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October 19, 2010 10:56 pm
Until the financial crisis, sovereign wealth funds were viewed with great suspicion and a touch of hysteria in the western countries where they bought assets. However then they became heroes: when other investors were fleeing, they rode to the rescue of tottering financial giants. Yet as a Financial Times analysis revealed this week, a lot of the old concerns about SWFs are still alive. Many of them deserve to be laid to rest.
One worry is that SWFs can use their financial clout – they manage an estimated $3,000bn-$4,000bn of assets – for political and strategic ends. China’s recent dash for natural resources in Africa to meet its increasing energy needs has heightened such fears.
Recipient countries also fret about the funds’ lack of transparency and accountability. SWFs have taken up that challenge. In 2008 many adopted the “Santiago Principles”, a code of conduct that included commitments to improve disclosure and invest solely on economic criteria. But critics complain that these are only voluntary guidelines, which are frequently breached.
We should not be naïve about the potential risks that SWFs pose. There is certainly a case for expecting them to meet minimum disclosure standards and limiting their stakes in sectors vital to national security.
However, nor should we pretend that SWFs are solely or even principally instruments of foreign policy. Their mandates typically include stabilisation of government revenues, long-term saving and economic development. If they fail to achieve these objectives – by pursuing political strategies or otherwise – they will come under pressure at home. Even the China Investment Corporation was forced to change its ways after domestic criticism of its bad investments.
SWFs benefit developing and developed countries alike. As long-term investors, they offer liquidity when others pull out of the market. They helped to recapitalise US banks during the crisis. Some, such as Norway’s, have been purchasing Greek government bonds.
SWFs are the flip side of global trade imbalances. It is inevitable that some countries, such as those with natural resources, will accumulate trade surpluses. SWFs play an important role in directing these surpluses to areas where they are most productively used.
The rise of SWFs has irrevocably changed the global economic landscape. Recipient countries should embrace – rather than shun – the opportunities that this rise offers them.
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