Political Economy of Sovereign Wealth Funds in the Oil Exporting Countries of the Arab Region and Especially the Gulf

In no other region of the world are Sovereign Wealth Funds (SWFs) as numerous, long-standing and diverse as in the Arab region. Unlike funds serving some of the same functions in other parts of the world, Arab SWFs are for the most part funds set up, and in many cases headed, by the sovereign heads of state or their family members. This paper traces their origin and their evolution over time in general terms, showing the role of environmental changes, such as those in oil prices, regional political changes (e.g. the Arab Spring) and individual country needs and priorities, and outlines a political economy model that helps to explain both the determinants and effects of SWF activities. Arab SWFs are shown to serve some six different functions, which vary from one SWF to another and over time. A central theme in the political economy framework is the notion of a social contract between the sovereign and the citizenry wherein the citizenry agrees to being excluded from information and management of the SWF in return for being assured of a reasonable standard of living. While a common characteristic of these SWFs prior to the global financial crisis was their extreme lack of transparency, the political economy model is drawn upon to explain why transparency may have been increasing in some SWFs but not others, and the possible consequences thereof. The paper concludes with some suggestions for improvement in both the Arab SWFs themselves and related policy reforms.