Brazil, China, Commodities, Corporate Finance, Economics, Emerging Markets, Emerging markets, global economy, IMF, International Trade, Latin America, Long term finance, Shadow Banking, Uncategorized, World Bank

Articles 2017 by Otaviano Canuto

Articles 2017 (Otaviano Canuto)


I – Global Economy


China and the new phase of trade expansion, OMFIF, Huffington Post, INTERFIMA, Seeking Alpha, December 2017

Two globalization processes will evolve in parallel, and might even reinforce each other. Much will depend on the extent to which anti-globalization sentiment rises or falls in key markets. Progress on trade deals like the new TPP and the wide reach of the Belt and Road should engender some confidence that international economic cooperation has not reached a nadir under President Trump – but can strike out in new and positive directions.


Overlapping Globalizations, Huffington Post, INTERFIMA, Seeking Alpha, November 2017

Current technological developments in manufacturing are likely to lead to a partial reversal of the wave of fragmentation and global value chains that was at the core of the rise of North-South trade from 1990 onward. At the same time, China – the main hub of the global-growth-cum-structural-change of that period – may attempt to extend the previous wave through its “One Belt, One Road” initiative.


The Metamorphosis of Financial Globalization Capital Finance International, Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, autumn 2017

After a strong rising tide starting in the 1990s, financial globalisation seems to have reached a plateau since the global financial crisis. However, that apparent stability has taken place along a deep reshaping of cross-border financial flows, featuring de-banking and an increasing weight of non-banking financial cross-border transactions. Sources of potential instability and long-term funding challenges have morphed accordingly.


Bloated central bank balance sheets  Capital Finance International, Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, spring 2017 (w/ Matheus Cavallari)

Central banks of large advanced and many emerging market economies have recently gone through a period of extraordinary expansion of balance sheets and are all now possibly facing a transition to less abnormal times. However, the fact that one group is comprised by global reserve issuers and the other by bystanders receiving impacts of the former’s policies carries substantively different implications. Furthermore, using Brazil and the U.S. as examples, we also illustrate how the relationships between central bank and public sector balance sheets have acquired higher levels of complexity, risks and opacity. (.pdf version here from OCPPC)


Global Imbalances on the Rise  Capital Finance International, winter 2017

Signs of a possible resurgence of rising global current-account imbalances have returned attention to the issue. We argue here that, while not a threat to global financial stability, the resurgence of these imbalances reveals a sub-par performance of the global economy in terms of foregone product and employment, i.e. a post-crisis global economic recovery below its potential. In addition, we approach how the re-orientation of the US economic policy already announced by president Trump suggests risks of new bouts of tension around global current account imbalances.


NAFTA at the Crossroads  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, May (w/ Michael McKeon and Samuel George)

The U.S. Senate voted to confirm Robert Lighthizer as United States Trade Representative last week, rounding out President Donald Trump’s cabinet and giving momentum to his trade agenda. At his swearing-in ceremony on May 15, Ambassador Lighthizer predicted that President Trump would permanently reverse “the dangerous trajectory of American trade,” and in turn make “U.S. farmers, ranchers and workers richer and the country safer.” This policy shift will begin in earnest in the coming weeks, when Lighthizer meets with congressional trade leaders to discuss the administration’s plan to renegotiate the North American Free Trade Agreement (NAFTA).


II – Infrastructure Finance


Bridging Finance and Infrastructure, Cornell on Emerging Markets, December 1, 2017 (w/ Aleksandra Liaplina)

A bridge between private sector finance and infrastructure can be built if properly structured projects are developed, with risks and returns distributed in accordance with different incentives of stakeholders.


Filling the infrastructure financing gap,  OMFIF, Huffington Post, INTERFIMA, Seeking Alpha, December 2017

Infrastructure investment has fallen short of what is needed to support potential growth. At the same time, financial resources in world markets have contended with low long-term interest rates, while opportunities for greater returns from potential infrastructure assets are missed.


