Sovereign Wealth Funds: Legitimacy, Governance, and Global Power [Course Book ed.] 9781400846511

Citation preview

Sovereign Wealth Funds

Sovereign Wealth Funds Legitimacy, Governance, and Global Power Gordon L. Clark, Adam D. Dixon, and Ashby H. B. Monk

P r i n c e to n U n i v e r s i t y P r e s s Princeton and Oxford

Copyright © 2013 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu All Rights Reserved Library of Congress Cataloging-in-Publication Data Clark, Gordon L.  Sovereign wealth funds : legitimacy, governance, and global power / Gordon L. Clark, Adam D. Dixon, and Ashby H. B. Monk.    pages cm  Includes bibliographical references and index.  ISBN 978-0-691-14229-6 (hbk. : alk. paper)  1. Sovereign wealth funds.  2. Sovereign wealth funds— Law and legislation.  3. Investments, Foreign—Case studies. I. Dixon, Adam D. II. Monk, Ashby H. B. (Ashby Henry Benning), 1976– III. Title.   HJ3801.C53 2013  332.67'252—dc23 2012048975 British Library Cataloging-­in-­Publication Data is available This book has been composed in Minion Pro and Myriad Pro Printed on acid-­free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

For

Peter and Shirley Clark,

Fay Dixon and Olga Thönissen,

Henry, Beatrix, and Courtney Monk

Contents

List of Figures and Tables  ix Preface  xi Acknowledgments  xix 1 Introduction  1 2 The Rise of Sovereign Wealth Funds  13 3 Rethinking the “Sovereign” in Sovereign Wealth Funds  30 4 The Virtues of Long-­Term Commitment: Australia’s Future Fund  46 5 The Ethics of Global Investment: Norway’s Government Pension Fund  67 6 Insurer of Last Resort: Singapore’s Government Investment Corporation  86 7 Legitimacy, Trade, and Global Imbalances: The China Investment Corporation  105 8 Modernity, Imitation, and Performance: The Gulf States’ Funds  121 9 Conclusion: Form and Function in the Twenty-­First Century  137 Appendix: Scoping Best Practice  155 Notes  163 References  173 Index  195

List of Figures and Tables

Figures Figure 1.1. The rise of sovereign wealth funds  4 Figure 4.1. Australian trade and government accounts (1990–­2008)  52 Figure 4.2. CPI and housing investment (Australia 1990–­2008)  53 Figure 4.3. Income and unemployment (Australia 1990–­2008)  54 Figure 5.1. Year-­end market value of the GPF-­G (NOK billion)  73 Figure 5.2. Structure, authority, and responsibility  75 Figure 7.1. U.S. trade with People’s Republic of China 1984–­2008 (US$)  110 Figure 7.2. U.S. dollar exchange rates (normalized to base 1, 1994)  111 Figure 7.3. Schematic of CIC governance (excluding Central Huijin Investment)  114 Figure 8.1. Trends and volatility of crude oil prices 1861–­2010  123 Figure A.1. Schematic of governance budget and risk budget  156

Tables Table 2.1. Example reasons for the establishment of SWFs  15 Table 5.1. Companies excluded from the investment universe by the Ministry of Finance upon recommendation by the Council of Ethics  81 Table 6.1. Asian economic growth  91 Table 6.2 Singapore macroeconomic indicators  94 Table 7.1. CIC –­Strategic investments by purchase price (2007–­2009)  117 Table 8.1. Gulf States’ adoption of SWFs  126 Table A.1. Best-­practice factors  162

ix

Preface

Global financial flows have come to dominate national macroeconomic policymaking around the world. This is true for Organisation for Economic Co-­ operation and Development (OECD) countries, the margins of continental Europe, and the developing countries of Asia and Latin America. As a consequence, national economic policymakers are keenly aware of the vagaries of global financial markets, not least because most currencies are vulnerable to the depredations of currency arbitrageurs and speculators. One lesson of the 1997 Asian financial crisis was that developing countries could benefit from the accumulation of foreign currency reserves so as to dampen or insure against similar events in the future. Another lesson was that nation-­ state macroeconomic planning had to take a long view of the future, setting aside a portion of short-­term export earnings for the stabilization of long-­ term economic growth. The global financial crisis brought home to the West these same lessons discounting claims of global hegemony and the virtues of Anglo-­American financial markets. Over the last two decades of the twentieth century, the developing economies of the East experienced a remarkable surge in the accumulation of financial assets. When combined with a cultural predisposition to high rates of household saving, economic development in the East has been a major contributor to the accumulating stock of global assets. Of course, the periphery of the global economy has, on occasion, also experienced episodes, or bursts, of significant national saving through commodity price booms and the like. Countries participating in the OPEC oil cartel have benefited from the premium on energy prices associated with global economic growth and market speculation in relation to the short-­term limits on energy production. However, the wealth generated by recurrent commodity price booms has often been squandered by recipient countries such that consumption, corruption, xi

xii

Preface

and poor investment strategy have often discounted the long-­term value of nations’ resources. The combination of pension fund capitalism in the West, neo-­mercantilism in the East, and commodity price booms at the periphery of the global economy have produced a map of global financial stocks profoundly different to that of fifty years ago. Whereas it was once meaningful to talk of global economic integration through commodity production and trade where finance was simply a means to an end rather than an end in itself, by the turn of the twenty-­first-­century global financial stocks had overwhelmed the global “real” economy. The significance of this fact of life was largely ignored until the global financial crisis exposed the consequences of “global imbalances” for financial stability, economic growth, and employment. Put simply, the accumulating financial stocks of the East and of commodity-­producing countries have been “hoarded” in a new form of institutional investor, the Sovereign Wealth Fund (SWF). The new global reality is one in which the emerging map of twenty-­first-­ century global capitalism favors the holders of financial assets over the domestic institutions and macroeconomic circumstances of Western countries. As such, the hegemony of the United States as the surviving superpower of the twentieth century has been undercut by the financial clout of East Asia, and in particular China. Equally, it is demonstrable that the distinctive economic and social institutions of particular countries and blocs of countries such as Germany, continental Europe, and the Atlantic economies are subject to the pricing power of financial markets and the holders of financial assets. Their stake in maintaining European traditions is quite marginal relative to their stake in realizing a long-­term return on those assets consistent with national interests. In play, therefore, is the emerging map of twenty-­first-­ century geopolitics as well as the contingency of nation-­states and their particular customs and traditions. Countries hold wealth in the form of financial assets for a variety of reasons. For some, these assets represent a form of self-­insurance against the worst-­ case scenario, whether related to global economic and financial instability or geopolitical claims on their autonomy and national self-­determination. So, for example, Singapore has pursued a long-­term development strategy buttressed by the accumulation of global financial assets to protect itself against global financial instability and the possible encroachment of its near neighbors on its success as a “Western” Asian economic miracle. Likewise, some countries have sought to manage their wealth in ways that strike a balance between current generations and future generations, reconciling current consumption with long-­term investment for the prospects of unborn citizens. Notwithstanding the diversity of motives and intentions, there is a most remarkable commonality: the use of SWFs to manage the rate of return on accumulated financial assets through the investment in a broad range of asset classes and regions of the world. For some commentators, it is an unparal-



Preface

leled institutional innovation. We believe it is better seen as a variation on existing institutions found in the West: in particular, the funded supplementary pension schemes that are responsible for the long-­term welfare of nominated beneficiaries and whose investment strategies are reliant upon financial markets and the global financial services industry. Apparently similar form and functions belie an ever-­present fact of life: SWFs are also the strategic instruments of nation-­states, conceived, in part, to underwrite their sponsors’ geopolitical interests. As such, SWFs are very different from pension institutions because their legitimacy is framed in terms of their domestic constituents as well as their role in international relations. By this logic, there is a premium on the transparency of SWFs’ investment decision-­making as well as full disclosure of their motivations and intentions when investing beyond national borders. As a consequence, sponsors of SWFs have adopted many of the governance mechanisms and decision-­ making protocols of pension plans, while setting out in more detail than might be expected the logic behind their asset allocation strategies and investment decisions. When SWFs invest in particular sectors and opportunities in the West, domestic politics often intrude upon the reception of such flows of assets. It might be argued that such reactions are entirely parochial; equally, it could be argued that these reactions reflect a much wider realization that the global hegemon is no longer in control of its destiny. In this book, we suggest that the significance of SWFs is to be found in their emblematic status as representatives of the global transformation of nation-­state economic prospects over the past decade and the next fifty years. As we show in our case studies, the forces propelling the adoption of the SWF institution have varied by country and by reference to the source of financial wealth. Like Mark Roe and others who are sensitive to the political origins of financial institutions, we believe national heritage counts; nonetheless, we find it remarkable that so many countries have adopted such a distinctive type of investment institution with identifiable commonalities of form and function that match the core institutions of Western financial markets. If there are differences in the governance and strategic importance of these institutions by country, the legitimacy of SWFs is to be found, in large part, in their commonalities rather than their differences. Our book has three objectives. The first is to explain the development of SWFs around the world, playing off national interests and traditions against the common form of such institutions. The second is to look inside SWFs, going beyond their stated purposes to a close analysis of their governance and investment management. We suggest that the legitimacy of these institutions is to be found in the degree to which the design and governance of sovereign funds match expectations in the West in regard to the discipline imposed on the investment process. The third objective is broader and more diffuse: we seek to undercut commonplace notions about the world inherited from the twentieth century and ready-­made assumptions about the emerging world of

xiii

xiv

Preface

the twenty-­first century. This is obvious in the changing status of the United States in relation to China and to East Asia in general. But there is more to it than the rivalries between superpowers. Even small countries with large and globally oriented SWFs are likely to play a significant role in international relations. Mapping the global footprints of these national institutions is thus the overarching goal of the book. Accordingly, we link institutional and local information collected through fieldwork with larger stylized facts and conceptualizations of global political economy, drawing on data from hundreds of semi-­structured interviews, primary accounts of SWFs by insiders, corporate and regulatory filings, and secondary sources. The book comprises nine chapters, beginning with an introductory chapter that sets the scene of our research and the analytical approach taken. Chapter 2 provides an introduction to the formation and development of SWFs around the world. In this chapter our argument is largely about form and function, emphasizing the functions that SWFs provide for nation-­states in the context of the global financial system. Our purpose here is to classify and explain the rise of SWFs, making links to the relevant literature in the social sciences on institutional innovation and change. We also emphasize the importance of SWFs as an institutional innovation consistent with and drawing legitimacy from fundamental changes in the global financial system that have prompted governments to seek ways of managing their “place” in a system subject to considerable volatility, risk, and uncertainty. One way of characterizing SWFs is through their financial functions, which link to the principles and practices of investment management. While very important in underwriting the legitimacy of these institutions, SWFs, as we argue in chapter 3, must be understood in relation to nation-­state ­sovereignty. This chapter goes beyond functionalism to a conception of nation-­state ­sovereignty that is increasingly contingent upon national heritage and the capacity of national elites to sustain that heritage in the face of global financial imperatives. While chapter 2 provides a functionalist classification of SWFs, chapter 3 provides a rather different typology focusing upon the interests of nation-­states and their place in the global financial system. This is important for what follows: the selection of our case studies is based, in part, on recognition of the distinctive situations facing nation-­states as they encounter market imperatives. In some cases, nation-­states simply use SWFs to hold market imperatives at bay. In other cases, however, state-­sponsored SWFs are strategic instruments focused on the global financial system but acting to realize national interests in the international community. Chapter 4 presents our first case study, looking past the geopolitical concerns that have plagued SWFs and focusing on the competing domestic political interests embedded in sponsoring countries. In other words, this chapter examines the domestic, political claims on SWFs and the principles and practice of governance used to discipline those interests. As we show, there is an ever-­present temptation that faces SWF sponsors: the option of spending



Preface

the assets for current political advantage. Through the case study of Australia’s Future Fund (FF), we examine how governance can, in effect, tame political temptation. Indeed, the Australian government specifically addressed the question of political temptation in its design of its SWF. The chapter focuses on the principles used to design the FF and references recent research on the principles of best-­practice investment management (the Appendix reproduces these principles). Continuing with the theme of long-­term institutional investment, chapter 5 examines the investment policies of the Norwegian Government Pension Fund-­Global (GPF-­G). One of the world’s largest investors, this SWF has an explicit mission to integrate long-­term investment policies with a two-­sided ethical commitment. The Norwegian fund’s ethical mandate is remarkable when compared to other SWFs. However, we note in this chapter that this mandate is best understood in terms of procedural rather than substantive justice. We claim that the primary reason for the ethical policies within the GPF-­G is to secure domestic legitimacy; its ethical impact is of secondary importance. Our argument is sustained by reference to recent work on the nature of state authority and legitimacy in democratic societies, the logic of institutional governance, and the functional integration of decision-­making. The chapter concludes with implications for situating the functional performance of the fund in the context of changing global financial markets. In chapter 6 we turn our gaze to Asia. During the financial crisis, a number of East Asian SWFs acted as insurers of last resort for their nation-­states, underwriting financial stability and social welfare. In this chapter, we explain how and why this role came to pass, arguing that it serves to sustain the legitimacy of the nation-­state as well as justify the separation of SWF assets from the public interest in current consumption and spending. Focusing on the Government of Singapore Investment Corporation (GIC), we suggest that the prospect of recurrent financial crises was an important prompt for its establishment in 1981, reinforced by the experience of many East Asian countries in the 1997 Asian financial crisis. The formal constitution of the GIC, the mechanisms by which its reserves are returned to the government in crisis, and the role of different sections of the political elite in managing those assets are explained. Referencing the principles of best-­practice fund governance and the Santiago Principles underwriting the legitimacy of SWFs, we also consider the governance of the GIC, especially in regard to its investment processes. We draw implications for the experience of Western countries, particularly the United Kingdom and the United States, wherein the failure of their banking systems has put untold pressures on current and future living standards. Chapter 7 then considers the China Investment Corporation (CIC). We explain how China came to own and control the world’s largest “strategic” investor. The CIC is a product of the original deal with the United States to open trade in the 1970s and is emblematic of the new status of China in the

xv

xvi

Preface

global economy. This chapter thus rehearses the arguments underpinning the rise of China. We also explain why the CIC has eschewed conventional portfolio investment in developed financial markets and replaced it with strategic investments in resources and jurisdictions deemed essential to China’s long-­ term growth. As such, attempts to rein in its ambitions through the Santiago Principles and the like have been circumvented by a very different approach to investment. The CIC is remaking the rules of engagement in global financial markets, redrawing the nature and scope of the long-­term relationship between the two superpowers of the twenty-­first century: China and the United States. Chapter 8 shifts focus to the adoption of the SWF institution in the Persian Gulf States. Here we focus upon the reasons for adoption, the apparent “neighborhood effect” in the pace of adoption by the Gulf States over the past decade, as well as the importance of adoption as a gesture of commitment to modernity (aimed at domestic constituents and the international community). Most importantly, we reference the academic literature on the putative effectiveness of adopting institutions conceived and developed in other jurisdictions with different traditions and commitments. At issue is whether adoption has been effective in the short run and will realize the promise of the SWF institution over the long term. By our assessment, there are good reasons to suppose that adoption may not pay off in the manner expected. Nonetheless, the commitment of the Gulf States to the idealized institutional form of the SWF is indicative of moves by the governing elites to transform their states into diversified developed economies. Our case studies were chosen so as to represent the various ways in which SWFs have been conceived and governed around the world. In large part, these case studies counterpose the ideal form of the SWF with the history and geography (economic and political circumstances) of nation-­state sponsors. Nonetheless, as we show in chapters 2 and 3, the SWF institution has been adopted precisely because it is widely believed to have a distinctive form superior and different from inherited institutions available to nation-­states (such as central banks, reserve funds, and Treasury facilities). With form come the functions needed for nation-­states to survive and prosper in the global financial system. In chapter 9, the book concludes with a critique of the ideal form of the SWF institution, referencing the lessons learned from the global financial crisis. Not only have the principles and practical logics underpinning the SWF institution been exposed to the harsh light cast by the global financial crisis, but also a number of nation-­state sponsors have come to see the SWF institution as an ideal mechanism for leading economic development. At the moment where the SWF institution has never been more popular, its ideal form is being remade according to the harsh realities of crisis and contagion. One lesson to be drawn from our book is that if the recipe for SWF institutional form and function was set at the apogee of Anglo-­American financial



