By Ashby Monk
SWFs are predominantly sponsored by developing countries: 17 of the top 20 according to research by Gerald Lyons in 2007. Given this, it is conceivable that these funds become important sources of development finance; some have even taken to calling SWFs ‘Sovereign Development Funds’.
However, a key question is what role SWFs will play in currently underserved financial markets, such as sub-Saharan Africa. World Bank President Robert Zoellick in April urged global SWFs to commit 1% of their assets to investments in Africa. Interestingly, a new article in Africa Investor offers an evaluation of this policy and outlines some of the Africa bound SWF investments to date as well as the scope for more investment in the future.
A recent Oxford Analytica briefing also examines this issue, making the case that SWFs are more likely to invest in underserved African markets than other, more traditional, financial institutions. The brief cites five SWF characteristics to back up this claim. One worth mentioning here is the South-South link: since SWFs are predominantly sponsored by developing countries, they have considerable experience operating in the difficult legal and regulatory environments characterized by these regions. This may give them an advantage over, say, US public pension funds in an African investment context.
In any case, it will be interesting to see to what extent SWFs contribute to African development in the future. I would expect that compared with the U.S and the E.U., African countries will welcome SWF investments with open arms, which may be another reason for SWFs to think more about the region…
Your entry makes me consider some of the recent congressional hearings regarding sovereign wealth funds, particularly because many economists warn against the dangers of distributing the wealth as a means of foreign aid. In a House hearing I was forced to consider the political ramifications of distributing sovereign funds as aid to African nations. Currently, the conventional wisdom is that SWFs will not make investment decisions with political motivations. However, despite Africa’s becoming a sought after market, I believe that this is a place where financial interests and political interests could begin to ovelap. If the funds at some point were to consider distributing aid as they are investing in African countries then there becomes a political connection between the fund and the nation.
I would also like to add that fears about the CIC stem from Chinese investment in general. Australia has expressed its concern regarding Sinosteel. I believe that the fear of Chinese global primacy is shared by many countries, however, I think that because the US has so many outspoken critcs (even arguably antagonists) of foreign investment within its government that the US is assumed to be the source of transparency fears.