Matchmaking Finance and Infrastructure  Capital Finance International, Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center summer 2017 (w/ Aleksandra Liaplina)

The world economy – and emerging market and developing economies in particular – display a gap between their infrastructure needs and the available finance. On the one hand, infrastructure investment has fallen far short from of what would be required to support potential growth. On the other, abundant financial resources in world markets have been facing very low and decreasing interest rates, whereas opportunities of higher return from potential infrastructure assets are missed. We approach here how a better match between private sector finance and infrastructure can be obtained if properly structured projects are developed, with risks and returns distributed in accordance with different incentives of stakeholders. (.pdf version here from OCPPC)


III – Brazil


Brazil’s Economic Deliverance Project Syndicate, September 28

Brazil’s proliferating corruption scandals have imposed substantial costs on some of the country’s largest companies. But, in the long term, today’s efforts to strengthen the rule of law and ensure fair market competition will prove to have been well worth it.


Dissolving corruption in Brazil  OMFIF, Huffington Post, INTERFIMA, Seeking Alpha, October  

The prevalence of crony relationships between public and private agents is neither new to Brazil nor singular to the country. The dissolution of this framework, even if painful in the short term, has great potential to create economic, political, and social gains in Brazil, and may provide an example for other countries around the world.


Does Brazil’s Sector Structure Explain Its Productivity Anemia?   Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, June (w/ Fernanda De Negri)

Brazil’s labor and total-factor productivity (TFP) have featured anemic increases in the last decades. As we illustrate here, contrary to common view, sector structures of the Brazilian GDP and employment cannot be singled out as major determinants of productivity performance. Horizontal, cross-sector factors hampering productivity increases seem to carry more weight.


Long-term finance and BNDES tapering in Brazil  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, June (w/ Matheus Cavallari)

One major policy issue in Brazil is how to boost productivity, while following a path of fiscal consolidation that will take at least a decade to bring the public-debt-to-GDP ratio back to 2000 levels. The productivity-boosting agenda includes not only the implementation of a full range of structural reforms, but also recovering and upgrading the national infrastructure and other long-term investments. Given that fiscal consolidation has already been leading to less transfer of funds—in fact, the reversal—from the Treasury to the National Economic and Social Development Bank (BNDES) and a consequent downsizing of the latter’s operations, pursuing the double objective of raising productivity and adjusting fiscal accounts will require an expansion of alternative sources of long-term asset finance.


Brazil’s Pension Reform Proposal is Necessary and Socially Balanced  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, April

Last week the World Bank released a Staff Note analyzing the pension reform proposal sent last December by Brazil’s Federal Government to Congress. It concludes that:  “… the proposed pension reform in Brazil is necessary, urgent if Brazil is to meet its spending rule, and socially balanced in that the proposal mostly eliminates subsidies received under the current rules by formal sector workers and civil servants who belong to the top 60 percent of households by income distribution.” With the help of some charts extracted from the note, we summarize here some of the reasons for such a statement.


The Brazilian debt hangover  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, January

With the help of five charts, we approach the Brazilian credit cycle, the downward phase of which helps understand why the post-crisis recovery has been so hard to obtain. In our view, the profile of such a credit cycle in effect points to it as a special chapter of our previously approached determinants of the Brazilian economic crisis.


The Brazilian productivity anemia  Cornell on Emerging Markets, April 2017

Brazil has been suffering from “anemic productivity growth”. This is a major challenge because in the long run, sustained productivity increases are necessary to underpin inclusive economic growth. Without them, increases in real labor earnings tend to conflict with global competitiveness; collecting taxes in order to fund government expenditures on infrastructure and social policies becomes a heavy burden; returns to private investment becomes harder to achieve; and ultimately citizens will have less access to high-quality goods and services at affordable prices. The focus on urgent fiscal reforms adopted by the new government– public spending cap, social security reform – must be accompanied by action on the productivity front.


