In my Arabic article on The Need for “Kuwait to change its strategy, philosophy and constitution with regards to how it can use its Oil revenues and Sovereign Fund Reserves”, I explain that an excessive contribution of natural resources revenue to the national budget and the false and misleading feeling of security and stability in turbulent times, that a large Sovereign Fund may provide are all damaging to a nations development and a drag on its competitiveness and productivity.
Primarily because they eliminate the pressure to reform and they take the urgency out of the drive for higher efficiency and productivity. While competing nations that have to live with volatility and insecurity will over time develop a thicker skin in the face of volatility and will be driven by the challenge to higher productivity and efficiency and as a result will drift further ahead of their secured comfortable competitors.
Volatility is critical to development and as such nations with surplus natural resource revenues must limit the contribution of natural resources revenues to government budgets and if their contribution is already very high, like in the case of Kuwait, they must come up with a plan with annual targets to bring natural resources revenues contributions down to a much lower level, and pass constitutional changes that prevent governments from taking annually from natural resources revenue anything more than what is agreed in the plan, this should create pressure and urgency to perform and reform, surplus natural resource revenues should be passed on to the sovereign fund.
As for the sovereign fund reserves, governments should not have the right to draw on them, nor should the fund provide guarantees to government borrowing, the fund should only be allowed to provide assistance to government budgets in times of war and natural disasters.
Should the country however go through a financial crisis the sovereign fund can contribute to a recovery plan that is approved by the World Bank and IFC, it may also invest in local development projects or venture in partnership with other investors or international institutions, such a structure should allow for the necessary volatility and help support a stronger recovery from such volatility.
A discipline on those lines should expose those nations to the necessary levels of volatility, insecurity and pressures that their competitors are exposed to, and that are critically important for their development, yet at the same time, provide them with the advantage of a stronger bounce back capability after a crisis.