Preface

hegemony, its evolution and reconceptualization will be set by the resource-­ rich and developing economies of the world. The second lesson from our book goes to the question of nation-­state legitimacy: the very idea of holding national assets and income in a remote “lock-­box” far from domestic interests and concerns about public well-­being is premised upon the power of the state relative to civil society. It may be justifiable if assets and income are secure and seen to be secure from the greed of privileged elites. But, in some countries, the legitimacy of sponsored SWFs may be undercut precisely because those institutions are intimately related to controlling elites. In these cases, whatever the functional value of a sponsored SWF and its notional commitment to the future welfare of society, the rhetoric of functional utility and commitment may be little more than a convenient cover for the expropriation of national assets. As such, the concerns expressed by many in the West about the lack of independence and professional autonomy of SWFs may be realized in revolutions from below that seek to overturn those who control national resources. A third lesson to be drawn from our book is that the governance of the global financial system through the multilateral institutions may be rewritten by sovereign nations whose financial power is concentrated in SWFs as opposed to distributed—­in a decentralized manner—­through private banks, institutional investors, insurance companies and pension funds. This may be an opportunity for the multilateral institutions to bring together the financial arms of emerging economies and markets in ways not possible when the world was dominated by segmented private interests. However, the challenge will be to show the resource-­rich and developing economies that the multilateral institutions are in fact relevant to their interests. Gordon L. Clark, Adam D. Dixon and Ashby H. B. Monk, Oxford, Bristol and Palo Alto, February 2013

xvii

Acknowledgments

This book crosses over continents, countries, and disciplines. As such, we have been fortunate to have the support of many colleagues and friends in allied academic fields, as well as the support of readers and contributors to our website www.oxfordswfproject.com. The topic of SWFs engages academic disciplines, industry groups, national policymakers, and many others as well. We are grateful for their continued interest and encouragement of the project. We would like to thank the Leverhulme Trust for its support of the research that underpins this book. Without its commitment, we would not have been able to reach out to the rest of the world. Our research would not have had the richness or the sense of urgency that motivates the analytical and case study chapters. Leverhulme also played a crucial role in underwriting the development of our blog. Through the global electronic highway, we have had the opportunity to learn from many people who have the depth of knowledge and insight that academics crave. Importantly, our collaboration with Roger Urwin from Towers Watson on the governance of financial institutions (notably pension funds) has been a vital ingredient in framing our research, the book, and our perspective on the interaction between governance and legitimacy. Likewise, we have been fortunate to enlist the support of Keith Ambachtsheer of the Rotman International Centre for Pension Management (ICPM) at the University of Toronto. Keith has been a long-­time supporter of our research and a strong advocate of a deeper understanding of the links to be made between the governance of financial institutions and their financial performance. Closer to Oxford, we are pleased to acknowledge the support (direct and in kind) of the University, the School of Geography and the Environment, St Peter’s College, and Christ Church. It is invidious to single out specific individuals, but Chris White (web support), Sue Blackshaw and Richard Holden xix

xx

Acknowledgments

(research services), Jan Burke, and Amanda Diener all played important roles in sustaining the program. Most importantly, Olga Thönissen was an incisive and effective assistant, coordinating the project around the world as well as being a very valuable editor. Editorial assistance was also provided by Amanda Diener, Christopher Coghlan and Lisa Toms. Colleagues and graduate students at Oxford helped with research assistance and criticism on specific papers. Here, we would like to thank Nick Howarth, Jaizhe Sun, and Claire Molinari. As well, Allan Fels, Dean of the Australia and New Zealand School of Government, and Stephen King, past Dean of Monash University’s Faculty of Business and Economics, have provided on occasion a hospitable home for research and writing. In a similar manner, our colleagues Eric Knight (co-­author of a version of chapter 5), and Dariusz Wójcik provided encouragement and critical interest in the progress of the book. We would also like to thank academic colleagues who have remained interested in the project throughout, including Sven Behrendt, Simon Chester­ man, James Faulconbridge, Dan Haberly, Richard Higgott, Owen Hughes, Alicia Munnell, Phillip O’Neill, Louis Pauly, Joseph Stiglitz, and Henry Yeung. From industry, we would like to thank Andrew Rozenov, Bill Hunt, Knut Kaiser, Laura Parsons, and Bill Dodwell (Deloitte, London); Marinus C. Huizer, Bernhard Reinsberg, and John Nugée; as well as the formidable Nancy Webman and her team from Pensions & Investments. For help in specific sections of the book we would also like to acknowledge the help and advice provided by David Murray, Juan Yermo, Paul Costello, the Hon. Peter Costello, and Nick Sherry, former Senator for Tasmania, Australia. Along the way, we have given numerous talks about our research. We have relied upon the comments and thoughts of those who have participated in the related conferences. Sponsors of presentations have included Oxford University, Oxford Analytica, New York University Law School, National University of Singapore Law School, Cambridge University, Columbia University, the Association of American Geographers, Institutional Investor, HSBC, and the Asian Development Bank. Initial ideas for the book were enthusiastically embraced by Richard Baggaley (then of Princeton University Press) and Peter Dougherty of the Press. More recently, we have relied upon Seth Ditchik to usher the book into production and publication. We are very grateful for their interest and commitment. The chapters of this book draw upon previously published papers from the project. Here we would also acknowledge the permission of publishers to use portions of those papers and essays: Pion Ltd. (London) for Monk, A. H. B. (2012), Sovereignty in the era of global capitalism: The rise of sovereign wealth funds and the power of finance, Environment and Planning A 43(8) 1813–­32; and Clark, G. L., and Monk, A. H. B. (2010), The legitimacy and governance of Norway’s sovereign wealth fund: The ethics of global investment. Environment and Planning A 42(7): 1723–­38, www.pion.co.uk and www.envplan.com.



Acknowledgments

Cambridge University Press for Clark, G. L., and Knight, E. (2011), Temptation and the virtues of long-­term commitment: The governance of ­sovereign wealth fund investment, Asian Journal of International Law 1(2): 321–­48. Taylor and Francis Group for Monk, A. H. B. (2009). Recasting the ­sovereign wealth fund debate: Trust, legitimacy, and governance. New Political Economy 14(4): 451–­68; and Clark, G. L., and Monk, A. H. B. (2010). Government of Singapore Investment Corporation (GIC): Insurer of last resort and bulwark of nation-­state legitimacy. The Pacific Review 23(4): 429–­51, http://www.tandfonline.com. Maney Publishing for Clark, G. L., and Monk, A. H. B. (2011), The political economy of US-­China trade and investment: The role of the China Investment Corporation, Competition and Change 15(2): 97–­115, www.maney.co.uk/ journals/com and www.ingentaconnect.com/content/maney/com. John Wiley & Sons for Dixon, A. D., and Monk, A. H. B. (2012). Rethinking the sovereign in sovereign wealth funds, Transactions of the Institute of British Geographers 37(1): 104–­17. Walter De Gruyter for Clark, G. L., and Monk, A. H. B. (2012). Modernity, imitation, and performance: Sovereign funds in the Gulf. Business and Politics 14(1), DOI: 10.1515/1469-­3569.1417. The previous version of this article can be found at www.degruyter.com.

xxi

Sovereign Wealth Funds

1 Introduction

Over the past few decades, the global economy has witnessed successive paradigm shifts: the Soviet Union collapsed; the United States ushered in the Internet economy; Brazil, Russia, India, and China, among other rapidly growing emerging-­market economies, were integrated into the global supply chain; the China–­U.S. economic alliance blossomed but then hit “choppy-­ waters”; and finance, with all its associated agents and institutions, came to overshadow, and eventually derail, the real economy. Overall, the market became an incontrovertible force for change in the world, rewriting the geography of the global economy and revolutionizing the interplay between various public and private actors and institutions. From liberal democracies to authoritarian and even communist regimes, capitalist systems of economic coordination have become pervasive. The decisions by nation-­states to deepen economic integration and facilitate globalization are premised on the idea that, when sovereign nations cede some portion of their domestic autonomy to a global system of coordination, they are compensated through efficiency gains, such as the discounted costs of consumption and a more productive supply chain. Without this benefit, countries would universally reject trade agreements and treaties. Instead, politicians have embraced, albeit begrudgingly in some cases, these new economic realities underpinned by global competition for capital, industry, jobs, goods, and services (among other things). States have willingly adopted postures motivated by a market-­based logic, legitimated by vaguely specified notions like “competitiveness” (Monk 2008a). As Gertler and Wolfe (2004, 45) note, “communities and regions, like companies, need to innovate and adapt to remain competitive.” However, the interplay of two competing counterparties in this new economic paradigm—­capital’s global search for higher returns and jurisdictions’ 1

2

Chapter 1

global search for capital—­has led the global economy into a murky institutional world without easily identifiable boundaries. Indeed, the prospect of political localities being motivated by the same market incentives as the firms located within these jurisdictions augurs a degradation of the boundaries that previously separated states from markets. Significantly, a growing number of states have become reliant on markets, and in particular financial markets, for the economic and social well-­being of their citizens. The rapid rise of prefunded pensions in the twentieth century has been the most obvious example of this transformation (Clark 2000). While the power of financial markets promises a great deal for managing difficult public problems, it also leaves these governments, and their constituencies, vulnerable to the volatility of financial markets. The recent global financial crisis is a telling reminder of capitalism’s dark side and the precarious position that governments may find themselves in when they rely on markets for national well-­being. Take the current global economic environment as an example: highly imbalanced and with a penchant for extreme volatility and unpredictability, the global economy’s future trajectory is increasingly difficult to predict. How then do governments make plans in an era with a flattened distribution of outcomes? The “rare” and “unexpected” events are much less rare and, as a consequence, much less unexpected than they used to be. Volatility, tumult, and crisis are seemingly routine, which makes generalizations (and thus predictions) about economic variables almost impossible. Indeed, the quantitative models upon which so many analytical frameworks rely have lost their luster. It seems that the world has fallen under the spell of a financial capitalism, leaving nation-­states powerless in the face of global economic forces. But this is where the story turns against those who would claim the world is converging toward a single model of economic coordination based on free-­ market capitalism. In the face of new and persistent global financial volatility, governments have managed to implement new mechanisms and tools that mute some of this global chaos at the local level. Indeed, policymakers are creating new institutions that seek a measure of certainty to domestic planning (Weiss 2005). Recurring crises have served to “jolt” governments into action, sending them in search of new ways to claw back (or simply retain) their decision-­making authority. Technocrats are cast as institutional entrepreneurs, searching for coping mechanisms that can help their states manage their precarious position in a rapidly globalizing world. One such coping mechanism has been the accumulation and sequestration of government reserves in the form of financial assets. The inspiration for reserve accumulation almost certainly goes back to the 1997 Asian financial crisis and, in particular, the resilience of certain reserve-­rich economies therein. For example, Singapore demonstrated at the time that having financial assets on hand (and in large quantities) was extremely helpful in times of economic uncertainty (see chapter 6). Years before, the country’s politicians



Introduction

had recognized the value of having a dedicated fund that stood ready to mobilize financial resources should that become necessary for the stabilization of the economy.1 Other countries around the world took note, deciding that what worked for an island nation could equally work for a country of more than a billion. By 2010, global government reserves had quadrupled from their 2001 levels. Nonetheless, while reserves had come to represent a new and powerful form of self-­insurance and stabilization, holding these reserves proved costly. The difference between what the reserves earn (if they are invested in financial markets) and what the country pays on the domestic debt that is used to sterilize the foreign assets can be significant. Coupled with increasingly low yields on traditional reserve assets, such as U.S. Treasuries, a new investment vehicle was thus needed to facilitate the diversification of accumulated reserves into higher-­yielding assets. This is the purpose of SWFs. In SWFs states found an institution that could transform sovereign wealth into financial assets for the purpose of investment, either directly or indirectly, in domestic and international financial markets. The idea was that by investing sovereign wealth in riskier assets, and generating higher returns, government sponsors could contain the costs of holding such reserves. And while the assets in an SWF are typically “excess” reserves, not needed for prudential purposes, these reserves could still be mobilized quickly to defend, engage, or simply stabilize domestic policies or institutions. Take as an example Russia, which used its commodity-­based SWF to stabilize its spending during the most recent financial crisis; or Singapore, which also tapped its reserve investment corporation for the first time; or Kuwait, which used its commodity fund to bolster domestic markets through direct investments. Even in the United States, Chairman of the Federal Reserve Ben Bernanke (2010) extolled the virtues of SWFs to state governors, suggesting that SWFs could be helpful for a rainy day in the future. In short, policymakers of all stripes, from democracies to autocracies, have all come to see SWFs—­be they in the form of a pension reserve fund, commodity fund, or a reserve investment corporation—­as important buffers against global market forces that threaten domestic institutions and policies. The Rise of Sovereign Wealth Funds

If we consider SWFs to be special-­purpose vehicles that provide governments with the ability to tap into the power of global financial markets, why do governments want this power? Put simply, global financial markets offer a ready storehouse for accumulated reserves and, equally, promise a mechanism for efficient diversification. The bigger question, however, is why governments need to accumulate reserves or diversify their assets in the first place. Here we proffer a more complicated explanation: in a world seemingly at the mercy of

3

4

Chapter 1

globalization, SWFs offer states an opportunity to reassert their sovereignty and authority over the hegemonic forces of global capitalism. Through self-­ insurance and financial stabilization, SWFs mute global forces at the local level. In effect, the rise of these funds is emblematic of a widespread realization that accumulating wealth in the form of financial assets is a reasonable precautionary policy, whether it is to deal with looming pension obligations or to manage the inevitable problems associated with a country’s integration into the global capitalist system. It is also about gaining access to the leading edge of globalization: global financial markets. While some funds resembling SWFs have been around for years, economic historians will inevitably mark the first decade of this millennium as the beginning of the SWF era. During this period tens of new SWFs were created, accounting for a large proportion of all SWFs in existence today. Governments around the world decided—­seemingly en masse and independent of their level of development or the form of government—­that these special purpose investment vehicles were crucial to achieving their policy objectives. What is more, the economic and financial turmoil of the past several years has reinforced this trend; in the period 2009–­11 eleven new SWFs were established and several more were at some stage of creation or implementation (see figure 1.1). In addition, SWFs’ assets under management increased collectively from less than US$1 trillion in 2000 to US$6 trillion by 2012, as Number of new SWFs 30

29

?

