Very Different Countries, Same Constraint

Ashby Monk

I’ve been covering the internal debates in Nigeria and India over whether to set up a new SWF for some time (for Nigeria, see here, here, here, here, and here and for India, see here, here, here, and here). If you aren’t aware, each country comes to the ‘SWF debate’ with very different circumstances and, it should also be noted, motivations for why a  SWF is needed:

  • India wants a SWF so that it can invest some of its foreign exchange reserves in strategic resources around the world. Think of this as a sort of ‘strategic commodity acquisition fund’.
  • Nigeria’s wants a SWF for more traditional purposes, such as stabilization, diversification and inter-generational equity.

In any case, over the past few months both countries have actually made considerable headway on their proposed SWFs. While India’s Finance Ministry has said that the decision on whether to establish such a fund has not been made, many think it a fait accompli. And while Nigeria’s Governors have yet to give their blessing to using the Excess Crude account for funding the new SWF, it is generally expected that the new SWF will soon become a reality.

Indeed, two well-crafted editorials were published today on the merits of SWFs in each country; one by the Editors of The Economic Times of India and the other by the Editors of the Daily Independent of Nigeria. Both seem to conclude that SWFs are a good idea and worth doing but with constraints:

India: “…there is merit in the proposal, provided we can devise an institutional mechanism that can deploy the funds with integrity and flexibility…Can we have a fund like Temasek or the Abu Dhabi Investment Authority, professionally managed, picking winners, tolerating some losses? To answer in the negative is far too cynical, and ignores innovations like the new pension system, where retirement savings are being managed by competent professionals in a competitive framework.”

Nigeria: “The possibility that the Fund could be mismanaged is real, especially given Nigeria’s ugly experience with the Excess Crude Account (ECA)… We therefore challenge the committee set up to work out the operational modalities of the proposed SWF to do a thorough job. First, it must ensure that its structures and funding sources are well defined. Moreover, it must have well-designed funding and withdrawal rules that are consistent with the stated objectives. Furthermore, as the nation’s common wealth for the present and future generations, its operation must be governed by strict standards of prudence, transparency and accountability. Nigerians need to be reassured that the administration of the SWF will be entrusted to seasoned professionals, knowledgeable in modern economic management systems. Furthermore, its governing board must have adequate representation from all sections of the country and sectors of the economy. Only then will the idea of setting up a Sovereign Wealth Fund for the country be likely to receive wide support.”

In sum, these different countries who want SWFs for very different reasons seem to agree on one thing: it’s not worth doing unless it’s done well. And I couldn’t agree more; if the governance and design of these funds are sub-standard, the new SWFs could fail to achieve a Pareto improvement, which means that the countries shouldn’t have done it to begin with.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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