Sovereign Wealth Funds in Nondemocratic Countries: Financing Entrenchment or Change?
Behrendt, Sven, Journal of International Affairs
The rising prominence of sovereign wealth funds--investment funds that are owned or controlled by national governments--has stirred debate about their potential use as tools to pursue global political interests rather than economic or financial ends. Recent sanctions levied on the Libyan Investment Authority, formerly operated by the government of Muammar al-Qaddafi, underscore this question. This article argues that the governance, accountability and transparency arrangements of sovereign wealth funds reflect the quality of political institutions within the countries that own them. In contrast to funds based in democratic states, those managed by authoritarian governments are distinguished by a lack of public oversight and are instead tightly controlled by the prevailing political leadership. The link between political leadership and fund management in many authoritarian countries allows governments more flexibility in using financial assets to pursue immediate political agendas.
As the unrest in Libya escalated in February 2011, the United Nations Security Council voted unanimously to adopt Resolution 1970. This measure--along with Resolution 1973, which closely followed it in March--condemned the Libyan government's use of force against civilians and imposed a number of international sanctions on the country, (1) In an attempt to drain financial resources from the government of Muammar al-Qaddafi, the Council requested that UN member states freeze all funds, financial assets and economic resources controlled by institutions and individuals affiliated with the regime." One of these institutions was a sovereign wealth fund (SWF) named the Libyan Investment Authority (LIA). Established by the Qaddafi government in 2006 to manage state-owned financial assets, it was mandated to build a well-diversified investment portfolio that would create a sustainable source of revenue, reduce the economy's dependence on oil and act as a savings fund for the future. (3) Since its establishment, Qaddafi and his family retained tight control over the fund, and Qaddafi's son Saif al-Islam
directed much of its investment activity. (4) The precise volume of assets controlled by the LIA remained unclear until May 2011, when Global Witness, a British nongovernmental organization, obtained LIA internal documents estimating the sum to be around $64 billion. (5)
By imposing sanctions on the LIA, the Security Council made clear its recognition of the fund's political influence. Security Council Resolution 1973 identified the LIA as "a potential source of funding for [Qaddafi's] regime" and thus ultimately capable of influencing the outcome of the civil war. This marked the first time that an SWF was specifically targeted by international sanctions. The shift in the international perception of SWFs and their role in political unrest became an unforeseen repercussion of the Libyan conflict.
The rise of SWFs during the past decade ignited intense debate about their impact on international affairs. The funds, defined as "government-controlled pools of assets designed to engage primarily in foreign investment," have recently emerged as important actors on the global financial and diplomatic stage. (6) Because SWFs are directed by governments, they represent potential instruments for states to exercise soft power in support of foreign policy objectives. They are thus recognized as capable of influencing outcomes in times of mounting geopolitical rivalry. To some observers, the growing prominence of SWFs indicates that the global financial system is becoming increasingly "neo-Westphalian" in character--i.e., dominated by the political interests of nation-states pursued by their governments. (7)
Academic analysis adds another dimension to this debate by assessing the interplay between SWF characteristics and domestic politics. A recent comparative analysis of global SWF assets has found that approximately 72 percent of assets under management of SWFs is controlled by authoritarian governments or hybrid regimes, while only 28 percent is controlled by democratic governments. …