Ethos Perspectives
Sovereign Wealth Funds
Introduction
The massive growth of sovereign wealth funds (SWFs)—pools
of assets controlled by governments and invested in private
markets abroad—has generated concerns in the West about
their potential destabilising impact on the global financial
system, given their general lack of transparency and accountability.
SWFs are also seen as the antithesis of the prevailing philosophy
of market privatisation.
Most of the concerns in the West revolve
around SWFs controlled by China and the Gulf oil producers.
At the heart of these concerns is the fear that SWFs might
be driven by political, rather than economic, ends and that
they might evolve into tools for acquiring controlling stakes
in strategic industries or assets.
This issue of Ethos Perspectives examines
the major concerns surrounding SWFs. It also surveys the emerging
protectionist backlash against the strengthening financial
muscle of Asian and Middle Eastern SWFs.
Origin of Sovereign
Wealth Funds
SWFs are special pools of global assets owned and managed
(either directly or indirectly) by governments to accomplish
a diversity of economic and financial goals. These goals include
optimising returns, inter-generational wealth transfer and
enhancing financial stability.
According to Morgan Stanley, "independent
of reserves, SWFs are conservatively expected to grow to US$12
trillion by 2015—a figure that will roughly equal the
entire US GDP". Thus, SWFs are no longer small enough
to ignore. Indeed, the sheer size of some of these SWFs reflects
the tremendous growth in reserves of many emerging Asian economies
as well as major oil exporters. These reserves are well in
excess of central bank requirements for monetary stability
and thus could be managed separately.
The vast majority of SWFs are derived from
the accumulation of reserves from the export of commodities
(e.g. oil, gas, minerals, etc.). The SWFs of many Middle Eastern
oil-producing countries, Norway, as well as Russia fit into
this category. Most of these funds were set up against concerns
that such resources were dwindling. The second category of
SWFs is not based on revenue from resources but instead involves
the accumulation of foreign exchange reserves derived from
large balance of payments surpluses. China is a prime example
in this regard. The increasing number of SWFs suggests that
governments throughout the world are keen to generate higher
returns on their assets than what would be yielded by bank
deposits and investments in treasury bills.
Reference 1: "The world's most expensive
club". The Economist (24 May 2007).
http://www.economist.com/printedition/displayStory.cfm
?story_id=9230598&fsrc=RSS
Reference 2: Rediker, D. and Crebo-Rediker,
H. "Foreign investment and sovereign wealth funds".
New America Foundation (3 October 2007).
http://www.newamerica.net/publications/policy/foreign_investment_and_
sovereign_wealth_funds
Emerging Financial Protectionism
SWFs are causing increasing unease
amongst Western countries, whose concerns centre on the SWFs’
financial power, estimates of further exponential growth,
and the lack of transparency and regulation.
With an estimated US$2.5 trillion in assets,
SWFs are large enough to influence financial market movements.
Furthermore, some SWFs are investing in other funds, such
as hedge funds. This involves leveraging, which multiplies
the SWFs’ impact on markets and can potentially destabilise
markets when bets go wrong.
Another concern over SWFs, particularly
in the US, is that SWFs run counter to the American philosophy
of market privatisation. In fact, many raise the spectre of
SWFs evolving into a form of “cross-border nationalisation”
and constituting government interference in free markets—only
this time, in other countries’ markets rather than their
own.
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