Sovereign Wealth Funds: Foreign Policy Consequences In an Era Of New Money

Over the past several months, few issues in international finance have generated as much discussion and comment as have Sovereign Wealth Funds (“SWF”s). This Committee deserves enormous credit for recognizing the potentially significant foreign policy consequences of the rapid accumulation by foreign governments of enormous, growing pools of capital. These large concentrations of government controlled wealth raise complex issues that transcend traditional boundaries between foreign policy, financial markets, international economics and national security.

It is my belief, however, that too much focus on SWFs may, in fact, divert attention from the more fundamental foreign policy issue that these funds have come to represent -- that of the rise of “state capitalism” and the broader use of finance as a tool of foreign policy. These, I believe, are increasingly important 21st century phenomena.

SWFs are simply a particular type of global financial market investor. They should not automatically trigger foreign policy concerns. Too much focus on SWFs as potential tools of political influence fails to take into account that the world’s more than fifty SWFs are very different in terms of the origin of funds, size, structure, investment philosophy and motivation. Other than the commonality of government ownership, they are really not a definable class of either political or financial actors. But it is specifically foreign government ownership and the possibility that these increasingly wealthy foreign governments may use finance as a tool to advance their national interests abroad that makes them of interest as a matter of foreign policy.

I believe the criteria by which many suggest we judge the risks posed by SWFs has resulted in an overemphasis on transparency and disclosure, while ignoring the more subjective, but more valuable, assessment of the political risk that a particular government owner poses. This is dangerous. While increased transparency and disclosure should be encouraged, such an over-emphasis on transparency of SWFs alone may, in fact, lead to unnecessary conflict with allies, which, for a multitude of reasons may fail to meet the requisite level of transparency. Likewise, we may take false comfort from those SWFs that comply with transparency rules, but whose government owners use of a broad array of other financial tools to advance foreign policy interests and which should warrant closer attention...

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