IV – Emerging Markets


Beyond the Ballot: Turkey’s Economy at the Crossroads  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, March 2017 (w/ Sam George)

In the current environment, Erdogan is no longer striving to prove Turkey is ready for the EU and many believe that this course has rendered Turkish accession extremely unlikely, at least in the near term. From a purely economic standpoint, a political falling out would be a shame. The European Union is the most important trading partner for Turkey, and 40 percent of Turkey’s exports are destined for European countries. Turkey has increasingly become a part of European production chains for manufacturing as well. If political ties are not deepened, these economic links may not reach their full potential. In the meantime Turkey’s economy continues to grow, and the country maintains its momentum. But as Turks prepare to take to the polls to address a political crossroads, they must not lose track of the economic crossroads bearing down on them from beyond the bend.


Colombia: getting growth, getting peace  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, March 2017 (w/ Diana Quintero)

The Santos administration has delivered on two of its main promises: sign a peace agreement with the FARC guerrilla and get approved a significant structural tax reform. We approach here why both are expected to become strong pillars to help keep the growth-cum-poverty-reduction momentum of the last decades.


Cuba Online  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, August 2017 (with Sam George)

Dual transitions are under way in Cuba. The island is slowly opening its economy, and a new crop of younger political leaders, potentially more open to democratic norms, waits in the wings. A third transition, the rise of digital access, is also in an early stage. But it is this third transition that arguably has the most momentum and could significantly accelerate the first two.

Brazil, China, Commodities, Corporate Finance, Economics, Emerging Markets, Emerging markets, global economy, IMF, International Trade, Latin America, Long term finance, Shadow Banking, Small States, Uncategorized, World Bank

Four Lectures on Emerging Markets and the Global Economy

Four Lectures on Emerging Markets and the Global Economy

Otaviano Canuto, Casablanca, 15-18 January 2017


  1. Asset Accumulation and Growth in Developing Economies
  • Behind our “measured ignorance”
  • Natural Capital and the Resource Curse
  • Poverty- and Middle-Income Traps
  • Innovation, Capabilities and Intangible Wealth
  • Investment Climate and Infrastructure
  • Income and Efficiency Gaps


Canuto, O. and Cavallari, M. “Natural Capital and the Resource Curse“, Economic Premise No. 83. World Bank. Washington D.C. May 2012.

Brahmbhatt, M.; Canuto, O. and Vostroknutova, E. “Natural Resources and Development Strategy after the Crisis”, in Canuto, O. and Giugale, M. (eds.) The Day after Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, World Bank, Washington D.C, 2010.

Agenor, P-R.; Canuto, O. and Jelenic, M. “Avoiding middle income growth traps”, Economic Premise No. 98. World Bank. Washington D.C. November 2012.

Agenor, P-R.; Canuto, O. and Jelenic, M. “Access to Finance, Product Innovation, and Middle-Income Growth Traps”, Economic Premise No. 137. World Bank. Washington D.C. March 2014.

Canuto, O.; Dutz, M. and Reis, J.G. “Technological learning: climbing a tall ladder”, in Canuto, O. and Giugale, M. (eds.) The Day after Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, World Bank, Washington D.C, 2010.

Cirera, X. and Maloney, W. F. “The innovation paradox: Developing-Country Capabilities and the unrealized promise of technological catch up”, World Bank, Washington D.C., 2017 (Executive summary and ch.1)

World Bank, “A better Investment climate for everyone”, World Development Report 2005, World Bank, Washington D.C. 2004

Araujo, J.T., Vostroknutova, E., and Wacker, K.M. “Understanding the Income and Efficiency Gap in Latin America and the Caribbean“, World Bank, 2016


  1. Trade Globalization and Industrialization
  • Globalization and “The Great Convergence”
  • China: from the Great Transformation to Rebalancing
  • What Happened to World Trade
  • The Future of Manufacturing-Led Development
  • Premature Deindustrialization
  • China’s Rebalancing and Sub-Saharan Africa
  • Middle East and North Africa needs reforms


Baldwin, R. “The Great Convergence: Information Technology and the New Globalization”, The Belknap Press of Harvard University Press, Cambridge, Mass., 2016.

