Sovereign wealth funds (SWFs) are investment mechanisms abused by mostly Arab and Asian countries to take control of strategic industries within developed economies. They should therefore be viewed with caution and regulated with homogenous global regulation to control their movements within the global market.

This is what Western economic leaders and politicians would like us to believe, but when stripped of their terrorist-style commentary and viewed through cold facts, SWFs have the potential to offer large benefits and to kick-start economic recovery.

An SWF is a specific type of investment vehicle used by a government or central bank to store and invest surplus cash. Few countries have them, but they are popular among Arab and Asian countries that run large trade surpluses. By keeping the large sums of foreign exchange inflows locked up in SWFs and out of the local economy, these countries prevent an increase in local money supply and inflation, as well as a rapid domestic currency appreciation.

These funds are then used to invest in offshore bonds and share markets as a way of maintaining the value of the fund or seeking returns. In resource-rich countries especially, SWFs are seen as a way of transforming the finite earnings of resources such as oil into longer-lasting and more sustainable sources of wealth.

But fear of foreign control and hostile economic takeover has sent commentary on SWFs into a blind turmoil. SWFs were particularly slandered when six US ports were temporarily bought by Dubai Ports World, and again with the attempt by the China National Offshore Oil Corporation to buy the US-based Unocal. The fact that both of these were state-owned enterprises and not SWFs seemed to elude Western politicians in their need to slander the emergence of new economic powers.

And therein lies an important difference: SWFs are not state-owned enterprises nor political vehicles. They are constructed by states to maximise returns on excess cash and managed by financial industry experts and not political officials. Their job is to find the highest rate of return at relatively low risk, anywhere, and to keep the country’s purse safe and growing. The funds can be used to help manage local economic instability or promote growth but in no cases has it been reported that SWFs have been used as tools of hostile foreign policy.

South Africa does not have a SWF and, with few excess financial reserves, would have little use for one. There is talk of creating a similar fund by increasing taxes on mining operations and using these funds to intervene in exchange rate markets in aid of mining exports and the economy at large. This proposal has a long way to go until the implications are fully understood.

South Africa and Africa as a whole, however, are likely to benefit hugely from the growth of SWF investment flows.

Growth predictions in Western economies are very low with expectations that interest rates will not rise back to their pre-crisis levels for many years to come. This makes them unattractive investment destinations.

SWFs are increasingly turning to African economies and other emerging markets as a place to store wealth. While the effective impact on local economic growth of these inflows needs to be questioned, SWFs may play a significant role in transferring surplus global funds to markets where they can be most productively used and thereby increase global economic efficiency and spur recovery.

Pierre Heistein is the convener for UCT’s Applied Economics for Smart Decision Making course.