2000s

2010s

20

10 3 0

4

1950s/1960s 1970s

Examples:

Kiribati Abu Dhabi Kuwait (ADIA) New Mexico Alaska Alberta Wyoming

5 1980s

8

1990s

Angola Abu Dhabi Azerbaijan Australia Colombia (IPIC) Botswana Brazil Ghana Brunei China (SAFE) China India Chile Hong Kong (CIC, NSSF) Israel Oman Iran France Mongolia Singapore Malaysia S. Korea Nigeria Norway Russia South Africa Venezuela Qatar and others and others

Figure 1.1. The rise of sovereign wealth funds. Source: Authors’ calculations



Introduction

more governments funneled increasing amounts of their sovereign wealth into these funds. In effect, SWFs have become a core element in global financial markets and a constituent part of the related financial services industry. Many expect this relationship to become increasingly important in the future, as renewed commitments made by many sovereign entities to their SWFs as well as the growing number of newly established SWFs suggest that the institution has not been as compromised by the turmoil in global markets as have other types of financial institutions. If anything, it seems that their significance has been strengthened. On the one hand, governments are increasingly committed to SWFs as a policy instrument while, on the other hand, the global financial services industry has grown dependent on their assets and commitment to portfolio investment. If otherwise risk-­averse in relation to the possible political costs (borne directly or indirectly) of high-­profile failures of investment strategy, the long-­term nature of SWFs gives these instruments the power and position to drive the frontiers of global investment management. Indeed, SWFs are intimately related to finance-­led capitalism, with its form and functions based on the hegemony of Anglo-­American finance over the late twentieth and early twenty-­first centuries (see chapter 9). While some might have welcomed the addition of SWFs to the tumultuous economic environment of the past several years, given that these funds exist to facilitate macroeconomic stability and invest a country’s assets over the long term, many in the West initially saw the rapid rise of these funds with concern and suspicion. To a certain extent, this was due to the fact that these funds represented a permanent redirection in investment flows and a shift in the dominant sources of financial capital. After all, financial markets were hitherto dominated by Anglo-­American financial institutions (Clark 2000). The apparent loss of hegemony left some, particularly in the United States and Europe, uncomfortable. By blurring the line between finance and politics, there was a fear that SWFs would not only redirect financial flows but also change the very nature of global markets. Indeed, there was a sense that foreign governments were resorting to SWFs to (mis)use financial markets to advance political, as opposed to commercial, agendas (Schumer 2008). Some came to view SWFs as the source of a new “state financial capitalism” (Lyons 2007), or as instruments for hiding attempts by foreign governments to obtain technology and expertise to benefit national strategic interests (European Commission 2008). Others wondered what the introduction of public investors into private markets would do for market efficiency (Gieve 2008). In all cases, SWFs were a new source of political intrigue and concern. Yet, concerns about emerging-­market investors are not new (see Moorsteen 1975), and it has been over two decades since Benjamin J. Cohen argued that, “high finance can no longer be kept separate from high politics” (1986, 3). Still, it seemed that SWFs were an affront to many Western policymakers, and these funds came quickly to face a global crisis of legitimacy.

5

6

Chapter 1

Legitimacy and Governance

Because distrust toward the activities of SWFs could lead to increasing protectionist sentiments (see Levi and Stoker 2000), which could in turn result in restricted access to key financial markets (see Tucker and Hendrickson 2004), there has been a premium placed on trust. One initiative that has sought to build trust is the voluntary Generally Accepted Principles and Practices (GAPP), known as the Santiago Principles, which were developed by the International Working Group of SWFs with the support of the International Monetary Fund (IMF). According to Hamad al Suwaidi of the Abu Dhabi Investment Authority and Co-­Chair of the International Working Group, the Santiago Principles were designed to establish “trust” between SWFs and recipient countries.2 Investment-­receiving countries shared this commitment. For example, according to Joaquin Almunia, the European Commissioner for Economic and Monetary Affairs, “The principles and practices of the GAPP amount to a global public good that can help foster trust and confidence between SWFs, their originating countries, and the recipient countries. This is what we need in these turbulent times: a strong commitment to enhance mutual trust.”3 Similarly, Kathryn Gordon of the OECD notes that their project on SWFs and the International Working Group’s project are “flip sides of the coin in the trust-­building process.”4 Evidently, “trust” is an important stepping-­stone for SWFs’ integration into the global financial system, and distrust is a problem that requires the attention of SWFs and policymakers alike. But is trust the primary issue? Trust reflects someone’s belief that an institution is performing in accordance with his or her normative expectations (Kaina 2008). Hence, embedded in this notion of trust is a performance; for SWFs, a performance could be a specific investment or asset allocation decision. These performances either conform to a normative expectation and create trust or contradict a normative expectation and create distrust. Subsequently, the question arises whether SWFs inspire concern among policymakers due to undesirable past performances (i.e., investments). The answer is no. Past SWF investments are not the issue. There are few, if any, examples of SWF investments that clearly demonstrate a breach of trust due to politically motivated investing. This would suggest that concerns over SWFs are largely unjustified if SWFs are evaluated according to their track records. Rather, much of the concern about SWFs is about codes of conduct and the appropriateness of funds’ investment strategies. Indeed, the current debate revolves around SWF principles and practices, which refer to the established norms and methods for operations and behavior, rather than performance per se. In short, SWFs inspire fear within certain policy circles, because some SWF principles and practices do not conform to their expectations. Therefore, the issue is less about trust and more about legitimacy.5 While this may



Introduction

seem to be simply a semantic argument, it has important implications for geopolitics. Yet the issue of legitimacy also goes beyond geopolitical concerns. As several of our case studies show, legitimacy is equally a matter of domestic politics and the domestic political claims on SWFs. Legitimacy can be described as the acceptance of an organization by its “environment,” and as the belief that an organization is authorized (legally and morally) to operate in a certain place and time. In this sense, legitimacy is a constraint (Dowling and Pfeffer 1975; Suchman 1995; Kostova and Zaheer 1999).6 According to Zimmerman and Zeitz (2002, 416), “legitimacy is a relationship between the practices and utterances of the organization and those that are contained within, approved of, and enforced by the social system in which the organization exists.” Being legitimate means that organizational procedures, structures, and principles align with the values, norms, and expectations of the society or the environment in which the organization seeks legitimacy, at home or abroad. It is a subjective quality that is defined by a certain actor’s perception of an institution’s practices and principles. Being illegitimate limits freedom of action, which may undermine organizational effectiveness. As Massey (2001, 157) notes, “[A]n illegitimate status demands that the organization respond, or else organizational failure could result.” One method for evaluating issues of SWF legitimacy, domestic and international—­which we adopt as a primary mode of inquiry throughout the book—­is to analyze SWF governance (see Appendix), as governance and legitimacy are intertwined (Stoker 1998). Legitimation is a process necessitating an evaluation of an organization’s governance: the techniques, procedures, categories, and structures through which organizational decisions are made (Perrow 1970; Suchman 1995). We define governance in financial institutions as the procedures, policies, structures, and decision-­making norms underpinning operations and investments (see Appendix).7 Governance is an important resource for financial institutions, as it provides, for example, the tools to protect against outside influence, stem fraud and corruption, maintain accountability and transparency, manage new and existing financial risks, and supervise new and existing stakeholders (Clark and Urwin 2008a). In effect, governance ensures that an organization is operating in accordance with the values and norms of society relevant to that institution (Monk 2009b). A well-­governed financial institution inspires confidence among stakeholders. Institutional Form and Function

Conceptually, the design of any organization and its governance architecture will affect its ability to meet its institutional objective(s) (see Davis and Steil 2001). Research has shown that there is a premium on properly designing investment institutions such that their structures and practices sustain performance, both in terms of financial returns and other objectives (Clark and

7

8

Chapter 1

Urwin 2008a). These are the characteristics that will dictate how internal authority is utilized and financial capital is distributed and mobilized. Ultimately, for any organization to be successful, its form must be consistent with its functional imperatives. In the case of SWFs, the functional imperative is to operate effectively in global financial markets. To achieve this objective, sponsoring governments have to consider two factors in designing SWFs. First, SWFs are required to generate the financial returns desired by the sponsor. Significantly, the Western model of corporate governance offered SWFs a form that was specifically designed to maximize efficiency and profits. Second, SWFs are required to maintain access to global financial markets, lest they cease having a reason to exist. As such, SWFs adopted the Western model of corporate governance, with its “recognized” management practices, logics governing investment, and principles of best practice (Clark and Urwin 2008a, 2008b). SWFs thus match, mimic, and approximate the management structure and governance practices of pension funds, endowments, and foundations, all of which also rely upon global financial markets for investment opportunities (Morrison and Wilhelm 2007). However, in thinking about the future of SWFs, one of the challenges facing these financial institutions is whether they will continue to rely on Western markets. Should they adapt their current form to create new pathways for the investment of sovereign wealth? After all, when considered over the past fifteen years or so, it is arguable that Western financial markets have hardly returned anything more than the global real rate of economic growth (taking account of volatility, inflation, and the costs of investment management). Moreover, the commercial orientation of today’s SWFs may not match up with the long-­term interests of the states that sponsor SWFs. Indeed, the formation of every SWF represents, inevitably, a political moment in the life of a nation-­state, which means these institutions carry with them the interests of the sponsoring entity. In this context, it is not obvious that a traditional financial institution is the best form to realize SWFs’ functions. The current SWF form seems to be the source of looming institutional contradictions. On the face of it, these funds swear off national, or strategic, investment strategies in deference to Western sensibilities. Nevertheless, they ultimately exist to serve the sovereign sponsor. Gelpern (2010) articulates this dilemma in the following way: “Reading between the lines of SWF definitions and commentary reveals a jumble of contradictions: public money that pledges to act private, vast pools of capital that promise not to move markets, non-­controlling investors that manage centrally controlled economies; and public fiduciaries that balk at corporate governance of their investment targets.” While SWFs claim to pursue financial profit alone, there nonetheless remains the long-­term interest of the nation-­state in using its sovereign wealth to advance the status and fortunes of the sponsoring nation as a whole. It should be noted, moreover, that SWFs enjoy a unique position among investors that makes them suited to this type of strategic investing: SWFs are



Introduction

not constrained by liabilities, as is the case with defined benefit (DB) pension plans; they are not managed in relation to participants’ account balances, as is the case with defined contribution pension funds; and, they are not subject to increasing solvency requirements, as is the case with insurance companies and banks. Accordingly, SWFs have greater discretion over tactical and strategic asset allocation (Campbell and Viceira 2002). Put simply, SWFs are unconstrained investors, which affects (or should affect) the nature of the risks that they are willing to bear, the time horizon of investment, the benchmarks (if any) used to evaluate performance, the demand for innovation in investment management, as well as the nature of “products” offered to SWFs by investment companies. Hence, it is entirely possible that SWFs will evolve, transforming into long-­term investors whose holdings are selected on the basis of their strategic interests rather than on the basis of modern portfolio theory. If so, the future of SWFs sponsored, for example, by Eastern countries will be more like that feared by their critics than the ideal form upholding a symbiotic relationship with the West. And while this evolution will unquestionably raise concern in certain quarters, Western policymakers will have to confront the issue as to whether it really matters if the motivation of a Chinese SWF, which owns 10 percent of a certain company, is commercial or political. If it does matter, will Western governments be able to respond? The Geography of Finance

The great irony embedded in SWFs is that while these funds exist to reap returns in global financial markets, their objective is to mute capitalism’s transformative forces, such as global finance, at the national level. In a manner of speaking, SWFs are chasing their own tail. That SWFs are the chosen means of protecting national sovereignty from the hegemonic forces of globalization is thus illustrative of the inherent contradictions embedded in capitalism. Moreover, these funds are at odds with the argument that the world is, and remains, a mosaic of different countries sustained by path dependence and tradition—­ the logic underpinning the political scientists’ commitment to varieties of capitalism and economic geographers’ commitment to path dependence. The growing importance of these funds would seem to give credence to the argument that all the world is subject to a financial capitalism. After all, these funds are emerging around the world from Canada, China, and Chile to Norway, ­Nigeria, and New Zealand. Independent of their variety of capitalism, countries have come to see the value of being in, and managing the forces associated with, financial markets. The rising importance of these funds thus underscores the difficulty of conceptualizing the global economic environment. Long before the SWF phenomenon was on the front pages of news­papers, a conceptual debate was raging in the social sciences over the resilience of

9

10

Chapter 1

local institutions to global market forces (for details, see Rodríguez-­Pose 1999; Gertler 2001; Hess 2004; Peck and Theodore 2007; Clark and Wójcik 2007). Two questions were core to this debate: (1) How do local, regional, and national geographies (i.e., laws, cultures, norms, and histories) respond to global capitalist forces (e.g., finance)? (2) Will filtering these forces through these same geographies result in convergent or path-­specific developments at the institutional and firm level? Originally, the pendulum swung out to the right with claims that the technological and financial revolution would result in an “end of geography” or “end of history” for which the result would be a total convergence toward a set of institutional best practices (see Fukuyama 1992; Ohmae 1990; O’Brien 1992). However, before this view could make significant inroads (except within the management-­focused publications that spawned it), the pendulum had swung back to the left with a conceptual riposte: path dependence and the varieties of capitalism (see Hall and Soskice 2001), which held that, by virtue of history and geography, the local would always hold sway over the global. Neither set of concepts, however, offers analysts reliable insights into some of the more troubling (empirical) problems facing the global economy (Clark and Wójcik 2007; Monk 2009a; Dixon and Monk 2009; Dixon 2011, 2012). Neither offers an adequate explanation for a world inhabited by SWFs. The vagaries of finance-­led capitalism are too complex to reify in this manner. On the one hand, the hyper-­globalization theses appear overly simplistic. Globalization may have forces driving convergence, but the idea that countries will adopt best practices that do not reflect local characteristics is mistaken (Gertler 2001). On the other, the supporters of path dependence come across as overly reductionist. Attempting to examine the global economy as if it were bimodal (i.e., coordinated market economies versus liberal market economies) cannot adequately reflect the variety inherent in the global economy. Instead, we see the world as a hybrid of these (and other) conceptualizations. It is not converging toward a singular model or “best-­practice” system of economic coordination. And yet, numerous practices, principles, and institutions are undoubtedly subject to market-­based expectations and global pricing (see Christopherson 2002). While much of the research to date has focused on the hegemony of finance at the individual level (Langley 2008; Strauss 2009), as well as the effects of financial markets on national and regional systems of corporate governance (Clark and Wójcik 2007), there is overwhelming evidence that nation-­states are at risk to the incontrovertible world of high finance (see Helleiner 2009). It is for this reason that theories of institutional change built on convergence and path dependence are of little use to our analysis of SWFs. In short, as states increasingly turn to SWFs, they find themselves better able to maintain their own path-­specific patterns of development. As a result, political economies have been shown to be capable of responding to global forces in ways



Introduction

that preserve local differentiation, autonomy, and, indeed, sovereignty. However, through their financial investments in global markets, SWFs have ushered global finance—­which is the quintessence of contemporary economic globalization—­into the state apparatus in countries of all political inclinations the world over (Monk 2009a). We rehearse these arguments and conceptualizations here because this pluralist approach forms the basis of our ontological perspective in this book. As economic geographers, we implicitly recognize the inherent variety and idiosyncrasy of economic life. In fact, our generic interest is in “mapping” the changing spaces and places that make up the ever-­changing global economic geography, highlighting the factors that inspire, constrain, or redirect economic agents and institutions. This includes the actual physical characteristics of the environment, but, equally, encompasses organizational and even psychological variations. In our view, these different geographic configurations can and do filter global forces at the local level. Moreover, we recognize the role of agency in this process, whereby local agents are cast in terms of institutional entrepreneurs that are constrained but also empowered by their local environment to effectuate change (or maintain the status quo) (Crouch 2005). We are also cognizant of the difficult balancing act governments are facing between the policies that will encourage economic growth and efficiency in the global economy and the policies that will match up with their promises and commitments to local constituents. The significance of this fact of life for many social scientists was largely ignored until the global financial crisis in the first decade of the twenty-­first century brought into the open the pervasive and indeed hegemonic influence that finance is having on individuals, corporations, and even governments. We should not act surprised by this, however, as the size of the financial economy was already estimated to be nearly three times larger than the real economy in 2007 (Lee et al. 2009). Moreover, the significance of institutional investors in global financial markets is well documented (see Davis and Steil 2001; Hawley and Williams 2005). Perhaps it is appropriate, then, that twenty-­first-­century capitalism is often portrayed as the era of financial capitalism (Clark 2009), which is another way of saying that production and trade, often described as the core attributes of the real economy, are no longer the dominant forces in the global economy. This is not to say that the real economy has lost its importance for understanding the global economy, but its relevance has fallen in favor of finance. As Dore (2007) puts it, the global economy has moved away from industrial relations toward investor relations. While inherited systems are resilient in certain places and industries, the financial concept of “shareholder value” still seems to permeate decision-­making among elites (Bauer, Braun, and Clark 2008). Former Chief Economist of the IMF Simon Johnson (2009) offers a very useful illustration of this phenomenon,

11

12

Chapter 1

[F]or the past 25 years or so, finance has boomed, becoming ever more powerful.  .  .  . From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade [the 2000s], it reached 41 percent. In our view, SWFs are a core element of this new geography of finance. They represent the high-­water mark of financialization and the next installment of capitalist development following Clark’s (2000) pension fund capitalism.

