Sovereign Wealth Funds

        Thanks to countless technological innovations and improvements, a plethora of companies have been joining the global economy within the last few decades. In response to this increased interconnectivity, a growing number of emerging markets have developed and caused a realignment of both global industries and economies. As countries become more competitive than ever over resources, exports, and financial power, they have also begun looking for more efficient and productive uses of their financial surpluses. Though first formed over 150 years ago, many countries have recently looked to sovereign wealth funds to manage their excess reserves obtained through breakthroughs in resource availability. Within the last eight years the amount held in these funds have more than doubled, despite occurring during one of worst global financial crises in history. The sheer size of these funds allow countries to make investments within other countries in a variety of ways, though some countries are not as welcoming citing national security and domestic economic concern. Many in the United States and Europe fear that the economic power held by these sovereign funds may eventually lead to them obtaining political power, calling for more regulation. Supporters of sovereign wealth funds argue that they are acting as any other investor and have done nothing improper. This paper looks to discuss the history of sovereign wealth funds, how they’ve effected the global economy, and a nuanced look at the argument for greater regulation. Finally, we will present an overall assessment of our findings while providing suggestions, perspectives and recommendations for global public policy.

        Sovereign wealth funds (SWF) have many definitions, but more broadly they are any “state-owned investment fund investing globally in both real and financial assets that is funded by foreign currency reserves but managed separately from official currency reserves” (Teslik, 2009). They are, in a sense, “rainy day funds” for countries. Modern funds are set up with one or more of a few basic goals in mind; stabilize economic volatility, sterilize unwanted liquidity, create a savings for future generations, or stimulate economic and social development (Rozanov, 2005). Early SWFs were established to fund specific public services, the first one being in Texas during 1854 with the intention to fund public education known as the Permanent School Fund (PSF) to benefit primary and secondary schools (Sovereign Wealth Funds Megginson & Fotak, 2015). It wouldn’t be until 1953 when the first SWFs for a sovereign state was established under the Kuwait Investment Authority, a fund created from oil revenues that is estimated to be worth over $592 billion today (Sovereign Wealth Funds Institute, 2016).

Stabilization funds, whose purpose is to offset revenue declines due to falling commodity prices or production levels, became very popular amongst countries whose primary revenue came from natural resources, though they were often mismanaged and exposed to possible excessive domestic spending in the pre-1980s. It wasn’t until the economists at the Chicago School reformed the Chilean economy via the Chilean Social and Economic Stabilization Fund in 1985 (Balding, 2012). Other countries saw the success obtained by the fund, which benefited from having an independent board setting target accruals and withdrawals, and began to replicate the model (Megginson & Fotak, 2015). From these stabilization funds came to what today we call sovereign wealth funds, and according to Balding (2012) there is an important distinction between stabilization and sovereign wealth funds; stabilization intends to promote local development while SWFs target financial returns. Thus, SWFs manage to avoid a pitfall of stabilization funds – excessive domestic spending – by diversifying revenue streams via foreign investments. In fact, SWF have been proven to be effective at preventing “Dutch Disease,” in which too much focus on local economy can negatively impact the development of other sectors (Megginson & Fotak, 2015). Note that while SWFs have been around for quite a while, it wasn’t until a 2005 article written by Andrew Rozanov titled “Who Holds the Wealth of the Nations” that the term was first used and gained notoriety.