Hallward-Driemeier, M. and Nayyar, G. “Trouble in the Making? : The Future of Manufacturing-Led Development”, World Bank, Washington D.C., 2017

WIPO – World Intellectual Property Right Organization, World Intellectual Property Report 2017 – Intangible Capital in Global Value Chains, Geneva, 2017 (Executive Summary and ch.1)

Canuto, O. “What happened to world trade?”, OCP Policy Brief PB-16/15, June 2016.

Dadush, U. “Is Manufacturing Still a Key to Growth?”, OCP Policy Paper PP-15/07,

Canuto, O. “Overlapping globalizations”, OCP Policy Brief PB-17/ , November 2017.

Canuto, O.  “China, Brazil: Two Tales of a Growth Slowdown”, Capital Finance International, summer 2013.

Chen, W. and Nord, R. (2017). “A Rebalancing Act for China and Africa: The Effects of China’s Rebalancing on Sub-Saharan Africa’s Trade and Growth”, IMF African Department Paper Series.

Lakatos, C. et al. (2016). “China’s Slowdown and Rebalancing: Potential Growth and Poverty Impacts on Sub-Saharan Africa”, World Bank, Policy Research Working Paper 7666, May 2016.

Azour, J. (2017). “A time for action”, Finance & Development, December, Vol. 54, n. 4.

Arezki, R. (2017). “Getting There”, Finance & Development, December, Vol. 54, n. 4.


  1. Financial Globalization and Emerging Markets
  • The Metamorphosis of Financial Globalization
  • Unbalanced Growth in the Global Economy
  • Macroeconomic Policies in Advanced Economies After the Global Financial Crisis
  • Capital Flows to Emerging Markets
  • Global Debt
  • China’s Great Leverage
  • Finance and Infrastructure


Canuto, O. “Macroeconomics and Stagnation – Keynesian-Schumpeterian Wars”, Capital Finance International, May 2014.
Canuto, O. and Cavallari, M. “The mist of central bank balance sheets”, OCP Policy Brief PB-17/07, February 2017

Canuto, O. “The Metamorphosis of Financial Globalization”, Capital Finance International, Autumn 2017

Canuto, O. Global Imbalances on the Rise  Capital Finance International, winter 2017

Canuto, O. and Gevorkyan, A. “Capital Flows and Deleveraging in Emerging Markets: the Great Portfolio Rebalancing”, Huffington Post, 2016

Canuto, O. and Gevorkyan, A. “Tales of emerging markets”, EconoMonitor, August 8, 2016

Hannan, S.A., The Drivers of Capital Flows in Emerging Markets Post Global Financial Crisis, IMF Working Paper WP/17/52, February 2017.

Canuto, O., “Whither Emerging Markets Foreign Exchange Reserves” Capital Finance International, winter 2015-2016.

Canuto, O. and Liaplina, A. Matchmaking Finance and Infrastructure  OCP Policy Brief PB-17/23, June 2017

Canuto, O. “China’s Spill-Overs on Latin America and the Caribbean”Capital Finance International, summer 2016.

IMF, 2017 External Sector Report, July 28, 2017

IMF, People’s Republic of China – Financial Sector Stability Assessment, December 2017

Canuto, O. and Zhuang, L. “Shadow Banking in China: A Morphing Target”, Huffington Post, 2015.


  1. Macroeconomic Policies in Emerging Markets
  • Fiscal Policy for Growth and Development
  • Macro-Financial Linkages in Emerging Markets
  • Monetary Policy and Macroprudential Regulation
  • Macroeconomics and Sovereign risk Ratings


Brahmbhatt, M. and Canuto, O. “Fiscal Policy for Growth and Development“, Economic Premise No. 91. World Bank. Washington D.C. October 2012.

IMF “Tackling Inequality”, ch. 1 of IMF Fiscal Monitor: Tackling Inequality, October 2017.

IMF, “IMF Fiscal Monitor: Achieving More with Less”, April 2017

Canuto, O. and Ghosh, S., “Overview”, in Canuto, O. and Ghosh, S., (eds.), Dealing with the Challenges of Macro Financial Linkages in Emerging Markets, World Bank, 2013.

