Few human creations represent the peak of globalization and the sovereign wealth fund. Nevertheless, the world’s 90-odd sovereign wealth funds have gained significant clout over the past two decades. Together, they oversee over $1 trillion in assets, equivalent to around 10% of the global gross domestic product. But what exactly is a sovereign wealth fund?
In a nutshell, Sovereign wealth funds are government-owned investment funds.
So, let’s break it down further. First, sovereignty is the power of a nation to self-govern.
Countries utilize this power by applying laws, imposing taxes, engaging in war, and participating in trade.
Essentially, a sovereign wealth fund is a pool of money owned and used by a national government for investment purposes.
Governments invest this money in companies and real estate worldwide to benefit their country’s economy and citizens.
So, where exactly does this money come from in the first place? The nation accumulates money in central bank reserves from budget ent traits are pluses or other sources of revenue. Most efficiently managed governments do not have a large surplus of money in their reserves unless they have a funded income.
Sovereign Wealth Fund History
Many oil-rich countries, such as Norway, Russia, and countries in the Middle East, have created a sovereign wealth fund.
Their primary purpose is to invest the money coming into the country from the oil. Very smart if you ask me.
The first country to start a sovereign wealth fund was Kuwait. In 1953, right after Kuwait discovered oil, it established a fund to invest its excess oil revenues. It soon became one of the wealthiest nations in the world.
Consequently, in 1990, the tiny Persian Gulf country was invaded, occupied, and then freed. And yes, this war was about oil.
With a population of only 4.1 million, Kuwait remains sovereign today. Furthermore, its sovereign wealth fund is estimated to be one of the largest funds in the world, worth over $500 billion.
Countries With a Sovereign Wealth Fund
Kuwait and East Asian countries like China, Hong Kong, and Singapore also have sovereign wealth funds, unlike their oil-wielding counterparts. But, like Kuwait, they set up their sovereign wealth fund to store and grow their excess funds.
First Country to Create a Sovereign Wealth Fund
Preserving Instead of Eroding Wealth
The government of Norway is adamant about preserving its wealth. Norway’s economy traditionally relied on fisheries, forestry, and Hydropower.
However, this changed in the 20th century when Norway claimed sovereignty over its continental shelf.
On 23 December 1969, Norway struck oil; this discovery made the country very rich. When Norway stuck oil, the money it made from the oil sector was reinvested into the oil industry.
After that, however, the Norwegian government realized they needed a sustainable way to manage oil revenues. Undoubtedly, the government realized they could not rely on oil revenues forever.
The “Dutch” Disease
By this time, the world was aware of the Dutch disease. Dutch disease was first described in the 1970s when the Netherlands discovered natural gas. Predictability: the discovery of gas brought an economic boom to the nation’s oil and gas industry.
Unfortunately, this resulted in an influx of foreign cash, making the Dutch currency more expensive. The currency was more expensive, but other parts of the economy were impacted. Exports, for example, became more costly and less competitive globally.
Because of this, the Netherlands was forced to move away from manufacturing and specialize in natural resources. As a result, heavy reliance on natural gas ultimately hurt the long-term health of the Dutch economy.
Norway was experiencing the same problems as the Netherlands. Throughout the 1970s and the 1980s, fluctuations in oil prices affected the Norwegian economy.
The government of Norway wanted to find a way to preserve its oil wealth for future generations. However, they also wanted to manage oil revenues that didn’t harm the economy.
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Solution to Preserve Wealth
The solution was to create a sovereign wealth fund and pull all the revenues from the oil industry into it. A fund would allow the government to collect oil revenues and save them for future generations. It also swapped volatile oil revenues and replaced them with a diversified portfolio of foreign assets.
Norway’s sovereign wealth fund was established by law in the 1990s, and the first sum was transferred in 1996. Since then, the fund has grown to $1.1 trillion, almost three times Norway’s GDP.
The fund has shares in 9000 international companies, and it has various bonded real estate investments as well. To preserve this wealth, by law, the government cannot dip into the fund, but it can collect the interest from the fund to finance public spending.
Currently, that amount is 3%, which provides billions of dollars in revenue for the Norwegian government.
Building a Better Country
Through the sovereign wealth fund, the government can fund many infrastructure and investment programs in Norway. The fund also allows the government to maintain Norway’s generous social safety net.
As a result, the people of Norway get paid parental leave, affordable childcare, free healthcare, and education. The net result of these investments is a high employment rate and a happy and productive society.
Even though the people of Norway cannot dip into that $1.1 trillion fund for personal use, they reap many rewards. Most importantly, the fund preserves Norway’s oil wealth, enabling future generations to get the same opportunities as everyone today.
Final Thoughts
A sovereign wealth fund is already standard for governments that have paid off their national debt and gone into the black. They’re common in well-resourced nations with strong balance sheets and state economic control. Similar countries would be wise to have sovereign wealth funds.
Do you think the US should have its sovereign wealth fund? Please feel free to leave your thoughts and comments below.
