Letters to the editor

The controversy over oil funds

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

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

P. Sudhakar

Adliya, Manama Bahrain

Jeffrey Davis and Rolando Ossowski reply

Mr. Sudhakar states that the creation of an oil fund would amount to "putting money away for a rainy day," discourage fiscal profligacy, and encourage public savings. We agree with these objectives but question whether a fund would likely contribute to their achievement. Money is fungible, and channeling certain resources into a fund would not prevent governments from spending them-say, by increasing borrowing. Moreover, actual experience with funds suggests that, for the most part, they have not led to more prudent fiscal policy. If...