Roosevelt Institute | Cornell University

Sovereign Wealth Funds: Financial Behemoths & Fiscal Prudence

By Eric LeePublished March 27, 2019

Singapore pictured in the photograph
In the face of skyrocketing deficits and record national debt, the United States and other Western countries should look for innovative solutions in the form of sovereign wealth funds to stabilize their fiscal position.

     Singapore’s Temasek Holdings, China’s CIC, Abu Dhabi’s Investment Authority—what do all these institutions have in common? What do they embody? They are all the culmination of several decades of wise and provident governance by each of these countries’ respective regimes. Even as the United States and most of the West plunge themselves into further indebtedness, we should be reminded of how there are those in the world who have actually put sound fiscal policy above the short-term political gains that deficit spending bestows. Such is a testament to their prudent judgment and is exemplified by the economic miracles their nations have experienced over the past several decades.

Called Sovereign Wealth Funds, SWFs for short, these government-run entities are financial institutions that operate for the dual purposes of investment and fiscal prudence. Functioning mainly as investment funds, SWFs resemble any other entity whose primary purpose is to enrich itself by investing in securities, bonds, real estate and so on. However, unlike other private funds such as private equity or hedge funds that seek profitability to maximize personal returns on investment, SWFs are subject to government mandate and follow strict guidelines set by the state’s treasury or central bank. Still, these funds can be run by private individuals instead of sluggish career bureaucrats. Moreover, they might even encourage an entrepreneurial work culture internally in order to boost organizational efficiency. Regardless, it is always in the public and state’s interests that these sovereign wealth funds exist and operate.

As of today, there are as many as fifty different countries with SWFs. Such funds range from Canada’s Pension Plan Investment Board (CPPIB), whose main responsibility is to subsidize the country’s future entitlement spending, to Saudi Arabia’s SAMA Foreign Holdings, an entity directly under the supervision of the kingdom’s central bank that promotes overall national economic growth by investing in projects and industries of strategic importance. Indeed, SWFs can come in all forms and sizes, as the parameters and functions of each depend on how the government chooses to employ them. And, while it can be argued that the United States has its very own SWF in the form of the Social Security Administration (SSA), this view is flawed.

Even though the SSA collects, holds, and distributes federal funds that, in turn, subsidize retirement and welfare programs for the country’s elderly and disadvantaged, it is, by all measures, too rudimentary and too dysfunctional to even be considered viable. The fundamental problem with this “trust fund for the retired” is that the main transaction it performs is to buy back low-yield federal reserve bonds that go into funding the federal government’s streak of budget deficits. Projections warn that the SSA risks becoming insolvent within the next decade. So, given this seeming absence of a nationwide, federal SWF in the United States, what examples do we have from abroad that demonstrate sound and prudent economic policy?

Right off the bat, a paragon of leading by example might be Singapore. As of 2017, Singapore owns and administers two SWFs—the Government of Singapore Investment Corporation (otherwise known as GIC Private Limited) and Temasek Holdings—that each manages assets worth upwards of 300 billion US dollars. While GIC’s main purpose as a government-owned institution is to use its foreign reserves to purchase foreign bonds, equity, and, to a lesser degree, real estate to boost the state’s financial standing, Temasek has the added responsibility of selectively investing in a wider array of products beyond securities including emerging fields of technology, banking, tourism, and energy. In January, Temasek not only backed one of the city-state’s own independent private equity firms, Ascent Capital Partners, in its bid to invest in Myanmar, but it also sold its minority stake in A.S. Watson Group, the world’s largest retailer in beauty and health products.

Among the Gulf monarchies, the Qatar Investment Authority and the UAE’s Abu Dhabi Investment Authority are two other stellar examples with the former’s assets totaling at over 320 billion US dollars and the latter’s at a staggering 828 billion. These government-owned, privately-run behemoths that outpace even the largest hedge funds in the world go even further than their Singaporean counterparts by investing in all sectors from automobile brands and football clubs like Porsche and Paris Saint-Germain to the luxurious Hôtel du Louvre in Paris.

Tackling such questions vis-à-vis the viability of and necessity for fiscal prudence, we might be tempted to drift into an overly vague and self-righteous conversation on whether the government should even manage such large funds that originate from the country’s economic output. Overzealous "don't tread on me" libertarians might deride such control by the state arguing that it concentrates the country’s economic surplus into an organization owned and controlled by bureaucrats. However, if modern economic history says anything, it is that the populace and the representatives they elect are the last people to whom we should entrust the future of the nation’s economy. As we have seen in places like the United States and the United Kingdom, the masses are willing to sacrifice long-term financial and economic stability for short-term, deficit-fueled shopping sprees totaling in the trillions. In turn, the leaders they elect to Capitol Hill oblige such spending in the hopes of reelection. After all, by the time someone has to pick up the tab, they will have long retired.

Another laughable rebuke that usually arises against SWF-like institutions is, of course, ad hominem denunciations against the states that employ them. The criticism always flows that SWFs are the territory of authoritarian despotisms that practice adulterated forms of state capitalism. But who can criticize the national economic policies of states such as China, the Republic of Singapore, or the Emirates of Dubai and Abu Dhabi when they have such a pristine and enviable track record of developmental success over the past several decades? Every single one of them has achieved what, in the West, took several centuries, and their governments continue to maintain national competitiveness using tools as pragmatic as SWFs.

Furthermore, it is not even the case that only the less “free” of countries around the world employ SWFs and hold large currency denominations in such funds. South Korea, Australia, Canada, and even South Africa are all electoral democracies with constitutional systems of governance, yet they still run SWFs that total 600 billion US dollars combined. Finally, if we consider how of all the SWFs, the largest belongs to the country ranked consistently as the world’s most democratic, Norway, we realize any moral or ideological opposition to the existence of such entities is ludicrous. Established by the Norwegian government after the discovery of abundant petroleum reserves in the North Sea in the 1970s, the Norwegian National Pension Fund (NPF), as it is called, owns assets valued at over 1 trillion US dollars.

As of now, the fiscal health of the United States is atrocious. While leaders and representatives from both sides of the political spectrum clamor for higher spending, increased borrowing, and greater deficits, sanity takes a backseat. In today’s world, there is a need for a centralized state to exercise fiscal prudence. There is also a need to make strategic investments that boost national economic competitiveness. In the short term, the US should probably begin by eliminating deficit spending. Perhaps, cuts to Medicare and the military as well as means-testing for Social Security are a good start. In the long run, however, there is probably nothing as systemically beneficial as a sovereign wealth fund in guaranteeing the economic destiny of a country.