Wednesday, 13 June 2012

Transforming wealth into development

Lots of people share Frank-Alexander Raabe's career aspiration: to create a better economic environment ultimately spurring human development.

Here is what this SAIS student is doing about it.

Raabe earned a bachelor's degree from a top business school in his native country, Germany, in 2010 after studying at the London School of Economics for a summer and in Paris for a semester.

Raabe receiving his award from
Economics Prof. Michael Plummer
Between 2008 and 2011, he worked internships in Malaysia, Thailand, Mexico and China. Just before starting his studies at SAIS Bologna a year ago as an International Development concentrator, he was working for the U.N. Development Program (UNDP) in Kuala Lumpur.

Along the way, he picked up fluent English, French and Spanish, and fair Mandarin and Malay.

Given Raabe's background and interests, his choice of essay topic for Prof. Richard Pomfret's "Central Asian Economies" course this past spring comes as no surprise: How to design Mongolia's sovereign wealth fund.

His paper, which you can read here, concludes that a mining boom in Mongolia holds the promise of vastly improving the lives of that nation's people, but only if the boom is well managed. "A sovereign wealth fund is a useful instrument to turn the mineral wealth into development progress," he says.

This might seem an obvious premise. But there are some surprises in Raabe's paper, including his finding that such a fund might perform better, at least in the initial stages, if it were less than perfectly transparent.

Raabe's efforts won him one of the three highest academic awards at last month's end-of-year ceremony. We published posts on the two other C. Grove Haines winners here and here.

What would Alexander like to do after graduating from SAIS next year? He could see himself working as a policy maker for an international or regional development bank or organization. Or working for the German foreign service.

I asked Alexander a few questions after he won his award.

Q: How did you get the idea for your paper?

Raabe: During the second semester I chose Prof. Pomfret's course "Economies of Central Asia". The course covered Central Asia's five "Stans" but not Mongolia.

I considered the final paper a unique chance to learn about Mongolia's economic development challenge. In contrast to the "Stans", Mongolia's mineral wealth remained untapped during the Soviet era. But the mining industry recently started experiencing an unprecedented boom.

In light of the many developing countries such as the Republic of Congo whose citizens do not benefit from mineral wealth, I asked myself how policymakers could transform this underground treasure into development progress. A discussion with Prof. Pomfret revealed that it might be worth looking into sovereign wealth funds as a possible solution. It turned out that this is an actual research niche.

Q: What was the biggest challenge for you?
Raabe: Since the paper is an econometric study, apart from constructing the hypotheses based on literature, finding the data was the biggest challenge. Often the data is not available for free so other proxies have to be developed to circumvent the data availability issue. And even when getting the data it takes ages to slice and dice them into a suitable format to run the regressions.

Q: Were you surprised by your conclusions?
Raabe: In many ways research is like a Kinder Surprise Egg. It takes some effort to obtain the results, but the findings themselves are a huge reward.

Also, to the best of my knowledge there are no other quantitative studies yet on what to take into account when designing a sovereign wealth fund to improve its impact on development. Hence, the innovative approach revealed several surprising findings.

For instance, transparency regarding the investment strategy reduces a sovereign wealth fund's performance. This contrasts with my hypothesis that only a transparent sovereign wealth fund spurs development.

Also, a sovereign wealth fund bears fruit only after more than a decade. This is a surprise and a warning for Mongolian politicians at the same time: patience is required. Politicians should not deplete the fund's resources for clientelistic spending programs in the short run. In essence, the study revealed many findings that might be useful for policy makers in Mongolia.

Nelson Graves