Canuto, O. and Cavallari, M. “Monetary Policy and Macroprudential Regulation: Whither Emerging Markets“, in Canuto, O. and Ghosh, S., (eds.), Dealing with the Challenges of Macro Financial Linkages in Emerging Markets, World Bank, 2013.

Canuto, O. “How Complementary Are Prudential Regulation and Monetary Policy?“, Economic Premise No. 60. World Bank. Washington D.C. June 2011

Canuto, O.;  Mohapatra, S. and Ratha, D. “Shadow Sovereign Ratings“, Economic Premise No. 63. World Bank. Washington D.C. August 2011.

Canuto, O.; Santos, P.F. and Porto, P.C.S., “Macroeconomics and Sovereign Risk Ratings“, Journal of International Commerce, Economics and Policy, Vol. 3, No. 2. May 2012.


My Articles in 2014 (with links)

Bear and bull dancing

Global Economy – Crisis Recovery and Secular stagnation Hypotheses

1. Macroeconomics and Stagnation – Keynesian-Schumpeterian Wars
Policy makers in the advanced economies at the core of the global financial crisis can make the claim that they prevented a new “Great Depression”. However, recovery since the outbreak of the crisis more than five years ago has been sluggish and feeble. Since these macroeconomic outcomes have to some extent been shaped by policy […]
May 6, 2014 | By Capital Finance International

2. Sluggish Postcrisis Growth: Policies, Secular Stagnation, and Outlook

(with Raj Nallari, and Breda Griffith)
Economic Premise n.139, April 2014.

3. Calibrating 2014
 Huffington Post – Posted January 2, 2014 | 12:35 PM
The global economy looks poised to display better growth performance in 2014. Leading indicators are pointing upward — or at least to stability — in major growth poles. However, for this to translate into reality policymakers will need to be nimble enough to calibrate responses to idiosyncratic challenges.

Emerging Markets

4. Liquidity Glut, Infrastructure Finance Drought and Development Banks
The world economy faces huge infrastructure financing needs that are not being matched on the supply side. Emerging market economies, in particular, have had to deal with international long-term private debt financing options that are less supportive of infrastructure finance. While unconventional monetary policies in advanced countries in the aftermath of the global financial crisis […]
September 19, 2014 | By Capital Finance International

5. Long-Term Finance in EMEs: Navigating between Risks and Policy Choices
(with Anderson Caputo Silva, and Catiana García-Kilroy)
Economic Premise n. 152, June 2014

6. China and Emerging Markets: Riding Wild Horses
Huffington Post Posted February 3, 2014 | 8:08 PM
One month ago, I discussed some major risks to a slight upturn in the global economic scenario for 2014. Among those risks, concerns with the growth slowdown and challenges with shadow banking in China have already come to the fore as the Chinese Year of the Horse approached…
Read Post

7. Sovereign Wealth Funds Are Coming Home
Huffington Post Posted January 15, 2014 | 5:30 PM
Followers of this blog have read several recent pieces on the changing landscape of investment finance in developing countries, particularly in natural resource-rich countries. We have approached the rise of development banks partially filling the void left by the retrenchment of international banking. We have also highlighted how…
Read Post

8. Commodity Super Cycle to Stick Around a Bit Longer
Some analysts have predicted that the commodity price boom has played itself out. However, natural resource-based commodity prices (with the exception of shale gas and its downward pressure on US natural gas prices) have remained relatively high over the last few years, despite the feeble global economic recovery (Canuto, 2014). The commodity price spike that […]
August 22, 2014 | By Capital Finance International


9. The High Density of Brazilian Production Chains
Huffington Post Posted November 13, 2014 | 12:50 PM
International trade has undergone a radical transformation in the past decades as production processes have fragmented along cross-border value chains. The Brazilian economy has remained on the fringes of this production revolution, maintaining a very high density of local supply chains. This article calls attention to the rising opportunity costs…
Read Post

