As we wrote in our earlier publications[1], there are mounting discussions about the creation of Sovereign Wealth Funds (SWFs) in developed economies as a way of improving the fiscal policy framework. In particular, such discussions have recently taken place in Ireland and Great Britain and most recently the issue of the creation of such a fund became one of the prominent themes in the US presidential debate. In our view the creation of a Sovereign Wealth Fund in the United States would harbour significant benefits not only for US fiscal policy but for the global economy (albeit under certain scenarios) as well.
While both the Biden/Harris and Trump camps appear to support the creation of a SWF, the approaches and underlying motivations are notably different. The Biden camp is looking to use the fund to boost “supply-chain resilience, technological pre-eminence and energy security”, while the Trump team is focusing on the development of infrastructure such as highways, airports and manufacturing hubs[2]. The creation of a SWF in the US will not be without difficulties, however, as this will necessitate the approval of the US Congress, while also leaving open questions pertaining to the funding of such an investment vehicle by an economy that is running high budget deficits. There may also be negative scenarios for the global economy in case the funding for the US SWF comes from higher import tariffs – as is currently planned by the Trump camp.
In our view the benefits for the US economy coming from the creation of a Sovereign Wealth Fund would include the following:
- Greater scope and incentives to reduce growing public debt – Trump has already indicated that proceeds from the investments via the SWF would be directed towards paying down US public debt, while his team is calling for securing budget surpluses in order for the fund to start operations
- More possibilities for the US to participate in global platforms formed by the SWFs – one of the recent examples was the creation of a platform to connect SWFs with SDG Impact Investing[3]
- Greater connectivity with the Global South: given that the vast majority of SWFs come from the developing world, the US could use its fund to forge alliances with other SWFs to co-finance projects in the green economy or infrastructure
- Improved conditions to compete globally via better targeted and funded industrial policy by using a pool of “patient and flexible capital that can be deployed strategically”[4]
- Greater inter-generational equity: current policies associated with the inexorable debt pile-up in effect shift the financing burden on future generations – the creation of a SWF would provide more possibilities to support future generations via allocations for the “rainy day”
- Possibility to re-configure the US budget policy framework by introducing a greater role for fiscal policy rules: the operation of the SWF while itself predicated on the reduction in fiscal imbalances will also widen the scope to apply additional check and balances/rules in the allocations to and from the SWF
In the end the increasing prevalence of SWFs in the world economy calls for greater international coordination and cooperation among the largest SWFs. The pragmatic agenda of sustainable financing may bring together the SWFs from the developed and the developing world providing a platform for greater North-South connectivity. The role of SWFs in green financing may notably increase in case such North-South platforms do emerge – this in turn may call for a revision of the “Santiago principles” in order to expand the possibilities for these funds to become a key factor in financing the “green transition”. After decades of the developing economies leading the formation of SWFs in the global economy, it appears that developed markets may be starting to play catch-up in creating such strategic investment vehicles.
Yaroslav Lissovolik, Founder, BRICS+ Analytics
[1] https://brics-plus-analytics.org/revisiting-the-case-for-a-south-african-sovereign-wealth-fund/
[2] A. Rappeport. National wealth fund has bipartisan appeal. The New York Times. September 17, 2024, p. 11
[3] https://brics-plus-analytics.org/revisiting-the-case-for-a-south-african-sovereign-wealth-fund/
[4] A. Rappeport. National wealth fund has bipartisan appeal. The New York Times. September 17, 2024, p. 11
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