2 The Rise of Sovereign Wealth Funds

On a midsummer visit to Russia in 2008, then–­U.S. Treasury Secretary Henry Paulson told Prime Minister Vladimir Putin that he had had a productive discussion with Russian Finance Minister Alexei Kudrin about the country’s SWF. Putin responded by saying, “Since we do not have a sovereign wealth fund yet, you are confusing us with someone else.” To which Paulson replied, “We can discuss what you have called the various funds but we very much welcome your investment.”1 This brief exchange is illustrative of the confusion surrounding SWFs: while Paulson was correct—­Russia’s National Wealth Fund is considered by many to be an SWF—­Putin’s response is also justifiable. A widely accepted definition of what exactly constitutes an SWF has been elusive. Accordingly, (as some have suggested) defining the term “SWF” is extremely important; if these funds are a threat, we must be able to point specifically to the factors underpinning this threat. Without a proper definition, certain financial institutions labeled as SWFs potentially could be the subject of protectionist sentiment and reaction. Classification is therefore an issue of geopolitics. Moreover, variable and changing definitions add to the confusion surrounding these funds, making constructive dialogue difficult. Andrew Rozanov first coined the term “sovereign wealth fund” in 2005. Rozanov noted that SWFs were “neither traditional public pension funds nor reserve assets supporting currencies, but a different type of entity altogether” (2005, 52). He was right; SWFs are different. However, there is still no consensus as to how SWFs differ from other public investment funds and how they should be defined. Rozanov (2008, 15) noted that SWFs “differ in size, age, structure, funding sources, governance, policy objectives, risk/return profiles, investment horizons, eligible asset classes and instruments, not to mention levels of transparency and accessibility.” Indeed, according to a survey conducted by the International Working Group (2008), most of the funds 13

14

Chapter 2

surveyed (twenty in total) were funded out of mineral royalties (primarily oil). Others, in contrast, were funded from fiscal surpluses, foreign exchange reserves, borrowings from the market, and even divestment proceeds. Likewise, there was a straight fifty-­fifty split among SWFs that were separate legal entities and those that were not; and the funds themselves cited various objectives, including fiscal stabilization, general savings for future generations, and covering expected future pension expenditures (for examples, see table 2.1).2 While there has been some definitional confusion surrounding these funds, most commentators agree that SWFs are special-­purpose vehicles that invest sovereign assets in private financial markets.3 Commodity funds, reserve investment corporations, and pension reserve funds are all types of SWFs that exist to facilitate or sustain the policies of sovereign entities (nation-­states, governments, and their instrumentalities). While SWFs have various macroeconomic functions or purposes, they typically invest their assets in global financial markets in accordance with the interests and objectives of the sovereign sponsor (see Monk 2009b). As such, SWFs demonstrate that the power of financial markets now extends to state agencies around the world, from representative democracies to authoritarian regimes (see chapter 3 for discussion of the word “sovereign” in SWFs). This raises the question as to why nation-­states have turned to SWFs to solve their problems. Before addressing this question, the next section provides a working definition of what constitutes an SWF. This exercise sheds light on why SWFs inspire fear in some quarters, and provides for many others a ready-­made category to be inserted into geopolitical debate. We then delineate three specific types of SWFs, noting the reasons that may have prompted the institutional innovation that led to their creation. Section three then sketches out the theoretical lens through which SWFs’ existence is explained, reviewing the literature on institutional innovation relevant to the rise of SWFs. Subsequently, section four offers a broad overview of the changing institutional environment associated with globalization, while illustrating a conceptualization of SWFs’ rise. The chapter concludes by arguing that SWFs offer states an opportunity to reassert sovereignty and authority over financial markets in the context of a world seemingly at the mercy of financial globalization (Helleiner 2009). Ironically, though, states have sought to tame global financial markets by establishing SWFs that are, in one form or another, conceived and governed in terms of the imperatives driving those same markets (­Behrendt 2009). Defining Terms

Undoubtedly, the divergence in fundamental characteristics of SWFs has been the source of much confusion. This has made coming to an acceptable definition that encompasses these variations difficult. There is a fine line between



The Rise of Sovereign Wealth Funds

15

Table 2.1. Example reasons for the establishment of SWFs Country

Fund

Impetus for Creation

Australia

Future Fund

Assist future governments meet the cost of public sector superannuation liabilities

Azerbaijan

State Oil Fund of the Republic of Azerbaijan

Improve the economic well-being of the population and safeguarding economic security

Bahrain

Mumtalakat Holding Company

Diversify the economy away from oil and gas

Botswana

Pula Fund

Ensure that national savings are deployed optimally over the long term

Canada

Alberta Heritage Savings Trust Fund

Save for future; strengthen or diversify the economy; and improve the quality of life of Albertans

Chile

Pension Reserve Fund

Support financing of government obligations arising from future pension contingencies

China

China Investment Corporation

Diversify foreign reserves and increase risk-adjusted returns, facilitating macroeconomic objectives

France

Strategic Investment Fund

Stabilize French firms

Indonesia

Government Investment Unit

Increase macroeconomic stability, economic growth, and government investment

Ireland

National Pensions Reserve Fund

Meet as much as possible of the costs of Ireland’s social welfare and public service pensions

Kazakhstan

Kazakhstan National Fund

Ensures that economy is stable during price swings of oil, gas, and metals

Korea

Korea Investment Corporation

Preserve long-term purchasing power of foreign assets and facilitate financial development

Kuwait

Kuwait Investment Authority

Manage the future and reduce country’s reliance on nonrenewable resources

Libya

Libyan Investment Authority

Protect and develop the value of national wealth and diversify the income away from natural resources

Mauritania

National Fund for Hydrocarbon Reserves

Ensures that macroeconomic stabilility, while accumulating savings for future generations

New Zealand

New Zealand Superannuation Fund

Reduce burden on future taxpayers of the cost of funding New Zealand superannuation payments

Norway

Government Pension FundGlobal

Support long-term management of oil revenues and facilitate savings to meet future pensions expenditures

Qatar

Qatar Investment Authority

Strengthen the country’s economy by diversifying into new asset classes

Russia

Reserve Fund

Ensure financing of the federal budget expenses and maintain budget balance

Singapore

Government of Singapore Investment Corp

Invest reserves in long-term and high-yielding assets

Timor-Leste

Petroleum Fund of Timor-Leste

Manage petroleum resources for the benefit of both current and future generations

Trinidad and Tobago

Heritage and Stabilization Fund

Smooth and diversify oil revenues, while providing for future generations

United Arab Emirates

Abu Dhabi Investment Authority

Secure and maintain current and future prosperity of the Emirate through prudent management of assets

United States

Alaska Permanent Fund

Save a portion of the state’s oil revenue for the future

Venezuela

FIEM - Macroeconomic Stabilization Fund

Stabilize the economy and stimulate noncommodity sectors

Source: Authors’ analysis

16

Chapter 2

making any definition too general (and including all public funds) and making it too specific (and eliminating some funds that deserve the SWF label). For example, limiting the SWF definition (as the U.S. Treasury has done) to those funds that receive their capital from foreign exchange reserves would eliminate well-­established SWFs such as Singapore’s Temasek (Nugée 2008). The logical question, therefore, is whether there are any commonalities among SWFs that could serve as the basis of an SWF definition. Three characteristics emerge from our case studies as crucial: 1. Ownership: Governments, both central and subnational, own and, to varying degrees, control SWFs. Control can be exerted either directly or indirectly through the appointment of the SWF board. 2. Liabilities: One point of agreement illustrated by the International Working Group’s (2008, 15) survey of SWFs is that these SWFs “have no direct liabilities.” This is perhaps a surprising point of agreement, as certain SWFs do have liabilities, such as sterilization debt or some deferred contractual liability to transfer money out of the SWF and into the general budget or a social security system (Rozanov 2008). However, the point is that SWFs have no outside (nongovernmental) liabilities. For those funds that do have a liability, it is typically intragovernmental. For example, the SWF might owe funds to the Ministry of Finance, the central bank, or even the social security reserve fund. However, SWFs have no external creditor, which means the assets are not encumbered by the property rights of outside, nongovernmental owners. In short, SWF liabilities (if they have any) are part of the broader national balance sheet. 3. Beneficiary: Despite certain explicit goals (e.g., filling a future pay-­as-­ you-­go [PAYG] pension gap), SWFs are managed according to the interests and objectives of the government or sovereign. As the accounting distinction underpinning Point 2 suggests, the ultimate beneficiary of an SWF is not a specific individual. Rather, the beneficiary is either the government itself, the country’s citizenry in the abstract, the taxpayer generally, or is simply left unidentified. This objective function drives the strategic choices made by funds’ asset managers, as the notion of fiduciary duty, which disciplines the investment practices of Western financial institutions like pension funds, does not apply. These three characteristics suggest the following technical definition: SWFs are government-­owned and controlled (directly or indirectly) investment funds that have no outside beneficiaries or liabilities (beyond the government or the citizenry in abstract) and invest their assets, either in the short or long term, according to the interests and objectives of the sovereign sponsor.4 This concise definition is suitable for three reasons. First, given the heterogeneous nature of the SWF population, the definition does not use specific sources of capital (such as commodities or foreign exchange reserves) or legal



The Rise of Sovereign Wealth Funds

status as a defining characteristic. The International Working Group’s 2008 survey illustrates that generalities in this regard are necessary.5 Second, the definition makes no mention of accountability, transparency, or governance. While some funds, such as the Canada Pension Plan Investment Board, have tried to differentiate themselves from SWFs on the grounds that they have higher-­than-­average levels of transparency, accountability, and governance (Bisch 2008), such distinctions seem to suggest that the term “sovereign wealth fund” is tantamount to unaccountability, nontransparency, and poor governance.6 This is a categorical error, because it suggests that as SWFs become more accountable, transparent, or better governed, they “graduate” from being an SWF to something else (acceptable).7 Consider briefly a different type of financial institution: are central banks with perfect governance practices and central banks with deficient governance practices all central banks? The obvious answer is yes; the same principle should hold true for SWFs. Finally, this definition underscores the vulnerability of SWFs to political influence, because the assets are: (1) owned by the government; (2) owed back to the government (instead of an outside beneficiary); (3) unconstrained by nongovernmental property rights or fiduciary duty to any individual beneficiaries; and (4) invested in accordance with the government’s interests or mandates. Defining the term “SWF” is important, as it helps to explain why Western policymakers have been concerned about the behavior of these funds. Indeed, if the sponsoring government is nondemocratic, autocratic, or controlled by a single ruling party (and many are), SWFs have faced difficult times reassuring investment-­receiving liberal democracies. Specifically, the inherent vulnerability of these funds to political influence means that they have had difficulty convincing others that their motivations are “purely” commercial. It is for this reason that some believe transparent and verifiable good governance practices will immunize SWF investment decisions from politics and establish trust despite difficult circumstances. Classification of SWFs

Few structural changes were as profound as the global economic imbalances that began to emerge in the latter half of the 1990s and have continued to grow through the first decade of the 21st century (see Eichengreen 2006 for a perceptive analysis). In the early 1990s, nearly all emerging-market countries were running current account deficits. However, over the past decade developed countries, such as the United States, became global debtors, while emerging-market countries, such as China, became global creditors. For example, the U.S. current account went from a US$113 billion deficit in 1996 to a US$811 billion deficit in 2006, while emerging-market countries as a group went from a current account deficit of US$74 billion in 1996 to a surplus of roughly US$600 billion in 2006 (Xafa 2007). This gap has widened

17

18

Chapter 2

dramatically over the past several years as the global financial crisis has enacted its toll on the capacity of developed economies to control the accumulation of debt. Some commentators have blamed the imbalances on the U.S. twin deficits—­ savings and trade—­while others blamed imbalances on an emerging-market “savings glut” (Bernanke 2005). This chapter is less interested in the specific direction of causality regarding the impetus for global imbalances; after all, these are two sides of the same coin (Smaghi 2008). It is impossible to under­ stand the current account surpluses of emerging-market countries without also understanding the current account deficits of developed economies (L. H. Summers 2006; Feldstein 2008). Rather, in this chapter we are interested in uncovering the “jolt” or moment of institutional innovation (Oliver 1992) that accompanied the rapid accumulation of foreign reserves in emerging-market countries that would ultimately prompt the formation of SWFs. Reserve Investment Corporations

Many would agree that the primary jolt prompting the creation of SWFs was the 1997 Asian financial crisis. According to Aizenman and Lee (2007, 192), this crisis led to “profound changes in the demand for international reserves, increasing over time the hoarding by affected countries.” We suggest two main reasons for this change in behavior, both related to what Greenwood, Suddaby, and Hinings (2002) might call the “pre-­institutionalization” phase of development. First, there was recognition among emerging-market countries that self-­insurance was preferable to IMF conditionality and the associated loss of sovereignty. In response, Park (2008, 1) argued that “the large war chest of reserves has given the region insurance and protection against a recurrence of the Asian crisis.” While one could argue that this reserve accumulation served only to exacerbate the global economy’s problems through the perpetuation of imbalances (Griffith-­Jones and Ocampo 2010), at the level of the specific countries involved this accumulation was viewed as preferential to the existing global framework for managing crises. Second, exchange rate volatility, which was associated with the Asian crisis, has been shown to reduce economic growth for countries with relatively low levels of financial development (Aghion et al. 2009). According to Aizenman (2008, 2), “policies that would stabilize the real exchange rate . . . of developing countries may provide further benefits by increasing their growth. An example of such policies is the buffering effect of international reserves, which tend to mitigate the impact of terms of trade shocks on [real exchange rates] of developing countries.” In short, foreign exchange reserves can be a buffer against potential capital outflows as well as being a means of keeping exchange rates low so as to promote export-­led growth. Both can have positive effects on countries’ growth prospects (Green and Torgerson 2007). By this logic, the accumulation of reserves has been, partly, a strategy of crisis prevention: in effect, a policy to bolster the nation-­state against the forces of



