The Norwegian Petroleum Fund – the Government Pension Fund Global – is the world’s largest government investment fund . This makes the Norwegian people the world’s largest government investor in international financial markets. At the end of 2011, the Petroleum Fund owned 1.1 per cent of the global stock market, and as of October 2012, the fund had a market value of more than NOK 3,700 billion .
Norway is not alone in owning a government fund – states are increasingly entering international financial markets as investors. This development has led to some concern that the investments of these state-owned funds may also have political motives, beyond the usual motives of achieving the highest possible return.
- What considerations must the Petroleum Fund take when investing funds?
- What type of investor is the fund actually?
- What motives do states have for establishing state investment funds?
- Does the Petroleum Fund have any significance for Norway’s foreign policy reputation?
There is broad political agreement in Norway that the Petroleum Fund should not be used for foreign policy purposes. Given the size of the fund, it is nevertheless almost inevitable that dilemmas and disputes over investments may arise .
Nationally, in some circles it is expected that the Petroleum Fund will at all times have an investment strategy that coincides with Norwegian foreign policy. Others see the Petroleum Fund as a potential foreign policy tool, where the fund, through its market power, can give Norway influence in areas and ways that are outside the scope of ordinary foreign policy. Still others point out that the financial markets must first and foremost channel capital to the most productive and economically profitable companies and investment objects. This function will be weakened if investments are made for political rather than economic reasons, it is said.
2: Emergence of government investment funds
Government investment funds are not a new invention. The first government investment fund was created by the oil country Kuwait in 1953. But it was not until the late 1990s that the number of funds and assets under management really picked up speed. Government funds gained serious attention and publicity after Chinese and Gulf-based investment funds helped save the Western banking system during the 2008 financial crisis.
In total, they then contributed around 60 billion dollars to Western banks on the verge of bankruptcy. Today, there are over 60 government investment funds, and the investment strategies of these funds are often characterized by having a very long-term perspective on their investments. This approach stands in stark contrast to most other market players.
In total, the state investment funds manage between NOK 22,000 and 28,000 billion . That is twice as much as what all hedge funds in the world manage together. If the government investment funds had been one country, and the assets under management the country’s gross domestic product , the funds would today have been the world’s fourth largest economy.
3: Why government investment funds?
What factors are behind the strong growth in government investment funds? It is first and foremost countries that over time have had large surpluses in the state budget, which establish state investment funds. These countries can mainly be divided into two country groups:
- Countries with large revenues from oil and gas exports
- The major exporting countries in Asia
Since the first group of countries derives large parts of their income from petroleum activities (natural resources), they are particularly vulnerable to fluctuations in commodity prices and the rate of recovery. Reducing this vulnerability was therefore also an important reason why the Norwegian Petroleum Fund was established. An oil fund acts as a buffer that protects the economy from fluctuations in oil revenues. Money can be put into the fund in good times and used over the state budget in financially tighter times.
In several of these countries, including Norway, the funds thus contribute to oil revenues being phased into the economy in a controlled manner. If oil revenues are channeled directly and continuously into a country’s economy, this can contribute to cost increases and overheating of the national economy. In Norway, we have also acknowledged that we are facing increased pension obligations in the years ahead. Without a fund, these obligations would have led to great pressure on public finances in the long run as oil and gas resources are depleted and petroleum revenues are reduced.
According to ethnicityology.com, the second group of countries consists of the major exporting countries in Asia. Imbalances in the world economy , with large trade surpluses and high savings rates in the Middle East and East Asia, are behind the increased revenues and profits of this group. For a number of years, a country can achieve such large profits that the country has problems absorbing the profits in a good way. This can lead to undesirable macroeconomic consequences such as rising exchange rates (and thus greater problems with selling their export goods) as well as inflation and overheating in one’s own economy.
It has been common to prevent these problems by building up foreign exchange reserves . When these reserves reach a high level, the states have seen it as increasingly attractive to establish government investment funds to manage the revenues from the trade surpluses.