Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State-Owned Enterprises, and the Chinese Experience

Author:Larry Catá Backer
Position:W. Richard and Mary Eshelman Faculty Scholar and Professor of Law, Dickinson Law School

W. Richard and Mary Eshelman Faculty Scholar and Professor of Law, Dickinson Law School, Affiliate Professor, School of International Affairs, Pennsylvania State, University Park, Pennsylvania, and Director, Coalition for Peace & Ethics, Washington, D.C. An earlier version of this Article was presented at the Symposium, Global Meltdown: Examining the Worst Global Financial and Economic Crisis Since the Great Depression, organized by Journal of Transnational Law & Contemporary Problems ("TLCP") at the University of Iowa College of Law. My thanks to the TLCP Editor in Chief, Minji Kim, and the rest of the Editorial Board, for contributing to the success of this important event. My special thanks to Augusto Molina (Penn State '09) and Sandra Gonzalez del Pilar (PSU-SIA '10), my research assistants, for their excellent work on this project. Particular recognition is due to my research assistant, Siyu Zai (Penn State '11), whose excellent research on the Chinese Investment Corporation and its subsidiaries was invaluable.

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I Introduction

"We plant everything."1

A century ago, the guardians of public power in the United States articulated a widely held fear of private aggregations of power. An influential member of the American judiciary at the time expressed that fear in comprehensive terms, stating, "Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business have become an institution-an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state."2 The threat, then, was understood not merely as a challenge to the welfare and power of the community of individual economic Page 6 actors functioning through markets in the private sphere. More importantly, such aggregations of private power appeared to challenge the effectiveness of the public power itself. It suggested the nature of the threat as not merely economic, but also conceptual. Large corporate aggregations threatened the hierarchy of legal authority, at the top of which stood the state and its apparatus. Such private concentrations of economic power also threatened the role of the state and its law-based regulatory framework as the only legitimate source of public regulation, within which everything else was meant to occupy the space reserved for the objects of that regulation.

This understanding of the danger posed by private aggregations of power was grounded in a set of simple conceptions about the world order. At its core was the belief that the power to regulate could only derive from law enacted through public bodies legitimately vested with the authority to command every member of the community it controlled. 3 While it was acceptable to argue about the arrangement of hierarchies of public regulatory regimes,4 or Page 7 the unruliness of customary law in a new rational and "scientific" age,5 it was accepted that regulatory authority had to be confined to the apparatus of the government. This was the classical age of Rechtsstaat.6 Beyond the state, little was legitimately regulatory in the political sphere.

All other forms of regulation might be coercive within the communities of stakeholders in such enterprises, but such regulatory activity was neither public (a matter affecting the governance of the political community) nor legal. Everything from the compulsion of religious codes of behavior to the contractual agreements between finite parties, which cover only very limited sets of behaviors, was tolerated as long as it did not challenge a state's ultimate authority to regulate such activity.7 Because no power greater than the state could exist, all activity was subject to and flowed from it. In other words, the state was the only legitimate source of public regulatory power. 8Within this normative framework, large corporate organizations that might regulate conduct effectively, by their sheer size and control, generally Page 8 threatened established hierarchies of power. More specifically, large corporations threatened the authority of the state as traditionally asserted through its legislative, police, and administrative powers. Despite the challenge, states and corporations appeared to reach a rough understanding. This understanding, memorialized in domestic law and policy, was grounded in the idea that the state asserted a paramount power to regulate markets and economic activity, but that private actors were free to order their affairs and participate in these state regulated markets. 9

A generation ago, the guardians of public power, now situated on a global stage, raised a similar alarm about the threat to public power by private economic collectives.10 This time, however, private aggregations of economic power, in the form of multinational corporations, appeared to threaten all states.11 The belief grew among states that these large aggregations of private power could overwhelm the more limited and territoriality-based public power, especially (but not exclusively) that of small states.12 These private entities, now spread beyond any one state, might subvert not only the traditional hierarchy with the state at the top, but might also subvert the global monopoly of political power exercised by the state system through institutionalized supranational systems of public actors.

Yet, the threat to the monopolies of power, whose borders are protected by the conceptual division of law into public and private spheres, has not come solely from multinational corporations and other economic entities. The growth of transnational civil society actors-including civil rights, human rights, and other groups representing non-state communities of actors-and their incorporation within the emerging framework of global trade and Page 9 politics13 suggest that other non-state actors are also challenging the divisions between public and private spheres and threatening the state's monopoly on regulatory, political, and even military power.14

Yet, state actors have not been passive in the face of these challenges. One important response by state and other public power actors has focused on efforts to domesticate private transnational power to an aggregate morality of public power, expressed at the international level and transposed into the law of all public actors. The United Nations' Global Compact project15 represents one attempt to put into operation such a system of internalized morality.16 Likewise, the Organization for Economic Cooperation and Development ("OECD")17 developed a cluster of principles and guidelines for corporate governance, multinational corporations, and state-owned enterprises, which sought to provide another framework to domesticate international corporations within legal systems.18 These guidelines are meant to supplement national regulation and harmonize national legal orders-a strength in numbers approach to meeting the challenge of transnational enterprise power.19 The alternative to these soft law systems of transnational Page 10 harmonizing guidelines, and less accepted responses, at least within the community of public actors, relies on public actors' willingness to acknowledge the public power of these private institutions and to bring them within the regulatory framework that binds and preserves the superior status of public political actors.20 In effect, this alternative has sought, still unsuccessfully, to acknowledge the public power of private enterprises and to force them to undertake the obligations of states when they engaged in activity with public or regulatory effects. 21

Still, the subversion of the classical notion of the public order, when that subversion can be affected to the advantage of the primi inter pares22 of the global state community, might be a tempting alternative. Today, the guardians of public power have succumbed to the lessons of a century. If the old field boundaries between public and private actors are ineffective in preserving local or global monopolies of public power controlled by governments, then those monopolies must adjust to fit themselves to the newer realities. Consequently, states have now sought...

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