Search

A defining feature of the global political economy, and the Eurasian region in particular, is the increasing growth of state capital. State-owned enterprises are now larger than the largest private...

This chapter unpacks the concepts of trust and legitimacy as they pertain to sovereign funds in the global political economy. Its argument is divided into three parts. First, the importance of trust in finance and geopolitics, and the critical role of transparency, and how this relates to sovereign funds. Second, the legitimacy of sovereign funds at home and abroad in general with particular reference to how the regulatory regime surrounding public institutional investors in developed democracies is emulated in the Santiago Principles, and why it is significant for understanding the legitimacy of sovereign funds. Third, the current state of trust and legitimacy for sovereign funds is evaluated, with an explanation of why the continued opacity of some sovereign funds has not reduced trustworthiness. The chapter concludes on a speculative note, suggesting that the expected institutional form and function of sovereign funds may be at odds with the long-term interests of their state-sponsors.

We welcome the opportunity to respond to Pete Moore's comments on our paper. In doing so, we address the central issue raised by Moore concerning our use of the term “modern” in our analysis of the origin, structure, and management of Gulf states’ sovereign wealth funds. As it turns out, our use of the term modern is complex and multifaceted; we hope to show that the issue raised by Pete Moore runs in a variety of directions and is not so easily resolved, as he suggests.

Thus far, our narrative has focused on beneficiary investors in middle to high-income economies. This is a simple function of where wealth is concentrated, and thus where a greater proportion of large beneficiary financial institutions are located. We would be myopic, however, if we did not include a discussion of potential frontier investors in the developing world. Many developing economies have made big strides in development and are becoming integrated with global financial markets. Indeed, frontier investors from the rich world continue to see growth opportunities and opportunities for collaboration in emerging markets, not least because of their comparatively young populations. And, many developing countries have recently established or intend to establish a sovereign fund. But including consideration of investors in developing economies also helps to reinforce the view that, ultimately, finance and investment should be about developing the real economy.

Nation-states are increasingly sharing sovereignty, both with other states and with supranational and non-governmental institutions. This is partly due to a long period of economic and financial globalisation, which has undercut territorial notions of sovereignty and varieties of capitalism. In trying to understand this phenomenon, we are drawn to sovereign wealth funds (SWFs), as they offer a unique lens into the changing dynamics of contemporary capitalism, global economic integration and state sovereignty. Indeed, the SWF provides governments with a tool for both engaging with new spatial forms as well as resisting them. While politicians may conceptualise the objective of such funds in the most practical terms, they serve an under-appreciated role in maintaining state sovereignty in a globalised world. In this paper, we build on emerging interdisciplinary scholarship concerning the rise of SWFs by broadening the interpretation of the utility of SWFs for the sponsoring government in relation to the practice and constitution of sovereignty, explicitly bridging political and economic geography. To this end, we offer an innovative, stylised typology of SWFs in relation to the state and sovereignty. The objective is to better understand the potential long-term significance of SWFs and the factors that might underpin further development of new SWFs in different countries in the future. Moreover, we believe SWFs can be differentiated according to the role they play in sovereignty and what underlies their claims to legitimacy within their respective nation-state. By understanding the rise and purpose of SWFs, we hope to better understand the sovereign in SWFs.

Over the past fifty years, there has been a revolution in the way nation-states, institutions, and firms interact with global markets. Through processes we have come to know as financialization and globalization, the fundamental dynamics of economic coordination have been restructured. Indeed, for many years it was argued that, as developed economies exported investment to developing economies, the map of the net financial flows was more important than the map of gross flows. This view of the world suggested that the real economy, comprised mostly of the production and trade of commodities, was the dominant mechanism underpinning global economic integration. While this was perhaps true at one point, by the turn of the 21st century, global financial stocks had overwhelmed the significance of the global `real' economy. Indeed, the size of the financial economy was estimated to be roughly three times larger than the real economy in 2007 (Lee et al, 2009). As such, finance and its various agents, institutions, and markets had become incontrovertible forces in the global economy (Monk, 2009a).(1) This is not to say that the real economy had lost all its importance for understanding the global map of economic growth and potential,(2) but its relevance was increasingly discounted in favour of finance. Here we conceive of the transition towards a financialized economy as the result of a 20th-century decision to prefund pension obligations with financial assets. The groundbreaking idea was based on a simple notion: there is an obligation to set aside assets in the present to avoid retirement crises due to insufficient resources in the future. As such, in the postwar years in the West, economic growth was accompanied by the establishment and development of various kinds of savings institutions that, in effect, collected together and invested the retirement savings of many workers and their dependants. This is a story that has been told in a number of ways, including Clark's (2000) ` pension fund capitalism'', Hawley and Williams's (2000) ` fiduciary capitalism'', and even Shiller's (2000) finance-led ` irrational exuberance''. Nonetheless, whatever Symposium: sovereign fund capitalism

There are three major trends manifesting in the business of institutional investment today. First, a growing number of pension and sovereign funds are moving towards a more active role in the investment process by taking a dynamic role in external manager selection and monitoring, or by insourcing asset management functions that would traditionally be managed by external parties. Second, there is a growing number of large institutional investors located far from the major international financial centers. Third, institutional investors are increasingly looking to new markets, industries, and asset classes to generate returns in a low-growth and low-yield environment. The combination of these trends gives rise to some geographic and organizational complexities for these investors, such as accessing talent, local knowledge, and aligned investment opportunities. In an attempt to resolve some of these issues, some investors have decided to launch satellite offices in major international financial centers and/or regional commercial centers at home and abroad. In effect, these funds are expanding geographically, moving their organizations into the markets they find appealing, rather than waiting for intermediaries to come to them, reflecting a broader trend towards the professionalization of pension and sovereign fund investment organizations. In this paper, we document and assess this trend, while also offering a set of principles and policies that could guide investors on their path to greater geographic distribution of organizational capabilities. In forming our arguments, we rely on the findings from twelve case studies of pension and sovereign funds.

