Comparative Analysis on Reforms of Commodity Stabilization Funds in Latin America: Case Studies on Chile and Mexico

Abstract

This thesis is to analyze the two Commodity Stabilization Fund (CSF) reforms of Chile and Mexico with institutional approach. CSF is a type of SWF sourced from commodity exports and mostly used by resource abundant countries in order to stabilize the owning countries macroeconomic situation. Many Latin American countries also introduced CSF to minimize the volatility of their economy and overcome the Resource Curse, a paradox that resource abundant countries have difficulty in achieving economic development due to their abundant resource. Previous studies on CSFs agreed that CSF does contribute to its original goal of macroeconomic stabilization but the quality of institutions of the CSF is much more important to make it more effective. In this context, this thesis uses an international agreement on the behaviors of Sovereign Wealth Fund, the Generally Accepted Principles and Practices which is also called as Santiago Principles as an analytic framework. The basic methodology is to compare changes in institutions before and after the reform described in the official documents of each CSF. The result revealed that CSF reforms of Chile and Mexico shared some commonalities in showing great improvement in terms of transparency while staggering in independence of the fund and in protection of shareholders´ rights. More importantly, however, they showed contradictions in most and least improved parts of new institutions. Investment strategy and risk management part was one of the most improved ones and accountability was hardly improved in Chilean reform while in Mexican one, it was one of the least improved part. On contrary, accountability was least improved part for Chilean Copper CSF while it was one of the most improved part for Mexican one. This contradiction is mainly originated from the different development stages and policy objectives of each fund. Chilean CSF has long history and greater size of asset and investment while Mexican one is relatively young and small. Also, the main objective of the Chilean reform was to legalize its CSF while Mexican CSF reform was a part or Energy Reform of Mexico focusing more on receiving investment rather than doing investment abroad. As a result, Mexico focus more on incoming investment amending accountability while Chile also emphasized investing abroad establishing investment and risk management strategies. Some policy implications are drawn that those CSFs should have strong drive to lead institutions to actual performances taking long term view. Also, the GAPP should have stronger binding power and try to be more concrete with consideration of member countries situations. Further studies may focus on the investment of CSFs since the importance of the CSFs and SWFs is rapidly increasing in FTAs including TPP agreement.