Teaching Comparative

Sovereign Wealth Funds: potential messages

Reuters reported recently that SWFs suffered in the collapse of the investment banking giants. Last fall and spring, several SWFs based in the Middle East had invested in those banking firms. The losses have made them more cautious and more interested in diversified investments.

The Bloomberg news service suggested that SWFs "may increase investment in commercial real estate to a net $725 billion by 2015..." That would follow the example reported in the Economist of the Abu Dhabi Investment Company which bought a 90% share in New York City’s Chrysler Building. However, American Public Media's Marketplace also reported that an Abu Dhabi fund bought the renowned Manchester United football (soccer) team last week. Talk about diversification.

So, oil exporting nations are investing for their futures. Through their SWFs they own some real estate, a British football team, some devalued bank stocks, and shares of of foreign companies. Are those things contributions to state power?

According to a recent report from The Wharton School at the University of Pennsylvania, "A common concern in the United States and Europe is that sovereign funds... might harbor noncommercial motivations." In other words, some people are concerned about the political goals of SWFs' investments. There are concerns about the "relative lack of transparency over investment strategies" and "over possible political intervention and potential large-scale market moves" by SWFs.

Wharton finance professor Franklin Allen is quoted as saying, "Sovereign funds don't have to just follow monetary goals... They can pursue other goals. And since some have gotten so big, they have a lot of power... If they concentrate that power in a certain industry, they have the potential to distort markets..." And if they distort markets, they can distort politics. (Look at the almost-bipartisan rush in Washington, D.C. to respond to the investment banking crisis for an example.)

Patrick Mulloy, Washington representative of the Alfred P. Sloan Foundation, told the Senate Banking Committee about concerns that SWF money will be used not just for economic reasons but also for political and strategic purposes.

What if a Russian SWF tried to buy Boeing? What if a Chinese SWF tried to buy control of GE? What if a Saudi SWF tried to buy the New York Yankees? Would those be seen as financial decisions or political decisions? Would the U.S. turn to protectionist legislation as quickly as it turned to government ownership of AIG, the world's largest insurance company? If the U.S. did, what effect would that have on NAFTA, the WTO, or the EU's market?

In comparative politics, the questions would revolve around relationships between SWFs and other parts of the state. Who controls the SWFs? We can be pretty confident that the Norwegian SWF is accountable to an elected government. But who controls the Chinese or Russian SWFs? And who profits? Would the profits go into better social services and infrastructure? Or would the profits go into the pockets of a ruling elite?

What stands in the way of Nigerian, Iranian, and Mexican SWFs? Would the goals of such funds be primarily financial or political?

Will SWFs change the governance, political culture, or civil society in states where SWFs exist?

The field of study expands. (There probably won't be questions on the Advanced Placement exam about SWFs in the near future. The AP curriculum responds to changes in the academic world. But this topic will deepen your -- and your students' -- understanding of this sub-discipline of political science.)

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There are good financial reasons for the reaction described below, but could there be political motives as well?

From the Washington Post, 25 September 2008:

U.S. Appeals Abroad Fall Flat as Leaders See No Crisis at Home

"As the world watched Congress struggle [Wednesday] with a plan to bail out the U.S. financial system, foreign leaders balked at similar fixes for their own economies, a few even dismissing the credit meltdown as an American problem. Some foreign investors who had previously provided crucial injections of capital remained on the sidelines...

"Meanwhile, the sovereign wealth funds of Asian and oil-rich Middle Eastern nations, which have come to the rescue of U.S. firms before only to see these investments erode, showed little interest in taking a similar gamble.

"'We are not responsible for saving foreign banks,' said Badr al-Saad, managing director of the Kuwait Investment Authority, in remarks broadcast by al-Arabiya satellite television Tuesday. 'This is the duty of the central banks in these countries.' Kuwait's sovereign wealth fund pumped at least $3 billion into Citigroup in January, but the stock has lost a third of its value since then...

"The world's big sovereign wealth funds -- whether run by the oil-rich sheiks with well more than $1 trillion in Kuwait, Dubai and Abu Dhabi alone or the technocrats of communist China -- have been missing from the scramble to rescue the American banks and investment houses...

"China Investment Corp., a $200 billion state fund set up last year, spent more than $8 billion on stakes in the Blackstone Group, the world's largest buyout fund, and Morgan Stanley, the second-biggest U.S. securities firm. The value of those investments have plunged about 43 percent...

"Sovereign funds, reeling from setbacks in other parts of their own international investments, also don't make decisions fast enough for the quick deal-making that has stunned Wall Street over the past two weeks, Nader Sultan, former chief executive of the Kuwait Petroleum Corp. and senior partner of F&N Consultancy said.

"Moreover, said Kuwait Investment Authority's Saad, 'We have social and economic responsibilities toward our own country.' Kuwait's investment authority has put more than $375 million into its own sagging stock market, Saad told al-Arabiya. The central bank of the United Arab Emirates said Monday it had set up a more than $13 billion fund to try to ensure the kingdom's banks had enough cash."

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Labels: economics, globalization, politics

posted by Ken Wedding @ 6:18 AM