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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



the Mongolian People's Revolutionary Party (MPRP). 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. the country missed the opportunity to benefit from the first resource boom of the 21st century. China is already Mongolia’s largest export market and accounts for 70 percent of its total exports (Batchuluun and Lin. The government acquired a 34 percent interest. Moreover. By the end of 2011. 2010. the vast mineral resources of this land-locked Central Asian country remained largely untapped. prices for exported commodities such as copper and precious metals like gold were skyrocketing (Figure 1). while Ivenhoe Mines retained 66 percent interest.ivanhoemines. This also impacted the exploitation of the country’s abundant mineral resources. The project is supposed to be worth US$ 4 billion and will account for 30 percent of the country’s GDP. 2012.3 tons of gold annually. Although the presence of the minerals in the Gobi-desert was well known. Oyu Tolgoi is supposed to be the world's largest undeveloped copper and gold exploitation project. why the mineral deposits have not been exploited so far. 2012). frequent natural disasters such as extremely cold winters called dzuds render mining activities retrieved on May 8. 2010). but negotiations with foreign mining companies were delayed by almost 10 years since Mongolia attempted to ensure majority (51 percent) shareholding. Second. 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 policy environment did not encourage exploitations. the remoteness of the mining areas impedes the infrastructure development necessary to supply a large mine with water and electricity.   2  Source: http://www. Since Mongolia did not manage to set up an enabling environment that would allow foreign mining companies to invest.5 tons of gold to be exploited. the mine will produce more than 450.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     1. resource-rich countries should consider accepting a less favourable deal.2 The government delivers higher estimates and indicates around 64 billion tons of copper and 1600 tons of gold. molybdenum. Otherwise there is no other choice than to leave the minerals underground. hence close to the large Chinese market (Figure 2. According to Ivenhoe Mines.1 Meanwhile.5 million tons of copper and 1437. Third and most importantly. Once fully developed. Mongolia’s transformation into a market economy has started only recently. tin and tungsten. the investment agreement took effect on March 31. 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. There are several reasons. Mineral deposits comprise mostly copper and gold. First. 550 km south of Ulaanbaatar and 80 km north of the Chinese-Mongolian border. slowed down economic reforms liberalizing markets in the 1990s.000 tons of copper and 11. construction works to gear up for exploitation were 70 percent complete. In fact. this mine contains about 40. During this rather long transition period. annex). Already in the beginning of the 2000s one of the world’s largest copper and gold deposits was confirmed at Oyu Tolgoi (Pomfret. the leading power in the country’s young democratic setting. but also coal. 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.asp?ReportID=379189.   3   . 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.

  A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     sites (Batchuluun and Lin. maybe decades. two other small nations whose economic success depends on natural resources (The Economist. following the nomenclature for other Asian high-growth countries in the 1990s. coined Mongolia’s nick-name as “Asian wolf”. 35. Likewise. as the world’s largest coal reserves are also found in Mongolia’s Tavan Tolgoi mining area (Brookings. 80 percent of total export value stems from the natural resources.006 . At current market prices the mineral wealth mentioned above translates into US$ 333. Mongolia left the lower income-level fairly recently during the last decade. This has turned the mining sector into a major driver of GDP (Figure 3).8 percent of GDP and further expanding. The IMF conservatively projects economic growth at 14 percent between 2012 and 2016. GNI per capita amounts to US$ 1870.005 or less. 2012).276 or more.275. Besides copper and gold other minerals are important. This is why Renaissance Capital. Given Mongolia’s low level of development progress. So.US$3. 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).333 per inhabitant. Given the enormous amounts of untapped natural deposits and the relatively small population of 3 million people. the mining boom makes Mongolia resembling Australia in the 1930s (Brian Fisher as quoted in The Economist. but remains behind Kazakhstan and Turkmenistan as one of the poorest among the Central Asia economies3 (Figure 5). 2012).US$12. producing a relief for the shortage of capital (Figure 4) and eventually favouring human development. 2010). Source: World Bank   4   . 2011). foreign direct investment (FDI) has soared.2 percent of Mongolians lead a life below the national poverty line. too. After the deal concerning Oyu Tolgoi kicked off an unforeseen boom of the mining industry. GNI per capita already more than tripled from US$ 640 to today’s level. Compared to the 2004 level.975. the export revenues generated from mining have the potential to propel the country on a high-growth path. Clearly. the country classifies as a lower middle-income country. Thus.                                                                                                                 3 The World Bank categorizes countries as follows: low income: US$1.976 . In fact. In many ways. already reaching a contribution share equalling 21. a Russian investment bank. the country has the potential to become the next Brunei or Dubai. this mining boom could mark the beginning of a development success story. the rapidly growing mining business implies a stellar potential for economic growth in the coming years. upper middle income: US$3. lower middle income: US$1. and high income: US$12.