The Rise of Sovereign Wealth Funds

unfettered global capitalism. For some countries, this phenomenon was present before the Asian financial crisis. For other countries, the crisis served as the jolt that drove the adoption of this policy of reserve accumulation, driven by the realization that self-­insurance would mean not having to rely on the IMF if a currency crisis took place again—­a luxury that these countries did not have in 1997. This was reinforced by the relative ease with which countries holding financial reserves (e.g., Singapore) had traversed the crisis. Ultimately, reserve accumulation and hoarding, which it should be noted has the potential to destabilize the economic system as a whole, grew in popularity. Even so, this does not fully explain the decision of countries to establish reserve investment corporations, a type of SWF, in that these entities represent only a subset of the foreign reserves that countries now hold. Indeed, the value of accumulated reserves quickly grew to exceed the level needed by countries for insurance purposes (barring another global financial crisis). One explanation is that holding reserves grew to be extremely costly; the cost of holding reserves is the difference between what the reserves can earn through investments in financial markets and what the country pays on the domestic debt that is used to “sterilize,” or soak up, the local currency that was issued to buy the foreign reserves in the first place so as to prevent domestic inflation. Taken as a whole, Rodrik (2006) estimates that hoarding reserves cost emerging-market countries around 1 percent of GDP annually (through the first years of the twenty-­first century). Consequently, while reserve accumulation was seen to be a useful policy in the era of globalization, the cost was too burdensome to be sustainable for most countries. Moreover, with more countries and ever more reserves, the demand for “traditional reserve assets” was far outstripping supply, which meant the yields on these securities were extremely low (Devlin and Brummitt 2007). Hence, those countries with large stockpiles of foreign reserves sought new mechanisms to invest their assets to achieve higher returns (see L. H. Summers 2006). Yet, since central banks are widely seen to be inappropriate for investing reserve assets in higher-­yielding (less liquid) securities, there was a need for a dedicated institution (see Aizenman and Glick 2008). SWFs are seen to be the “natural institutional blueprint for more active management of excess reserves” (Park 2008, 2). As such, SWFs have been diffused through Asia over the past decade; countries such as China and South Korea have followed in the steps of Singapore and Hong Kong by setting up SWFs. As a result, reserve investment corporations are now a key part of the global financial environment dedicated to self-­insurance via foreign exchange reserves. In theory, these institutions allow countries to self-­insure at a lower cost. Commodity Funds

More than in any other sector, commodity-­producing and exporting companies are typically state owned. Just twelve emerging-market, state-­owned companies control roughly three-­quarters of the world’s oil reserves (Harris

19

20

Chapter 2

2009). As such, governments experienced a considerable jump in state revenues with the increase in commodity prices over the past decade. For instance, oil revenues increased by 561 percent for major exporting countries from 1992 to 2006 (GAO 2008). With rising oil prices, resource-­dependent countries sought to avoid the mistakes made after similar windfalls in the 1970s. At that time, the assets associated with the global commodity boom were largely squandered. As with reserve investment corporations, past experience has served to jolt policymakers into creating and using SWFs to capture the value of market prices. Technocrats and policymakers have become aware of the utility in converting physical assets “in the ground” into financial assets. The basis for the financial institutionalization of the resource assets has three components. First, governments have sought to smooth consumption in order to manage future resource-­price shocks. Research shows that volatile commodity revenues have a negative impact on the growth of resource-­rich countries (see Auty and Mikesell 1998; Mikesell 1997). Fluctuating revenues make it extremely difficult to pursue a prudent fiscal policy, especially over the long term, which in turn aggravates other problems in resource economies (see Stevens 2003). So, for example, the establishment of Norway’s SWF was based on the potential short-­term costs of fluctuating revenues for macroeconomic stability, which is a characteristic shared by many commodity-­based economies (see chapter 5). For small economies, the volume and volatility of resource earnings pose a threat to domestic economic stability. By sequestering a portion of the revenues in an SWF, countries can smooth market prices over the long term. In this sense, countries have not established SWFs because they are resource rich; they established SWFs because being a resource-­dependent economy means that their societies (or the country’s political structure) are vulnerable to changes in the global market for commodities. The SWF offers sponsors a tool for stability by managing current and future resource revenue. Second, Corden (1984) and Corden and Neary (1982) are credited with identifying the adverse consequences of unearned windfalls, often summarized by the phrase “Dutch disease.” This refers to the phenomenon whereby resource wealth leads to currency appreciation and the deterioration of the manufacturing sector. As Gylfason (2001, 302) notes, this problem includes “an overvalued currency that impedes non-­primary exports and perhaps total exports as well, and a heavy dependence on natural resources, which, in times of resource booms, is viewed as the root cause of the real overvaluation of the (national) currency.” Eriksen (2006) from the Norwegian Ministry of Finance made the argument (put forth by many) to the effect that resource wealth distorts the economy, discounting the value of agriculture and industry as well as the benefits of education for long-­term individual human capital and social development. Hence, Norway’s SWF was established as a policy designed to avoid the curse of resource wealth. In this regard, SWF sponsors seek to manage better their competitive position in the global economy.



The Rise of Sovereign Wealth Funds

Third, in countries with substantial export and fiscal revenues from exhaustible resources, policymakers are increasingly preoccupied with intergenerational equity (Fasano 2000). At issue is how much of a country’s finite resources are to be spent by the current generation and how much is to be saved for future generations. As Solow (1986, 141) asked, “How much of the world’s—­or a country’s—­endowment of non-­renewable resources is it fair for the current generation to use up, and how much should be left for generations to come who have no active voice in contemporary decisions?” Current generations are not necessarily obliged to save the actual resources. Rather, they may be obliged to ensure that the productive capacity embedded in current resources is shared across generations: “whether productive capacity should be transmitted across generations in the form of mineral deposits or capital equipment or technological knowledge is more a matter of efficiency than of equity” (Solow 1986, 142). For this reason, SWFs are a tool for managing commitments to future generations in an uncertain world (as illustrated by the logic underpinning the establishment of Australia’s Future Fund; see chapter 4). To summarize, the logic behind this burst of institution-­building can be explained as follows: “the main factors determining the success of mineral exporters are less likely to be technical and more likely to relate to the political economy of managing rents” (Eifert, Gelb, and Tallroth 2002, 24). Indeed, resource wealth often affects the structure and shape of the relationships between government, corporations, and civil society (Karl 1997). In effect, Eifert, et al. (2002, 4) note that “[j]ust as political traditions shape the use of oil rents, rents shape the political economy of petroleum exporting nations.” In the past, weak domestic institutions have meant that resource-­ rich countries could not withstand the effects of oil price volatility and other macroeconomic shocks (Rodrik and Subramanian 2003). This vulnerability can result in sharply lower rates of economic growth than expected, as was the case in the 1970s. Given the opportunity again, states have responded by creating commodity and stabilization funds to prevent similar crises. Commodity funds help countries to manage rents, restoring a certain amount of stability and, indeed, autonomy to resource-­rich countries that have seen their position in the global economy change due to factors beyond their control. Accordingly, from Angola and Azerbaijan to São Tomé and Príncipe and Timor-­Leste, commodity-­based SWFs are emerging around the world. Pension Reserve Funds

The late twentieth century saw the realization of a creeping crisis in advanced welfare states. Substantial declines in fertility and increasing longevity have increased the social cost of retirement. Flat or declining population-­growth rates in many countries have meant that fewer people are paying into social security programs than is needed for long-­term solvency. Therefore, in countries with increasing long-­term old-­age dependency ratios, the costs

21

22

Chapter 2

of state pensions have become a serious concern for fiscally constrained governments (Bryant 2004), particularly as concerns over global economic competitiveness limits governments’ ability and/or willingness to collect (i.e., increase) taxes to cover the additional costs of social welfare provision (Clark 2003). Hence, economic globalization is frequently cited as a reason why some countries’ social welfare programs are unsustainable (Adnett 2001), while economic forces are seen to trump domestic social policies (see Ohmae 1990).8 Governments are facing an increasingly difficult balancing act between economic efficiency and social justice (Esping-­Andersen 1996). At the very least, economic internationalization has led advanced economies to streamline and discount their welfare systems (Hemerijck and Schludi 2000), which has put many welfare states in a precarious position; their political commitment to social welfare is increasingly difficult to reconcile with the competitive constraints and imperatives of the global economy (Esping-­ Andersen et al. 2001; Monk 2008a). Here, Freeman (1998, 1) has speculated whether inherited institutions can survive the “war of models”—­liberal market economies versus coordinated market economies—­and flourish in the twenty-­first century. The recent global financial crisis has only amplified the significance of this question. Governments have responded to the creeping crisis in social commitments by creating yet another type of SWF: the pension reserve fund. Several OECD countries, such as Ireland and New Zealand, have prefunded their pensions and today invest the assets in equities through an SWF. Pension reserve funds differ from traditional pension funds in that they have no designated claimants on the available assets. Rather, they are contingent national investment funds established in case future government budget expenditures are unable to meet mandated payments. In so doing, politicians from countries with pension reserve funds have recognized the future cost of their aging populations, and view the SWF as an instrument to overcome the looming crisis. These are commitment mechanisms for politicians who might prefer to spend their countries’ wealth today instead of saving it for future generations. As such, many have come to see these funds as important tools for maintaining social welfare programs (see Dixon 2008). At the very least, they represent an alternative to reducing benefits or increasing contributions, both of which are politically unpalatable (but arguably inevitable) (Palacios 2002). Pension reserve funds seek to minimize expected future budget outflows stemming from state pension costs in much the same way that commodity funds seek to eliminate volatile budget inflows due to changing commodity prices. Through pension reserve funds, the nation-­state relies upon global financial markets to maintain local institutions of social value, which are, ironically, being corroded by global economic forces. By generating additional returns through risk-­bearing investment strategies, policymakers hope to reduce the direct costs of pension provision to be shouldered by future taxpayers.



The Rise of Sovereign Wealth Funds

Logic of Institutional Innovation

Weiss (2005, 347) argues that globalization has prompted politicians around the world to initiate institutional innovation as a means of coping with these tensions and dilemmas. As shown in the previous section, SWFs are one of these coping mechanisms, established to deal with a variety of imminent or future global crises at the local level. As Oliver (1992) foresaw, crises are often an important trigger or “jolt” prompting governments to innovate and restructure (if they can) their inherited institutions and organizations. Accordingly, in order to explain the rise of SWFs, the analysis that follows is based on the process and the components of institutional change. Institutions can be conceived as organized procedures, standard interaction sequences (Jepperson 1991), organizations, organizational fields, or even states (Seo and Creed 2002). The institutional structure of a society can be seen as the enduring elements or social mechanisms of coordination that affect the way individuals and organizations behave (see Lawrence and Suddaby 2006). Organizations depend on this institutional structure for survival, as it dictates the rules and regulations that legitimate organizational power (see Greenwood and Hinings 1996; Thornton and Ocasio 1999). That is, institutions have an overarching social role and functional purpose, even if imperfect (Roe 2006), whereas organizations can be seen as specific forms of those institutional imperatives. New organizations may be designed to realize institutional structure; new organizations may also realize the imperatives driving institutional innovation and transformation (Ingram 1998; Maguire, Hardy, and Lawrence 2004).9 Therefore, as indicated above, the rise of SWFs reflects larger and perhaps more profound changes in, or challenges to, countries’ inherited institutional fabric. Here we rely on two separate conceptualizations of institutional change and innovation. The first is Greenwood et al.’s (2002) work on institutional innovation: these authors conceptualize this process in a way that includes deinstitutionalization and reinstitutionalization, distilling from the social science literature a model of nonisomorphic change that describes the stages of institutional change. They highlight how environmental characteristics—­and the agents that populate the environment—­effect change to the institutional framework of societies through a specific sequence of steps. This sequence offers a powerful analytic device for the institutional analyst. According to these authors, the initial stage of institutional innovation typically requires a destabilizing event that disrupts existing practices and procedures. Referred to as a “jolt” (see also Meyer 1982; Meyer, Brooks, and Goes 1990), this can be an instance of social upheaval, technological disruption, competitive change, or even regulatory intervention that threatens or actually permanently changes the operating environment. This “jolt” precipitates the entry of new actors or new coalitions of actors who reconceptualize

23

24

Chapter 2

the environment and what is possible therein; these agents and coalitions offer the inspiration for institutional innovation and change, which the authors call “deinstitutionalization” (see also Oliver 1992). Once this process is firmly in play, the “preinstitutionalization” process begins. This is where institutions respond to the jolt (see Tolbert and Zucker 1996). The environment then enters a new theorization period, during which existing organizations may revise practices, procedures, and decision processes in light of institutional change. Equally, it could be the case that preexisting organizations may be deemed inconsistent or unable to realize changes effectively in the institutional fabric of society. In these situations, institutional innovation is accompanied by new organizations. Either way, institutional innovation typically involves securing two important assets: (1) moral legitimacy, which is achieved by “nesting” the innovation within prevailing normative prescriptions; and (2) pragmatic legitimacy, which is based on demonstrating the superiority of the innovation over inherited functions and forms (see Suchman 1995; Tolbert and Zucker 1996).10 If the ideas under­ pinning the innovation are compelling beyond the immediate context or jurisdiction, their “value” becomes “objectified.” At this stage, institutions and their particular organizational forms may be imitated further afield. Once the density of adoption attains a certain threshold, the institution and its particular organization(s) are seen to have cognitive legitimacy (Suchman 1995)—­ that is, they are taken for granted as part of the institutional fabric of society. Another conceptual framework that is relevant to this chapter’s objective focuses on “institutional work.” Lawrence and Suddaby (2006) emphasize the importance of agency in the logic of institutional innovation sketched earlier. Lawrence and Suddaby’s argument adds an important missing dimension to Greenwood et al.’s conceptualization of institutional innovation, as the former focuses explicitly on the intentions and actions of agents while the latter explains the process of innovation. There is a danger that Greenwood et al.’s logic is so disembodied that their stepwise process of innovation lacks the motive force of economic and political interests. As DiMaggio (1988, 14) notes, “new institutions arise when organized actors with sufficient resources (institutional entrepreneurs) see in them an opportunity to realize interests that they value highly.” As such, Lawrence and Suddaby introduce the concept of “institutional work” to describe the actions of individuals and the social entities that seek to create, maintain, and even disrupt institutions. Put slightly differently, institutional work is the intelligent and situated action by individuals in organizations that results in institutional innovations. For example, Lawrence and Suddaby (2006) note that new institutions demand the mobilization of public, political, and regulatory support. Known as “advocacy” or “vesting,” this is about securing the resources (whether social, political, or, of course, financial) to create a new and enduring institutional structure. In this respect, Oliver (1992) shows how political pressure, in the form of shifting distributions of power, can drive institutional change.



