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Economics of Governance
Published in: Economics of Governance 2/2016

03-06-2015 | Original Paper

The ruling bargain: sovereign wealth funds in elite-dominated societies

Author: Artur Grigoryan

Published in: Economics of Governance | Issue 2/2016

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Abstract

This paper generates new results on the creation and use of sovereign wealth funds (SWF) as tools for maximizing political power of the ruling class. It models a ruler’s decision to set up a SWF in a society dominated by a powerful elite in order to pacify the elite’s political ambitions by transferring resource rents. Furthermore, it shows under which circumstances the ruler is able to gain the elite’s support using a fund and to overcome the danger of coups d’état. SWFs can serve as appropriate instruments for this purpose because they are long-term oriented and strongly institutionalized.
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Appendix
Available only for authorised users
Footnotes
1
The list of SWF-sponsoring countries includes among others Angola, Ghana, Mongolia, Nigeria and Panama.
 
2
According to the International Monetary Fund, the UAE’s hydrocarbon export revenues were about $118 billion in 2012 (IMF 2013).
 
3
Emirates Ajman and Umm al-Quwain do not have oil reserves worth exploiting commercially. The other emirates Dubai, Sharjah, Ras al-Khaimah and Fujairah account for 6 percent of the UAE’s crude oil reserves (EIA 2013).
 
4
“Bani Zayed” is translated as “Zayed’s sons” (Davidson 2006).
 
5
Distant cousins and uncles of contemporary ruler Shaikh Khalifa bin Zayed al Nahyan, another branch of the family starting from sons and grandsons of Zayed the Great. For more details see Anthony (1999).
 
6
Following the Government Pension Fund-Global of Norway with its $838 billion assets under management (SWF Institute 2014).
 
7
One can find this information on the particular SWF’s web-pages. Compare, for instance, ADIA (2014), ADICO (2014), IPIC (2014) and Mubadala (2014).
 
8
Another important dimension in the analysis of power sources in Abu Dhabi which is not considered here, is Al Nahyan’s connection to Dubai’s ruling family. For more details on this and on further issues see Anthony (1999) and Davidson (2006).
 
9
With this specification, the relative size of different groups and distributional issues within the elite do not play any role.
 
10
Certainly, this is a very reduced form of a production function, but it simplifies the analysis of the problem without any loss of generality. By using a usual production function, for example of Cobb–Douglas type, and allowing the non-elite to choose effort as a reaction to the ruler’s behavior, one would get the same results.
 
11
Allowing for government debt would not change the results of the model qualitatively as long as one assumes that there are increasing costs of debt.
 
12
For details see appendix “The ruler’s investment decision”.
 
13
Historical details on the creation and development of Kuwait’s SWFs can be found in Bazoobandi (2013).
 
14
More information on the political situation and on the formation as well as the structure of post-independence Kazakhstan’s elites can be found in Murphy (2006), Satpaev (2007) and Ostrowski (2010).
 
15
Samruk included the five large state monopolies, KazakhTelecom, KTZh, KazMunayGaz, KazPost and KeGoc. Kazyna JSC was holding regional Social-Entrepreneurship Companies focused on economic development (Kemme 2012).
 
16
Venables (2010) and van der Ploeg and Venables (2011a, (2011b) analyze this problem in several papers and show that developing countries must weigh the benefits of domestic public investment against the benefits of a SWF. It should be a priority for these countries to use resource rents to promote growth and increase consumption (Collier and Venables 2008). Although, Sovereign Development Funds exist which invest domestically, it is not clear how their investment priorities and objectives are defined and whether this is the best strategy for a given country.
 
17
For details compare Pistor and Hatton (2011), Dixon and Monk (2012) and Monk (2009).
 
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Metadata
Title
The ruling bargain: sovereign wealth funds in elite-dominated societies
Author
Artur Grigoryan
Publication date
03-06-2015
Publisher
Springer Berlin Heidelberg
Published in
Economics of Governance / Issue 2/2016
Print ISSN: 1435-6104
Electronic ISSN: 1435-8131
DOI
https://doi.org/10.1007/s10101-015-0168-7