Weekend Reading

Ashby Monk

I just read a new paper by Stephany Griffith-Jones and José Antonio Ocampo entitled, “Sovereign Wealth Funds: A Developing Country Perspective.” The paper offers up some useful insights into the dramatic rise of these funds. As you may have noticed, this is an increasingly popular topic among academics.

“When understanding the rationale for SWFs, it is therefore important to start with the current account, as well as the underlying reasons for a current account surplus. If there is no current account surplus, it is difficult to rationalize the creation of SWFs. Indeed, were a SWF merely created on the basis of “borrowed reserves” –or, more broadly, “borrowed liquidity”—we can think of it really as a form of financial intermediation, as it would not involve really the management of net foreign exchange assets.”

We have actually seen quite a bit of this type of intermediation as of late, as several SWFs have taken to borrowing their capital from private markets. Anyway, the authors continue:

“We differentiated four different motives for the accumulation of foreign exchange assets. The first two, which we called the “wealth substitution motive” (transform a natural resource into financial assets) and the “resilient surplus motive” (long-lasting current account surpluses that cannot be corrected in the short-run by exchange rate appreciation). These two motives are behind those SWFs that are savings funds in character –and indeed, we argued strongly that, in strict sense, these are the only two motivations that should lead to the creation of SWFs. A third motive, the counter-cyclical one, calls for either stabilization funds or the accumulation of international reserves to absorb temporary current account surpluses and, in some cases, fiscal effects associated with booming commodity prices or export revenues in general. A fourth motive, self-insurance, aims at reducing the risks associated with pro-cyclical capital flows. In all cases, avoiding the dynamic economies of scale associated with the Dutch disease is a major justification of the accumulation of foreign exchange assets, but they must be weighted against the costs of sterilizing the monetary effects of booming foreign exchange inflows when there are no fiscal surpluses to undertake that function. As we have argued, different motives generate a demand for different types of funds, each category requiring somewhat diverse investment criteria.”

I think this is a really interesting paper and a useful intervention. Well worth a read. Enjoy your weekend!

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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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