The Rise of Sovereign Wealth Funds

She argues that this may occur due to evolutionary changes to the environment or, alternatively, in response to endogenous or exogenous crises as in the “jolts” referred to earlier. Lawrence and Suddaby also highlight the importance of rule systems that ascribe status, identity, and membership to institutional innovation. This “definitional work” is a way of accrediting the processes, standards, and the new actors and organizations within a jurisdiction. There is a great deal of work to be done in securing acceptance among the populace for new institutions. Not surprisingly, policymakers typically leverage practices, rules, and organizations that are already viewed as legitimate in other contexts. Indeed, institutional isomorphism has been shown to result in organizational legitimacy (Deephouse 1996). How do these conceptual frameworks inform our project? Both are ingredients in our institutional ontology, which can be summarized as follows: as environments change, a preexisting institutional framework may come into contradiction with another institutional logic. This may be sudden or it may be a gradual and incremental process (Campbell 2004; Hall and Thelen 2009). Either way, this contradiction will eventually lead to a crisis or just a realization that jolts policymakers into action. As they seek to respond to the jolt in an innovative manner, they may delegitimize preexisting institutions, change them in some manner, or, simply, create new institutions (see also Seo and Creed 2002). “Institutionalization” can then be represented by the legitimation of an organization, practice, or procedure in response to a broader institutional contradiction (Oliver 1992). Legitimation can be realized through “institutional work,” which may include “mimicry,” “nesting,” “advocacy,” and “education.” If successful, the institution is accepted (“objectified”) and it may become a solution that is copied by other jurisdictions facing similar pressures (“diffusion”). While relatively simple, this distilled conceptualization of institutional change has powerful implications. Importantly, it helps us understand and appreciate the current tumultuous institutional landscape, as global markets and nation-­states, each with their own distinct institutional logics, collide. Globalization and Institutional Innovation

The global economy has undergone profound structural changes over the past few decades (see Xafa 2007). Reduced trade restrictions, free flows of capital and labor, the costless transmission of information, and many more changes illustrate the development of the global economy over the past fifty years, leading to a revolution in the way nation-­states, institutions, and firms interact with global markets. Finance has also experienced a fundamental transformation, illustrated in large part by the widespread move from bank-­based to market-­based financing (Dixon 2012; Lounsbury 2002). The evolving economic geography of global capitalism has created winners in Asia, the Middle

25

26

Chapter 2

East, Latin America, and (to a lesser extent) Africa (Grossman and Helpman 2005). However, there have also (and often) been problems associated with absorbing the newly created wealth, as local institutions and markets were, in many cases, not prepared for the influx of capital and its attendant effects. Moreover, local economies were not prepared for the ­exogenous forces that came with their integration into global capitalism. Elites, technocrats, and policymakers have come to recognize the impact that global markets can have on their domestic institutions, plans, and agendas. These institutional entrepreneurs, conscious of their past, in the parlance of Greenwood et al. (2002), theorize SWFs in the present as tools for managing imminent and future crises. Accordingly, policymakers establish and use SWFs to minimize uncertainty and volatility and maximize state autonomy. The recent crisis has served only to crystallize the utility of SWFs in this regard—­one explanation of the spike in the number of SWFs around the world. Whether the SWF has a mandate to fill an unfunded pension liability through investments in riskier assets or has a mandate to smooth volatile commodity prices, these funds represent an attempt by governments to manage their future, acting as insurers of last resort for a given domestic problem. SWFs thus offer a chance to make reliable and consistent plans in an environment that is increasingly subject to volatility and market-­based short-­ termism (see Clark 2011).11 As suggested by Greenwood et al.’s (2002) framework, the contradiction between the market and the state has been a source of institutional innovation (see also Oliver 1992).12 In some cases, this change was a gradual process (see Campbell 2004), while in others it was a sudden crisis that jolted institutional entrepreneurs into action. Either way, new institutions have come to play an increasingly important role in facilitating the benefits of global capitalism, while also attempting to mute its negative effects. For example, Rodrik and Subramanian (2003, 32) outline various institutions that have come to play the role of market stabilizers, which “ensure low inflation, minimize macroeconomic volatility, and avert financial crises.” These authors also highlight institutions that have come to be market legitimizers, which “provide social protection and insurance, involve redistribution, and manage conflict.” SWFs fall into both categories and, thus, represent an innovative or hybrid institution that seeks both to stabilize and legitimize local economic activity in a global marketplace. In short, states have turned to SWFs to help them solve a variety of problems associated with global capitalism. In this respect, the rise of SWFs implies that global capitalism does not necessarily translate into a decline of state sovereignty; instead, it implies the transformation of the state. As Weiss (2005, 347) explains, While the constraining aspect of globalization is often explained by the economic logic of capital exit, the enabling aspect has more to do with



The Rise of Sovereign Wealth Funds

the political logic of voice—­that is, with the demand for coping solutions to ease adjustment pressures. The enabling logic of globalization derives from a need to manage the increased vulnerability that economic integration brings. The more countries become integrated into the global economy, the more exposed certain social sectors become to the risks and uncertainties of market fluctuations, and consequently the more vulnerable to economic and social dislocation. In this respect, globalization is enlisting governments in multi-­faceted efforts to cope with increased economic vulnerability. Global capitalism, in effect, provides the policymakers of internationally exposed countries with the logic for institutional innovation. Global capitalism provides policymakers with a legitimate reason to do the “institutional work” necessary to meet the challenges of an increasingly open world economy. Globalization and financialization together are the seeds of future crises. Policymakers recognize this connection as an unambiguous threat to their sovereignty, which has had a catalyzing effect on institutional change (Edmondson et al. 2005). The rise of SWFs is necessarily a part of this give-­and-­ take between states and markets. To a certain extent, this explanation actually discounts the extent to which some governments have come to perceive SWFs as tools for facilitating autonomy and sovereignty. If we look at those SWFs that are still in the early stages of creation, we can see this clearly: the former President Mohamed Nasheed of the Maldives saw the creation of an SWF, if fanciful, as a tool to buy new land and move his country’s people should the Maldives end up totally submerged due to climate change.13 In addition, some subnational governments have come to see SWFs as tools to facilitate their independence (i.e., autonomy). For example, Greenland recently set up an SWF for the purpose of facilitating independence from Denmark. Likewise, Scotland mooted the idea of an SWF to facilitate independence from the United Kingdom. Even South Australia’s Commissioner for Aboriginal Engagement, Klynton Wanganeen, saw an SWF as an innovative tool to help Aboriginal communities support themselves instead of relying upon government welfare (for more examples, see table 2.1). Viewed in this light, SWFs are perceived by some policymakers to be a means of insulating completely against the outside world; the SWF is seen as a tool to allow the state sponsor to continue with institutions, plans, or policies that, in a totally open and competitive world, would be suboptimal. So, the SWF promises a powerful form of protection from the depredations of the global economy. As we saw in the previous discussion, crisis can come in the form of a commodity price collapse, a mortality improvement, a diminishing tax base, or even a currency crisis (among other things). These crises can be a sudden jolt or simply a jolt of realization that some factor has evolved into a problem. Whatever the case, an SWF is theorized by the sponsor as a buffer against the risks to autonomy and sovereignty in a global economy.

27

28

Chapter 2

Conclusions

In explaining the establishment of SWFs, this chapter has emphasized the costs and consequences of globalization for nation-­state sovereignty. We combine ready-­made observations about the nature of global economic integration and financial market performance with the concern expressed by many countries’ political elites about the problematic nature of nation-­state sovereignty in a globalizing world. At one level, SWFs are conceived to be a desirable bulwark against the depredations occasioned by globalization—­a means of protecting nation-­state institutions and commitments from the economic and financial imperatives that drive the discounting of those institutions and commitments. At another level, however, SWFs seek, more often than not, a premium on nation-­state resources, especially those that can be transformed into financial assets available for investment in global financial markets. To explain the development of this particular institution, we have relied upon insights and conceptual tools developed by institutional theorists from across the social sciences. Here we linked together observations made about the changing relationship between markets and states in the context of globalization with a more general conception of institutional innovation and the forces behind the innovation process. At base, we have argued that institutional innovation is either chosen or pushed upon policymakers by virtue of the discontinuities and disjunctions associated with globalization. Most importantly, we distinguish between the institutional framework or structure of society and the particular organizational forms that realize the goals and objectives of institutional innovation. So, for example, we suggest that the imperatives driving the establishment of SWFs are profound in that they represent a sustained challenge to the integrity of many countries’ established institutional frameworks. By this logic, SWFs are an expression of global economic integration and the long-­term realignment of geopolitical power associated with finance-­led market capitalism. There is a further point to be made about institutional innovation and the particular organizational form of SWFs: more often than not, SWFs match, mimic, or approximate the management structure and governance practices of Western institutional investors. SWFs are thus modeled on a distinctive type of financial institution readily identified in global financial markets. In this respect, SWFs are not just the expression of states’ interests in protecting themselves from the depredations of globalization; they are also a distinctive type of organization whose principles and practices are derived from the theory of financial investment. Indeed, SWFs are the institutional expression of the creeping financialization of nation-­state policy and its implementation (Helleiner 2009).14 The SWF is thus an expression of the hegemony of finance as the single most important organizing principle behind the latest stage of capitalist development.



The Rise of Sovereign Wealth Funds

As such, SWFs exist at the intersection of globalization, financialization, and the forces of convergence/divergence driving nation-­state politics and policies. In this respect, the idea that SWFs are the chosen means of protecting national sovereignty is quite inconsistent with the argument that the world is, and remains, a mosaic of different countries sustained by path dependence and tradition—­the logic underpinning the political scientists’ commitment to “varieties of capitalism” and economic geographers’ commitment to path dependence. Indeed, these funds suggest that alternative conceptions are warranted.

29

3 Rethinking the “Sovereign” in Sovereign Wealth Funds

The recent global financial crisis has seen the reemergence of states as important arbiters of the prospects and direction of capitalist economies. With a near-­total collapse of private demand and major turmoil within the financial economy, governments from both developed and developing economies have been forced back to insurers (or saviors) of last resort seeking to cushion the blow of volatile financial markets and speculative excess. For some commentators, particularly those fearful of any sort of government intervention in private markets, the reaffirmation of the state’s role in smoothing the economic prospects of the nation-­state foretells the reemergence of state capitalism (Bremmer 2010). Indeed, many believe that this form of capitalism will replace what was thought to be a global political economy set on a trajectory of increasingly unfettered markets. Such concerns are further exacerbated by the accelerating importance of emerging-market countries in the functioning of the global economy. In particular, China has inspired Western concern due, in large part, to the nebulous boundaries between China’s state apparatus and the market (Jacques 2009). While fiscal rectitude will undoubtedly dampen state dominance in many countries, particularly in North America and Europe, the reappearance and, indeed, emergence of government actors is revelatory of the continued significance of the state in contemporary global capitalism (Skocpol 1985). The continuing importance of this state-­market relationship is demonstrated by the rise of SWFs.1 As an empirical object, SWFs offer a unique and powerful lens for studying the changing dynamics of contemporary capitalism, global economic integration, and state sovereignty; they challenge claims that presume a strictly bounded territory separated from an outside world that is implicit in classical accounts of both the national political economy and national state sovereignty (Agnew 1994; Lake 2003; Taylor 1994, 1995). The pervasive nature 30



Rethinking the “Sovereign”

of globalization over the past fifty years has changed both how sovereignty—­ the quintessential form taken by political authority –­operates in practice and how the global economy is structured and differentiated (Agnew 2005). In this chapter, we ask what is the “sovereign” in SWFs? More specifically, how can we interpret the SWF phenomenon without succumbing to classical notions surrounding the territorial status of sovereignty and of political economy (Brenner 1999)? The first section provides a discussion on sovereignty in theory and in practice, and in relation to SWFs; it also includes a theoretical grounding for the primary contribution of this chapter in the second section. This is a stylized typology of SWFs in relation to the state and its sovereignty. It comprises five ideal-­types: postcolonialist, rentier, productivist, territorialist, and moralist. This typology does not seek to replace the more conventional classifications or typologies of SWFs based on their source funding or the explicit a priori objectives of the sponsor (outlined in chapter 2). Rather, it is historical shorthand designed to provide an understanding of the long-­term significance of SWFs and the factors that might underpin further development of new SWFs in different countries. We illustrate the different typologies with reference to different SWF cases in the following chapters of the book. Conceptions of Sovereignty

Before presenting our typology, we begin with a set of assumptions and empirical facts relating to political authority and sovereignty, both in domestic and international terms. First, we assume that the SWF is the product of a political decision by the sponsoring authority. As a result, we assume that SWFs are subject to different preferences, goals, and objectives underlying decision-­ making within their respective domestic authority structures (Moravcsik 1997). Second, we assume that impinging upon these preferences, goals, and objectives are the conditions of a state’s sovereignty in the international system (Berg and Kuusk 2010). We assume that sovereignty is the result of the purposes of states in interaction with one another and that such purposes can involve a broad range of practices and power asymmetries, which ultimately are subject to change over time (Biersteker and Weber 1996). Following Krasner (1999, 11–­25), we see sovereignty as having four different manifestations: international legal sovereignty, Westphalian sovereignty, domestic sovereignty, and interdependence sovereignty. International legal sovereignty relates to the mutual recognition of territorially defined states in the international system. Recognition by other states is important, as it provides both material and normative resources. In effect, it allows states to enter into important international accords such as trade agreements or security alliances, or to secure foreign capital. It can also be crucial in maintaining domestic power and legitimacy for a state’s ruling faction.

31

32

Chapter 3

Westphalian sovereignty pertains to a state’s capacity to exclude external actors and forces from influencing and intervening in domestic authority structures. Fundamental to Westphalian sovereignty is the principle that states are defined by specific territorial boundaries. Domestic sovereignty concerns the organization and structure of political authority within the state and the degree of control exercised by the possessors of power. Such organizational structures can range from power concentrated in the hands of a single ruler, oligarchy, or political party, to power dispersed across various institutions and representative political parties, such as in a constitutional republic. Interdependence sovereignty relates to the ability of the state to control flows across its borders. Such cross-­border movements range from goods, capital, and people to ideas, diseases, and pollution. Fundamental to these four types of sovereignty is the distinction between authority and control (Krasner 1999, 10). “Authority” implies the mutually recognized capacity of states to engage in certain types of activities. While the line between the two is slightly fuzzy, as control and authority can be coterminous, “control” can also imply the capacity of the state to resist or utilize coercion without necessarily possessing mutually recognized authority to do so. Issues of authority pertain exclusively to international legal sovereignty and Westphalian sovereignty, raising questions such as the following: Does a state have the authority to engage in international relations? Does a state have the authority to reject external interference? Issues of control pertain to interdependence sovereignty: can the state effectively control cross-­border movements? And, issues of both authority and control pertain to domestic sovereignty: what are the authority structures extant within a state, and what levels of effective control do they possess? Three Conditions of Contemporary Sovereignty

In the contemporary international system, three fundamental conditions complicate a state’s capacity to exercise authority and control across the four types of sovereignty listed in the previous section. First, the world is replete with significant inequalities in terms of certain states’ power vis-­à-­vis other states (Kingsbury 1999; Jackson 1990). For the most part, equal sovereignty—­broadly defined—­exists only for a handful of states, such as the United States, European states, Japan, China, and a few others.2 Such sovereignty can result from material strength related to military, natural, and industrial resources, but also from ideational power. For those states not sufficiently privileged to possess this status, which includes most of the states in the world, sovereignty is marginalized and true autonomy—­again broadly defined—­is never realized in practice (Inayatullah and Blaney 1995). Despite having international legal sovereignty, such states experience a sovereignty deficit. On the one hand, these states lack sufficient power to resist incursions to their Westphalian sovereignty by more powerful



