Lessons from Successes and Failures

The Case for Lessons from Successes and Failures. Sovereign Wealth Fund: Lessons from Successes and Failures

by JOE WALLACE

SEPTEMBER 9, 2024

The proposal to establish a U.S. sovereign wealth fund (SWF) has recently gained bipartisan attention, with both Donald Trump and Joe Biden expressing support. A SWF could serve as a powerful tool for economic stabilization, savings, and strategic investments. However, concerns about potential mismanagement, similar to the misuse of Social Security funds, have raised questions about whether the U.S. government could responsibly manage such a fund. To assess the potential benefits and risks, it’s essential to examine both successful and failed SWFs worldwide.

Global Examples of Sovereign Wealth Funds

Successful SWFs are often associated with strong governance, transparency, and a long-term investment focus. Among the best examples are Norway, the United Arab Emirates, and Singapore, which have leveraged their funds to secure economic stability and national development.

1. Norway’s Government Pension Fund Global (GPFG): Funded primarily by oil revenues, Norway’s GPFG is one of the world’s largest SWFs, valued at over $1.4 trillion. The fund was established to save for future generations and to mitigate the economic impact of oil price fluctuations. Norway has implemented strict fiscal rules that limit how much of the fund’s returns can be used annually, safeguarding it from political interference. The fund emphasizes ethical investing, transparency, and has not been bonded against, ensuring that it accumulates wealth responsibly while contributing to national priorities, such as pensions.
2. United Arab Emirates (Abu Dhabi Investment Authority): The UAE’s SWF has transformed the country from a primarily oil-dependent economy into a diversified global player. The fund invests internationally and has also financed domestic infrastructure and economic diversification projects, enhancing the quality of life for citizens. Strong governance and strategic investment have allowed the UAE to use its SWF to fuel national development while preserving significant wealth.
3. Singapore (GIC and Temasek Holdings): Singapore manages two major SWFs that have supported the nation’s economic transformation into a global financial hub. GIC focuses on long-term investments to stabilize reserves, while Temasek invests actively in various sectors, including technology and healthcare. These funds have financed national development projects and strengthened economic resilience, showcasing how SWFs can drive innovation and growth.

Failures and Mismanagement of Sovereign Wealth Funds

While successful examples demonstrate the potential of SWFs, other countries have struggled with mismanagement, corruption, and political interference, resulting in severe economic consequences.

1. Venezuela – Fonden (National Development Fund): Established to manage surplus oil revenues, Venezuela’s Fonden became a textbook example of mismanagement. The fund’s resources were used for short-term political spending, including subsidizing social programs, rather than investing in productive assets. Rampant corruption, lack of oversight, and political misuse led to the fund’s depletion, contributing to Venezuela’s economic collapse. Today, the country faces extreme poverty and hyperinflation, with no savings to stabilize the economy.
2. Nigeria – Excess Crude Account (ECA): Nigeria’s SWF was set up to save oil revenues for economic stabilization, but it has been plagued by chronic mismanagement and lack of transparency. Funds were frequently withdrawn to cover budget deficits without accountability, leaving the account nearly empty despite high oil prices in earlier years. The ECA’s failure illustrates the dangers of political interference and poor governance, which undermined its intended purpose.
3. Libya – Libyan Investment Authority (LIA): Libya’s SWF suffered from political turmoil, corruption, and mismanagement, particularly during and after the Gaddafi regime. Investments were poorly managed, and international sanctions led to asset freezes. The absence of robust governance and the exploitation of the fund by competing political factions severely compromised its potential to support Libya’s economy.
4. Kazakhstan – Samruk-Kazyna Sovereign Wealth Fund: Kazakhstan’s fund was intended to manage state assets and support economic projects, but it has been criticized for inefficiency and lack of transparency. Investments often propped up state-owned companies rather than fostering diversification or profitable ventures, resulting in lost opportunities and stagnation.

Conclusions and Recommendations

The experiences of successful and failed SWFs provide valuable lessons for any country considering establishing such a fund. For the United States, a sovereign wealth fund could offer substantial benefits, including economic stabilization, future savings, and strategic investments in national priorities. However, the key to success lies in robust governance, transparency, and a commitment to long-term financial health over short-term political gain.

Recommendations for a U.S. SWF:

1. Establish Independent Governance: To avoid political interference, the SWF should be managed by an independent board with clear guidelines on how funds can be used. Learning from Norway’s success, only a small portion of the fund’s returns should be available for annual spending.
2. Ensure Transparency and Accountability: Regular public reporting and independent audits are crucial for maintaining public trust. Transparency would deter misuse and allow the public to hold managers accountable.
3. Focus on Strategic Investments: The fund should prioritize investments that align with national interests, such as green energy, infrastructure, and technological innovation. These investments can drive economic growth and improve citizens’ quality of life without compromising the fund’s integrity.
4. Separate from Day-to-Day Budgeting: The SWF should not be treated as an emergency source of funds for budget deficits. Clear rules must be established to prevent withdrawals driven by political expediency, as seen in Venezuela and Nigeria.

By adhering to these principles, the U.S. can create a sovereign wealth fund that safeguards national wealth, invests in the future, and learns from the successes and failures of other nations. A well-managed SWF could serve as a financial cornerstone for generations, securing the nation’s economic future.