Guest Blog: Sovereignty in the Long Term

Adam Dixon

We like to think of SWFs as truly long-term investors, perhaps even super long-term investors. They don’t have liabilities like pension funds or insurance companies; they can largely ignore the day-to-day, the month-to-month, and conceivably some of the year-to-year fluctuations of the market; and, their sheer size gives them the ability to invest in ways that others, aside from maybe the largest pension funds, can’t.

Put simply, for those interested in the ways financial markets can contribute something to addressing long-term existential issues such as climate change, the potential for super long-term investors is quite seductive. They’ve got the firepower to realize long-term objectives others won’t, or are too focused on the short term to do so.

But, can SWFs really be counted on to be super long-term investors? One would hope so. And for many SWFs the answer is probably a resounding yes. Unfortunately, a look at geopolitical history may temper such optimism.

With the Arab Spring and the fall of Colonel Gaddafi in Libya we are reminded about how fragile ‘sovereignty’, in whatever form it takes, can be. Just think about the massive geopolitical transformations of the 20th century. Dictators came and went; liberal democracies were brought to the verge of collapse; European colonialism left a patchwork of artificial nation-states; and there was the rise and fall of the Soviet Union.

The recent history of the 21st century is not as bloody, but geopolitical transformation and the subsequent reconfiguration of sovereign authority continues. Take, for example, the recent split between North Sudan and South Sudan. Suffice it to say, uncertainty as to the stability of sovereign authority may significantly shrink time horizons, at least in some places.

This does not mean that SWFs won’t take long-term investment positions. (Was Gaddafi expecting to lose his authority 18 months ago?) In fact, SWFs are likely to be used as a means of protecting the structure of sovereignty in a country, whatever that may look like. But if major political change occurs such that the structure of domestic sovereignty is radically transformed, what are the implications for the SWF?

It is too early to say what the new government in Libya will do with the country’s resource wealth. One would imagine that the fund will be used to help rebuild while maintaining its international diversification. Yet, the new government and the people of Libya, assuming stability returns, may want something radically different done with their sovereign wealth.

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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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