Rethinking the “Sovereign”

states and/or international institutions, multinational firms, and global markets. On the other hand, these states face inadequate recognition of their internal political authority—­an undermining of their domestic sovereignty—­ especially if they depend on external support for the maintenance of their power and if the claim to that power is a product of colonial design. It is likely also that these states have limited capacity to prevent an erosion of their interdependence sovereignty. Second, there is growing relational sovereignty that complicates a state’s capacity to exercise authority and control (Slaughter 2004; Stacy 2003). This complication arises from a multitude of environmental, economic, and social problems that transcend political borders and are too large for any one state to manage effectively (Lemos and Agrawal 2006). States are therefore more willing to engage each other and coordinate their activities, or at least attempt to do so. States seem more willing, at least out of necessity, to share certain aspects of their sovereignty (Krasner 2004). In effect, states are giving up some of their interdependence sovereignty, which may require incursions on their domestic sovereignty, such as removing the domestic authority’s right to regulate a certain activity. For instance, capital account liberalization and the expansion of trade agreements necessitate that governments cede some portion of their domestic autonomy to the global marketplace. While access to global markets has clear benefits, many states’ economic and social well-­ being has become dependent on, or at least vulnerable to, the behavior of foreign countries and markets (Strange 1994). Third, as Agnew (2005, 441–­2) puts it, sovereignty—­broadly defined—­is often “exercised nonterritorially or in scattered pockets connected by flows across space-­spanning networks,” which, again, limits a state’s authority and control. For instance, more powerful states may exercise control over weaker states not through territorial control but through networked flows, such as flows of capital, goods and services, or international agreements. A quintessential example of this is the U.S. exercise of military security oversight across the globe. At the same time, institutions other than the state, from private to supranational, such as international organizations, non­governmental organizations, or standard-­setting bodies like the International Accounting Standards Board, have been accorded significant authority and legitimacy, which in many cases erodes interdependence and domestic sovereignty of host countries. Ultimately, if state authority is not absolute and authority is not restricted to states, then authority is not necessarily exclusively territorial. We can expand this last point to include the structure of the contemporary global economy, which is made up of a set of complex global production networks—­of both goods and services—­that have come to redefine the global economic geography and its organizational composition (Henderson et al. 2002; Coe, Dicken, and Hess 2008). Such networks are populated by globally dispersed suppliers spread across different countries and regions that produce in accordance with the demands of, and often at the direction

33

34

Chapter 3

of, lead orchestrating firms. The latter are generally large transnational corporations with broad international remits, or they are firms that dominate important national/regional markets. While value is generated and enhanced along the network in varying degrees, a disproportionate amount of value is captured at particular nodes in the network. Some firms or agglomerations of firms in the network may be more adept at extracting value for their shareholders and for the national/regional economy within which they are located. Such firms tend to be those charged with design, branding, and distribution. Ultimately, such activities are likely to be located in only a few places, even if the entire network encompasses a great number of countries and participating firms. Accordingly, many countries and regions may find it challenging to keep up with the vicissitudes of global competition in order to contribute different inputs to a global production network, let alone extract value from that network (Coe et al. 2004; Scott 1998; Storper 1997). Likewise, some countries may contribute significantly to the network but sit at a point where only a fraction of the value can be extracted. In effect, these countries possess a weaker degree of interdependence sovereignty than others, which suggests also that domestic sovereignty may be compromised over time if sufficient value is not captured at the domestic level. This is a very different system of economic coordination and cooperation from that of past periods of industrial capitalism, where value could be more easily captured from the externalities of an economy’s local asset specificity (labor pools, resource endowments, production infrastructure, etc.). Today, different local assets infrequently come together in a coherent productive system. Rather, local assets are increasingly integrated into extraterritorial production systems, which allow foreign actors to assume part of the value creation of, and control over, a particular asset (Phelps 2007, 2008). The Logic of SWFs: Engagement and Resistance

If we accept this expansive and variegated view of state sovereignty, which is subject to various constraints, power asymmetries, and shifting spatio­ temporal patterns, it comes as no surprise that the number of SWFs has been growing rapidly over the past decade. Indeed, the rapid increase in the number of SWFs can be attributed, among other reasons, to the multiple ways in which state sovereignty is currently practiced in world politics. We argue, in this regard, that embedded in SWFs are two complementary logics: engagement and resistance. Similar to how authority and control underlie the four types of sovereignty, the logics of engagement and resistance help us to theorize the purposes of different SWFs of disparate sovereign states and the interests and preferences of the sponsoring authority. While we can agree that engagement and resistance are somewhat coterminous, our conceptualization of the former is more related to processes of involvement, while the latter is more related to processes of maintenance, prevention, and precaution.



Rethinking the “Sovereign”

In some cases SWFs may provide states the possibility of rectifying, or at the very least improving, their sovereignty deficit vis-­à-­vis more powerful states. We consider this action to be a form of engagement. This is a reasonable assessment if we consider that global political power is partly a function of economic power, and financial market power is now a major component of economic power. While most SWFs are not sufficiently large to dictate the shape and prospects of markets, an SWF of even the smallest size can give states access to important political-­economic spaces. For example, a single, albeit large, investment in a firm of strategic importance by an SWF could provide entrée into a given economy’s political leadership.3 Moreover, as that SWF builds ownership positions in the “advantaged markets” of powerful states, the latter will inevitably take the former more seriously, in business as in politics.4 This new-­found access to different sites of power changes, invariably, a state’s sovereign status—­broadly defined—­on the world stage. Moreover, such investment can partially realign the value component of those asymmetries across global production networks by providing a disadvantaged country with some ownership over the advantaged country’s domestic assets and the profits that arise therein. In effect, this measure counteracts the deterioration of a country’s interdependence sovereignty, providing beneficial effects as well for domestic sovereignty (i.e., preserving domestic power structures). With regard to the latter effect, this issue highlights the coterminous logic of engagement and resistance. SWFs also may be increasingly important in the context of an emerging relational sovereignty. While sovereignty may be divisible, it is not necessarily inclusive. As such, some states may be left out of those spaces where ­sovereignty is shared (Beckfield 2003). Yet, for states intent on participating in these spaces of power, an SWF may be an important entrée and increase the state’s capacity to engage. This is particularly evident in the contemporary era, as many social, economic, and environmental problems require significant financial resources for their management. For instance, at the beginning of the financial crisis in 2007, SWFs were seen as potential sources of liquidity to prevent the financial system from collapsing, and in 2010 they were involved in the climate negotiations in Copenhagen. The latter example suggests that SWFs may provide a qualitative enhancement to a state’s international legal sovereignty, limiting more powerful states’ derogation of their commitments to mutual recognition in the international system. In contrast to providing a source of engagement, SWFs can also be utilized as a form of resistance. As intimated, SWFs may provide a source of protection for domestic sovereignty, protecting fragile political mandates while also limiting external interference. As a result, the SWF may further Westphalian sovereignty. We can see this precautionary resistance in SWFs derived from the accumulation of excess foreign-­exchange reserves, which have become particularly apposite to developing Asian economies. It has been argued that

35

36

Chapter 3

the accumulation of reserves, which are then redeployed through SWFs for higher returns, serves the purpose of resisting potential incursion by multilateral financial institutions—­particularly the IMF—­that intervene accompanied with harsh conditionalities in the event of a balance-­of-­payments crisis. Again, this protects both Westphalian and domestic sovereignty. Typology of SWFs

SWFs have been categorized in various ways over time. As noted earlier, one commonly used typology is based on the SWFs’ source of funding. Reserve investment corporations, commodity funds, and pension reserve funds are all types of funds that call to mind the source of capitalization underpinning the SWF. Other analysts have sought to categorize SWFs according to their stated objectives, such as a heritage fund that saves for future generations. While we accept that sources and objectives offer a useful technique for differentiating among SWFs, we would suggest another metric for categorizing these funds. Specifically, we propose that SWFs can be differentiated according to the role they play in sovereignty and what underlies their claims to legitimacy within their respective nation-­state. Before illustrating our typology, we should note that the different categories below are not mutually exclusive. Our typology is a form of historical shorthand for understanding SWF development as related to state sovereignty. Indeed, some SWFs and their sponsors may possess traits of one or more ideal-­types but still fall largely within a particular category. Therefore, we are unwilling to make claims to the strong path dependence of a particular SWF and its state sponsor. We also should articulate that the sponsors of these plans did not necessarily conceive of SWFs in this manner, even if the role of these funds has grown to include many of the factors discussed in the following categories. Postcolonial SWF

Many postcolonial states are portrayed as weak—­lacking, for instance, the capital and instrumental power of stronger more developed states. While such conventional discourse can be challenged for its inherently Western conception of what constitutes a strong sovereign state (see Sidaway 2003), this does not neglect the fact that postcolonial states still aspire to posses the same sovereign status—­again broadly defined—­of more developed states. Given that many postcolonial states occupy marginal positions within the global division of labor, strengthening their sovereignty has been a focal point of their individual and collective diplomacy. This can be seen readily in postcolonial states actively participating in the organs of global governance, even if their power remains marginal (Beckfield 2003). Such participation is continued acknowledgment of such states’ de jure sovereignty and thus



Rethinking the “Sovereign”

their transition beyond the postcolonial realm. As mentioned earlier, however, for many postcolonial states such aspirations remain unrealized. Part of the problem is that in a global system of 195 countries, postcolonial states, particularly small ones, can be easily overshadowed and homogenized within their broader cohort. As a result, postcolonial states may seek to separate themselves and gain wider reception from more powerful cohorts of states. In effect, they seek to enhance their international legal sovereignty inasmuch as limiting derogation from the principles of mutual recognition. This can also be seen as an effort to construct Westphalian sovereignty. It is by this logic that we conceive of the postcolonialist SWF. As previously intimated, the SWF can provide a state with increased capacity to (1) engage with more powerful states through investment in the markets of the latter, and (2) engage with institutions such as multinational firms or other non­ governmental organizations that may possess significant if not implicit power in the global economy and thus the political sphere. The postcolonialist SWF is a means of increasing a state’s capacity to engage, thus partially improving the country’s perceived sovereignty deficit; it is not, however, a panacea for the state’s intrinsic developmental problems—­inasmuch as they exist—­ that limit the state’s capacity to become a stronger state and a less ­peripheral player in global production networks. In contrast, we conceive of the postcolonialist SWF as serving the function of an engagement tool with outside interests and power networks, with developmental goals residing as a secondary concern. It is through this capacity to engage more powerful interests beyond the state’s borders that the postcolonialist SWF obtains its legitimacy vis-­à-­vis the local populace. To illustrate this conception, see our case study of Singapore’s Government Investment Corporation (GIC) (chapter 6). Before doing so, consider the case of the Petroleum Fund of Timor-­Leste. Realizing sovereignty for Timor-­Leste has been a decades-­long struggle (Kingsbury 2009). As Portugal’s Carnation Revolution in 1974 triggered the country’s process of withdrawal from its colonial possessions, Timor-­Leste unilaterally declared independence on November 28, 1975. However, nine days later Indonesian troops occupied the territory before the sovereignty of Timor-­Leste could be recognized internationally. Indonesian occupation was not welcomed by all of the East Timorese population, which was marked by a continued resistance by guerrilla forces until a U.N.-­supervised popular referendum in 1999 set Timor-­Leste on the way toward independence, which came officially on May 20, 2002. Much of the economic infrastructure of the country was destroyed in the struggle for independence, leaving the country with significant developmental challenges. However, petroleum and natural gas development has brought new wealth to the fledgling country. In 2005, the Timor-­Leste government established an SWF, known as the Petroleum Fund (PF). At the end of 2011 the PF had assets of nearly US$9.3 billion.5 The stated objectives of the PF are to manage the petroleum resources for the “benefit of both current and future generations

37

38

Chapter 3

[and] be a tool that contributes to sound fiscal policy, where appropriate consideration and weight is given to the long-­term interests of Timor-­Leste’s citizens.”6 While this objective is typical of commodity-­based funds, it can be argued that the fund serves to further Timor-­Leste’s efforts to realize and establish its sovereignty in the international realm. Rentier SWF

According to Beblawi (1990), a rentier state is one in which external rents accrue to the government (e.g., sale of natural resources on the global market) and only a small proportion of the population is engaged in the generation of this rent. As a result, the rentier state does not need to tax the population, or, if it does, it demands only very little. This affords a situation where the rentier state is virtually free of the accountability that comes with popular taxation. Furthermore, the rents further strengthen the rentier state’s capacity to effectively bribe certain groups in the population and to quell opposition. This is thought to produce a “rentier social contract,” whereby the rentier state is afforded considerable autonomy in decision-­making. This situation also stymies changes in class structure, which largely consists of a small elite and a large underclass. Ultimately, this ensemble prevents the development of a democratic state, resulting in the persistence of authoritarian or oligarchical regimes (Herb 2005; Karl 1997). As long as the rentier state continues to receive external rents and the economy remains largely inadequate in comparison, the status quo (i.e., the structure and scope of domestic sovereignty) is maintained. Rentier states are most associated with oil-­rich countries in the Middle East (see chapter 8) but are equally applicable to other resource-­rich regions (see, e.g., Franke, Gawrich, and Alakbarov 2009; Yates 1996). For the rentier state, the SWF is the institution that is used to provide long-­term assurance that domestic sovereignty can be maintained and, more importantly, enhanced. Here, the governance and investment strategy of the SWF is important. Once the resource rent is received it can quickly diminish in value if it is not placed in an asset that provides a return above inflation. As the rentier state will not immediately want to spend its resource wealth, it will have no choice but to place those funds in financial markets. On the one hand, the rentier state could simply buy low-­yielding sovereign debt and attempt to maintain at least parity with global inflation. On the other hand, the rentier state could attempt to harness higher returns—­though riskier—­ afforded by other asset classes, such as equities and alternative investments. While providing scope to maintain wealth and thus ensuring the status quo within the rentier state, the SWF can potentially provide a higher return that further increases the rentier state’s capacity to maintain domestic sovereignty for an even longer period of time. It is from this capacity to resist the diminution of power of the ruling elite over the long term that these SWFs derive their legitimacy. More to the point, the fund’s long-­term viability is a function of its utility to the ruling elite. So long as the SWF contributes to stability and,



Rethinking the “Sovereign”

indeed, strengthens the power of the regime, its “legitimacy” in the eyes of the government is assured.7 We can look briefly at two of the oldest SWFs in the world—­the Kuwait Investment Authority (KIA) and the Brunei Investment Agency (BIA)—­as examples of the rentier logic. While Kuwait has a modicum of democracy, the ruling family, the House of Al Sabah, maintains significant power and runs much of the day-­to-­day business of government (Mitchell 2010). What is more, Kuwait remains a classic rentier state, as oil revenue provides roughly 90 percent of government revenues (Al Khouri 2008). The KIA has been a core component of this national identity. Founded in 1953 with offices in London and Kuwait, KIA currently manages roughly US$200 billion. It is hard to view the KIA as anything but a tool of the ruling elite. For example, it is illegal for any member of the government to disclose any information about the KIA’s activities to the general public. Indeed, Clause 8 of Law No. 47 of 1982 regarding the establishment of the KIA explicitly prohibits the disclosure to the public of any information related to KIA.8 Like Kuwait, Brunei Darussalam is a rentier state controlled by the Sultan Hassanal Bolkiah (Saunders 2002). The country is dependent on the earnings produced from crude oil and natural gas exports. The BIA was established in 1983, a year prior to Brunei’s independence from the United Kingdom, with the purpose of increasing the real value of the Sultanate’s excess reserves and diversifying wealth across a variety of asset classes and geographies (Gunn 2008). As the Sultan holds complete executive authority—­he embodies the sovereignty of the country—­the assets of the BIA in effect belong directly to him. As a result, the BIA is extremely secretive; it did not even participate in the International Working Group of SWFs, which is responsible for the much-­vaunted Santiago Principles. Productivist SWF

