Zongyuan (Zoe) Li | SAIS Johns Hopkins University

The Wealth of Nations in the 21st Century. Sovereign Wealth Funds as a Tool to Address the Problem of Disembedded Capital Abundance

Scholars have contributed tremendously for deepening our understanding of the problem of ages of current account deficit and huge accumulated national debts in both developed economies and emerging market economies. In particular, with Dr. Ben Bernanke’s “global saving glut” being widely discussed as a major contribution to the 2007-2009 Global Financial Crisis, a lot of attention has been given to explain what happened and the consequences, and how countries –especially America –should react to reduce their unbearable debts.

However, what has not been thoroughly examined is the other side of this global imbalance: the side of the countries with persistent current account surplus and those who have accumulated excessive amount of FX reserves. This dissertation will examine Sovereign Wealth Funds (SWFs) as a tool to address this problem of disembedded capital abundance. The central empirical question it tackles is how countries resort to SWFs to relieve the pressure of consistent current account surplus and to pursue higher returns on their excessive FX reserves. The vital theoretical question it addresses is how state-owned investment vehicles have reshaped the landscape of global financial markets and the process of financial globalization.

This dissertation conducts comparative studies on major commodity exporting countries and non-commodity exporting countries. Major cases include UAE, Norway, Singapore, China, and Japan. Germany and Saudi Arabia are two potential candidates. In studying individual cases, quantitative methods are employed to assess the level of FX reserves, and qualitative methods are used to examine how politics and economic rationales interact.

Chapter 1 explains the problem of disembedded capital abundance. In this dissertation, disembedded capital abundance is used to describe the phenomenon of some countries in the world having accumulated excessive amount of FX reserves and maintained current persistent account surplus for many ages. Chapter 1 conducts a background survey on countries that exhibit such features, and discuss the different methods they have employed in order to balance the surplus. In the end it comes down to talking about SWFs as one of these several means.

Chapter 2 starts with a detailed examination of the economic rationales behind establishing SWFs, then go on to examine three different narratives of SWFs: funding source, geographic, and home country’s regime type.

Chapter 3 and 5 studies commodity-based SWFs following the principle of from general to specific. It first outlines major SWFs established by commodity exporting countries (with a list of all of them established by 2016). Then in Chapter 4 it conducts the first major case study in this dissertation: UAE, as a representative of big commodity exporters in the world. It concludes with practical and policy implications for major commodity exporters such as Saudi Arabia. Chapter 5 is dedicated to smaller commodity exporters in the world, compare and contrast them with big commodity exporters.

Chapter 6-8 studies non-commodity-based SWFs and it also follows the principle of from general to specific. Chapter 6 examines how and why certain non-commodity exporting countries have also accumulated huge amount of FX reserves. Chapter 7 and 8 conduct the second and the third major case study in this dissertation respectively: the China case and the Singapore case.

Chapter 9 is dedicated to counterfactual(s): Japan (and Germany). Japan has the largest amount of FX reserves in the world, and it also owns the world’s largest pension fund. However, it has not established a SWFs yet. Considering most of its neighboring countries with similar development experience have already established at least one SWF, why Japan has not done so is an intriguing empirical puzzle. It puts the case of Japan in a comparative perspective, examining how Japan’s Government Pension Investment Fund differs from Norway’s Government Pension Fund Global.

Chapter 10 puts SWFs in the big context of financial globalization. It firsts discuss the political economy of SWFs in two hard times: 1) SWFs and the 2007-2009 Global Financial Crisis; and 2) SWFs and the Collapse of Commodities Prices. Here the focus is how SWFs have been loved and hated, as well as been praised and condemned, during these two challenging times. Then it goes on to assess to what extent the Santiago Principles and the International Forum of Sovereign Wealth Funds (IFSWF) could introduce a behavioral convergence of SWFs.

Chapter 11 is the conclusion of this dissertation. It wraps up the empirical findings and the theoretical contributions that flow out from this dissertation.