The Political and Governance Risks of Sovereign Wealth
By Paul Rose, The Ohio State University, USA, rose.933@osu.edu
Abstract
Sovereign wealth funds (SWFs) are designed to solve critical domestic policy problems. Poorly managed SWFs and SWFs that are managed as tools of economic nationalism or mercantilism will present problems for both the sponsor country and for host countries that receive SWF investment. This article discusses these and other significant concerns presented by sovereign wealth, addressing both domestic and international risks. As described in the article, these risks fall along four dimensions: domestic political risks, domestic governance risks, international political risks, and international governance risks. The International Forum of Sovereign Wealth Funds’ (IFSWF) Santiago Principles provide a basic framework to manage and mitigate each of these types of risk, although they have limitations as a form of soft law that relies on the SWFs’ own internal compliance efforts. Notwithstanding these concerns, SWFs have proven themselves to be generally benign investors, suggesting that present governance and host country regulatory structures have successfully mitigated international risks to this point. The same is not true, however, of domestic risks presented by SWFs, which remain a serious concern for governments and, to a lesser extent, markets generally.
The Political and Governance Risks of Sovereign Wealth
The Political and Governance Risks of Sovereign Wealth begins with a brief introductory history of the rise of sovereign wealth, from its early precursors in the United States to the large and more recently created funds of natural resource-rich countries. The introduction also provides a discussion of how sovereign wealth funds (SWFs) have been defined by both observers and the funds themselves and distinguishes SWFs from other important state-controlled enterprises, including state-owned enterprises (SOEs) and sovereign development funds (SDFs). The monograph then turns to the risks created by these funds. Section 2 reviews the domestic political risks associated with SWFs and how the domestic legitimacy of SWFs is tied to the substantive and procedural legitimacy in the creation and operation of the fund. Section 3 turns to the most publicized risk posed by SWFs: the potential that they could be politicized and used as mechanisms of mercantilism. This section also details how host countries have responded to acquisitions of domestic firms by foreign state-controlled enterprises by amending their procedures for reviewing acquisitions that pose potential threats to national security. Section 3 also distinguishes the investment behavior of SWFs from SOEs and discusses how the risks associated with SOE investment are typically of a greater magnitude than those posed by SWFs. Section 4 turns to domestic governance risks for SWFs and discusses the mechanisms that are designed to mitigate such risks. Section 5 examines SWFs’ governance risks from an international perspective and how best practices like the Santiago Principles attempt to provide multilateral self-regulatory mechanisms.
