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The New Economics of Sovereign Wealth Funds by Fabio Scacciavillani, Massimiliano Castelli

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1

The Macroeconomic Dynamics Behind SWFs

The decades around the turn of the century will be remembered in economic history for the process of ever closer economic and financial integration across the world which is synthetically referred to as ‘globalization’. This process was propelled by the trade liberalization spurred by the inception of the World Trade Organization (WTO), the economies of scale that ensued in key industries, the technology transfers to emerging countries from relocation of factories, the advances in telecommunications and connectivity, and the revolution in logistics which, by pushing transport costs sharply down, paved the way to a revamp of global manufacturing. (A fascinating account on the effects of the globalization is The World is Flat by Friedman, 2006.)

Ironically, the early exegesis of globalization disseminated the illusion that stronger economic ties among remote geographical areas would set the stage for the extension of a US-centric dominance to those countries emerging from decades of stagnation or underdevelopment and eager to embrace free markets after shedding the self-sufficiency myth. Policies promoting economic liberalization, capital flows and Western-style democracy were considered the wings on which this process was destined to take off.

Few envisaged that the globalization would set in motion a momentous dislocation of economic activities, promote a myriad of cross-country relationships at microeconomic level, accelerate the transfer ...

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