10. Navigating Brazil’s Path to Growth
Huffington Post Posted November 9, 2014 | 10:01 PM
Brazil’s macroeconomic management will face four major immediate challenges in the near future. The response to them will be strengthened if we could have some indication of how to steer the Brazilian economy back to a growth route.
A first major challenge will be the upward realignment of domestic regulated…
Read Post

11. Three Perspectives on Brazilian Growth Pessimism
(with Philip Schellekens)
Economic Premise n.148, June 2014
It has become increasingly evident over the last two years that the growth engine of the Brazilian economy has run out of steam. Despite relative resilience during the global financial crisis and following a quick recovery, economic growth registered just 1 percent in 2012 and…

12. What’s Holding Back Brazil?

Project Syndicate,February 21, 2014

One often hears that Brazil’s economy is stuck in the “middle-income trap,” having failed to revive the structural transformation and per capita income growth that it enjoyed before the debt crisis…

13. Clogged Metropolitan Arteries
Huffington Post Posted February 10, 2014 | 3:45 PM
Bad conditions of mobility and accessibility to jobs and services in most metropolitan regions in developing countries are a key development issue. Besides the negative effects on the wellbeing of their populations associated with traffic congestion and time spent on transportation, the latter mean economic losses in terms of waste…

Middle-Income Trap

14. Access to Finance, Product Innovation and Middle-Income Traps
(with Pierre-Richard Agenor)
World Bank Policy Research Working Paper Series 6767, February 2014

15.  Access to Finance, Product Innovation, and Middle-Income Growth Traps

(with Pierre-Richard Agenor and Michael Jelenic)

Economic Premise n.137, March 2014.)

Debt Restructuring

16. Orderly Sovereign Debt Restructuring: Missing in Action! (And Likely To Remain So)
(with Brian Pinto and Mona Prasad)
The World Bank Research Observer 01/2014; 29:109-135.
(Accessible in and


Sovereign Wealth Funds Are Coming Home

Followers of this blog have read several recent pieces on the changing landscape of investment finance in developing countries, particularly in natural resource-rich countries. We have approached the rise of development banks partially filling the void left by the retrenchment of international banking. We have also highlighted how  less tax avoidance on extractive industries can be obtained and how that would make a huge difference in terms of resources available for local investment in those countries, provided that appropriate policies are put into place. Furthermore, we have pointed out the emergence of new forms and contracts of resource-backed investment finance, including a redirection toward home in asset acquisition made by developing countries’ Sovereign Wealth Funds.

I have invited three colleagues who have been studying the subject more closely to write the short piece below. Hope you will enjoy it as much as I did.


Sovereign Wealth Funds Investing at Home: Opportunity Fraught with Risks

Håvard Halland, Alan Gelb, Silvana Tordo

Traditionally, economists have advised countries where oil, gas or mineral reserves are discovered to invest extractives revenues abroad, ensuring a continuous future revenue stream from the return on accumulated foreign assets. The structure to do this became known as a Sovereign Wealth Fund (SWF). More recently, it has become accepted policy for resource-rich developing countries to invest a larger share of resource revenues at home, through the national budget. Now, some of these countries are turning the concept of the SWF on its head by using SWFs directly for national investment, particularly in infrastructure. For many public finance experts, such intentions cause warning lights to flash, and for good reason – the risks are substantial. As several countries push ahead with this new role for SWFs, what can be done to minimize the risks, and could there be potential advantages? A recent Economic Premise by Gelb, Tordo and Halland addresses these important questions.

The Evolving Agenda of Sovereign Wealth Fund Policy

SWFs have become so common that it is easy to forget that the term has been in use for less than a decade. However, there has already been a paradigmatic shift in the way SWFs are expected to be used for development. Until three or four years ago, oil and mineral producing countries were advised to save resource revenues abroad according to 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. For many developing countries, this always seemed like an outrageous idea, given urgent needs to expand infrastructure investment at home. Eventually, economists arrived at the same conclusion, considering domestic investments a potentially beneficial complement to foreign savings in cases where they contribute to increased economic productivity. For example, a new power plant can provide reliable access to electricity where power cuts previously hampered firms’ output.

