SWFs and the Economic Development Agenda – Reflections on the “Arab Spring”

by Elijah Reese

Without preference to the Arab world, economic challenges fuel social pressures. As the Arab Spring has ably demonstrated, resulting voices of displeasure, even in non-democratic countries, can lead to regime change with compounding complications.

Among many of the Middle East/North Africa (MENA) region countries, a common problem persists: the lack of a thriving and diversified private sector to facilitate job creation, social development, and the move away from largely resource-based economies.

Economic development is inhibited by the lack of foreign direct investment and in flows of capital. What role can Sovereign Wealth Funds (SWFs) play in the strengthening of the pillars of a domestic economy if they are mandated to investment externally? What hope will citizens have that the benefits of a SWF will translate into the social development necessary to meet their basic needs?

A recent report by PricewaterhouseCoopers found that SWFs can have tangible effects on the economic success of the their host countries by helping to lower inflation, reduce government borrowing, and limit foreign exchange rate appreciation brought about by the so-called “Dutch Disease.” Of additional interest, the study found that SWFs help to alleviate the perception of corruption in the countries that had established SWFs.

An additional benefit attributable to the SWFs institutionally is the aggregation of investable pools of capital. During the recent financial crisis and resulting decline in available capital, SWF investments added capital to struggling companies and financial institutions, providing liquidity to companies that otherwise would have required government support to succeed.

Regionally, funds such as the Mubadala Development Company, the Mumtalakat Holding Company, and the Ras Al Khaima Investment Authority (RAKIA) have primarily domestic investment mandates as they seek to develop and diversify their home economies and facilitate technology and knowledge transfer.

SWFs and the Economic Development Agenda – Reflections on the Arab Spring