Can Sovereign Wealth Funds in the Middle East and North Africa be usedfor the Solution of Economic Problems?

We can divide wealth funds into two main groups as sovereign wealth funds and private wealth funds. The purpose of this article is to briefly explain the purpose of the sovereign wealth fund concept, introduce sovereign wealth funds in the Middle East and North Africa (MENA), and discuss whether these funds can be used for the solution of economic problems in the region.

SovereignWealth Funds (SWFs) can be considered as a national saving and investment mechanism. These funds may include real and financial assets. From a historical perspective, it is seen that the said fundshave mainly been constituted by commodity export revenues, especially energy products, budget surpluses, retirement funds surpluses, and official reserves. We see that formation of these funds has intensified with the second half of the last century. The founding purpose of the SWFs often determinesthe funding forms. For instance, it is suggested that the purpose of the funds constitutedbyforeign exchange earnings accumulated thanks to the exports of energy products and other natural resources is to share sovereign assets with the future generations. On the other hand, in countries where especially natural resource export revenues constitute a large part of the gross domestic product (GDP) and government revenues, and large fluctuations in both GDP and government revenues arise as international prices of these resources vary, these funds serve as a stabilization tool. Besides, these funds can also be formed in order to manage the foreign exchange reserves of countries in a productive/profitable way. An SWF can also be created in countries such as Turkey in order to gather international resources and to manage the process of channellingtheese resources into infrastructure and productive investments if national savings are not enough to finance national investments.

According to the Sovereign Wealth Fund Institute (SWFI) data, the value of sovereign asset funds was $ 7.4 trillion at the end of 2016. The largest asset fund is the Government Pension Fund of Norway. The asset value of this fund is $ 871 billion and its source is oil. Linburg and Maduelldeveloped an openness indexbased on a scale ranging from 1 to 10 for SWFs in 2008. The Norwegian fund’s index value is 10. Despite this, the biggestSWFamongthe MENAcountries is the Abu Dhabi Investment Authority which was established in 1976. The value of the fund based on the source of oil revenues is 782 billion dollars. The openness index of this fund is 6. According to the SWFI data, the oldest fund in the region is the Saudi Arabian Monetary Authority (SAMA) Foreign Holdings. Founded in 1952, the source of this fund is oil revenues and itis worth 576 billion dollars.However, the openness index value of this fund is 4. The value of the Kuwait Investment Fund, created in 1953, is 592 billion dollars and its openness index value is 6.

We can itemise asset funds worth above 10 billion dollars in the region, according to their values, establishment years and openness indexes as follows: Qatar Investment Fund, $ 335 billion, 2000, 5; United Arab Emirates (UAE) Dubai Investment Fund, $ 201 billion, 2006, 5; SA Public Investment Fund, $ 160 billion, 2008, 4; UAE Mutual Investment Fund, 125 billion dollars, 2002, 10; UAE Abu Dhabi Investment Council Fund, $ 110 billion, 2007, openness index value is not available; Libyan Investment Fund, $ 66 billion, 2006, 1; Iran National Development Fund, $ 62 billion, 2011, 5; Oman State General Reserve Fund, $ 34 billion, 4; UAE Emirates Investment Fund, $ 34 billion, 2007, 3; Algeria Revenue Regulation Fund, $ 27 billion, 2000, 1 and Bahrain Mumtalakat Holding Fund, $ 11 billion, 10.

According to the World Bank estimates, the GDP of the MENA region is about 3.5 trillion dollars in 2016. We see that the total worth of asset funds in the MENA region is 2 times more than the GDP value. Even though the fact that the openness indexes of funds are significantly behind the world average raise doubts whether they are efficiently managed or not, it can be argued that the level these funds have reached can make a great contribution to the solution of many socio-economic and political problems in the region. It is possible to divide the countries of the region into two groups as rich in terms of energy resources, relatively developed countries and underdeveloped countries. A major short-term problem for the developed countries of the region is that fluctuations in oil prices bring about huge fluctuations in exports and budget revenues and therefore in GDP and GDPper capita, and the amount and quality of the services the government provides for their citizens. In the long run, these countries are faced with serious problems such asdiversifying their economies, investingin health and education fields, and decreasing the level of unemployment, especially that of youth unemployment and the radicalization problem that this process has created. The less developed countries in the region are obliged to meet the basic needs of their citizens in the short term and to solve development problems in the long term.

According to the World Bank data, as of the end of 2016, the unemployment rate in the MENA is 11.3%,almost two times more than the world average of5.3%. The situation in the youth unemployment is even worse: The youth unemployment rate in the world is 14% while in the MENA it is 30.4%. Whereas there is no data for income distribution, it is anticipated that the MENA is among the regions with the worst income distribution in the world. While the share of health expenditures in the world is 9.9% of the world’s GDP, the share of health expenditures in the MENA region is only 5.3% of the regional GDP. While the population growth rate in the world is 1.2%, the MENA is the region with the highest population increase in the world with 1.9%. Such a high population growth deepens the current economic problems and makes their solutions difficult. On the other hand, while there is a great need for investment in the MENA region for economic development, reducing unemployment, increasing per capita income, the ratio of gross fixed capital investments inthe MENAcountries to the regional GDP is 27.3%, which is significantly behind the Asian and Pacific countries. However, whereas in many developing countries, including Turkey, the main problem is that enough saving cannot be made to meet investments, in the MENA countries oversaving is the case; the ratio of gross savings to the GDP in the region is 36.9%.

In summary, the sovereign investment funds in the MENA take their sourcesfrom the income obtained from the export of energy resources. One of the purposes of these funds is to share the income acquiredfrom the natural resources of these countries with future generations. On the other hand, countries in the region have problems with profound socio-economic and political consequences, such as diversifying their economies, creating industrial infrastructures, reducing unemployment, raising the level of education and reducing the problem of income distribution. In the MENA countries, in contrast to many less developed and developing countries of the world, oversaving is the case, and sovereign investment funds are two times more than theGDP in the region. Instead of financing consumption and investments in the developed countries through the financial markets there, these funds should be used both for the long-term development process and to solve short-term socio-economic problems of the region.