For the world of finance, sovereign wealth funds are just another source of investment capital. For the world of politics, SWF’s are an increasingly worrisome development as they infiltrate national economic and thus political structures.
These government-backed investment institutions represent operational elements of what is in effect state capitalism. There are socialist states, such as China, that acquired their wealth originally through limiting free markets within their country and pocketing the proceeds of their international trade. They then shifted to a form of market economy and made money for the private sector and also for the government. China’s initial financing of China Investment Corporation, its sovereign wealth fund, came about through a simple transfer of $200 billion of the national treasury’s foreign exchange reserves.
The immense Abu Dhabi Investment Authority, with assets worth about $625 billion, was created to manage a portion of the UAE oil export income. Setting the recent tone, ADIA has put its money to work in various financial instruments, such as the troubled Citigroup. Other resource-rich nations have also spun off government-owned companies to invest their substantial income. Placing their nation’s cash in minority equity ownership of publicly traded financial institutions at bargain prices appears to work out well for all parties.
It’s hard to say how many of these sovereign funds exist. Some countries do not have dedicated government-owned corporate investment instruments. They invest in foreign public and private corporations through other of their state-controlled agencies. The Saudis, for example, are very clever about hiding their vast sovereign wealth abroad. Some of the other countries that are known to have SWF’s include Russia, Singapore, Norway, Kuwait, Qatar, Brunei and Iran, though the latter’s is well hidden through cutouts.
The power of the SWF government-backed investment mechanisms is reflected in the best estimates of their collective assets of between $2-3 trillion. One calculation indicates that if the global sovereign wealth funds continue to develop foreign hard currency at the current rates, assets will grow to be close to $10-15 trillion by 2018.
POLITICAL POWER admittedly cannot be judged in a straight-line fashion emanating from such things as asset ownership, strategic placements in banking, infrastructure development and downstream energy investments. Nonetheless, it would be willfully obtuse not to recognize that such activities have the capacity to exercise leverage in the internal political economics of the host nations.
Investing in major industries and financial institutions internationally is still the most efficacious manner to both increase and diversify wealth sources for countries with limited domestic investment potential and/or need for foreign exchange. At the least it obviously broadens their international prestige. The best targets for SWF’s are well-established companies that are in enough financial trouble as to offer an exceptional premium for investment either through loan or equity. At the same time these usually very large corporations must still retain attractive growth potential.
The SWF’s, as government-backed investors, purposely attempt to maintain low ownership profiles. Generally, though not always, the funds are not present on the boards of the corporations in which they invest. At the same time the various funds’ long term objectives eventually will involve them, and their usually large stakeholding, in seeking — if obliquely — to influence corporate strategic objectives.
The entire concept of having foreign government-owned financial instruments becoming major investment sources for domestic firms holds within it the implicit danger of the development of political influence with and through the recipient firms. This exercise in state capitalism runs counter to the entire philosophy of private/public ownership of industry that is the historical basis of the American capitalist system.
While the influx of needed new capital is an advantage for U.S. business, the fact that this financing comes from foreign governments is a greater disadvantage. The same would be the case if the United States Government gained ownership positions in American firms in exchange for injections of capital.
Sovereign wealth funds are potentially dangerous instruments in the political and commercial life of any truly private enterprise western economy. This is particularly true for the United States. Despite its possible economic utility and legality, to attempt to justify injection of foreign government investment capital into American financial, industrial and service firms is in political terms a subversive act!