com Gold.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure 1: Commodity prices.00   8000.00   2000. Word Bank   Exports  (FOB)  in  %  of  GDP   5   .June 2011 12000.    per  troy  ounce   Figure 3: GDP growth and exports (FOB) compared.00   4000.00   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.00   10000. April 1992 .  annual  growth  in  %   5   0   30   70   60   50   40   -­‐5   -­‐10   -­‐15   GDP  growth   Exports   20   10   0   Source: World Development Indicators.indexmundi.  per  metric  ton   Source: www. 1981 . in US$.00   0.2010 15   10   GDP.00   US$   6000.

3 (2003) 32.61 30.2 1381 0.8 (1998) Kyrgyzstan 5.5 847 0.74 30.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure 4: Savings-investment gap.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. in % of GDP.8 (2003) (2006) Source: World Development Indicators.8 (2002) 6.64 16.6 36. 1981 .9 820 0.6 28. Word Bank.4 (2005) 5 3967 0.68 40.65 32. United Nations Development Program   6   .76 2250 0.3 9132 0. 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.

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

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

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

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

Also. there are fewer incentives for politicians to use the proceeds for other than development purposes. First. Fourth. 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. As far as Mongolia is concerned. However. Often. foreign investors perceive the country more favourably. smoothing the government budget and reducing inflationary pressures. 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. few pieces of literature are devoted to the analysis of the SWF’s impact on the issuing country. Remarkably. suggesting that it might be too early to draw final conclusions. most SWF emerged only recently.. The SWF’s macroeconomic stabilization function stated above. (2011) also emphasize the importance of a SWF for development. 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. since this is the actual purpose of turning illiquid natural resources into liquid financial assets. this would make those countries’   11   . Second.g. in support of health and education. certainly favours the country’s development as economic agents can plan ahead more reliably. funds are operated with regard to several of these objectives. the impact on inflation is more pronounced in commodity-rich countries such as Mongolia as compared with noncommodity based SWFs (Selfin et al. a cornucopia of objectives will apply to its SWF under way. There. While they find that oil funds are associated with reduced inflation. 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. In turn. they report that the negative relation between the presence of an oil fund and the volatility of the exchange rate is statistically weak. other funds have a specific development purpose. Norway’s SWF is an example for the latter. The last category is pension funds to support the budget in serving pension liabilities. Third. since it not only transforms finite mineral wealth into financial assts. i. e. Furthermore in the short run a SWF prevents a Dutch disease effect. As aforementioned. 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. this might be specific for this commodity only and therefore not apply to Mongolia because Mongolia does not produce oil.2011). 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.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     countries such as China. 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. The fund could also be tapped in times of weak terms of trade and to reduce dependence on export revenues. However. Tony Tan managed Tamasek Holdings before becoming President. The following three hypotheses that are empirically proven by Selfin et al. as foreign currency does not flow into the country. Shabsigh and Ilahi question this (2007). As foreign exchange is channelled into the fund. Abu Dhabi and Qatar run a reserve investment corporation to increase returns on reserves by investing abroad. 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.e. as an established SWF is a signal of fiscal prudence.

