Sovereign Wealth Funds as a Development Tool for ASEAN Nations: From Social Wealth to Social Responsibility

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I. INTRODUCTION

While sovereign wealth funds (SWFs) have existed since the 1950s, their significance and importance in economic, political, and policy terms have increased exponentially in the past decade or so. Ironically, though, it may be argued that the development aspects of SWFs have been a missing dimension from the latest rounds of analysis and scrutiny. This is somewhat surprising since most new SWFs are being formed in emerging or developing economies. (1) This Article will address this vacuum by exploring certain development aspects of SWFs.

Specifically, this Article will examine three separate but interrelated questions: (1) why, and under what economic and political conditions, should an emerging (ASEAN) (2) economy create an SWF; (2) what should the specific objectives of a newly formed SWF be, and how should the SWF be structured to meet these objectives; and (3) should an SWF be used as a self-financing tool for development purposes and, if so, how?

With respect to the first question, the debate surrounding the establishment of an SWF by India is examined. Although India is not an ASEAN member, certain precautionary notes may be useful in this context especially for the ASEAN-4 nations (Indonesia, Malaysia, the Philippines, and Thailand). Secondly, this article will address the specific objectives that an SWF may support, and how it may best be structured in support of such goals. Finally, the relative merits of using SWFs as a development finance tool will be explored.

A. Definition and Structure of a Sovereign Wealth Fund

Generally speaking, a sovereign wealth fund (SWF) is a state-owned or state-controlled investment fund that consists of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets. (3) These assets can include, for example, balance of payments surpluses from sales of commodities or other exports, official foreign currency operations, the proceeds of privatizations, or fiscal surpluses. (4)

Typically, SWFs have six main characteristics:

* SWFs are state-owned or state-controlled;

* SWFs are managed separately from official foreign exchange reserves;

* SWFs have high foreign currency exposure;

* Unlike pension funds, SWFs have no explicit (or contingent) liabilities;

* SWFs have high risk tolerance; and

* SWFs have long-term investment horizons. (5)

SWFs are generally structured as funds, pools, or corporations. (6) However, the legal structure of SWFs is certainly not uniform. For example, an SWF need not be a separate legal entity from the government that formed it, as in the case of Norway's Government Pension Fund. (7) It could also be a government corporation, as with the Korea Investment Corporation. Finally, it could be a government-owned corporation governed by the country's corporate law, as in the case of Temasek Holdings (a Singapore SWF). (8)

Sovereign wealth funds are specifically defined by the U.S. Treasury as government-held investment funds that are denominated in foreign currency (or, in other words, held in currencies other than the investing host government's own currency). (9) These reserves are managed separately from official currency reserves, and are often invested in foreign companies or enterprises for profit. When an excess of such foreign currency reserves (usually held in U.S. dollars, Euros, or Japanese Yen) are accumulated, a host country may decide to establish a sovereign wealth fund. Common wisdom dictates that a foreign exchange reserve cushion should be sufficient to support three to four months worth of imports and cover all external debt financing needs for one year. Using this standard, the foreign exchange reserves accumulated by several Asian countries far exceed that amount. (10)

The first SWF was established in 1953 by the Government of Kuwait for the purpose of investing surplus oil revenues in order to reduce reliance on its finite oil reserves. …