think beyond the next election period. since development is a function of the SWF’s performance with a time lag of more than ten years. A SWF is a useful instrument to turn the mineral wealth into development progress. 1981 .   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure 10: Current account balance.  in  %  of  GDP   10   0   1981   1984   1987   1990   1993   1996   1999   2002   2005   2008   -­‐10   -­‐20   -­‐30   -­‐40   Source: World Development Indicators.2010 20   Current  account  balance. Conclusion The current mining boom in Mongolia could change the life for all Mongolians for the better. nor does the SWF’s performance in driving development run like clockwork. there is an incentive to misuse the fund in a populist manner.g. Over time. meaning that a small initial endowment to the fund is adequate. rising income levels will reinforce the development impact of the SWF. Word Bank 6. e. The analysis reveals that the SWF would neither be a panacea for all development bottlenecks. This should be a warning for politicians not to loose patience with the fund’s development purpose. to provide cheap credit to domestic companies in order to favor constituencies. The 12 hypotheses tested in this paper provide Mongolian policy makers for the first time with quantitative insights on which the design of the SWF could be based. Asset size does not matter for the SWFs’ performance.

a balance needs to be struck between the transparency requirement and secrecy that seems to foster the SWF’s performance.   23   . meaning that the findings described here need to be applied to Mongolia specifically.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Besides. Finally. it is of utmost importance to keep in mind that these findings are derived from a general assessment and do not yet account for the peculiarities of the Mongolian SWF. This is why based on this paper the next step should be a case study that takes into account the institutional setting in Mongolia. the integration into the fiscal framework as well as accountability are crucial for the creation of a SWF. Should Mongolia climb the income ladder. In particular. each fund is different in terms of objectives.

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Mine. all Mine. Annex   Figure  2:  Map  of  mineral  deposits  in  Mongolia       Source: The Economist. Vol 402. 8768     Figure  8:  Principles  of  the  Linaburg-­Maduell  Transparency  Index     Source: Sovereign Wealth Fund Institute     27   . 2012. No.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     8.

00000908 (-0.19) -0.) 0 (.4 -0.09 corruption_assetsize 0.94) 0.00936 -0.10) (-1.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure  9:  Regression  results.83) 0.383*** (-7.362 (-0.0156 -1.15 -0.259*** -4.20) 1.42 -3.207 (-1.0000370** 0.417 -1.68) -8.26) -0.0639 (-0.76 0 (.00945 (-0.0262* (-2.0733 -1.23E-10 (-1.) 0 (.50) 0.354** -2.616 -1.43) 0.7 0.71) -4.) 0 (.75) 1.06) -2.0728 (-0.30) -0.42) -0.41) -5.578 (-1.92   28   .397 (-0.00372** -2.83) 0.57) -0.00233 -1.) 0 (.836* (-2.24 0.) 0 (.000108*** 0.  dependent  variable:  SWF  performance     Fix Random Reduced SWF set variables (random) only gdp_l5 0.12) -0.71) -1.) -0.325 (-0.09) -0.43) -0.00) -0.033 (-1.631* -2.228* (-2.19) 0.0648 (-0.191 -0.750* (-2.89 -0.428* (-2.18) -0.0461* (-2.929*** (-5.0486 -0.86) -0.067 (-0.017 (-1.14 -0.32) -0.) 0 (.09) -1.92) -1.227 -0.0363 (-1.47) -1.72 -0.153** (-2.0799 (-1.47 -0.0257*** (-3.0128 -0.478*** (-4.22) 0.59 0.97 corruption_commodity health_edu asiad latamd africad linaburgmodell -0.57) 0.32) -1.72 -0.116 (-1.935*** (-6.61e-10** (-2.524 (-1.0727*** -4.61) 20yr 10yr commodity_metalsd ruleoflaw size_assets_gdp aid corruption edu_exp health_exp trade_gdp -0.95e-10** (-3.000147 (-0.31 -0.22) -2.

              29   . size_assets_gdp.544 -1. Besides a random.582** -2.35) 1.44 168 0. commodity_metalsd.262 -1. ** p < 0. 10yr. 20yr.145 (-0.46   Figure 9: Continuation commodity_ruleoflaw Fix 0. commodity_ruleoflaw as well as regional and yearspecific dummies are included.31) 2. Hence only the explanatory variables linaburgmodell.001     Nota bene: This table displays four different regressions.and a fixed effects regression.916 p < 0.339 Random -0.84 168 0. ruleoflaw.139 -0.434* -2.35 0.5 168 0.01.102 (-0.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe   Reduced set (random) SWF variables only -0.926 _cons N R-sq t statistics in parentheses Significance levels: * 1.65 168 0. *** p < 0. The regression “SWF variables only” is a random-effects regression of the residual from the first regression on all factors directly concerning the SWF-performance and excluding the variables describing the macroeconomic environment. For both variables data is not available for the years preceding 1995.05. the regression “reduced set” refers to the regression of the residual taken from the regression in the first step on all regressors shown in the initial regression function except for the two variables: rule of law and health expenditures as share of GDP.

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