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. e. when more foreign exchange is available for the fund. However. Therefore. The existing literature covers some qualitative assessments of SWFs’ management only and will be referred to in section 5. In turn. The second hypotheses is derived from this: 2) The SWF’s performance is dependant on the size of assets. quantitative studies have not been produced yet. Nevertheless the flow of FDI also depends on the openness of the economy. However.g. low-income countries such as   12   . As the SWF aims at long term investments. it might be difficult to withdraw the committed capital as fast as necessary. This gives rise to the first hypothesis: 1) A more open economy increases the SWF’s performance. In order to satisfy the information needs of Mongolian policy makers and answer the questions raised previously. 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. it is imperative to look at past trends of other SWFs and distil insights applicable to the design of the planned Mongolian SWF.   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. Since the establishment of a SWF depends on a current account surplus. is there a relationship between the income level achieved upon the creation of the fund and its performance? For instance. 3. 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. As demonstrated by this overview of recent literature. Empirical. Likewise. the existence of a SWF attracts foreign investors as the fund signals fiscal discipline. Creating a SWF makes even more sense for Mongolia in light of rising commodity prices (Figure 1). several hypotheses will be tested with regard to these enabling conditions. a higher degree of portfolio diversification can be achieved reducing the volatility of the funds’ return on investment. As outlined above. Next. a larger investment portfolio yields higher absolute returns. a more open economy is more likely to generate a surplus and hence foreign exchange to be channelled to the SWF. In the following the performance of the SWF is judged by this effectiveness. 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. the absence of capital controls. This implies that the fund’s development performance increases with the size of assets managed by the fund. 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. 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.

  13   . 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. 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.   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. This leads to the hypothesis: 8) The higher the aid received. 9) The commodity-based SWF’s have a smaller development impact. 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. This results in two hypotheses: 6) The SWF shows better performance when education levels are high. the lower the level of development and likewise the impact of the SWF. Besides these conditions related to a country’s state of development in general. As introduced earlier. Otherwise the fund might suffer from mismanagement or theft by corrupt government officials. a fund can be commodity or non-commodity based. In this sense a SWF might require the attainment of a certain threshold of economic development. a higher level of human development as defined by Sen and Haq (1990) could lead to higher development effectiveness of the SWF. High corruption and weak rule of law probably leads to higher political discretionary power over the fund. the more aid is usually required. this also could be approximated by the amount of official development assistance that a country receives. 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. This gives rise to the following two hypotheses: 4) Strong rule of law improves the SWF’s development impact. 5) The lower the perceived corruption the better the SWF’s performance Besides economic development. the following hypothesis will be tested in order to determine whether this difference in commodities versus non-commodity based growth matters. Managing such a fund requires a well-educated and trained workforce. So. What’s more. the third hypothesis is: 3) The higher the income level the more a country benefits from its SWF. Populist spending policies at the expense of the SWF’s savings do not favour development. The reason is that low-income countries’ economies are mostly based on subsistence agriculture. Also the SWF is likely to perform better when the population is healthy. For instance. Hence. In line with Sachs and Warner’s (2001) argument that commodity-based economies enjoy lower growth rates. The lower the level of human development. 7) The SWF’s impact depends on the health level of the workforce. Should the SWF’s performance depend on a country’s level of human development.

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

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

An indicator framing the rule of law was not included. The openness of the economy is proxied by the trade volume to GDP. 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. An interaction term combining both of these variables is introduced next in order to increase the explanatory power of the model. including both petty and grand forms of corruption. the asset                                                                                                                 10 11 12 13 ibid ibid ibid According to the World Bank. The aid as share of GDP frames the effect of official development assistance provided. in the subsequent step the error-term is regressed on variables possibly impacting the SWF’s performance. A corruption13 indicator reflects the efficiency of institutions. Source: The Worldwide Governance Indicators. since data is only available starting in 1996. The asset size15 as a share of GDP is the 10th variable added. the indicator “[r]eflects perceptions of the extent to which public power is exercised for private gain.  t:  time)   In addition to the regressors included in the first regression. Since data only is available for the current asset size managed by each SWF. 2011 Update. As this regression is just the first step. Finally. since paying bribes increases transaction costs in an economy. as well as "capture" of the state by elites and private interests”. lags were supposed to be constructed for all regressors. Health and education expenditure10 as a share of GDP not only reflect the public services provided in key areas for development. This would have led to fewer observations due to the nature of the unbalanced panel. 15  Source: Sovereign Wealth Fund Institute   16   . they also stand for lagged HDI11 which could not be included due to data availability.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Originally. but again data availability would have led to too few observations. three zero-one dummies capture special regional characteristics in Africa. This is not acceptable because the standard error of the residual term should be as small as possible εct. Having obtained the residual as a proxy for the SWF’s performance in the first step. this reduction in observations deteriorates the quality of the results by generally increasing the standard errors14. 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. 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. several other SWF-specific variables in line with the hypotheses put forward are included in the second step. In addition year-specific dummies are created to control for special events in single years such as coups undermining the political stability or recessions. Latin America and Asia.

