The Rise of Sovereign Wealth Funds in the Global Economy: Can South Africa Establish a Sovereign Wealth Fund?

Abstract

ABSTRACT Establishing a sovereign wealth fund is one of the instruments the governing party has considered to give expression to the idea of a developmental state. Such an instrument would largely draw on natural resource windfalls to build an intergenerational store of wealth while also responding to longstanding developmental challenges. This makes sense given South Africa’s mineral endowments and future prospects in natural gas, as shown recently by the abortive attempt of Royal Dutch Shell to undertake geological surveys along the country’s wild coast. A sovereign wealth fund could underpin a developmental state and act as alternative resource for achieving legitimate social goals. South Africa presently lacks fiscal space and does not have the conditions necessary for a viable sovereign wealth fund. These need to be created. Certain resources and institutional qualities are vital to building a functional sovereign wealth fund, including a high-performing economy, current account surpluses or resource windfalls, sound institutional framework, good corporate governance, and strong state capabilities. The effects of the Covid-19 global pandemic, and its devastating impact on the South African economy, could further constrain the options of setting up a sovereign wealth fund, which is why the country needs to develop a long-term path for inter-generational equity.