This chapter outlines the creation and development of the Australian Future Fund (FF), showing how and why policy makers adopted this option to manage the challenges presented by the “good economic fortune” that occurred in Australia from the mid-1990s to 2010. It discusses the politics behind the governing structure of the FF, which is copied from its neighbor, New Zealand. Despite its initial emphasis on independence, political influence was inevitable when selecting and appointing the chairman of the Board of Guardians. The chapter examines the two key issues of “ethical investment” and “ethical operation” and shows the difficult balance of demands between diverse constituents; it identifies the space created by the expectation that the FF will behave in a similar fashion of all profit-maximization investors.
Chile has managed to avoid the St Augustine Syndrome of fiscal procrastination. This has required the prudent management of both fiscal flows and stocks. On the one hand, a fiscal policy rule has permitted Chile to save in sunny good times and to spend extraordinary resources on rainy days. The stabilizing fiscal policy rule has been key to smooth fiscal expenditure and avoiding the economic sins present in several countries: those of deficit bias and procyclicality. On the other hand, the management of fiscal stocks through its sovereign wealth funds (SWFs) has transformed Chile into an international example of transparency, good management, and responsibility. This sounds easy but it requires both political courage and economic responsibility. Several lessons could be learned from this which would be useful for other countries in any stage of development.
The Norwegian Government Pension Fund Global and the Implications of its Activities for Stakeholders
Geoffrey Wood, Noel O'Sullivan, Marc Goergen, and Marijana Baric
The chapter discusses the role and impact of the Norwegian Government Pension Fund Global (NGPFG) (which has some $873 billion of assets), explaining its objectives, its characteristics and also providing some details of the extent of its investments, specifically investments in firm equity. It discusses the NGPFG’s behavior as a shareholder that seeks to influence corporate behavior from within, the high levels of transparency exhibited and the ethical standards expected from the NGPFG and its role in the broader scheme of international politics/relations. The chapter concludes with thoughts for further research on the NGPFG and its activities.
Sovereign Wealth and the Extraterritorial Manipulation of Corporate Conduct: A Multifaceted Paradigm in Transnational Law
Global legal harmonization is an aspect of transnational law whereby a family of norms is formed by a non-state legal order. Sovereign wealth funds (SWFs)—diverse in terms of their countries of origin, size, investment strategies, asset allocation tactics, and underlying purposes—contribute to the harmonization by setting and enforcing cross-border ethical norms and governance standards. This chaper examines aspects of SWFs as transnational lawmakers, a significant phenomenon for the global family of standards and a potential challenge for state-based legal orders. It examines SWF adoption of general legal principles and customs as advanced by a global civil society and through standardized contract forms and conduct codes; voluntary enactment of informal soft laws; and creation of norm-setting institutions. It concludes that SWFs are part of a diffused, multilevel, coordinated, political system that defies state-centric paradigms, contributing to the dynamism that defines transnational law while creating concerns related to legitimacy, democratic authority, and democratic deficit.
Sophie Béreau, Jean-Yves Gnabo, Malik Kerkour, and Hélène Raymond
In the past decade, sovereign wealth funds (SWFs) have been very active in western economies with massive liquidity injections and numerous stakes in various strategic areas. While a vast literature has documented their influence on firms’ behavior and equity valuation, their impact on the whole economy has been largely unexplored. This chapter investigates the aggregate impact of SWFs’ investments at the industrial level. Using a panel of ten European countries from 2006 to 2012, a relevant instrumental variables strategy is used to circumvent potential double causality between returns of the recipient countries’ stock market indices and SWFs’ investments. The results show a positive and significant impact of SWFs’ investments for five sectoral indices out of ten. Looking at conditional effects, it does not find that this relationship is affected by either the availability of alternative sources of financing in the economy—consistent with the liquidity argument—or different volatility regimes.
This chapter examines investments of sovereign wealth funds (SWFs) in publicly traded firms, focusing on how these investments impact firms, and the potential channels through which their effects materialize. Using data that includes SWF holdings in 8,000 firms in 58 countries, we find that SWF investments have a positive effect on firm valuations and operating performance. The results are not driven by any particular SWF and are stronger for foreign SWF holdings. Additionally, we find evidence that after a large investment by SWFs, firms have better monitoring, expand their international operations, and are able to raise more capital as a consequence of the SWF investment. In terms of determinants of their holdings, we find that SWFs prefer large and profitable firms that enjoy significant external visibility. Additionally, they tend not to invest heavily in firms in high-tech industries or those operating in areas involving intensive research and development.
Sovereign Wealth Funds and the Resource Curse: Resource Funds and Governance in Resource-Rich Countries
Jędrzej George Frynas
Historically, a key purpose of sovereign wealth funds (SWFs) has been to help manage and minimize a range of negative economic and political consequences of natural resource wealth, often lumped together as the “resource curse.” This chapter asks to what extent SWFs—specifically “resource funds”—can mitigate the resource curse. It discusses the available empirical evidence for the effectiveness of resource funds as well as the relationship between societal governance and the effectiveness of resource funds. The available findings suggest that wider societal governance is of significantly greater importance for tackling the resource curse than the existence of a resource fund. Bad governance in a country prevents even the most transparent and robust resource funds from becoming an effective policy instrument. Conversely, resource funds can be successful in countries with effective societal institutions such as sound fiscal rules, good quality of government budget documentation, free civil society and independent media.
This chapter examines the Central and Eastern Europe (CEE) activity of sovereign wealth funds (SWFs) from two perspectives: CEE-based SWFs operating internationally and CEE as hosts to international SWF investments. The scales of both activities are marginal in global terms, yet the SWF footprint can be significant in isolated CEE industries or investment targets. While new SWFs are unlikely to emerge in CEE, the scale of global SWF allocation to the region is set to expand in line with diversification and growth opportunities. CEE should strive to improve its investment climate, including competitiveness of financial industries. The existing CEE-based (Russian) SWFs would benefit from deregulation, transparency and commitment to performance metrics, yet they remain a hostage to the future shape of Russian, and world macroeconomic policy.
The period from early 2000s to 2014 witnessed unprecedented and sustained high oil prices transforming the main oil and gas exporters in the Persian Gulf into major players in global finance. The Islamic Republic of Iran and the six GCC member states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have been using these massive oil revenues to assert their economic and political leverage on the regional and international scene. A key component of this effort has been the creation of sovereign wealth funds (SWFs). This chapter examines the SWFs in Iran and the GCC states. It includes discussion of the emergence and evolution of the oil and gas industry in the region, analysis of the sharp drop in oil prices since 2014 and how this cycle is different from previous ones, and detailed examination (based on limited data availability) of Iran’s and the GCC’s major SWFs.