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

Similarly.6 percent of the variation of the SWF-performance. a fixed-effects model automatically creates dummy variables that are needed in order to differentiate the cross-sections.5 to +2. 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. rule of law is assigned a value of -0.1 percent level. As for corruption. which shed light on the determinants of a SWF’s performance. so that the impact of these dummies cannot be observed in a fixedeffects model. the proxy for the SWF’s performance. Lagged GDP is significant at the 1 percent level in “reduced set” and at the 0. Both rule of law and corruption are very problematic issues in Mongolia. Results and policy implications Running the above-specified regression yields several findings. Again. this implies that rule of law is rather weak in Mongolia. The reason is that R-squared is highest in the random model. The same is true for corruption. Despite the insignificance revealed in this study it probably is a good idea for Mongolian policy makers to aim for a highly transparent SWF. Surprisingly. A Hausman test has been conducted to determine the preferred model. The results are reported in the annex (Figure 9).71 in the World Bank’s assessment. This is good news for Mongolia. In combination with the other dummy variables defined as independent variables they effectuate multicollinearity. Although the result of the Hausman test suggests a fixed-effects model the results of the random-effects model seem more useful. The asset size of a SWF enters significant at the 5 percent level and negatively in both the fixed. reveals that the trade volume is significant at the 1 percent significance level. In the “SWF variables only” regression. linaburgmodell. either fixed. However. 5. shows no significance. this contrasts with the need for accountability (Truman. Moreover. non-commodity) prove insignificant. asset size is significant at the 0. rule of law and the associated interaction terms are not significant in any of the regressions. The regression on the residual. lagged GDP has a positive impact on the SWF’s performance. also the interaction terms combining corruption with the asset size and the source of funds (commodity vs. since such liberalizations might have sideeffects on the inequality and income levels of the poor.5. indicating a highly corrupt environment.and random-effects models. as the country would benefit from the fund already from the beginning on. As hypothesized. meaning that the regressors described above together explain 92. 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. 2007). On a scale from -2.1 percent level in the random-effects model. the country scores 3 out of 10 total points on Transparency International’s corruption index.   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. Accountability and transparency prevent misuse not geared towards development and a lack of integration with the fiscal and monetary framework. This insight could also explain why the variable measuring the transparency of the fund.or random effects model. also in order   18   . The caveat remains that this suggestions is associated with a better performance of the SWF only. when accumulated savings are still low.

Hence hypothesis 6 that higher education levels improve the fund’s performance thanks to more skilled management does not hold. 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. former CEO of Mongolia’s Khan Bank. the insignificance of both variables might stem from the fact that high income-countries such as Singapore. the analysis yields a very clear picture. Hiring foreigners for these specialized tasks worked well in the past as shows the case of Peter Morrow. Younger funds. Development achievements in terms of education levels do not enter significantly. is a mere input variable and does not say anything about the effectiveness of those expenditures in achieving higher education levels. At the same time health expenditures itself have a significantly (0. If the source of the current account surplus is based on a commodity. The earlier the fund has been established the higher its positive impact on development. In fact. Therefore. seem to have a negative impact. This suggests that. education expenditures enter positively at the 0.   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. unless there are qualified Mongolians. While the older SWF is based on copper. 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. refusing hypothesis 7. Hence. however. the impact of human development as approximated by education and health levels remains ambiguous. Also if money was spent on primary education. In fact Chile already established a second fund.1 percent significance level in the random-effects “reduced set” regression. however. Official development assistance enters negatively and is significant at the 1 percent level in both random-effects regressions.1 percent significance level in combination with health expenditures. 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. Secrecy as a recipe for success might only work for funds from middle. high-level income countries. here used as a proxy for education levels. The fact that the interaction term of education and health enters positively. Nevertheless. Australia and Norway as well as countries with old funds such as Kuwait and Saudi Arabia were included in the panel analysis. The reason could be that education expenditures. As for the age of a SWF. the commodity-based SWF could be complemented by a noncommodity based fund later on. the newer one is a savings fund for pensions and invests abroad. since procedures guaranteeing the success of the SWFs are less likely to be deviated from and reflect a prudent management of the fund. This should. although health expenditure enters negatively and education expenditures are not significant. Secrecy also might apply to funds already established long time ago. external managers could be hired until Mongolians receive finance training required to run the fund. The dummy accounting for the SWFs established more than 20 years ago enters positively. This confirms hypothesis 8. Due to the country’s comparative advantage in raw material production.1 percent significance level) negative impact. 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. this has a significant (at the 1 percent significance level) negative impact on the SWF’s impact on development. at the 0. Mongolia does not have a choice of an alternative source for its SWF. implies that an omitted variable renders the interaction of both significant and positive. The 10-year   19   .

