September 6, 2020
The Economy & Finance, Article No. 34/2020
Balancing infrastructure development and savings through the Sovereign Wealth Fund
A Sovereign Wealth Fund (SWF) is a mechanism of moving a country’s savings and investments from present to future. SWFs are managed in different structures ranging from Central Banks to private investment corporations. There are four basic benchmarks put forward by Ang (2010) with respect to SWFs to the extent where they should take into account the economic and political context underpinning the establishment of the SWF, and the role that the SWF will pay as one part of government 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 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 a SWF to consider the long run equilibrium benchmark of the markets in which the SWF invests and the long-term externalities affecting the SWF.
Conversely, instead of a SWF, there is another such like mechanism referred to as a Stabilization Fund or often times called a ‘Budget Stabilization Fund’. This type of fund usually has clearly laid out rules for the deposit and withdrawal of resources to smooth the fluctuations (deficit/surplus) in the government budget. It is usually funded from excess revenues, but their purpose is to help ensure that earnings or profits are spent – through the budget process – in a way that makes it possible to share wealth with future generations (IMF, 2013 & Loppnow, 2009).
That said, do we really need to have a SWF when Guyana is still largely underdeveloped in many respects? Or, should the revenues be utilized to pursue massive investments in infrastructure, education, health care, security and information technology etc., which the country, unarguably, badly needs?
Dubai is a classic example of an oil rich country that has pursued a similar strategy. How did Dubai get so rich – was it really the oil revenues or locking away oil revenues in a SWF? To answer this question the answer lies in what Dubai actually did with their oil revenue at the onset– in that how was it spent? Dubai is the second wealthiest emirate in the United Arab Emirate (UAE) after Abu Dhabi which is the capital state. Dubai’s massive transformation has taken place over the last four decades, managing to shift their economy from fishing and trading to tourism, shipping and finance. Dubai’s image is synonymous with luxury, multi-billion real estate ventures; 12 million visitors in 2005; and a Vanity Fair has described it as a “city on crack”.
Interestingly, Dubai’s Gross Domestic Product (GDP) is not driven by oil per se – in fact, about 95 percent of Dubai’s GDP is not oil based. Dubai had discovered that it had limited oil and gas reserves (1/20th of the reserves of Abu Dhabi) and was thus determined to build up an economy that could survive the end of the oil boom. To this end, Dubai invested massively in infrastructure development. With the creation of ports, Dubai established itself as a hub of trade by sea and a center of tourism and business travel by air. There are a plethora of examples underpinning the huge economic success of this country which is beyond the scope of a single article. Hence, at the end of this article the author has placed three links that readers can access (at their own leisure time) in this regard.
Citing the National Development Strategy (Guyana) document, recognition has been given to the fact that Guyana is very poorly supplied with roads. The gross inadequacy of the transport system affects the country’s social and economic development in many ways. For example, it increases productions costs and as such, constrains our national competitiveness particularly in the mining and forestry sectors. It also inhibits our capacity to fully utilize those natural resources that are not located on the coastland. And, by limiting communication between those who live on the coastland and those who inhabit the hinterland, effectively divides the country into two almost unbridgeable cultures. Moreover, and perhaps more importantly – it acts as a barrier between the unity of the country both in a physical and spiritual sense: because it seems difficult to think as Guyanese and act as one nation.
There is also a restriction to the coastal population’s penetration of the hinterland regions and as such, forces coast landers to live in a cramped and crowded manner on the coast, struggling and competing for land – space and other amenities, while more suitable areas are available farther south. Failure to occupy a larger part of the country tends to somewhat logically bolster some of the territorial claims by neighboring countries.
Finally, within these contexts, Guyana does not necessarily need a Sovereign Wealth Fund at the onset of oil production. Rather, a hybrid model of a Stabilization Fund and SWF might be more suitable which would effectively reduce the heavy reliance to borrow funds externally. In essence, locking away large revenues in a SWF would mean that other countries and multinational corporations would enjoy the direct and immediate benefits of such funds for it will be used for such like investments – while Guyana remains largely underdeveloped.
About the Author:
- Bhagwandin is a macro-finance and research analyst, lecturer and business & financial consultant. The views expressed are exclusively his own and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to firstname.lastname@example.org.