Should Every Resource-Rich Country Have a SWF?

When I put the question like that, you can guess that I think the answer should be “not necessarily”.  SWFs are very useful financial vehicles that can solve a wide range of economic and social issues . . . provided that the right governance conditions are in place. 

More specifically, what about a country like Myanmar?  Foreign policy analyst Oliver Gilbert offers 7 reasons why Myanmar should not create a sovereign wealth fund:

  • Myanmar lacks a balance of payments surplus necessary to responsibly fund a SWF
  • Myanmar lacks technocratic expertise necessary to provide domestic oversight of a SWF
  • Myanmar does not need a SWF to manage adverse macroeconomic effects of the resource curse
  • Myanmar can achieve economic diversification without creating a SWF
  • Creating a Myanmar SWF would carry an excessive opportunity cost
  • Myanmar lacks the necessary political consensus to manage a SWF
  • Myanmar’s extreme corruption would lead a SWF to fail

It is that last point that I think is especially interesting.  Gilbert cites a Harvard Business School study that (unsurprisingly) links measures of corruption to direct investment in domestic enterprises:

The HBS team compared SWF management to the International Country Risk Guide, a widely accepted metric of country corruption that ranks countries from zero (most corrupt) to ten (least corrupt), and discovered that each point of additional corruption creates a 10.8% greater likelihood that countries with direct investments domestically. Alarmingly, the researchers also observed that politically influenced funds that made direct domestic investments significantly underperformed by 16% in the following six months compared to funds managed by experts without domestic political interference who would otherwise be predisposed to invest globally.

According to the 2011 Corruption Perception Index, an annual index released by Transparency International that gauges perceptions of domestic corruption, Myanmar ranked among the most corrupt states in the world at 180 out of 183 countries. Myanmar’s extreme corruption and the opaque nature of many global petroleum-fueled SWFs casts serious doubt on the ability of a SWF to overcome significant political pressure that has previously ruined funds or resist corrupt abuses by government officials.

So how does one keep a SWF from becoming simply a mechanism of the ruling elite to enrich and entrench themselves at the expense of the general citizenry?  As a law professor, my answer is simple: make sure a strong legal framework is already in place.  Finance must be built on law, a point supported by research by R. LaPorta,  F. López-de-Silanes, A. Shleifer, and R. Vishny (finance professors!) in their seminal article The Legal Determinants of External Finance. We cannot build a financial structure and expect the supporting legal foundation to fill itself in over time.


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