A reversal of neo-colonialism: the pitfalls and prospects of sovereign wealth funds.

Author:Lee, Yvonne C.L.
 
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  1. THE RESURGENCE OF NATIONAL INTERESTS 8c POLITICISATION OF SOVOEREIGN WEALTH FUNDS (1) (SWFS)

    The U.S. financial crisis triggered unprecedented foreign sovereign wealth investments in Western countries or developed countries. (2) Eastern countries with economies ranging from advanced to developing, such as China, India, Kuwait, Qatar, Russia, Saudi Arabia, Singapore and United Arab Emirates, were beneficiaries of escalated oil prices and the exponential growth of emerging markets in Asia and Middle East. An intensive SWF shopping spree driven by the rapid build-up of reserves generated by export surpluses, changes in global economic fundamentals and new investment opportunities, began in 2007. (3) Investments made by Eastern SWFs include property purchases such as The Chrysler Building, and portfolio stake-holdings in Barclays PLC, Credit Suisse, Citigroup, Merrill Lynch, Morgan Stanley and UBS AG, all acquired at distressed prices. However, the continuing deterioration of the global economy without any forecast of a 'bottoming out' of the financial markets, has led to diminishing SWF investments after the last quarter of 2008. (4)

    Managing assets having an estimated value of U.S. $3,652.7 billion, (5) these Eastern SWFs have attracted global attention and debate. Although many of these investments were actively solicited by the management of cash strapped corporations, they precipitated calls for heightened scrutiny to guard against economic exploitation and protect nationalsecurity in recipient countries. (6) In October 2008, two interest groups, the SWFs home countries and the OECD (comprising several key recipient countries), issued the Sovereign Wealth Funds Generally Accepted Principles and Practices (7) (GAPP or SANTIAGO PRINCIPLES) and OECD Declaration on Sovereign Wealth Funds and Recipient Country Policies (8) (OECD DECLARATION ON SWFS) respectively (collectively, SWF PRINCIPLES). The two groups are defined more by the health of their economies than the political and socioeconomic North/South divide.

    This article briefly outlines the origins, objectives and various forms of SWFs. It then comments on the use of international law by the West or developed countries to advance their elite interests: first as a sword in the colonial subjugation of territories and thereafter in the neocolonial expansion of economic influence; and recently as a shield against the increasing economic influence of SWF home countries in the name of sovereignty. A reversal of fortunes arising out of the financial crisis has occurred. The increased stakes of Asian governments in Western financial institutions resulted in a new 'Eastern neocolonialism' which reversed 'Western neo-colonialism' in two ways: a change in the direction of capital inflows and outflows, and a switch between state actors supporting liberalization of foreign investments.

    Secondly, to demonstrate the reversal of neo-colonialism and resurgence of national interests, this article examines three recent SWF investments of Singapore, a former colony of Britain. Singapore Sovereign Wealth Funds' portfolio investments were in Merrill Lynch and Citigroup in the U.S., a developed country; Shin Corp, a telecommunication company in Thailand, a developing country; and Indostat, a telecommunication company in Indonesia, a developing country. These case studies show that non-monetary costs or 'hurdle rates' associated with economic, political, and national security concerns of the recipient State, often overshadow the initial cost benefit analysis. This article evaluates the legitimacy of claims based on economic and national security concerns leveled against the SWFs, and considers the implications of politicized SWF investments.

