Are SWFs Too Popular?

Ashby Monk

At the end of last year, I argued that the era of sovereign wealth funds was upon us. As I said at the time:

“For those that thought the global financial crisis would mark the end of SWFs, think again. 2009 was a banner year for these government owned special purpose vehicles. From Greenland to Angola to Papua New Guinea, I managed to count 14 funds at various stages of consideration or creation. Clearly, SWFs have never been more popular than they are now.”

Well, it appears the popularity of SWFs has not waned. In fact, I’d say it may have actually  increased,  as politicians from around the world – ranging from the staunchly communist to the most conservative – are increasingly looking to and relying on these special purpose vehicles to help smooth their country’s integration into the global economy. And, given the extreme volatility as of late, many of the countries considering new SWFs have good reason to do so, such as Colombia, Ghana, Papua New Guinea, Nigeria and Saudi Arabia. Indeed, in my opinion, all could benefit from having a SWF.

But, I have to say, the rush to set up SWFs may have gotten a bit out of control, as some countries that really have no reason for a SWF (at least in the short- to medium-term) are talking about their intention to set up such a fund. For example, I saw last week that Rwanda – a country totally dependent on foreign aid –  announced plans for a new SWF. I acknowledge that the time frame given by Foreign Minister Louise Mushikiwabo is generous – she wants the new fund by 2020, which gives the Rwandans plenty of time to develop the country’s methane gas sector – but it just seems a bit odd to raise the idea when there are so many other pressing issues to worry about. (It’s a bit like telling US states to consider setting up new stabilization funds).

This then got me thinking about other situations where countries are perhaps misguided – or at least premature – in considering a new SWF. And, to my surprise, I came up with quite a few that might want to think twice about their current SWF plans:

  • Tunisia: There are plans to set up an SWF to help with the country’s unemployment. You’ll agree, this is a unique rationale for an SWF. Why would the government set aside money to invest in financial markets over the long term when it could fruitfully spend the money today to alleviate the problem?
  • The Maldives: President Nasheed wanted (or he pretended to want) a SWF to help move the country’s citizens to another location should the country be totally submerged due to climate change. Again, I’m not sure that’s what SWFs are typically used for, but it’s an interesting concept.
  • Iran: Policymakers want a new SWF to help develop the country’s domestic resource industry. This isn’t that bad an idea actually, as Iran’s industry does need help. But the fund, if implemented, would create plenty of domestic economic problems and would do nothing to curb Iran’s inflation (which is very high).
  • Lebanon: Policymakers are talking about a new SWF for the revenues from resources that aren’t even discovered let alone out of the ground. While I like the enthusiasm, it’s probably a bit premature for this.
  • Taiwan and China both want new “SWFs” to help manage their under-performing SOEs. While it’s a reasonable idea, I think it’s a bit of a stretch to call these SOE holding companies SWFs. Will these funds even make investments?
  • India: Policymakers were planning on setting up a SWF to facilitate strategic resource acquisitions around the world. Significantly, however, the country decided at the end of last week that the SWF wasn’t necessary. And that was probably wise.

Anyway, all this is to say that SWFs have become so popular among politicians that we may be getting carried away. In a way, SWFs have almost become status symbols among emerging market economies (i.e. if you want clout, you need an SWF).

While I get the impulse to set up an SWF, these proponents need to understand that these funds are not a panacea. There are plenty of countries out there that have set up SWFs and found themselves worse off afterwards (see Nauru).

In sum, I’m not trying to say that these countries shouldn’t set up SWFs at all – I don’t know all the relevant details about each case to make such a statement – I’m just pointing out that while SWFs did undoubtedly help many countries through the financial crisis, that doesn’t mean that every country needs one today.

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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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