When World Bank president Robert Zoellick called for sovereign wealth funds to invest one percent of their capital in Africa, (1) he was expressing what has become the conventional wisdom in two distinct ways. First, many scholars and policymakers have come to believe that poor countries are better served by private investment than traditional public development assistance. (2) For example, in 2006 private capital displaced official development assistance as the dominant source of finance for African states, and all indications demonstrate that states are unlikely to significantly increase official development assistance in the near future. (3) Indeed, Zoellick's suggestion echoed a similar call from the Organization for Economic Cooperation and Development. (4)
The second way that Zoellick's call reflected the conventional wisdom is the implicit assumption that a large infusion of wealth would benefit the people of Africa. If wealthy countries were to heed Zoellick's call, there would be an influx of up to $30 billion in new equity investment in Africa. (5) At first blush, this might appear to be a pure benefit likely to lead to economic growth and improvement in the welfare of people located in the world's poorest countries. But history has shown that infusions of wealth from wealthy countries to developing countries have not had their intended effect. For example, states that receive substantial revenue from the sale of natural resources like oil, gas, or minerals have often fared worse than similar states without such resources. (6) In many countries, development assistance has had very little impact on economic growth and many of the biggest recipients of foreign aid are less well off now than they were two generations ago. (7) There are compelling reasons to be skeptical over whether increased investment in Africa by sovereign funds promoted by Zoellick, even if heeded, will do much good, and some reasons to think that such investment might actually do harm.
In this Article we propose a mechanism designed to increase the likelihood that greater sovereign investment in Africa will actually benefit the citizens of recipient states. We take as our starting point an important facet of Zoellick's proposal. He suggested that one-percent of investments from sovereign wealth funds be channeled through the International Finance Corporation, (8) the branch of the World Bank responsible for private sector investment in the service of the World Bank's mission of reducing poverty. (9) Zoellick argued that the IFC's "access, knowledge, and capital" could "help other investors over the initial hurdles of investing in new equity opportunities in Africa." (10) Toward this end the IFC announced in December 2008 that it would create a "Sovereign Funds Initiative" to enable the IFC "to raise and manage commercial capital from sovereign funds for equity investments in some of the poorest developing countries." (11) The IFC has not yet released details about the new initiative, but it is at least an indication that the IFC is attempting to put Zoellick's words into action. The IFC has an extensive record of investing in Africa and providing advisory services for private investors, (12) which suggests that the IFC could add value to the investments of others by, for example, helping to identify viable projects or avoid untrustworthy partners. But the real potential of the Sovereign Funds Initiative to do good (or harm) depends in part on how it shapes the incentives and constraints facing the recipients of its investments.
Zoellick's proposal and the nascent Sovereign Funds Initiative have the potential to provide real benefits to poor people in Africa if structured appropriately, but must first resolve an important and difficult problem: additional wealth can reduce welfare. To describe this problem we use the term unconditioned wealth, by which we mean wealth owned or obtained by states unaccompanied by strong political or market conditions. …