Enhancement in Governance Capacity of the Sovereign Wealth Funds of Mongolia

Abstract

AbstractThe purpose of this study is to examine the learnings from past Mongolian wealth management, particularly in sovereign wealth fund (SWF) activities, to explore the key development features of governance of selected SWF best practices, and to identify appropriate and prudent policy implications for strengthening fund management.From international experiences, it is recommended that the government institutions, which can help stabilize the economy and exchange rate and flatten the inflation rate over generations, are the key to sustainable development in resource-rich countries. Sovereign wealth funding is a modern approach to sustainable development. In resource-rich countries, in particular, it is considered to prevent the Dutch disease and rent-seeking caused by limited democracy, poor fiscal discipline, and corruption of bureaucracy. The study involves quantitative and qualitative methods to answer a research question using a strengths, weaknesses, opportunities, and threats (SWOT) analysis and regression analysis. The selection of case studies is based on SWF indicators (scale of the fund, transparency, and accountability rate) and the country’s resource similarities that contributed significantly to the government budget. This study covers Norwegian and Chilean cases and investigates the main factors behind the success of SWF management. After obtaining the key concepts and principles for the success of SWF, we examine the Mongolian case and investigate the main reasons for its failure. Subsequently, the pros and cons of the Mongolian SWF in terms of internal and external factors are studied using SWOT analysis. The quantitative analysis is conducted in two batches of statistical estimation techniques to (1) examine the relationship between governance indicators and the scale of SWF and (2) verify the assumption that the SWF can contribute to the government’s fiscal activities. We believe that natural resources contribute to well-being, poverty elimination, job creation, and prosperity through fiscal income. Resource-rich countries should be concerned about how resource revenues drive other forms of capital that can achieve sustainable development. However, there are several challenges related to governing issues and development difficulties arising from capacity building in developing nations. Several studies indicate that resource-rich countries tend to fail in capacity building, thus causing vulnerable economies and weak social development over generations, particularly in emerging and developing countries. However, not all endowed nations have resource-management problems. Some have achieved sound resource management, which enables them to provide good public service and social benefits on a transparent base, develop innovative and modern technology, improve productive capacity, and increase revenue from surplus for safe and responsible management for future generations. In this study, we address the importance of SWF strengthening through sound governance, attempt to clarify the current situation of SWFs in Mongolia, and suggest further improvements. Mongolia, a natural resource-rich country, can convert wealth into well-being if wealth management is significantly improved. Due to the democratic regime, the nation has the potential to implement good international practices and introduce them into national wealth management under effective and efficient governance. The Government of Mongolia has established several sovereign funds through policy reforms to achieve the international organizations’ requirements for the sustainable stabilization of the economy. Some funds are terminated early due to weak governance and legislation, while others achieve their initial objectives by updating policy and legal documents through reforms. The main challenges of SWF management are political interference in decision-making; weak institutional capacity, including human capital, technology, industry standards, and internal ethical guidelines; and poor transparency performance. The failures of previous SWFs were due to unclear rules for its mission and unclear delegation from owners to managers, inadequate design and governance, excess withdrawal by political decisions, lack of operational freedom (political interference), and mismanagement (to finance directly to government expenditure). This study analyzes the measures of national governance correlated with the scale of SWF to provide evidence suggesting that countries with a higher (lower) degree of government effectiveness tend to accumulate more (less) wealth for generations. We also present an empirical analysis of how the growth in SWF asset accumulation contributes to national fiscal balance fluctuations. We show that if nations accumulate more financial wealth from government revenue surplus, the fiscal deficit tends to fluctuate in a stable manner.KeywordsSovereign wealth fundGovernanceInstitutional capacity buildingTransparency and accountabilityInclusive growthSustainable developmentStabilizing the economyFiscal deficit