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. The paper suggests that the best way to manage the petroleum wealth of developing countries 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.
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