Academic journal article Stanford Law Review

Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Mercantilism

Academic journal article Stanford Law Review

Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Mercantilism

Article excerpt

     A. The Problem of Underinclusion
     B. The Problem of Overinclusion


Keynes taught years ago that international cash flows are always political. (1) Western response to the enormous increase in the number and the assets of sovereign wealth funds (SWFs), and other government-directed investment vehicles that often get lumped together under the SWF label, proves Keynes right. To their most severe critics, SWFs are a threat to the sovereignty of the nations in whose corporations they invest. The heat of the metaphors matches the volume of the complaints. The nations whose corporations are targets of investments are said to be threatened with becoming "sharecropper" states if ownership of industry moves to foreign-government absentee holders. (2) More tempered critics fear that SWFs will make decisions for political, not economic reasons. (3) Calls for both domestic and international regulation of sovereign wealth funds' investments are now a daily occurrence. (4) In this Article we frame a minimalist response to concerns over SWFs.

The high profile controversy over the rise of SWFs is one--but only one--of the frictions that result from the interaction of two very different conceptions of the role of government in a capitalist economy--"state capitalism as opposed to market capitalism." (5) In the form of market capitalism that has developed in the advanced economies, to be sure with fits and starts, the individual company is the unit whose value is maximized. Prohibitions against government subsidies and preferences reflected in WTO and European Union rules are designed to prevent governments from shifting the level of profit maximization from the company to the state. In contrast, some major developing countries (China foremost among them) increasingly reflect a form of state capitalism--what we call the new mercantilism. In this form, the country is the unit whose value is to be maximized, with a corresponding increase in the role of the national government as a direct participant in and coordinator of the effort. For the developed economies, the belief that free trade and competition amongst companies increases GDP at the national level is an article of faith: the market polices the tautology. For developing economies, particularly those whose enterprises must compete with companies from more advanced economies, the state, acting through SWFs, through direct ownership of operating companies, and through regulation, seeks to level the playing field. For the new mercantile capitalism, the government attempts to ensure that company-level behavior results in country-level maximization of economic, social, and political benefits.

Although SWFs constitute only one mechanism of state involvement in the economy, they have attracted great attention because for some commentators they are the current face of this tension between competing forms of capitalism. Lawrence Summers has pointed out that the cross-border activities of SWFs and other sovereign investment vehicles have reversed the trend toward privatization that swept over the globe in the past quarter century. (6) Governments are now accumulating stakes in what were purely private entities. As one commentator argues,

   these trends [in the growth of SWFs and their investment
   activities] involve a dramatic increase in the role of governments
   in the ownership and management of national assets. This
   characteristic is unnerving and disquieting. It calls into question
   our most basic assumptions about the structure and functioning of
   our economies and the international financial system. (7)

Looking behind the rhetoric, SWFs' investments have attracted attention as a result of two factors, one economic, the other tied to national regulation. …

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