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

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

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

  A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Besides. This is why based on this paper the next step should be a case study that takes into account the institutional setting in Mongolia. each fund is different in terms of objectives. In particular. Should Mongolia climb the income ladder.   23   . 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. Finally. a balance needs to be struck between the transparency requirement and secrecy that seems to foster the SWF’s performance. meaning that the findings described here need to be applied to Mongolia specifically. the integration into the fiscal framework as well as accountability are crucial for the creation of a SWF.

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

000108*** 0.228* (-2.0727*** -4.31 -0.417 -1.47) -1.0486 -0.83) 0.00936 -0.354** -2.) 0 (.478*** (-4.22) -2.09) -0.383*** (-7.325 (-0.86) -0.7 0.0156 -1.41) -5.) 0 (.20) 1.76 0 (.95e-10** (-3.23E-10 (-1.0461* (-2.616 -1.12) -0.362 (-0.75) 1.428* (-2.  dependent  variable:  SWF  performance     Fix Random Reduced SWF set variables (random) only gdp_l5 0.68) -8.0128 -0.30) -0.153** (-2.26) -0.00) -0.92) -1.0648 (-0.00233 -1.19) 0.71) -1.57) 0.71) -4.0000370** 0.00000908 (-0.227 -0.4 -0.836* (-2.18) -0.) 0 (.929*** (-5.0363 (-1.) -0.92   28   .935*** (-6.94) 0.0639 (-0.06) -2.00945 (-0.42) -0.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe     Figure  9:  Regression  results.59 0.14 -0.10) (-1.191 -0.47 -0.42 -3.89 -0.15 -0.32) -0.631* -2.57) -0.97 corruption_commodity health_edu asiad latamd africad linaburgmodell -0.0262* (-2.000147 (-0.750* (-2.09 corruption_assetsize 0.83) 0.0728 (-0.259*** -4.32) -1.207 (-1.033 (-1.50) 0.19) -0.22) 0.72 -0.578 (-1.72 -0.) 0 (.067 (-0.0799 (-1.0733 -1.524 (-1.43) -0.397 (-0.61) 20yr 10yr commodity_metalsd ruleoflaw size_assets_gdp aid corruption edu_exp health_exp trade_gdp -0.017 (-1.00372** -2.09) -1.116 (-1.0257*** (-3.) 0 (.61e-10** (-2.24 0.) 0 (.43) 0.

ruleoflaw.44 168 0.916 p < 0. *** p < 0. 10yr.and a fixed effects regression.544 -1.434* -2. commodity_ruleoflaw as well as regional and yearspecific dummies are included.35 0. 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.339 Random -0.262 -1. 20yr.01.926 _cons N R-sq t statistics in parentheses Significance levels: * 1.05.46   Figure 9: Continuation commodity_ruleoflaw Fix 0. ** p < 0.145 (-0.139 -0. commodity_metalsd.65 168 0.35) 1.84 168 0. Besides a random. Hence only the explanatory variables linaburgmodell.5 168 0.582** -2.   A primer on how to design Mongolia’s SWF   Frank-Alexander Raabe   Reduced set (random) SWF variables only -0.31) 2. 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.102 (-0. For both variables data is not available for the years preceding 1995. size_assets_gdp.001     Nota bene: This table displays four different regressions.               29   .