Sovereign wealth funds (SWFs) have traditionally been created to recycle excess reserves from natural resource or non‐commodity revenues. However, in recent years funds are being established under conditions of capital scarcity with objectives to contribute domestic economic development, often through the buildout of national infrastructure programs. Such trends in new fund creation represent a fundamental shift in the sovereign wealth fund paradigm and raise serious questions about how these entities are to be capitalized and also the implications of capitalization models on their sustainability. This study examines the recent evolution of SWF models focused on economic development. Its analytic focus is drawn, in particular, to countries that are neither endowed with oil wealth, nor otherwise enjoy export surpluses to be used to capitalize a development‐oriented SWF. While this study is relevant to and expands the scope of the broad literature on SWFs, its specific contribution is as a focused analysis of how SWF funding sources impact achieving long‐term financial and socio‐economic development objectives.
Strong internal governance – extending from key government stakeholders to fund managers – is critical to enhance the ability of a development and strategic investment fund to meet return requirements and deliver economic gains while avoiding negative impacts.
A clear delineation is required to separate spending priorities set under the government's budget on the one hand and investments for development financed by the fund on the other hand.
Appropriate fund capitalization strategies must be coupled with careful policy due diligence on residual fiscal impacts in order to narrow the scope of externalities.