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Economic Factors that Contributed to creation of the Government Pension Fund-Global

Norway has experienced economic surpluses since the development of its hydrocarbon resources in the 70s. This reality, coupled with the desire to mitigate volatility stemming from fluctuating oil prices, motivated the creation of Norway's Oil Fund, now the Government Pension Fund-Global (GPF-G). The instability of oil prices has been of constant concern for oil-dependent countries since the start of the oil boom, but especially so in the decades following the first oil shocks in the 1970s. As the real GDP of oil-exporting states is linked with the price of oil, it has been a goal of these exporters to stabilize oil consumption patterns, and a host of these exporting states singled out sovereign wealth funds as an effective policy tool for achieving this outcome. The adoption of the GPF-G has been in line global economic trends, especially investment patterns. International investment has increased at a significantly higher pace than either global GDP or global trade of goods and services, increasing by 175% over a period at which the former two metrics increased by 53% and 93% respectively.

Relationship to Sovereignty

The rise of globalization as the predominant political-economic system has had several key effects on states, especially in regards to interdependence and sovereignty. The erosion of fully independent socioeconomic structures has provoked new questions regarding the role of the state and its ability to project its sovereignty on a set of global economic systems that seem largely out of reach both legally and pragmatically for most states. Sovereign wealth funds are an inherently nationalist type of investment vehicle, and there exists potential for their use as a mitigating force to the supranational forces of globalization. The issue with this is that such practices may lead to a general increase in protectionism as nations attempt to wrestle back control of their economies from external forces, an outcome that most economic intergovernmental organizations, such as the International Monetary Fund, would like to see avoided. Some commentators, like Professor Gordon L. Clark of the University of Oxford, express concerns regarding non-profit considerations motivating the practices of the GPG-G, especially in regards to its ethical concerns and how these considerations may be used as a means of exerting Norwegian standards on foreign firms. On the other hand, the OECD has stated that sovereign wealth funds have had a stabilizing influence on international markets due to their ability to provide capital during times of domestic investor pessimism. The OECD has taken steps to minimize the possibilities of economic protectionism by instituting the Freedom of Investment project, where participating states agree upon guiding sets of principles that seek to boost transparency and transnational investment, while also advising states on how to best handle issues of foreign investment in the sphere of national security.

Concerns and Potential Outcomes

There are diverse concerns and predicted effects of sovereign wealth funds on international financial markets and the global economy as a whole, with experts expressing strong fears regarding destabilization and protectionism stemming from sovereign wealth funds. The destabilization argument, often cited by Roland Beck of the European Central Bank, is that non-market investment motives may lead sovereign wealth funds managers to make decisions that go against market logic, in turn causing an unexpected and potentially disastrous ripple effect. The protectionist argument, aforementioned in relation to sovereignty and sovereign wealth funds, is essentially a fear that sovereign wealth funds could be used in a non-market, protectionist manner where competing states would perpetuate ever-increasing anti-global free trade movements. However, despite these fears, there is also strong evidence to suggest that sovereign wealth funds are unlikely to gain board of directors seats in their acquisitions. Additionally, Norway’s GPF-G is especially unlikely to gain any board-of-directors seats in a company headquartered in an OECD country. Furthermore, some experts directly contradict fears regarding the destabilizing effect of sovereign wealth funds, arguing that these funds increase the stability of global finance due to the fact that they serve to increase the variety of owners of risky financial vehicles, minimizing exposure to shocks in any one particular industry, while also simultaneously limiting the absolute loss any actor can suffer in a particular global economic sector .