Dear Editor,
I refrained from the recent discussion on the Sovereign Wealth Fund (SWF) because I thought, and still believe, that it is an excellent idea. The coalition government has made the right decision to create a SWF (for oil but it should also extend to other natural resources). A SWF is a state-owned pool of money that is commonly established from balance of payments surpluses and funnelled into investments rather than simply keeping it in the central bank or channelling it back into the economy.
SWFs are usually designed with a variety of objectives, including intergenerational equity, macroeconomic stabilization, addressing future financial needs and protecting a country’s economy from extraordinary shifts in its fiscal situation. Because SWFs have become so common, one would not realize that the term has been in use for only about a decade now. Despite the meagre life of the term, there is already a paradigmatic shift in the way SWFs are expected to be used for development. According to a recent World Bank blog, it was only a few years ago that experts advised oil and mineral producing countries to save resource revenues abroad. This advice was based on some version of the permanent income hypothesis, which posits accumulation of foreign savings until returns on accumulated capital are sufficient to provide an even future revenue stream. Given urgent needs to expand infrastructure investment at home (in power, energy, water resources, etc), some developing countries view this as poor advice. Economists have also arrived at the same conclusion: domestic investments are a potentially beneficial complement to foreign savings if they contribute to increased economic productivity. For example, a new power plant can provide reliable access to electricity, lessen or eliminate power cuts and thus boost business and economic growth.
Several recent and upcoming oil and mineral producing countries, including Tanzania, Uganda, Mozambique, Sierra Leone, and Zambia, are now considering the use of their SWFs for direct domestic investment, outside of the national budget. While this may sound like a new role for SWFs, it is not. In a recent World Bank Policy Research Working Paper, Alan Gelb and others count 14 SWFs that invest domestically, including well-established funds such as Singapore’s Temasek and New Zealand’s Superannuation Fund. These two funds, and several others, are commercial investors on par with pension funds and other privately owned funds, where the composition of the domestic investment portfolio is determined on the basis of expected financial returns. For other SWFs, including Malaysia’s Kazanah, several funds in the Gulf States, and Nigeria Infrastructure Fund, the investment mandate goes beyond financial returns to include development objectives.
Using SWFs for national development purposes carries significant risks. From a macroeconomic perspective, there is the risk of worsening detrimental boom-bust spending cycles. On the investment side, quality, productivity and integrity of investments may suffer, particularly if there is a high risk of investment decisions being influenced by political and lobbying pressure, and high risk of low productivity, badly selected and poorly implemented white elephant projects. Since Independence in 1966, Guyana has in fact invested in several white elephants. Yet these risks do not negate domestic investment by SWFs, but instead suggest that such investments must place heavy emphasis on financial returns.
I would now like to address the issue of intergenerational equity, which is a major argument for the establishment of a SWF. Natural resources are finite, and through the instrumentation of an SWF, a country can diversify revenue streams by allocating a portion of its reserves to an entity that invests in the types of assets which act as shields against systemic risk, such as the massive oil shock Guyana witnessed in 1973-74. More to the point, there are two reasons why a SWF could promote intergenerational justice. First, there is a direct link between intergenerational justice and the size of SWFs because these funds represent private and national savings. Future generations benefit from high savings today as this means less consumption by the current generation and more investment that will benefit future generations. Second, SWFs can potentially influence businesses that they own, which will, in turn, affect the development of the economy. For example, SWFs can contribute to reducing one important source of intergenerational injustice ‒ externalities. Externality occurs when a decision has unintended consequences for a third party; and intergenerational externalities are the unintended consequences on future generations of decisions made today. For example, emissions of greenhouse gases due to human activities contribute to climate change, but the cost of climate change will be paid primarily by future generations.
Here I suggest a different, and perhaps controversial, manner to promote intergenerational equity: using a portion of the resource from the SWF to invest in Guyanese. That is, to give each new-born child, regardless of the race, colour or socio-economic status of its parents a ‘wealth endowment’ (WE). The amount of endowment each child receives will be ascertained based on well-defined criteria. For the purpose of argument, arbitrarily assume US$15,000. With about 15,000 births and about 500 deaths of children under 5 years annually, the total WE endowment will be US$217.5 million per year; far less if deaths under 22 are considered. I am not saying that the WE should start as soon as funds begin to flow into the SWF. It could begin after the SWF has accumulated a certain amount, arbitrarily say, US$500 million. To safeguard the financial viability of the SWF, the WE would not be paid immediately upon birth of the child but over a period of time, say a decade. A limit will also be placed on the amount of funds flowing to WE per year.
If a child passes away before the age of 22, the endowment reverts to the SWF. The WE cannot be withdrawn before the child is, say, 18 years and enters an accredited tertiary institution within or outside of Guyana. The WE will thus be used to fund tertiary education of the child, who will be required to serve Guyana for at least one year after graduation. Better yet, all education right up to a Bachelor’s degree should be free and the endowment will be paid upon graduation with a certain grade point. Further, the child will have to live in Guyana until age 18. If the child migrates before age 18, the endowment goes back to the SWF. In exceptional circumstances, the WE may be used to cover medical expenses in cases of serious illness on the condition that these expenses are beyond the means of the child’s parents. Even so, each request will be considered on a case-by-case basis. Further, the WE is not transferrable from the child to any other person.
This form of investment in human beings will broaden the wealth of all Guyanese, blunt marginalization and help to create equal opportunities for all. Wealth-broadening, with the right kind of leadership and narrative, can become good politics, which is good for growth, equality and human development. It would help young people accumulate wealth that their parents did not manage to do – not by heroic self-sacrifice but simply through playing by the rules. Aside from wealth-broadening, this form of investment could help to reverse the falling birth rate, a shrinking population and perhaps curb outward migration. Finally, the WE may be seen as an incentive to have more children and to ensure that they are better educated.
Yours faithfully,
Ramesh Gampat