    Thirdly, this article proposes a regime of international governance for SWFs that differs from dominant approaches in international law. To do so, this article broadly surveys the wide range of interests such as the popular or democratic will of the people in recipient and home countries, the international economic norms of laissezfaire--free market and trade, the protective and welfare functions of governments, the sovereignty of recipient countries and the right to development of home countries. Given the varied and contentious national interests, the nature of financial investment and the fluidity of financial markets, it is difficult to obtain the agreement or consensus necessary for the formation of treaty or customary international law. A regime of hard regulation modeled after the system and agreements of the World Trade Organization will suffer the same disability of non-consensus of its members concerning foreign investment. In the absence of any real consensus on international financial or investment regulation, an alternative regime of international governance by good practices is preferred. Although the SWF PRINCIPLES suffer from vague concepts, carve-outs in favor of national laws, and the absence of a central regulator and enforcer, they provide a broad framework based on a 'thin' financial rule of law and allow for recipient and home countries to reach a common understanding and practice. These countries can then harden specific aspects Of good practices under their respective national laws.

    Lastly, this article offers several preliminary observations on the calls for greater supervision of global financial markets and a coordinated global response to the financial crisis made at the Asia-Europe summit (9) and the recent G20 Washington and London summits, (10) and the recent 'bailout' purchases of stakes in key corporations by Western governments in response to the rapidly deteriorating financial crisis.

  2. SOVEREIGN WEALTH FUNDS AS A MOTLEY CROWD: THE ORIGINS 8c PURPOSES OF SWFS

    SWFs have existed since the 1950s. (11) There are several definitions of SWFs. (12) The latest definition stipulated in the SANTIAGO PRINCIPLES is:

    SWFs are ... special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, 'SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.... This definition excludes, inter alia, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, operations of state-owned enterprises in the traditional sense, government-employee pension funds, or assets managed for the benefit of individuals. (13) This definition accentuates the distinct and different purposes and forms of SWFs. SWFs exist in various forms as funds, pension schemes, state enterprises in home countries and investment vehicles constituted under foreign laws. They have the key purposes and objectives which correspond to their respective constitutive forms and may not be mutually exclusive: (14)

    1. Development funds for the earmarking of resources for priority sectors such as infrastructure

    2. Pension reserve funds to meet long term government obligations

    3. Savings funds to steer wealth across generations

    4. Stabilization funds to insulate the budget and economy of natural resource-rich countries (usually oil and gas producers) from the volatility of commodity prices

    5. Reserve investment corporations for the pursuit of investment policies with higher returns and to reduce the negative cost-of-carry of holding reserves.

    However, the perceived lack of transparency regarding SWF investments has caused several to voice concerns that SWFS might pose actual problems for national security interests in recipient states. (15) As one academic puts it, "because sovereign wealth funds are owned and ultimately controlled by governments, it is naive to believe that they can or should be treated as apolitical. The standards applied to sovereign wealth funds should be higher than those applied to private sector institutions precisely because they are governmental institutions that are not subject to the discipline of the market and ultimately are accountable to the citizens of their countries." (16)

    Several SWF critics allege that contrary to SWFs' claims, SWFs are similar to hedge funds without long term investment objectives but are less transparent than hedge funds. Their investments are hence more ominous. (17) Such generalizations unjustifiably discriminate against SWFs, and gloss over the levels of secrecy and accountability enjoyed by so-called private investors such as private equity funds, hedge funds and investment banks. (18) Indeed, the imbalanced focus on non-Western SWFs by Western recipient states has been criticized:

    "The demand for increased transparency of SWFs by western countries lacks credibility in the light of poor levels of transparency and governance standards of big private investors. Singling out SWFs for their opaqueness but overlooking similar (or even greater) levels of secrecy and unaccountability enjoyed by hedge funds, private equity funds and investment banks exposes the double-standards of the western policymakers. In principle, all financial institutions (public or private) should be transparent." (19)

    Clearly, the diverse SWF characteristics and objectives warrant a closer scrutiny of each SWF. SWFs are not inherently dangerous merely because they are sovereign owned. (20) The sweeping generalizations, particularly the broad assertion that recipient countries must be mindful of the sovereign nature of SWFs, serve only to generate the "politics of fear." They assume a starting point based on suspicion, in contrast to the alternative of legitimate commercial activities. A presumption of possible ill intentions is thus created, and the onus is placed upon the...

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