Why sovereign wealth funds can’t save Africa

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They’ve been criticized for their lack of transparency. Many politicians and commentators have raised fears about their potential to “buy up” important assets outside their home countries. And now, sovereign wealth funds (SWFs) — government-controlled funds that are investing in stocks, bonds, and commodities everywhere from Australia to the United States — are being hailed as the next great hope for Africa.

Last week, World Bank President Robert Zoellick urged such funds to invest at least 1 percent of their proceeds in Africa — a step that would immediately raise investment in Africa by $30 billion. The International Financial Corporation, the private-sector lending arm of the Bank, is considering creating a “fund of funds” designed to encourage SWFs to invest in African businesses.

Sounds great, right? Most people seem to think SWF investment in Africa is a positive idea and a smart move both financially and politically (in terms of bolstering the image of SWFs). But Zoellick’s idea could end up doing more harm than good, for two main reasons.

First, SWFs are obligated to make the best investments for the citizens of their home countries. They are not in the business of aid or charity work; nor should they be. Norwegian or Kuwaiti pensioners would have every reason to rebel if their governments’ surpluses went toward either speculative investments or aid projects. (This echoes Anders Åslund’s argument that if anyone should fear SWFs, it’s citizens of the countries that have them.) If African governments are not even willing to invest in their own continent, why should others do so?

Second, SWFs must pursue investments that deliver a strong bottom line, but many of the best opportunities in Africa are in the natural-resource sector. China has already invested heavily in Sudanese oil — not exactly a great way to underwrite healthy development in the country.

More broadly, there are good reasons why many private companies are unwilling to invest and set up operations in Africa. Why else would Zoellick and others be pushing SWFs to fill the equity void in the first place? Corruption, lack of security, and failure to protect property rights are just a few of the reasons countries in Africa have failed to create a positive investment climate. If SWFs step in with billions of dollars, they may well undermine efforts to promote good governance. In the long run, it is those efforts — not easy cash from Abu Dhabi or Beijing — that will attract private investment and generate sustainable economic development. So, although an extra $30 billion for Africa should be welcomed, SWFs may not be the best way to deliver it.