By Drezner, Daniel
The American (Washington, DC) , Vol. 2, No. 3
Sovereign wealth funds are government-controlled pools of assets that are making increasingly prominent investments in the economies of the Anglosphere. The combined heft of SWFs is estimated at approximately $3.3 trillion and growing rapidly. In 2007, Russia and China created new SWFs; press reports indicate that Saudi Arabia and Japan will create their own SWFs in 2008. These funds have been involved in high-profile equity purchases of Blackstone, UBS, Merrill Lynch, Morgan Stanley, and Citi. Morgan Stanley economist Stephen Jen projects SWFs to amass $12 trillion in assets by 2015--similar to the current gross domestic product of the United States. Their growth, unfortunately, feeds into two trends known to unnerve Americans: foreign investors and financial turbulence.
Over the past 30 years, the United States has experienced periodic waves of investor protectionism. In the 1980s, the specter of Japan Inc. gobbling up prestigious pieces of property led to such absurdities as members of Congress holding a press conference to bash Toshiba products. In 2006, public hysteria helped to block United Arab Emirates-owned DP World's acquisition of six port facilities in the United States. Congressional resistance thwarted China National Offshore Oil Corporation's attempt to acquire Unocal. Public opinion polling shows unremitting hostility among a majority of Americans toward the prospect of foreign "ownership" of American firms (they're more receptive to "investment"). SWFs exacerbate these suspicions. If Americans reacted negatively to faceless Japanese salarymen, imagine the reaction when the foreign purchasers are Arab governments or the Chinese Communist Party.
At the same time, a series of financial disruptions have buffeted and confused Americans over the past decade. Americans have had to cope with the vicissitudes of the dot-com bust, Enron and its aftermath, financial derivatives, hedge funds, private equity, subprime mortgages, and structured investment vehicles. Given the uncertain effects of many of these financial shocks, one could excuse the average American for looking at SWFs with more than a whiff of distrust.
In an admittedly hostile political climate, the SWFs have not done themselves many favors. At a Davos World Economic Forum session in January, Norway's finance minister Kristin Halvorsen responded to gentle criticism of her country's sovereign wealth fund by responding, "It seems you don't like us, but you need our money."
Compared to Norway, the transparency of other SWFs ranges from bad to worse. In terms of U.S. foreign policy, an obvious concern is that SWFs are sprouting up primarily in countries not commonly thought of as reliable U.S. allies. Testifying before the U.S.-China Economic and Security Review Commission in February, Alan Tonelson of the U.S. Business and Industry Council voiced the obvious concern: "If, for example, the Chinese government held significant stakes in a large number of big American financial institutions, especially marketmakers, and if our nation's current period of financial weakness persists, how willing would Washington be to stand up to Beijing in a Taiwan Straits crisis?"
No question, the growth of SWFs puts advocates of open capital markets in a quandary. During debates over what to do with the Social Security trust fund a few years ago, there was deep resistance to the idea of having a U.S. government fund pick winners in the stock market. Why should foreign governments get to play?
Sovereign wealth funds do present concerns on the near and far horizons, but the predominant reaction at this point should be what is emblazoned on the cover of The Hitchhiker's Guide to the Galaxy: "DON'T PANIC." To date, SWFs have acted responsibly, and there is no sign that their behavior will change soon.
A mixture of voluntary standards and additional surveillance by the salient authorities should deal with current concerns. …