Sovereign Wealth Funds and Emerging Economies: Tools for Boosting Development and Shifting Capital Flows

Abstract

Following the 2008 global financial crisis, Sovereign Wealth Funds (SWFs) gained visibility. Despite the regulation demands by host states, this new sovereign role in international markets can work as an important tool for developing countries. By cushioning imbalance periods and insulating from international fluctuations, SWFs can act to stabilize national economy. SWFs can also strengthen the international financial system, by diversifying the markets’ motivations, but specially by providing long-term investments and greater liquidity. Finally, by moving state international reserves into riskier investments, SWFs can work as a tool for inverting the Lucas paradox and attracting capital influx into developing countries through capital markets.

Keywords: Sovereign Wealth Funds, emerging economies, Lucas paradox, capital flows, financial stabilization

JEL Classification: F21, F52, G15, G18, H30