Recasting the Sovereign Wealth Fund Debate: Trust, Legitimacy, and Governance

Click to increase image sizeClick to decrease image size Notes An important caveat is necessary. While this paper focuses on the current problems facing SWFs in the West, it does not make the argument that SWFs are inherently threatening. Quite the contrary, I simply make the observation that in certain places, policy makers perceive SWFs to be a threat (for whatever reason). In fact, there are many who question the credibility of those even discussing protectionist policies. As Warren Buffet noted: 'Our trade equation guarantees massive foreign investment in the US. When we force-feed $2 billion daily to the rest of the world, they must invest in something here' (cited in Hamilton 2008 Hamilton, J. 2008. Buffett Blames US Policy for Rise of Sovereign Wealth Funds. Bloomberg.com, March 3. Available from: www.bloomberg.com [Accessed 1 October 2009] [Google Scholar]). It is not only the politicians who are concerned with the politics of SWFs. A recent survey conducted by Public Strategies, Inc. of 1,000 registered voters in the United States further demonstrates SWFs' problems: 66% of respondents felt that allowing foreign governments to buy stakes in US companies could compromise national security. As Stützel (1981) Stützel, W. 1981. New Thoughts on the Recycling of Petro-dollars. The World Economy, 4(1): 49–56. [Crossref] , [Google Scholar] shows, there has been an uneasy relationship between resource rich countries and the countries that receive their capital in the form of investment for some time. Also, Cohen (1986) Cohen, B. J. and Council on Foreign Relations. 1986. In Whose Interest?: International Banking and American Foreign Policy, New Haven, London: Yale University Press. [Google Scholar] noted the US perception in the 1970s that large concentrations of assets in the hands of 'Arab governments' might be a national security threat. See 'SWF and foreign investment policies – an update'. October 2008. Available from: http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000232851.pdf [Accessed 1 October 2009]. See http://www.reuters.com/article/marketsNews/idUSL3028241920080630. This definition consciously excludes any reference to 'foreign assets', as many SWFs begin as domestically oriented funds and grow to include foreign assets, such as Temasek. My view is that the definition should include these funds from their inception rather than when they decide to invest overseas. Nevertheless, as the liabilities section above implies, sources still do have a role in this definition. Indeed, if the money comes from within or without the government has implications for the categorisation. Rather, I would argue that the Canada Pension Plan is not a SWF because the government has no claims to the assets in the plan, the assets are contributed by employees and employers, it receives no general tax revenues, and, by law, it is not managed according to the interests of the sponsor but to maximise investment returns for beneficiaries. SWFs have been set up in response to the accumulation of wealth, while other types of funds are set up for the purpose of wealth accumulation. This differentiation has led Ambachtsheer (2008) Ambachtsheer, K. 2008. Sovereign Wealth Funds: Friends or Foes?. The Ambachtsheer Letter, 264: 1–4. [Google Scholar] to refer to SWFs as 'accidental financial tourists'. While it is true that some SWFs were thrust onto the global stage before they had a chance to set up the appropriate governance mechanisms, this is not how SWFs should be categorised – it simply helps to explain current practice. See http://www.iwg-swf.org/tr/swftr0802.htm. See www.iwg-swf.org/tr/swftr0802.htm. See http://www.iwg-swf.org/pr/swfpr0808.htm. See http://oxfordswfproject.com/2008/11/06/qa-with-kathryn-gordon-senior-economist-at-the-oecd/. It should be noted that this is a liberal democratic perspective on 'good governance'. Due to the extreme sensitivity of the issues, all individuals have been anonymised and, moreover, some of the insights garnered during interviews are not attributed at all – this is necessary in order to protect sources given the small community of experts and practitioners focused on SWFs. It should be noted that political interference in the decision making of any public financial institution is perceived as inappropriate in the West. For example, political influence over US public pension funds has been deemed illegitimate (Romano 1993 Romano, R. 1993. Public Pension Fund Activism in Corporate Governance Reconsidered. Columbia Law Review, 93(4): 795–853. [Crossref], [Web of Science ®] , [Google Scholar]). This fear is perhaps justified, as international capital flows cannot help but be of a political nature (see Keynes 1933 Keynes, J. M. 1933. National Self-Sufficiency. Yale Review, 22: 755 [Google Scholar], cited in Gilson and Milhaupt 2008 Gilson, R. J. and Milhaupt, C. J. 2008. Sovereign Wealth Funds and Corporate Governance. Stanford Law and Economics, Working paper No. 355 [Google Scholar]).

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