The Economics of Sovereign Wealth Funds

Many countries have set up sovereign wealth funds (SWFs) as vehicles for public saving and wealth management. The majority are in resource-exporting countries; frequently stated objectives are macroeconomic and fiscal stabilization, intertemporal transfer of wealth, and national development. Some resource funds hold assets equivalent to several multiples of GDP, but many funds are relatively small. The evidence shows that the design and operation of an SWF can help or encumber economic management and wealth preservation. Poorly designed stabilization and saving funds without operational flexibility can be costly and interfere with wealth objectives. Many SWFs conduct domestic operations; this creates opportunities but also potentially serious risks to public wealth that must be addressed. Strong SWF governance and transparency are key to achieving sustainable performance and preventing political capture and misuse of public resources. While a number of funds have made progress in these areas, in others much remains to be done.