Why do countries set up SWFs? What are the local characteristics that are necessary preconditions for SWFs’ creation? I’ve thought a great deal about this topic. So I was intrigued to come across a paper by Bernhard Reinsberg from 2009 entitled, “Sovereign Wealth – No Fund: The Decisive Role of Veto Players.” In the paper, he explains how the political environment in India prevented the creation of a SWF despite the fact that the other necessary preconditions are met:
“First, [the paper] confirms conventional economic theory which shows the requirement of excessive foreign reserves for the set-up of SWFs. Second, it suggests that political systems matter, as demonstrated by the lively debate in India on whether that country should have such a fund. In this way, influential societal actors, in particular the central bank and regulating agencies as well as business associations, have dominated the public discourse and successfully lobbied the government to waive initial plans in support of an alternative wealth management scheme.”
Reinsberg seems to argue that democracy is inconsistent with the creation of SWFs; but his argument is more nuanced than that. He also focuses in on the role of ‘veto players’ in the ‘sovereign wealth – no-fund’ result. It’s an interesting idea. Read it here.
Unfortunately a piece that the ancient greeks would file under rhetoric instead of philosophy. A work in progress but not in a promising direction.