Should Tanzania establish a sovereign wealth fund?

Abstract

Abstract Many natural resource abundant countries have established sovereign wealth funds as part of their strategy of managing the resource wealth. The paper looks into different arguments used as reasons to establish such funds, discuss how these funds are organized, and draw some policy lessons. The paper then develops a theory of how petroleum funds may affect the economic and political equilibrium of an economy, and how this depends on initial institutions. A challenge with petroleum funds is that they may produce economic and political incentives that undermines their potential benefits. In conclusion, the paper suggests that the best way to manage the petroleum wealth of Tanzania may not be to establish a sovereign wealth fund, but rather use revenues to invest domestically in sectors such as infrastructure, education and health. Such investments may produce a better economic, as well as institutional, development. This paper is a product of the research programme ”Tanzania as a future petro-state: prospects and challenges”, funded by the Royal Norwegian Embassy in Dar es Salaam. An earlier version of the paper was presented at REPOA’s 21st Annual Research Workshop, Dar es Salaam, April 6-7, 2016. I am grateful for many comments from the workshop participants, and for comments on a revised version from Odd-Helge Fjeldstad and Jan Isaksen. Keywords Fiscal policy Extractive industries Resource curse Sovereign wealth fund JEL Classification E21, E62, Q32, Q38