Sovereign Wealth Funds

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  • Topic: Sovereign wealth fund, Temasek Holdings, China Investment Corporation
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Mary
Political Economy
January 10, 2010

Do Sovereign Wealth Funds Pose a Security Threat to Western States?

Sovereign wealth funds have been on the international economic scene since the middle of the 20th century. The Kuwait Investment Authority, for example, was created in 1953. (Lyons, p.25) However, until lately they had gone either unnoticed or ignored by the majority of political commentators. Several factors have brought them to the center of attention in economic and political debates in recent years. Firstly, the number of sovereign wealth funds has multiplied since 2000. As the IFSL Research affirms, “Around half of the top forty SWFs have been established since 2000.” (IFSL Research, p. 2) Secondly, the value of the assets controlled by these funds has dramatically augmented over the past decade and is expected by some to increase tenfold within the coming decade. This spike in the value of sovereign wealth funds was due in large part to a substantial inflow of capital from the West to oil-producing states as well as emerging economies. (Behrendt, p. 3) The oil producing countries have greatly benefited from the sharp increase in the price of oil over the last 15 years. Moreover, the greater global economic integration in part due to World Trade Organization agreements has opened the door to new opportunities for states looking to invest surplus capital. (Shediac, p.8) Thirdly, and perhaps most significantly, the global economic crisis has created an atmosphere of uncertainty especially among the Western nations regarding individual state security and the stability of the international economy more generally. A Morgan Stanley report from May 2007 was the spark that ignited the flame of contention in the Western world over whether or not sovereign wealth funds pose a security threat, be it political or economic, to individual states. The report asserted that sovereign wealth funds could be in control of up to 12 trillion dollars of assets as soon as 2015. (Behrendt, p.5) This was an eye-catching estimate in an environment already high-strung due to the deteriorated global economic situation. Two opposing camps dominated the debate. The first, the populists, warned that SWFs would obtain valuable assets in the West and, due to lack of regulation and transparency would then be capable of threatening strategic and economic interests of Western states. The second, the pragmatists, argued that SWFs are an essential source of capital for the West and protectionist politics would only hurt Western interests. (Behrendt, p.16) In this paper I will attempt to answer the question “Do sovereign wealth funds pose a security threat to individual states?” first by dissecting the entity “sovereign wealth funds”, then by evaluating the behavior of these funds in the past, and finally by reflecting on the costs and benefits that governments would incur were they to use sovereign wealth funds for political purposes.

Definition and Dissection of SWFs
In order to answer the question whether or not sovereign wealth funds constitute a political or economic danger for individual states, it is first necessary to define the concept sovereign wealth fund. This is not easily done because there is no clear consensus on the matter. (IFSL Research, p.1) For example, some analysts exclude central banks such as SAMA from the category of SWFs while others include these entities asserting that they behave like SWFs to a certain extent and, therefore, should be included in analyses of SWFs. Still others, such as the Kuwait Financial Centre “Markaz”, argue that “anything that is 100% owned [by the government] can be classified as a SWF.” (Kuwait Financial Center, p.2) Moreover, the jury is still out on whether personal funds held by a ruler can be thrown into the SWF basket. (The classification of Dubai International Capital presents this problem.) (Behrendt, p. 11) For the purposes of this paper, I will use the general...
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