In this paper we unpack the scope and possibilities of sovereign development funds in different forms and under different political-cum-institutional conditions as a policy tool supporting economic growth and development, particularly in developing countries. Defining what that purpose should be and what is possible is complicated by a number of factors. The form of government of the sovereign sponsor and the significance of public legitimacy may help or hinder different types of investment mandates. Moreover, different investment mandates and their relative sophistication require organizational capabilities and expertise that are often not available locally or are insufficiently developed, such that the implementation of certain investment mandates is constrained and/or too costly. The purpose and the design possibilities of a sovereign development fund are, ultimately, contingent on local conditions, resources, and the essential developmental needs of the country and its population.

The financial crisis ultimately caused Western governments to welcome sovereign wealth fund (SWF) investment as a way to put a floor under collapsing markets and to provide a set of voluntary principles that would underwrite SWFs’ claim to legitimacy in the international community. In the autumn of 2007, then U.S. Treasury Secretary Henry Paulson, in conjunction with the International Monetary Fund, convened the International Working Group of SWFs (IWG) to draft a set of generally accepted principles and practices. These principles are referred to as the “Santiago Principles.” The implicit objective of these twenty-four voluntary principles is to promote greater transparency and disclosure among the SWF com-munity and mollify skepticism surrounding their commercial orientation. Like any voluntary standard, compliance relies on the goodwill of the organization, and ultimately, the organization’s sponsor. Compliance is further complicated when there are varied interpretations as to the standard requirements. What is needed is an explicit treatment of transparency in its different forms such that SWFs, their sponsors, and external analysts have a dis-cursive device for evaluating and communicating when and why (and why they think) certain nondisclosures are legitimate, or more importantly, when and why transparency in one domain may diminish the significance of disclosure in other areas, thus reducing the significance of non-disclosure in those areas. The aim, then, is to encourage dialogue, in conjunction with the Santiago Principles, on nondisclosure as doing so leads to increased transparency overall. Said slightly differently, dialogue on nondisclosure is, in itself, a form of transparency.

The worldwide rise of sovereign wealth funds is emblematic of the ongoing transformation of nation-state economic prospects. Sovereign Wealth Funds maps the global footprints of these financial institutions, examining their governance and investment management, and issues of domestic and international legitimacy. Through a variety of case studies--from the China Investment Corporation to the funds of several Gulf states--the authors show that the forces propelling the adoption and development of sovereign wealth funds vary by country. The authors also show that many of these investment institutions have identifiable commonalities of form and function that match the core institutions of Western financial markets. The authors suggest that the international legitimacy of sovereign wealth funds is based on the degree to which their design and governance match Western expectations about investment management. Undercutting commonplace assumptions about the emerging world of the twenty-first century, the authors demonstrate that even small countries with large and globally oriented sovereign wealth funds are likely to play a significant role in international relations. Sovereign Wealth Funds considers how such financial organizations have altered not only the face of finance, but also the international geopolitical landscape.

One of the potential consequences of the international community’s focus on transparency and commercial orientation when it comes to sovereign wealth funds has been to shorten the latter’s investment time horizons. As a result, these theoretically long-term investors are pressured into behaving like the many short-term investors in the marketplace today, pushed by structural conditions that demand short-term performance in order to secure legitimacy. In evaluating the tension between transparency and long-term investing, we offer a conceptual framework for thinking through different types of transparency pertaining to the investment process as a means of discussing and communicating acceptable and non-acceptable asymmetric information in relation to financial performance.

The discovery of natural resources in a developing country is not always the good news it appears to be. Resource-rich countries, particularly emerging and developing economies, face the significant challenge of using their natural wealth to improve the living standards of average citizens. Too often the wealth is wasted through weak institutions and corruption, a phenomenon referred to as the ‘resource curse’. One increasingly popular mechanism for dealing with the curse is the commodity-based sovereign wealth fund (SWF). While it is not a panacea, in the right circumstance SWFs can be a very useful tool for managing resource revenues and facilitating long-term economic development. However, SWFs will achieve these lofty objectives only if the appropriate design and governance systems are in place. In this paper we illustrate the design principles and governance practices required to set up a successful SWF.

Nation states are increasingly sharing sovereignty, both with other states and with supranational and non-governmental institutions. In large part, this is the result of a long period of economic and financial globalization, which has undercut territorial notions of sovereignty and varieties of capitalism. In trying to understand this phenomenon, we are drawn to sovereign wealth funds (SWF), as they offer a unique and powerful lens into the changing dynamics of contemporary capitalism, global economic integration and state sovereignty. Indeed, the SWF provides governments a tool for both engaging with new spatial forms as well as resisting them. While politicians may conceptualize the objective of such funds in the most practical terms, they serve an under-appreciated role in maintaining state sovereignty in a globalized (i.e. deterritorializing) world. In this paper, we build on emerging interdisciplinary scholarship concerning the rise of SWFs by broadening the interpretation of the utility of SWFs for the sponsoring government in relation to the practice and constitution of sovereignty. To this end, we offer an innovative, stylized typology of SWFs in relation to the state and its sovereignty. The objective is to better understand the potential long-term significance of SWFs and the factors that might underpin further development of new SWFs in different countries in the future. Moreover, we believe SWFs can be differentiated according to the role they play in sovereignty and what underlies their claims to legitimacy within their respective nation state. As such, by understanding the rise and purpose of SWFs, we hope to better understand the sovereign in SWFs.