The case for a Sovereign Wealth Fund

I’ve been wanting to write about this for sometime and now seems like an appropriate one with Australians looking like they’re about to elect an anti-science government determined to dig up every last speck of coal they can find. George Monbiot, who has come up with the term “Abbottalypse“, describes this strategy as a “21st-Century nation (is) returning to a 19th-Century economy“.

The problem with resource-dependent economies is that when countries dig natural resources out of the ground and sell them, they are taking away the future wealth of the country because natural resources are finite. Or, as Angela Cummine puts it, for these countries their “dominant source of prosperity is finite”. Many nations recognize this and have established Sovereign Wealth Funds (SWF) which are state-owned investments, funded by the export of natural resources. More than 50 countries around the world possess a SWF with most of these having been established after the year 2000. Governments of these countries have prudently decided to save and invest these resource windfalls from boom times for use during times of need such as for projected savings shortfalls, currency fluctuations and infrastructure investment targets. One of these countries, Alaska, even goes as far as to distribute these profits to national citizens.

Australia is the world’s largest exporter of coal but paradoxically, has no SWF. Malcolm Turnbull has been arguing for a SWF for years, but so far, nothing has come of it.  Why not? One reason for this is that people think Australia needs to get its budget in surplus before this is even considered. But Angela Cummine thinks that this argument is invalid because it assumes the capital gained from the export of resources is an income, a flow of money, when in actual fact it is a stock or wealth. She says this wealth can be used for both present needs and also long-term challenges if the fund is designed correctly. She writes,

Indeed, a fund that draws its revenue from resources that no one created and that are finite arguably should benefit both present and future generations.

Malcolm Turnbull‘s view is that we should start setting up a fund right away and spend the years prior to surplus getting the design right.

The cash will probably continue to pour in, he says, and rather than waiting until Australia is debt free to make up our minds we should decide now that it is the right thing to do and spend the intervening years getting the fund’s design right.

The question that arises with talk of a SWF fund is who owns the resources that are finite and that no-one actually makes? The answer seems pretty clear to me, the people own them. Australians own Australia’s natural resources. Not Gina Rinehart and not Clive Palmer.

11 Replies to “The case for a Sovereign Wealth Fund”

  1. There’s another George Monbiot article in which he argues (based on something said by someone called Parth Dasgupta) that you should include the depreciation of natural capital when evaluating a country’s wealth. This then allows one to distinguish between countries that have long-term growth potential and others that are growing because they using some resource that may well be depleted in the not too distant future.

    1. Thanks, I hadn’t seen that article before. The concept of putting depreciating on natural assets is a good one I think and one I’ve heard argued for by people from every political persuasion. The historian, Niall Ferguson (a self-confessed conservative) mentioned this idea in one of the Reith Lectures he gave last year.

  2. Well, perhaps Malcolm Turnbull will have some success in introducing a SWF for Australia. He’d be pushing shit uphill against the mining lobby and the likes of Gina and Clive, though, unless enough Australians take a united stand. Getup and have been doing a good job at mobilizing support for various issues.

    1. Let’s hope so. I think many Australians aren’t even aware of the need for such a fund.

  3. Hi Rachel, this is actually the first time I have ever heard of an SWF. What a fantastic idea.

    I think that not only do a portion of the profits from our resources need to be directed back into the Australian Community, but those resources also do need to be mined/harvested in a measured way.

    A way that causes the least amount of harm to the environment, provides income through employment and investment and stimulates the economy.

    Mining our resources is not always going to be an option for the above and we need to start considering other ways to get the job done.

    Great informative post, thankyou for sharing.

    Miss Lou

    1. Thanks for your comment Miss Lou. I agree with all that you say, especially the bit about causing least harm to the environment.

      It does also seem to me that a business model which depends on selling a finite natural resource to a big customer (China) that is currently making plans to shift away from using this resource is perhaps not such a smart strategy for the long term.

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