The era of high commodity prices and large balance of trade surpluses in developing economies such as China and India is changing the global financial landscape. One new and significant feature on this world scene is Sovereign Wealth Funds (SWFs). These are huge investment funds owned and managed by governments that are buying into or buying up assets in countries around the world, including the United States.

Such government-owned funds are not new, however, The first one was set up by the government of Kuwait in 1952 to invest its excess oil revenues. In Europe, the largest SWF is the Government Pension Fund of Norway, with $396.5 billion. It was set up in 1967 to invest surplus revenues from the North Sea oil fields to cover the expenses of Norway’s social security system.

The state of Alaska has had such a fund since 1976, into which it places 25 percent of the proceeds from oil and gas tax and lease revenues. Alaska’s fund was worth about $40 billion in 2007. Last year,  the state government paid a dividend of more than $1,600 to every eligible state resident.  

SWFs are also owned and operated by the states of New Mexico ($16 billion), Wyoming ($3.9 billion), and Alabama ($3.1 billion). 

What is new is the growth in the number of such funds and the amount of money now at their disposal. Estimates put more than 50 SWFs in more than 35 countries, with 12 of them (almost 25 percent of the total) coming into existence just in the last three years. These 12 originated in either Arab countries, developing countries in Asia (e.g., China) or Russia.

 Table 1 lists the largest SWFs in terms of total assets.

The monies for SWFs come from two sources. The first is commodity funds representing oil revenue that a government has collected from sales, leases, or taxes, and which it chooses not to use for current budgetary expenditures.

Out of the top dozen countries with government investment funds that are primarily commodity based, eight are in the Middle East (Saudi Arabia, Iran, Iraq, Kuwait, and United Arab Emirates) or North Africa (Libya), or former Soviet republics (Russia and Kazakhstan).

The SWFs that are significantly based on excess reserves from balance of payments surpluses are mostly headquartered in countries outside of the Middle East, as shown in Table 2.

While the nearly  $4 trillion estimated to be owned and managed by SWFs seems like a large amount, the sum diminishes in weight when compared to the overall international financial market. At the beginning of 2007,  the total size of global capital markets was estimated at around $190 trillion dollars.  

International assets owned or controlled by all governments (foreign exchange reserves, and pension and non-pension funds) numbered about $15 trillion. Various levels of government in the United Stats owned or controlled $3 trillion (or 20 percent) of this total.

The chart below shows the value of assets managed by pension funds, mutual funds, insurance funds, SWFs, hedge funds, and private equity funds. SWFs are a distant fourth in comparison to the first three.

The value of total assets under the control of SWFs is less than 5 percent of the total of the three larger managed funds. And SWFs represent only 2 percent of the total value of global capital markets.

Part II of this article will look at the patterns of SWF investments. It will also examine the reasons and rationales behind the negative views that have been articulated in actual or potential recipient nations about the nature and size of these government-owned investment funds.

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