World Economic Forum 2008

As in previous years, participants at the World Economic Forum 2008 are discussing a wide range of economic and political issues. My favorite so far is the panel discussion on the increasing role of Sovereign Wealth Funds (SWFs) in global finance. As the name indicates, SWFs belong to governments and at present the main sources of SWFs are Asian and Middle East countries, whose economies are experiencing large balance-of-payments surpluses.

The rise of SWFs has attracted attention because, unlike traditional foreign reserves, which are typically invested in financial assets with low but safe returns (e.g. foreign government bonds, mainly the US treasuries), they are directly channeled to foreign private companies, in the form of equities and bonds. The argument in the panel discussion is between SWFs managers, who see themselves as purely profit driven (searching for higher rates of returns), and officials from the countries on the receiving end, who suspect the funds might as well be politicized in one way or another. Not surprisingly, there is a bit of truth in both positions.

In its issue of January 19th-25th, 2008, The Economist devoted its cover story to the Invasion of the sovereign-wealth funds.