Sovereign Wealth Funds: The New Intersection of Money and Politics

By Christopher Balding | Go to book overview

CHAPTER 9
This Is Not the End of the World
as We Know It

The SWF story has just begun. Despite their recent discovery, SWFs have existed in various forms for more than half a century and will continue to grow and evolve for the foreseeable future. Challenges exist for policy makers and SWF managers alike with no simple answers. Though easy answers from ready-made frameworks are the preferred solutions by politicians, the solutions to SWF problems remain messy and complex for formulating economic and investment policies over the long run. The evolution of thinking about SWFs began with a small monarchial state setting aside money with no real plan and developed into the current state of affairs based on the long-term real return on assets and implied commodity hedges. The thinking about how best to manage surplus funds and the secondary economic problems they bring has evolved for the past fifty years and will continue to develop. States and managers exist in a status of blissful ignorance, and the mistakes of economic and financial managers should be studied to avoid repeating the mistakes of the past. However, many of the mistakes with sovereign wealth funds are mistakes of ignorance rather than mistakes of malice. The best managed funds in the world made mistakes in their early development while establishing themselves. The challenges to SWFs will only increase over time as domestic constituencies become more aware of their existence, commodity revenues remain volatile, and other states create new policies for foreign government investment. Now that sovereign wealth funds are better understood, the hard work begins.

The potential ability to smooth out economic downturns coupled with the longterm financial stability offered by SWFs has enticed many new entrants to create their own funds. Some are based on large commodity reserves while others are based on a rush to join the frenzy. The stampede of countries creating SWFs bears similarities to a sovereign wealth fund bubble. States with few resources are creating SWFs in order to put their names in the group managing billions of dollars, whether any economic or investment rationale exists. The number of countries that now manage billions of dollars is small, but the number of countries that have squandered billions with little to show for their extravagance is numerous. The only problem that compares to managing a country without money is managing one with large amounts of money. The management problems of sustaining

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