What role for sovereign wealth funds in Africa's development?

The discovery of natural resources in a developing country is not generally the good news it appears to be. In fact, resource-rich developing countries face the significant challenge of using their natural wealth to improve the living standards of average citizens, rather than wasting it through weak institutions and corruption – a phenomenon often referred to as the "resource curse." Civil wars and political turmoil tend to exacerbate the problem. One increasingly popular option for dealing with the resource curse is the commodity-based sovereign wealth fund (SWF). Angola, Ghana, Mozambique, South Africa, Uganda and Nigeria are set to join other African countries, such as Botswana and Mauritania, in turning to these special-purpose financial vehicles to help ensure proper management of resource revenues. By sequestering some of their resource revenues in a SWF, these countries hope to smooth resource price volatility, make long-term fiscal policy, manage currency appreciation, facilitate intergenerational savings, and, perhaps most importantly, minimize corruption and tame the political temptation to misuse the newfound wealth. However, as Nigeria’s experience with the Excess Crude Account illustrates, it is not enough just to set money aside. The success of SWFs is ultimately a function of good governance and clear mandates. This paper illustrates the key ingredients required for an SWF to succeed at facilitating development in the African context