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issues
This page considers debate about SWFs, including criticisms
that they foster corruption and undermine the stability
of the international financial system, arguments that
petro-wealth fosters a 'magical state' that is antithetical
to civil society, and calls for restrictions on what SWFs
can buy.
It covers -
transparency
The Economist editorialised in 2007 that most
SWFs
make private-equity partnerships look like paragons
of transparency. No one knows much about their internal
checks and balances, investment strategy or commercial
goals. Murkiness brings unpredictability, which financial
markets do not like. If the Abu Dhabi Investment Authority,
with an estimated $875 billion under management, decided
to unwind a big position and nobody knew why, it could
start a panic.
Edward Truman's 2007 Sovereign Wealth Funds: The Need
For Greater Transparency & Accountability (PDF)
notes that
some governments distinguish between their reserve assets
and other international holdings of the government or
the monetary authorities. For example, the Saudi Arabian
Monetary Authority (SAMA) reported that its foreign
exchange assets were $23.2 billion as of April 2007.
For the same date, SAMA reported additional holdings
on its balance sheet of $184 billion in investment in
foreign securities and $31 billion in deposits with
foreign banks and reported as memorandum items investment
in foreign securities by independent organizations of
$51 billion. Thus, Saudi Arabia can be said to have
at least $235 billion in international investments by
the government outside of its foreign exchange holdings
without having formally set up a sovereign wealth fund
or its equivalent
effectiveness
Are funds effective? The IMF argued in the 2001 paper
on Stabilization and Savings Funds for Nonrenewable
Resources by Davis et al that
-
For countries with natural resource funds, establishment
of the fund did not have an identifiable moderating
impact on government spending.
- countries
with more prudent expenditure policies tended to establish
resource funds, rather than the fund itself leading
to
increased expenditure restraint.
- establishment
of resource funds may have helped to
maintain cautious policies in the context of ongoing
revenue variability.
- coordination
of fund operations with overall national fiscal policy
- to the extent that is defined as a policy objective
- has proven difficult.
- Evidence
suggests that funds have been most difficult to operate
when the extent of reliance on resource revenues has
been largest.
UNCTAD commented in 2006 that
Stabilization
funds have generally, but not always, failed. There
has been no discernible impact on government spending,
no avoidance of price shocks including Dutch disease
effects, and so on. In countries such as Oman and Venezuela,
frequent changes to rules and deviations from objectives
led to their funds’ failure. In Alaska, easy access
to the stabilization fund to boost the population’s
income postponed a response to the state’s structural
problems: falling oil production and inability to develop
other sectors. In other countries, funds intended for
earnings stabilization were simply no longer there when
the need for stabilization came, as politicians had
found other uses for them
Samuel Asfaha concluded in 2007 that
Two
key lessons can be drawn from the empirical evidence:
i. the establishment of an NRF on its own does not necessarily
guarantee prudent fiscal policy and does not necessarily
ensure inter-generational equity; and
ii. NRFs are ultimately ineffective, even when designed
perfectly, if robust institutions for ensuring a governments'
strict observance of the fund's rules are absent. Political
will and commitment to prudent revenue management by
governments are critical
the magical state
Those criticisms are reflected in expressions of concern
that SWFs in resource-rich nations will reinforce the
'magical state'.
Fernando Coronil's criticisms of Venezuela might be extended
to the Middle Eastern and African petrostates, where concentration
of wealth in the state means that it appears to have magical
powers, the ability to accomplish any feat without cost
to the population and to engage in projects that are spectacular
but deliver few benefits other than to publicists or providers
of civil engineering services.
Coronil argues that the Venezuelan state has sought to
monopolise both violence and the nation's natural wealth,
in ways that inhibit long-term economic development and
a healthy relationship between government and the governed.
The
state has exercised this monopoly dramaturgically, seeking
compliance through the spectacular display of its imperious
presence - it seeks to conquer rather than persuade.
… By manufacturing dazzling development projects
that engender collective fantasies of progress, it casts
its spell over audiences and performers alike. As a
'magnanimous sorcerer', the state seizes its subjects
by inducing a condition or state of being receptive
to its illusions - a magical state.
responses
Responses to SWFs reflect the shape and intensity of anxieties.
Some nationalists have called for outright restrictions
on acquisition of 'strategic' enterprises by SWFs and
more broadly by SOEs.
Others have merely proposed restrictions on purchase of
majority stakes or exercise of control, with an SWF -
or the SWF from a particular nation/region - being limited
to a 5% passive stake.
Critics have noted that such restrictions are antithetical
to notions of free trade and might be subverted, with
SWFs from several petrostates for example tacitly acting
in concert to acquire dominance through acquisition of
ostensibly independent small stakes.
The European Commission has called for an 'EU response',
warning against national action that results in either
a regulatory race to the bottom regarding protectionism
or liberalisation.
Some nations have mooted the idea of 'golden shares' that
would supposedly prevent SWF acquisition of politically
sensitive enterprises and infrastructure. The problematical
viability of such mechanisms has led others to emphasise
transparency, underpinned by arguments that disregard
of good governance would lead to restrictions on the exercise
of control, on further investment and on repatriation
of capital.
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