Sovereign wealth funds could increase equality in a post-COVID world

Power-generating Siemens 2.37 megawatt (MW) wind turbines are seen at the Ocotillo Wind Energy Facility as the spread of the coronavirus disease (COVID-19) continues in this aerial photo taken over Ocotillo, California, U.S., May 29, 2020. Picture taken with a drone. REUTERS/Bing Guan REFILE - CORRECTING CITY - RC2OYG9NINL2
ESG investments have outperformed the wider market in the recent downturn.
Image: REUTERS/Bing Guan
  • Expanding sovereign wealth funds could drive forward a sustainable agenda and lift economies.
  • Dividends or returns would be distributed in a similar form to Universal Basic Income.
  • Tax reform could increase revenues to be reinvested into the economy via the fund.

For decades, global economic leaders touted the benefits of globalization, such as increased cross-border trade or reduced global inequalities. The 2010s, however, saw a rise in political nationalism, as the reduction in global economic inequality had led to an increase in much national inequality. As a result, globalization had become an easy target with free trade deals painted as an evil spectre meant to steal your job. The fact that a trade deal could result in job losses, can be better attributed to weak social systems unable to cope with the brunt of demand for new job opportunities than opening the global economy. As the world explores the changes needed for a “great reset” – as set forth by Professor Klaus Schwab – a top priority must be to allow for proper and equitable access to financial markets.

According to the United Nations, the COVID-19 economic crisis is likely to put up to 160 million jobs in manufacturing, tourism and commodity sectors in developing countries at risk. With these job losses, inequality is slated to worsen within and between nations worldwide. Faced with today’s unprecedented economic crisis, now is the time to work towards a true model of stakeholder capitalism that rethinks globalization within the limitations posed by existing financial institutions. To do so, there is a “simple fix” that we can easily and readily explore today.

With leaders actively seeking the changes needed for the great reset, by lifting economies and pressing forward with a sustainable agenda, we can expand the concept of sovereign wealth funds (SWF) and do both. These funds have typically served resource-rich countries to prepare to transition away from natural resource dependence and/or invest in a more diversified portfolio of industries. However, what if we switched the model to encourage greater equality?

Klaus Schwab -

What would this look like?

In the United States alone, 84% of all stocks owned four years ago belonged to only 10% of households. However, many prominent American billionaires have already come out to say they would like to pay higher taxes and emphasized increasing at least the capital gains, estate or income tax to redistribute some wealth. By reforming taxes, the newly perceived revenues could then be reinvested into the economy to boost the job market and production. Unlike other sovereign wealth funds in countries like Norway or Saudi Arabia, here any dividends or returns would be distributed in a similar form to Universal Basic Income. The advantage over direct distribution, however, is the flexibility of returns. If managed in a similar fashion to many of the world’s life insurance schemes, governments could provide a guaranteed minimum income to those within pre-specified tax brackets.

What advantages would this bring?

As already mentioned, access to stock ownership is disproportionately skewed towards the wealthy, where this would provide more equal market access to all members of society. Today, only a select proportion of people have the access and the knowledge to make informed investment decisions, whereas an SWF would better distribute market earnings.

Additionally, depending on how it is implemented, an SWF could either empower people or funds to independently choose to invest money in accordance with what is most interesting for stakeholders, notably sustainable development. In fact, during the recent market downturn ESG investments have outperformed the wider market and would make for a more equitable form of investment by citizens. Lastly, unlike many universal basic income schemes that go straight back into the pockets of citizens, here the initial sum can be better protected so that fair and equal distribution can come in good times and in bad ones.

coronavirus, health, COVID19, pandemic

What is the World Economic Forum doing to manage emerging risks from COVID-19?

The first global pandemic in more than 100 years, COVID-19 has spread throughout the world at an unprecedented speed. At the time of writing, 4.5 million cases have been confirmed and more than 300,000 people have died due to the virus.

As countries seek to recover, some of the more long-term economic, business, environmental, societal and technological challenges and opportunities are just beginning to become visible.

To help all stakeholders – communities, governments, businesses and individuals understand the emerging risks and follow-on effects generated by the impact of the coronavirus pandemic, the World Economic Forum, in collaboration with Marsh and McLennan and Zurich Insurance Group, has launched its COVID-19 Risks Outlook: A Preliminary Mapping and its Implications - a companion for decision-makers, building on the Forum’s annual Global Risks Report.

The report reveals that the economic impact of COVID-19 is dominating companies’ risks perceptions.

Companies are invited to join the Forum’s work to help manage the identified emerging risks of COVID-19 across industries to shape a better future. Read the full COVID-19 Risks Outlook: A Preliminary Mapping and its Implications report here, and our impact story with further information.

To shift from shareholder to stakeholder capitalism, access to the very markets that form the basis of the capitalist system needs to be equalized. Through an expanded sovereign wealth fund, investment opportunities would be readily available and the increased investment in companies and private sector endeavours could be better funded. Globalization has certainly had its faults in providing adequate social protections, but in expanding access to markets for all, leaders can tackle massive inequalities while pressing forward and rebuilding a sustainable and equal post-COVID world.