Should you fear the sovereign wealth fund?

Over at Foreign Policy, economist Anders ?slund says that sovereign wealth funds pose greater problems to home countries than host countries: [S]uch funds are nothing for Americans or Europeans to fear. If anyone should worry about them, it?s the people whose governments are amassing them. That?s because governments tend to be terrible at managing money ...

Over at Foreign Policy, economist Anders ?slund says that sovereign wealth funds pose greater problems to home countries than host countries: [S]uch funds are nothing for Americans or Europeans to fear. If anyone should worry about them, it?s the people whose governments are amassing them. That?s because governments tend to be terrible at managing money that is best left in the hands of private citizens. And locking away billions of dollars in wealth can have pernicious economic side effects. Maybe that?s why sovereign wealth funds are popular with dictators and semi-authoritarian regimes, which don?t have to answer for the consequences when they make poor economic gambles.... Consider Abu Dhabi and Kuwait, which wanted to save their oil endowment for future generations, an admirable goal. But today these two bureaucratized emirates look like poor cousins in comparison with freewheeling Dubai, which has much less oil. Because the rulers of Abu Dhabi and Kuwait centralized their nations? wealth in the hands of the state, their state sectors stifled their economies. Abu Dhabi?s fund may be impressive, but the entrepreneurial emir of Dubai has done a far better job of putting sustainable wealth in the hands of his citizens.... In short, sovereign wealth funds are often a lousy bargain for the countries that have them. That may explain why they have been developed mostly by authoritarian regimes in semi-developed countries, where citizens don?t have a chance to demand smarter economic policies. Take Singapore, whose economy depends on trade rather than a declining resource such as oil, and yet has locked up billions of dollars of its wealth in a fund since 1960. The government there has exceptionally managed to maintain its authoritarianism after the country became wealthy, but authoritarian regimes are more vulnerable to economic downturns than democratic systems. Singapore?s unelected rulers need a reserve to pay off dissatisfied subjects to maintain power when economic times get tough. In democracies, the politics work differently. The only democratic country with a large sovereign wealth fund is Norway. Since the Norwegian fund was established in 1990, every incumbent government has lost elections because the opposition has promised all kinds of popular expenditures from the abundant fund. Democratically, it is difficult to defend an excessive public reserve fund. Certain international reserves are always needed, and exporters of commodities with highly fluctuating prices require larger reserves as a safety net. However, sovereign wealth funds are something different. They reflect a paternalistic?and economically illiterate?notion that the ruler knows best while citizens are so irresponsible that they cannot be entrusted with their own savings. It would be more economical and democratic to cut taxes and let citizens save and invest themselves.

Over at Foreign Policy, economist Anders ?slund says that sovereign wealth funds pose greater problems to home countries than host countries:

[S]uch funds are nothing for Americans or Europeans to fear. If anyone should worry about them, it?s the people whose governments are amassing them. That?s because governments tend to be terrible at managing money that is best left in the hands of private citizens. And locking away billions of dollars in wealth can have pernicious economic side effects. Maybe that?s why sovereign wealth funds are popular with dictators and semi-authoritarian regimes, which don?t have to answer for the consequences when they make poor economic gambles…. Consider Abu Dhabi and Kuwait, which wanted to save their oil endowment for future generations, an admirable goal. But today these two bureaucratized emirates look like poor cousins in comparison with freewheeling Dubai, which has much less oil. Because the rulers of Abu Dhabi and Kuwait centralized their nations? wealth in the hands of the state, their state sectors stifled their economies. Abu Dhabi?s fund may be impressive, but the entrepreneurial emir of Dubai has done a far better job of putting sustainable wealth in the hands of his citizens…. In short, sovereign wealth funds are often a lousy bargain for the countries that have them. That may explain why they have been developed mostly by authoritarian regimes in semi-developed countries, where citizens don?t have a chance to demand smarter economic policies. Take Singapore, whose economy depends on trade rather than a declining resource such as oil, and yet has locked up billions of dollars of its wealth in a fund since 1960. The government there has exceptionally managed to maintain its authoritarianism after the country became wealthy, but authoritarian regimes are more vulnerable to economic downturns than democratic systems. Singapore?s unelected rulers need a reserve to pay off dissatisfied subjects to maintain power when economic times get tough. In democracies, the politics work differently. The only democratic country with a large sovereign wealth fund is Norway. Since the Norwegian fund was established in 1990, every incumbent government has lost elections because the opposition has promised all kinds of popular expenditures from the abundant fund. Democratically, it is difficult to defend an excessive public reserve fund. Certain international reserves are always needed, and exporters of commodities with highly fluctuating prices require larger reserves as a safety net. However, sovereign wealth funds are something different. They reflect a paternalistic?and economically illiterate?notion that the ruler knows best while citizens are so irresponsible that they cannot be entrusted with their own savings. It would be more economical and democratic to cut taxes and let citizens save and invest themselves.

Daniel W. Drezner is a professor of international politics at Tufts University’s Fletcher School. He blogged regularly for Foreign Policy from 2009 to 2014. Twitter: @dandrezner

More from Foreign Policy

Bill Clinton and Joe Biden  at a meeting of the U.S. Congressional delegation to the NATO summit in Spain on July 7, 1998.

Liberal Illusions Caused the Ukraine Crisis

The greatest tragedy about Russia’s potential invasion is how easily it could have been avoided.

A report card is superimposed over U.S. President Joe Biden.

Is Biden’s Foreign Policy Grade A Material?

More than 30 experts grade the U.S. president’s first year of foreign policy.

White House National Security Advisor Jake Sullivan gives a press briefing.

Defining the Biden Doctrine

U.S. National Security Advisor Jake Sullivan sat down with FP to talk about Russia, China, relations with Europe, and year one of the Biden presidency.

Ukrainian servicemen taking part in the armed conflict with Russia-backed separatists in Donetsk region of the country attend the handover ceremony of military heavy weapons and equipment in Kiev on November 15, 2018.

The West’s Weapons Won’t Make Any Difference to Ukraine

U.S. military equipment wouldn’t realistically help Ukrainians—or intimidate Putin.