The Business of Governments: Nationalism in the Context of Sovereign Wealth Funds and State-Owned Enterprises

Article excerpt

There is Russia and there's Norway, so sovereign wealth funds differ just as (countries do).... I like some countries, some other countries not so much.

--Chairman of the House Financial Services Committee Barney Frank (D-MA) (1)

Since the dawn of the industrial revolution in Europe, ownership of large enterprise has been tied to nationalist concerns over state power. (2) Early protectionist sentiments in Great Britain resulted in restrictions on the export of machinery and on the emigration of artisans. Such prohibitions were eventually eliminated because they were ineffective, unnecessary and dangerous. (3) Free trade emerged from a variety of causes but was underpinned with a liberal doctrine that emphasized increased allocative efficiency, increased productivity through innovation and an aversion to monopolies. (4) Alexander Gerschenkron famously connected the progression of European economic development to national financial institutions by pointing out that the banking system solved the problems of late industrial development. Universal banks allowed greater leeway for the state to mobilize capital for development and to influence resource allocation among competing sectors. (5) Liberal sentiments have thus always been tempered by political realist concerns with territory, populations and control of other material sources of state power.

Contemporary sovereign wealth funds (SWFs) and state-owned enterprises (SOEs) raise many of the old questions about the relationship between the ownership of large enterprise and state power. (6) Hence, while today's concerned parties do not necessarily seek to restrict the outflow of private resources within a state, they do seek to restrict investment inflow to sectors that could be considered sensitive for national security--or on a scale that could reshape their financial market systems with untoward, foreign government intervention. Therefore, SWFs and SOEs confront protectionist contradictions similar to that of earlier eras. On one hand, economic doctrine teaches that the greatest allocative efficiency and highest prices for assets can be obtained when the greatest number of potential buyers can participate in a market free of government intervention. On the other hand, when the bidders for assets are themselves state-controlled--as is the case with SWFs and SOEs--ownership could potentially be passed outside market arrangements as they are currently understood and ultimately threaten state autonomy. The problem of SWFs and SOEs is thus not an economic one because they are one form of collective investment vehicle among many bank and non-bank participants that do not disclose holdings or investment strategies. Likewise, the problem of SOEs is not economic because many are highly profitable. The problem with both is political because when they are introduced into a liberal financial system, bidders for a given economic asset may no longer seek profit maximization because nationalism in each country of origin does not provoke the same degree of national concern in the states in which they invest. Moreover, they are associated with nationalist concerns in the United States over a large current account deficit that creates a need for foreign capital inflows, as well as the accumulation of dollar-based obligations around the world.

Therefore SOEs and SWFs combine liberalism with nationalist tendencies in a new way How does liberalism coexist with nationalism in SOEs and SWFs? How do the national purposes of these vehicles vary? What are the implications of this nationalism for global economic arrangements? To answer these questions, theorists need to analyze the political activity intrinsic to large firms in the states where the SWFs and SOEs are located. Aggregate analyses, which consider the investment activities of SWFs and SOEs when they list, distribute and buy securities in transnational markets, miss this dimension. (7)

Strong political connections between large enterprise and development activities of the state are not new. …

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