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The debate regarding the sovereign wealth funds (SWFs) has drawn the attention of many financial regulators. Sovereign wealth funds are governments’ acquisitions of financial assets located across the world. The returns from the assets are usually more than the returns earned in markets free of risk.
In the contemporary world, the popularity of sovereign funds have grown exponentially with their net worth estimated to be more than three trillion dollars. Besides, it is important to recognize that SWFs constituted high percentage of all mergers and acquisitions witnessed at the onset of 2008. They also contribute hugely to the money injected in foreign assets.
The size of the funds has increased tremendously as countries seek to increase the returns from such funds. In fact, they are growing at a rate of approximately 24% annually. Although the idea of SWFs is not entirely new, their growth has sparked concerns especially among politicians and financial analysts at the helm of international financial markets.
The rationale is increased lack of transparency in these funds. While politicians are using the funds to change macroeconomic perspectives of their respective countries, regulators highlight the increased need for accountability. As such, the article tends to explore the validity of the concerns raised in the context of sovereign wealth funds.
There are two explicit ways in which governments are increasing returns from sovereign wealth funds. First, it happens through exportation of commodities. Countries engaging in exportation of commodities are willing to invest in SWFs owing to their increased need to cushion their markets from fluctuation.
These fluctuations occur during booms and downfall of markets. As such, financial analysts have found out that the likelihood of commodity exporters to place their money in SWFs is three times more than in countries that do not export commodities. In addition, such non renewable resources as oil have forced countries to liquidate their value through the funds.
Second, countries with huge fiscal and balance of trade have also increased their tendency to invest in SWFs. The countries invest in such funds to keep their exports competitive in international markets. Economists explicate that the concept of sovereign funds are effects of macroeconomic imbalances.
Policy concerns
To deal with these growing concerns of sovereign wealth funds, the article highlights policy issues that need to be addressed. In particular, the author points out that there are apparent worries that have gripped investors regarding their potential effects on corporate governance.
In addition, other fears entail protectionist backlash. At the outset, it is important to recognize that the transparency of SWFs has reduced tremendously over the years. Many sovereign wealth funds fail to reveal their financial information making it hard for regulators to control them.
The countries’ objectives of acquisition of international financial assets have switched rapidly and many financial analysts say that the manner of acquisition reflects strategic interests of various countries. This is in opposition to their main objectives of accumulating high returns.
Thus, their intentions are vague to many people and financial investors who agree that the concept of counterparty surveillance would have turned them more transparent than now. With all these factors surrounding the sovereign wealth funds, they provide a thriving ground for corruption and manipulation of financial policies.
As American financial analysts would agree, the rise of authoritarian regimes in Asian countries which have continued to acquire numerous international financial assets is a big worry. In authoritarian regimes, there is an increased incentive to invest through SWFs more than in a democracy.
This happens in two folds. Chiefly, there is an increased room for corruption and lack of accountability in dictatorial regimes. In addition, the policymakers are able to make unpopular decision relating to SWFs without any dissent emanating from their population. Some of these decisions yield high returns in the long term.
This model where the authoritarian regimes are able to suppress dissent has enhanced the ability of the countries to make high returns and increase their strategic interests in comparison to a more transparent economy. Are these concerns valid?
The arguments provided above lack clear empirical foundation. While many of them insinuate that SWFs are detrimental to the financial markets, there have been instances in which all participants in financial markets stand to gain. In particular, such sovereign funds as Blackstone have gained immense returns by investing in China.
Sovereign wealth funds seem to be in line with other similar funds. It is therefore important not to single out the funds as the riskiest given that pension and endowment funds are increasing their assets’ acquisition in developing countries. As such, the growing concerns over the funds are unfounded. Besides, SWFs have been known to increase technological development of domestic and home countries.
Nevertheless, leverage exercised by countries over SWFs has been typical of the international markets. For instance, the threat by Muamar Gaddafi (the former leader of Libya) to withdraw the country’s sovereign funds from African states due to their disinterest in the idea of African unity was seen by financial analysts as a misinformed decision that would paralyze the international markets.
The act however did not have any significant effect in policy frameworks. The rationale is that such threats only yield effects under specific situations. Besides, it is important to notice that research shows that such threats have no capability of forcing countries to assume specific decisions. Although the growing acquisitions of funds may bring about comparative advantage in the long-term long term, it remains unseen.
To increase the validity of potentially harmful effects of sovereign funds, international institutions such as IMF have attempted to provide ethical guidelines.
However, the failure of countries to agree with the provisions unanimously has been apparent. However, sovereign funds remain important sources of both authoritarian and democratic regimes across the world. This is despite the apparent difference in SWFs of the two sets of regimes.
The article points out that the difference between sovereign wealth funds located in democratic and authoritarian regimes is the lack of transparency which might have a detrimental effect.
Are the SWFs the same? Yes. The rationale is that there have been many steps in the international markets to be able to comprehend the policy frameworks of authoritarian regimes making the SWFs the same regardless of the nature of political regimes.
In America, the growth of sovereign wealth funds may compromise the country’s ability to remain within the principles of democracy as the country may result to the tendencies of other players in the financial markets. The increase of the funds is a revelation of America’s weak macroeconomic policies. Importantly, the direction that sovereign funds have taken may influence American foreign policy in a great way.
The rationale is that the country may see the need to review it democratization policies owing to its inability to provide an equal platform amongst countries venturing in sovereign wealth funds. Coupled with the fact that the authoritarian regimes especially those that are in the Middle East have reaped immense benefits from SWFs , the countries may have gathered immense influence to counter the advancement of democracy by the Americans.
Further, consolidation of funds by authoritarian regimes in addition to growing dissent of Americanism may frustrate the efforts and objectives of prescribing democratic regimes in such countries.
It is critical to consider SWFs within the context of changes that are typical of contemporary world. In particular, it is advisable to reflect on changes in technology, policy and international markets.
Besides, change of power distribution among countries in the world ought to serve as the lens through which financial regulators and monitors analyze the sovereign wealth funds. Importantly, globalization of financial markets has further complicated the concept of sovereign wealth funds.
Summary
In sum, sovereign wealth funds reflect the continued acquisition of international financial assets by countries across the globe. There have been numerous concerns that surround the increase of sovereign funds. These concerns include lack of transparency and sovereignty of countries participating in international markets. Nonetheless, in line with articulations of the article, the concerns lack firm foundations.
Indeed, the author points out that there is no significant difference between sovereign funds in authoritarian and democratic regimes. The author however reveals that the exponential growth has clearly shown that there are macroeconomic weaknesses in European and American markets. This may influence their ability to influence other countries, which ultimately means a change in their foreign policies.
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