Today V. Tomorrow

When a government decides to set up a new SWF, it is making a conscious effort to consider tomorrow’s needs in addition to today’s. I find that encouraging...


In public policy terms, I often think of sovereign wealth funds as mechanisms for reconciling present day political temptations with future government obligations. And, it seems, the venerable development economist Paul Collier agrees:

“There is an evident economic and ethical rationale for using a substantial proportion of the revenues from the depletion of public natural capital for the accumulation of other forms of public capital...Disturbingly, to date this has not been the global pattern because resource rents have been associated with political dysfunction...The type of politics which produces pressures to over-spend resource rents on consumption is well-understood, notably the ‘voracity effect’...To avoid this syndrome of political pressures governments again need commitment technologies. Currently, the governments of several resource-rich countries are establishing such commitment technologies through variants on Sovereign Wealth Funds (SWF), examples being Nigeria and Ghana. These are constitutional devices which earmark a certain proportion of resource revenues for the Fund. In turn, money in the Fund can only be used for the accumulation of assets, whether foreign financial assets or domestic public investment.”

Professor Collier is picking up on an interesting theme here, namely that SWFs offer governments a useful way to deal with temporal challenges. For example, SWFs can smooth volatile resource revenues over time; they can support sustainable government spending; they can facilitate inter-generational wealth transfers; and they can (if set up correctly) minimize political temptation for malfeasance and misappropriation of state resources. All of these objectives are about disciplining the short-term temptation of politicians with a view to prioritizing the long-term interests of the nation-state.

So, when you think about it, a government that decides to set up a new SWF is making a conscious effort to consider tomorrow’s -- in addition to today’s -- needs. Given the incredible popularity of these funds over the past few years, I think that’s quite encouraging...