Sovereign Wealth Funds as Development Finance Tools during Crises

• In Event: International Finance Challenges and Tools

Abstract

Over the past two decades, the global economy has experienced two major economic crises - the Global Financial Crisis and the Covid-19 crisis. These events have demonstrated the need for more state capacity for economic contingency planning regarding the negative consequences of large-scale economic integration and the increased depth and economic importance of financial markets. Development finance has played an increasing role in this regard. During the Global Financial Crisis and the Pandemic, public investment to support businesses and encourage private investment played an important part in the fiscal strategies for economic recovery. Many governments and regional organizations have also discussed the creation of additional "rainy-day investment funds" to grow financial assets via investment for future fiscal stabilization. But how do governments organize and delegate the tasks of investing public money? What impact do these choices have on the behaviour of institutions charged with them? This paper addresses these questions by looking at a so far understudied but increasingly important tool of development finance – Sovereign Wealth Funds. SWFs were conceived as funds to manage public windfall profits from natural resource wealth and trade surpluses. However, economic policymakers increasingly recognize SWFs as versatile policy tools, as they can help governments achieve economic policy goals via financial market investment. SWFs provided vital capital investments to struggling banks in 2008/09. Since 2020, many SWFs have developed investment programmes to support domestic industries impacted by lockdowns and lower global demand. Some countries have also drawn on their SWF's financial resources for fiscal expansion during the pandemic. Yet, the scope and way in which governments use such funds as tools for development finance during crises differ widely. This is likely because governments have chosen to organize SWFs differently. SWFs vary in mandates as well as structures that determine the level of control governments have over their investment behaviour and withdrawal rights. In this paper, I discuss four case studies of different SWF institutional structures in Europe – Ireland, Italy, Norway and Spain. I seek to understand how the institutional setup of such funds affects the scope of their use as tools of development finance during a crisis. I offer an insight into the background that explains their differing structures and assess the impact such have had on their ability to coordinate SWF behaviour with the fiscal recovery priorities of governments during the Covid-19 pandemic. This includes their investment behaviour as well as the choices governments made regarding the withdrawal of assets from SWFs for fiscal expenditure. I argue that governance mechanisms are as important if not more than official fund mandates to explain different courses of action of SWFs during the pandemic and the level of their coordination with governments' fiscal strategies. SWFs offer a potentially useful tool for development financing. However, their effectiveness in supporting the fiscal priorities of governments during crises depends on their governance structures. These, in turn, represent outcomes of political and bureaucratic beliefs regarding the appropriate level of state involvement in the economy. This work seeks to contribute to the developing fields of literature on development finance, public wealth management and the governance and organizational behaviour of public financial institutions. It also aims to create a link to wider current discussions in the fields of IPE and CPE on globalization, financialization and the revival of state-led policy approaches.

Author

• Katharina Fleiner, University of Geneva