The Case for Economic Development Through Sovereign Investment: A Paradox of Scarcity?
| Author | Juergen Braunstein,Asim Ali,Patrick J. Schena |
| Published date | 01 September 2018 |
| DOI | http://doi.org/10.1111/1758-5899.12549 |
| Date | 01 September 2018 |
The Case for Economic Development Through
Sovereign Investment: A Paradox of Scarcity?
Patrick J. Schena
Fletcher School, Tufts University
Juergen Braunstein
Harvard Kennedy School
Asim Ali
SovereigNet
Abstract
Sovereign wealth funds (SWFs) have traditionally been created to recycle excess reserves from natural resource or non-com-
modity revenues. However, in recent years funds are being established under conditions of capital scarcity with objectives to
contribute domestic economic development, often through the buildout of national infrastructure programs. Such trends in
new fund creation represent a fundamental shift in the sovereign wealth fund paradigm and raise serious questions about
how these entities are to be capitalized and also the implications of capitalization models on their sustainability. This study
examines the recent evolution of SWF models focused on economic development. Its analytic focus is drawn, in particular, to
countries that are neither endowed with oil wealth, nor otherwise enjoy export surpluses to be used to capitalize a develop-
ment-oriented SWF. While this study is relevant to and expands the scope of the broad literature on SWFs, its specific contri-
bution is as a focused analysis of how SWF funding sources impact achieving long-term financial and socio-economic
development objectives.
Policy Implications
•Strong internal governance –extending from key government stakeholders to fund managers –is critical to enhance the
ability of a development and strategic investment fund to meet return requirements and deliver economic gains while
avoiding negative impacts.
•A clear delineation is required to separate spending priorities set under the government’s budget on the one hand and
investments for development financed by the fund on the other hand.
•Appropriate fund capitalization strategies must be coupled with careful policy due diligence on residual fiscal impacts in
order to narrow the scope of externalities.
The emergence of sovereign wealth funds is organically
linked to the accumulation of surpluses from commodity
revenues, particularly in emerging economies. To insulate
capacity-constrained domestic economies from the negative
externalities of the so-called ‘resource curse’, capital was
gathered into investment pools and shielded from national
economies through investment in the well-established finan-
cial markets of developed economies. In their formative
years, the creation of these early SWFs was –we argue –lar-
gely ‘supply-driven’. They were created at first to manage an
excess of accumulated commodity wealth, then to later to
recycle expanding current account surpluses. It other cases,
funds were capitalized using state commercial assets that
had outgrown the capacity of government bureaucrats to
oversee effectively. The latter might include, for example,
Temasek in Singapore, Khazanah in Malaysian, Mumtalakat
in Bahrain, and Samruk-Kazyna in Kazakhstan.
Since the global financial crisis, and more recently in the
wake of commodity price declines and slowing growth in
emerging economies, the establishment of fund structures
has accelerated. However, in the current period this acceler-
ation has not been in response to rising surpluses, but
rather has been spurred in part by a slowdown in foreign
investment. An objective is that they promote domestic
investment to restart economic growth, promote economic
diversification, and advance national competitiveness. Thus,
the creation of many new funds has become ‘demand-dri-
ven’, motivated less by the need to capture and invest sur-
plus wealth, than to further key –and some cases urgent –
national economic policy goals (e.g. see Halland et al. 2016).
Global Policy (2018) 9:3 doi: 10.1111/1758-5899.12549 ©2018 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 9 . Issue 3 . September 2018 365
Research Article
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