Today’s edition is the sixth article compiled so far on the SWF series. In the previous articles, a definition of SWFs together with a presentation on the different models of institutional structures and governance frameworks was discussed. Other aspects covered so far include the legal framework, objectives, and risk management frameworks; and last week, an overview of the SWFs around the world, such as in Asia, Africa and the Middle East. This columnist sought to put into perspective the rationale for their development by these countries, and their roles in the global financial markets and to the respective countries’ economic development.
Andrew Ang (2010) (a study by the Columbia Business School) proposed four benchmarks of SWFs to the extent where the benchmarks should take into account the economic and political contexts underpinning the establishment of the SWF, and the role that the SWF would play as one part of government’s overall policy. The first benchmark is legitimacy – which should ensure that the capital of the SWF is not immediately spent; and, instead, is gradually disbursed across the present and future generations.
The second benchmark is that it should recognize the implicit liabilities of the SWF by taking into account its role in government’s fiscal and other macro policies.
The third is setting the performance benchmark which should complement the governance structure of the SWF. And fourthly, the long-term horizon requires an SWF to consider the long run equilibrium benchmark of the markets in which the SWF invests, and the long-term externalities affecting the SWF.
SWF and a developing country perspective
Developing countries accumulated large foreign exchange assets in SWFs during the 2000s, and those are of growing importance. It is, however, recognized that the accumulation of foreign exchange reserves by developing countries is partly a consequence of deep financial integration and the instability that it can generate. Such actions feed into global imbalances through “fallacy of composition” effects (a simple definition for this term is where an individual assumes that something is true of the whole just because it is true of some part of the whole. For example, the paradox of savings: it is believed that if one individual can save more money by spending less, then the entire economy can save more by spending less. However, this is far from the reality, because if everyone reduces spending, then demand for goods and services will fall, which would in turn lead to lower growth and revenue for businesses. As a consequence, businesses may lower wages and lay-off individuals, and people would have less income to spend and less to save). Griffith-Jones & Ocampo (2008) argued that though these strategies may be rational for developing countries, they contribute to global imbalances. Simultaneously, SWFs have played somewhat of an unexpected stabilizing role by providing the funds that have helped to stabilize the banking system of developed countries during periods of financial turbulence. They have also generated an important opportunity to increase financial cooperation among developing countries, both on a regional basis and on a broader scale.
Moreover, it is worthwhile to note that SWFs are considered to be an important source of capital in the global financial markets. And these funds originate from countries with rich natural resources and favourable international balance of trade in ono-commodity goods and services (Patton, 2012). In order to lend a more meaningful insight with regard to the impact of SWFs on economic development within the context of a developing economy, the discussions presented hereunder examine some empirical evidence in the case of Nigeria and Uganda.
Oleka et al (2014) conducted an empirical analysis on SWF and economic growth in Nigeria.
Same was published in Journals of Economics and Finance (www.iosrjournals.org). The study found that the link between SWF and economic growth in Nigeria is statistically significant, but not positive. The reason for this outcome is because SWF is relatively new in Nigeria and there are several challenges facing its operation, and as such, it has not contributed much to the growth rate in GDP of the Nigerian economy. Additionally, the study found that the SWF gained significant recognition in the global economy, and has been acknowledged as a catalyst and veritable channel for economic growth, especially in developed economies. But the contribution has been less than satisfactory in Nigeria. (This discussion will be continued next week).
*The Author is the holder of a MSc. Degree in Business Management, with concentration in Global Finance, Financial Markets, Institutions & Banking from a UK university of international standing.