SWFs that Invest at Home

Several recent and upcoming oil and mineral producing countries, such as Tanzania, Uganda, Mozambique, and Sierra Leone, as well as Zambia, are now considering the use of their SWFs for direct domestic investment, outside of the national budget. In fact, this role for SWFs is not as new as it sounds, and Gelb and others (forthcoming) count fourteen 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 more recently the Nigeria Infrastructure Fund, the investment mandate goes beyond financial returns to include development objectives.

Why Resource Revenues Might be Safer Abroad

Using SWFs for national development purposes carries significant risks. From a macroeconomic perspective, there is the risk of exacerbating damaging boom-bust spending cycles. On the investment side, quality, productivity and integrity of investments may suffer, particularly in contexts where there is a high risk of investment decisions being affected by political and lobbying pressure, and the risk of low-productivity, badly selected and poorly implemented “white elephant” projects is high.

It could be argued that, in the light of such risks, SWFs investing domestically should make domestic investments based purely on financial returns. However, equity markets in developing countries tend to be underdeveloped, and new infrastructure projects are frequently considered too risky to be bankable on purely commercial terms. Under such circumstances, SWFs’ opportunities for domestic investment could be very limited, and their contribution to development marginal.

Addressing the Risks of Domestic Investment

How can the integrity of SWF’s investment processes be ensured, reducing opportunities for corruption and politicization while bringing additional expertise to the investment process? In their forthcoming piece, Gelb, Tordo and Halland propose three main avenues to address such challenges.

Firstly, they suggest that domestic investment projects should compete for funding with foreign assets, rather than be fixed at a certain portfolio share. In periods of low domestic returns, or when there are indications of asset bubbles, investments would be channelled abroad. If the investment project has a clearly defined development objective, it would still be benchmarked against the financial return on foreign assets, but allowance could be made for a limited mark-down from the benchmark rate. Determining an acceptable “home bias” of this kind is challenging, and there are few examples to draw on. Gelb, Tordo and Halland discuss this issue in a forthcoming paper and suggest possible solutions. Investments that cannot be expected to yield a competitive return, such as for example public schools, would be undertaken through the national budget.

Secondly, partnering with experienced international investors can strengthen the integrity of the investment process and the quality of investments, by bringing additional oversight and expertise. The Nigeria Infrastructure Fund provides an example of this, having signed cooperation agreements with General Electric, the Africa Finance Corporation and the International Financial Corporation.

Third, SWF governance structures must ensure that investment decisions will be made independently of political and other pressures. Operational independence of professional management from the Board needs to be solidly embedded in the SWF governance structure, as well as an arms-length relationship between Board and the government as owner of the SWF.  Additionally, if the SWF is large relative to the rest of the economy, coordination with overall macroeconomic policy is needed to avoid exacerbating macroeconomic cycles. Coherence with investments funded through the budget needs to be ensured by coordinating with the overall national investment program.

Looking for the Upside: Potential Opportunities and Advantages

The use of SWFs for domestic investments carries significant risks. But can there be an upside too? An SWF that invests domestically on a commercial or quasi-commercial basis could act as an expert investor that shares risk and crowds in private investment to projects that would otherwise not be bankable but have an important development impact. Where necessary the SWF could boost its capacity by involving foreign majority investors. The first paradigmatic shift in developing countries’ resource revenue policy changed the emphasis from a focus on foreign savings to include a larger share of domestic investments. The next shift may see an expanded role for SWFs as active domestic investors. However, the risks are high, and the level of success will depend on the establishment of strong checks, balances and governance structures.

Alan Gelb is a Senior Fellow at the Center of Global Development in Washington, DC. Silvana Tordo is Lead Energy Economist for the Sustainable Energy Department, Extractive Industries. Håvard Halland is a Natural Resource Economist for the Poverty Reduction and Economic Management (PREM) Network of the World Bank.

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