Sovereign Wealth Funds

This chapter examines the rationale for the existence of sovereign wealth funds (SWFs) from a developing country perspective and the implications thereof for the world economy. It first provides an overview of the evolution of foreign exchange reserves in the developing world, the relative importance of the current versus the capital accounts as the source of those assets, and the rise of SWFs as well as some of their categorizations. It then reviews the rapidly growing literature on the determinants of reserve accumulation in developing countries, with particular emphasis on competitiveness versus self-insurance motives for such accumulation, along with some of the literature on optimal reserves. It also considers the motives for the accumulation of foreign exchange assets, highlighting the distinction between the role played by the current and the capital accounts, and between the structural and cyclical determinants of such accounts. The chapter concludes by discussing some political economy issues associated with the nature and management of foreign exchange asset accumulation and the systemic implications of large reserves and SWFs.