Sovereign Wealth Fund - SWF

For countries dependent on a commodity, like oil, it’s smart to have a sovereign wealth fund.

Sovereign wealth funds (SWF’s) are state-owned investment funds that hold reserves (money saved up), usually for a specific, public-benefit purpose. (The problem: many of these funds are managed by friends-of-the-government rather than by talented investors, so results often suck; and, of course, the temptation for massive corruption is there. "Why rob banks? Because that's where the money lives.")

If SallySeaShore, a nation, had an economy completely dependent on seashells, its entire economy would be subject to the whims of the international seashell markets. When demand for seashells is high, the economy is doing well. But...when another country, OllieOcean, floods the international market with seashells, that demand (not to mention prices) drops. This would cause SallySeaShore to go into a recession. Or worse.

In the case of SallySeaShore, they could create a sovereign wealth fund with the purpose of saving up money when the economy is doing well. That way, they can tap the fund when times are bad and seashell prices and demand are down.

There are no hard and fast rules for sovereign wealth funds; some are pretty liquid, others are more concerned with returns.

Norway boasts the largest sovereign wealth fund in the world, more than $1 trillion USD. Luckily for Norwegians, their sovereign wealth fund is also very transparent. Most other significant sovereign wealth funds are less transparent, implying they’re either tapped by politicians, used as political tools, or both.