Sovereign Wealth Funds: The New Intersection of Money and Politics

By Christopher Balding | Go to book overview

CHAPTER 4
The Politics of Sovereign Wealth Funds

The concern of policy makers about sovereign wealth funds (SWFs) concerns the funds’ potential to wield political influence in international economic affairs. As one central banker put it, sovereign wealth funds “challenge these deeply held assumptions about the world economy” (Hildebrand 2007). The regulation of sovereign wealth funds will pose an excellent test case as to how developed countries manage global financial regulation, specifically in their dealings with less developed countries (Drezner 2009). The question of whether sovereign wealth funds will work to maximize shareholder value or act as political extensions of the state is a valid worry expressed by a wide range of policy makers. Irrespective of the research and data about sovereign wealth fund investment, opinion about SWFs is formed by politics (Deutsche Bank 2007). Before the global recession in 2008, target countries demonstrated skepticism to downright hostility toward SWFs, while during the recession they could not encourage enough investment or rescue packages of failed companies. Much of this stemmed from a clear lack of knowledge, admitted by IMF officials, about sovereign wealth funds (Johnson 2007). Initially, countries negotiating from a position of strength pushed to curtail the influence of sovereign wealth funds; however, with ballooning budget deficits, failing banks, and collapsing equity markets, policy makers’ fears about mixing business and politics have evaporated. Though research indicated that SWFs acted similar to other asset managers, and were not politically motivated, the concern remained (Beck and Fidora 2008). One study by a current Obama administration economic official noted that SWF countries “have a history of mixing politics with business” (Farrell et al. 2008). Such rhetorical flourishes demonstrated little detailed knowledge of sovereign wealth funds, their divergent investment strategies, or their economic situations. There is little recognition of the divergent investment strategies based upon the source and hedging necessity of countries (Xiang et al. 2009). The possibility of SWFs proving that their investments are motivated by financial interest, rather than political opportunism, as a means to avoid regulatory scrutiny has been raised as a possibility, though there is little evidence of how SWFs might parade their good intentions (Badian and Harrington 2008). Concern demonstrated by the Obama administration’s National Economic Council Director Larry Summers and Deputy Director Diana Farrell accurately

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