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Sovereign wealth funds (SWF) have once again come under the spotlight in the wake of crises facing the global financial system.
There has been an increasing interest by countries and economic institutions in investing in SWF to prevent the financial system from collapsing.
Some economists believe in the enormous financial capabilities of these funds, whose investments increased several folds in the past few years, jumping from $500 billion in 1995 to $2500 billion in 2007.
These collective investments are expected to reach $12,000 billion by 2015, out of which GCC SWFs own a stake of 50 per cent.
Many questions arise: will SWFs alone solve the crises of global financial markets and prevent global economy from stagnation? Does the global financial crisis exceed the capacity of SWFs due to the restructuring of the developed economies of Western countries, or to the soaring cost of the US war in Iraq, which surpassed $12 billion a month?
Identifying the root causes of the financial crisis should come before searching for solutions.
There are many reasons behind the crisis. The US is facing problems that hinder the restructuring of its economy, with the war in Iraq topping the list of these difficulties.
Secondly, the fierce competition among financial institutions led to them extending subprime mortgages to boost their profits.
The mortgage crisis has had its negative impacts on the financial and monetary situations in the US and Europe. Moreover, the financial crisis coincided with the rise in commodity and oil prices, which led to the deterioration of the dollar value and the rise in inflation rates in the entire world.
All these factors and problems have created a state of fear in poor countries, which have not yet managed to deal with these big increases in global market prices and meet the basic needs of their people.
The current crisis is bigger than the issue of SWFs, some of which tried to help solve the mortgage crisis by buying significant assets in some global banks and financial institutions, which were badly affected by the crisis, and write off losses worth billions of dollars.
The efforts of SWFs are not enough, since the current crisis is much deeper and Western countries are looking for easy solutions.
Europe has joined the US and the World Monetary Fund in demanding some agreement on the work of the 40 SWFs in the world, which are expected to increase to 50 by 2015.
Although an agreement is needed, it is worth mentioning that SWFs are no longer affiliated to developing oil-producing companies alone.
There are now SWFs which are affiliated to major and influential countries with strategic aspirations such as China and Russia, which makes the issue of SWFs and their widely diverse investments more complicated.
Developing countries do not have political competition with Western countries suffering from the credit crisis, but they have mutual interests.
However, the case of China and Russia is totally different. They compete over advanced technologies, information sources and media, which can be acquired through SWFs of the major countries, and which Western countries consider part of their national security interests.
Reaching an agreement on the work of SWFs may be very important for the stability of the global economy, and to avoid more problems and commercial and economic disputes. However, the US and Western countries must look for additional solutions to resolve the credit crisis.
The writer is a UAE economic expert.
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