We emphasized earlier that complex global production networks characterize the production, distribution, and consumption of goods and services in an increasingly globalized economy. Such networks are organizationally complex, transcending and including global, regional, and local economic and social formations. These networks are an expression of the dynamic uneven nature of capitalist development in time and space. Importantly, value-­ capture concentrates at certain nodes in the network. Consequently, while some political economies may appear to contribute significantly to material production within the network, they may extract only a marginal portion of the value created. However, as global financial markets expand the potential ownership participation of those entities and markets wherein the largest part of value is extracted, nominally marginalized, rapidly emerging political economies can make portfolio investments that reduce the extant asymmetries in the network. At the same time, strategic investments can be made in certain activities (e.g., R&D, distribution) that partially reshape

39

40

Chapter 3

the network. These two functions characterize the rationale driving what we term the productivist SWF, which are most associated with high-­growth Asian countries. Productivist SWFs are those that inspire the most vocal protectionist rhetoric in the West, since they are primarily interested in investing in markets where value is captured. Indeed, these SWFs seek out portfolio investment opportunities in jurisdictions, industries, and firms where the value can best be extracted from the network, while also making strategic investments that improve their relative position within the network, or extend their influence and that of their firms within the network to other locations (i.e., taking ownership stakes in production and distribution assets elsewhere). We term these SWFs as productivist because they have a clear developmental (or neo-­mercantilist) logic for the national political economy, one that builds Westphalian and domestic sovereignty and counteracts losses to interdependence sovereignty, while also serving to alter and extend complex global production networks. What is important to emphasize, in other words, is that while the asymmetries of the network are being reshaped and new globally dispersed owners are capturing value, the network is not being dismantled. An example of a productivist SWF is the China Investment Corporation (CIC) (chapter 7). Created in 2007 and originally allotted US$200 billion, the CIC is charged with maximizing the real value of part of China’s staggering US$3 trillion in excess foreign exchange reserves. On the one hand, the CIC is invested across asset classes and geographies, fulfilling the role of the diversified global portfolio investor that seeks to capture the value of global production networks from those leading markets, both developed and emerging, where maximum value is generated. On the other hand, the CIC makes important strategic investments that serve the interests of Chinese economic development. As Haberly’s (2011) networking mapping analysis of CIC investment shows, in the first three years of the fund’s existence it made 100 percent of its nonfinancial-­sector foreign direct investment in the extractive and energy sectors. While the CIC argues officially that such investments are made to hedge against global inflationary pressures, the pattern of investment suggests that they are underscored by national strategic considerations. Equity investments in these firms, which are strongly oriented toward the Chinese market, generally range from 15 to 20 percent, often making the CIC the largest shareholder, sometimes with board representation. These investments also frequently coincide with direct or indirect investment by Chinese state-­owned enterprises. This pattern suggests that the CIC is being utilized, in addition to its role as portfolio investor, as a tool to ensure access to raw materials, as part of China’s broader economic development and energy needs. In other words, the CIC’s domestic sovereignty—­which is what sustains its existence­—­is a function of its ability to advance the national interest profitably. In other



Rethinking the “Sovereign”

words, the CIC’s existence is perhaps more precarious than some realize, as Beijing is asking a lot from this SWF: to beat the markets while also securing assets in the national interest. Territorialist SWF

Despite major advances in free trade policies, governments across the globe are eternally concerned with the competitive pressures these policies place on their firms and their economies (Bhagwati 1988). Most governments try to play a balancing act of appeasing local interests while remaining committed to free trade. On the one hand, as the development of the WTO suggests, governments are reluctant to give up the perceived benefits of free trade and the access it provides their industry elsewhere. On the other hand, however, they are reluctant to allow the market to decide completely on the location of economic activity in the global division of labor, for fear that their interests will be discounted in the global context. As a result, actually existing free trade is still not as pure as free trade in theory, as governments continue to look for novel and surreptitious means of supporting their interests. We are hesitant to call this “protectionism,” as protectionism connotes implicitly the protection of uncompetitive national industry that is unviable in comparison to market standards. In the global economy of today, national industry has largely given way to global industry, which, as we have described already, is networked across political economies. As a result, protecting uncompetitive national industry would seem impractical and ineffective. What governments are more likely to do is to support (which is not the same as protect) particular local interests so as to ensure they remain competitive within the large global production network (Bathelt 2006). This is a process of resisting the deterritorializing aspects of economic globalization—­that is, counter­acting erosion to interdependence sovereignty while limiting potential internal challenges to domestic sovereignty. It is by this logic we conceive of the territorialist SWF. The stated or implicit rationale behind these funds is to support the competitiveness of local firms, both at home and abroad. In many respects the territorialist SWF shares many similarities with the productivist SWF. However, the crucial difference is that the former is specifically a strategic investor. At the same time, we associate these funds with countries that are either highly developed already, or are quickly reaching this status (as illustrated by the China case). The logic of the territorialist SWF is therefore to develop and ensure the continued dominance of local assets within broader global networks of production, R&D, and distribution. Importantly, territorialist SWFs are not likely to support uncompetitive firms and/or parts of the economy. Rather, the territorialist SWF operates on a market logic comparable with strategies followed by successful private equity firms. This market-­based logic is crucial, as it deflects potential controversy, both in international and national contexts, involving government intervention in private markets.

41

42

Chapter 3

We can illustrate this logic through the new French SWF, the Fonds Stratégique d’Investissement (FSI). In 2008 the French government created the FSI with an initial allocation of €20 billion. Ironically, the impetus for this fund stemmed from concerns about other SWFs’ strategic investments in French enterprises.9 The FSI is not a particularly novel innovation for the French government (Dixon 2008). Indeed, explicit dirigisme has long since been an active characteristic of French industrial policy (Levy 2006). While the government has divested much of its investment in nonstrategic industries, the French state is generally unabashedly supportive vis-­à-­vis French industrial interests (Schmidt 2003), inasmuch as the state can be under European competition rules and France’s WTO obligations. The FSI is a product of this positioning in economic governance, making only noncontrolling minority investments. The objectives of the FSI are (1) to support the development of promising small and medium-­sized enterprises that have difficulty in obtaining financing, (2) to secure finance for medium-­sized enterprises that have a high growth potential that can play a catalyzing role in economic development and innovations, (3) to support certain firms in sectors undergoing mutation for the purpose of redeploying industrial assets, and (4) to support the stabilization of capital to facilitate value-­creating industrial projects in large and medium-­sized enterprises that play an important role in their sector. The FSI does not seek to support firms that are not viable. Ultimately, the FSI invests in firms that show potential to support the competitiveness of the economy. In particular, the FSI seeks to invest in those firms that demonstrate certain competences, both technological and in terms of human capital, that are “irreplaceable for the national and European territory.”10 Seeing that the FSI has an explicit mandate to judge investments against competing opportunities provided by market conditions, it is difficult to classify it as a protectionist institution. It is, however, an institution that seeks to create advantage for local economic interests in broader global production networks. Moralist SWF

Intergenerational justice is a major concern for all advanced democracies. While just democracies are concerned with ensuring citizens’ freedom and independence and continually moderating those tendencies that intensify inequalities in wealth, social status, and the accumulation of political power within generations, preserving this basic structure of justice over time requires real saving for successor generations (Rawls 2001, 159). The two most prominent intergenerational justice issues facing contemporary advanced democracies are environmental degradation and demographic aging, which together can have caustic implications for domestic sovereignty over the long term; failure to plan for these intractable problems could result in a loss of domestic authority and control (as suggested by our case study of Australia’s Future Fund; see chapter 4). As such, confronting these issues has become a source of legitimacy for several SWFs. We define these SWFs as moralist.



Rethinking the “Sovereign”

There are logical reasons why an SWF can be an important participant in environmental governance. If regulation is one means of forcing change in corporate behavior, pressure from major owners of corporate equities and bondholders is another potentially effective strategy. As this pressure requires owners with significant capital resources, only the very largest institutional investors are able independently to exact a material effect (Clark and Hebb 2005; Hawley and Williams 2005). The moralist SWF is active in this area, where it is conscious of and considerate to the welfare of the citizens of the sovereign sponsor. Moreover, it also looks beyond its own borders and pro­ jects domestic sovereignty norms for ethical behavior around the world, be it in terms of the environment or anything else (e.g., human rights). For countries with rapidly aging populations, projections suggest that the working population will unlikely be able to afford the necessary transfer payments to sustain the living conditions of those in retirement, even with improvements in productivity. GDP growth will be constrained and will be below necessary levels to counteract higher dependency ratios (Holzmann and Hinz 2005). While not a panacea to the aging problem, prefunding retirement income through investments in global financial markets has the potential to capture some of the value of faster-­growing and demographically younger economies. As a result, there has been a push, particularly in quickly aging European countries, to shift to prefunded retirement-­income arrangements. While much of this investment has occurred through private means, governments are also turning to financial markets to prefund the pending baby boom retirement by establishing pension reserve funds (Dixon 2008). The Norwegian Government Pension Fund-­Global (GPF-­G) illustrates the moralist SWF (see chapter 5). The GPF-­G was established in 1990, initially as the Government Petroleum Fund (GPF), to support the long-­term management of Norway’s petroleum wealth and as a fiscal policy tool. Although the fund has no formal pension liabilities, there is the expectation that the fund will help cover the future public pension costs, hence the renaming of the fund in 2004 from Petroleum Fund to Pension Fund (even if a political decision has not been made as to how and when the fund will be utilized for this purpose). In 2004 stringent ethical guidelines were established for the fund. These guidelines call for the fund to exclude certain companies on the basis of poor environmental, social, and governance standards, and to remain vigilant of the actions of the firms in which it remains invested. With approximately US$572 billion in 2011, the GPF-­G is one of the largest institutional investors in the world. Owning 1 percent of global equities, the GPF-­G has the potential to sway markets partially through passive and active investment strategies. As the fund is invested completely outside Norway, the fund externalizes Norway’s commitment to global social and environmental justice, thus ensuring the fund’s legitimacy vis-­à-­vis the Norwegian people. In effect, the GPF-­G fulfills a welfare function by underwriting intergenerational justice at the local level while attempting to shape social and environmental

43

44

Chapter 3

stewardship at the global level. As such, the GPF-­G has sought to legitimize itself in the eyes of its domestic population (which matters a great deal in democratic Norway) by aligning the fund with “pensions” (not petroleum) and investing the assets in the fund in line with societal expectations. Without this moralist approach, this fund’s existence would be in jeopardy. And it is important that this fund be maintained, as it offers the country a degree of surety that its domestic sovereignty will be safeguarded over the long term. Conclusions

The global economy is no longer a mosaic of competing nation-­state economies (Scott 1998). Geography still matters, but the production of goods and services is increasingly networked across nation-­states, concentrating in different regional agglomerations. What is more, the expansion of financial markets has increased the opportunities for distant investors of different persuasions to capture value from those nodes in the network where value is most easily extracted. While this economic globalization alone undercuts and/or redefines Westphalian, domestic, and interdependence sovereignty, states are increasingly sharing sovereignty, both with other states and with supranational and nongovernmental institutions. International legal sovereignty may purport to offer states mutual recognition in the international system, but inequality and marginalization of weaker states’ interests pervades the empirical record (Krasner 1999). Sovereignty—­ broadly defined—­is not a condition that exists out of the state of nature. It is, rather, a condition in a constant process of becoming, subject to normative interests and the distribution of economic and political power in the international system, coupled with the interests, preferences, and objectives of domestic power structures. In this respect, the SWF provides a tool for both engaging and resisting changing phenomena at the heart of this process. In other words, the SWF plays on both the deterritorializing and the reterritorializing logics of globalization, both political and economic, and on state sovereignty. The typology we have presented is an attempt to take seriously these deterritorializing and reterritorializing logics of globalization and state sovereignty. From an inductive logic we have tried to make the typology sufficiently large to capture different characteristics among SWFs and their respective state sponsors, while resisting the urge to provide ever-­greater nuance that would reduce our capacity to group SWFs in an ideal-­typical fashion. Inasmuch as we imply mutual exclusion among different categories, we prefer a slight fluidity among different categories. While this may detract from the generative value of our typology for theory development, the emerging empirical record is one of dynamic SWF development. For instance, many SWFs that we might classify as rentier, such as Abu Dhabi’s Mubadala, have adopted strategies



Rethinking the “Sovereign”

similar to territorialist SWFs of developing local competitive capacity. In the process, the economy and society of the sponsor is becoming more open to external influences. Whether this will result in upsetting the authority of the rentier state is uncertain. The point to draw from this analysis, however, is that SWFs can be utilized in different ways, even if the underlying rationale (e.g., sustaining the power of the elite in the rentier state over the long term) remains the same. In sum, SWFs have a broad relevance for the global economy and the evolving nature of “sovereignty” in the era of globalization and financialization. They reflect the recognition on the part of nation-­states that their economic and social well-­being has become dependent on, or at least vulnerable to, the functioning of foreign markets and the behavior of foreign countries and firms. In some cases, this has resulted in a sovereignty deficit, which, in turn, has necessitated the need for new tools of engagement with the outside world. Indeed, in the face of capitalism’s creeping intrusion on the territorialized state and economy, the SWF represents a powerful state-­led response to hold onto sovereignty in this new deterritorializing/reterritorializing space. Accordingly, the highest levels of political authority are today using financial power for the preservation of sovereignty, as well as for the expansion of their sovereignty abroad. SWFs are used, in effect, as complementary actions of resistance and engagement. In a manner of speaking, then, the rise of SWFs is symptomatic of a new economic and political reality; they demonstrate that twenty-­first-­century global capitalism favors the holders of financial assets over simply the domestic institutions and macroeconomic circumstances of Western countries.

45

4 The Virtues of Long-­Term Commitment: Australia’s Future Fund

Debate over the significance of SWFs has focused, in part, on the geopolitics of investment: the extent to which SWFs are the instruments of their sponsoring nation-­states with certain geopolitical goals and objectives. That these interests are expressed, or may be expressed, through investment, given the financial crisis affecting many Western advanced economies, is cause enough to give life to political anxieties in the target or destination states. When coupled with nations’ strategic interests in gaining control of increasingly scarce resources including raw materials, it is little wonder that the governance of (distant) sovereign funds occupies the front pages of newspapers and websites around the world. As we have suggested in previous chapters, at issue is the legitimacy of these funds notwithstanding claims that they should be treated as any other investment fund. In this chapter, we begin our case studies of SWFs. However, instead of immediately focusing upon geopolitics, we elaborate on the issue introduced in the previous chapter: that is, the sovereign interest of the national sponsor emphasizing the design and governance of the AUS$100 billion Australian Future Fund (FF). We do so for two reasons. First, we seek to demonstrate that SWFs come from various types of countries, including parliamentary democracies. Second, we also use the case study to explain the significance of “domestic” considerations, emphasizing that not all SWFs are about geopolitics whether by design or effect. In fact, our case study of the Australian fund along with that of the Norwegian and Singaporean funds (chapters 5 and 6) suggests that the legitimacy of such institutions may be deeply embedded in domestic political considerations, especially in regard to the long-­term welfare of society. As such, this case study is an exemplar of sovereign interests in promoting long-­term intergenerational equity (in the terms introduced in the previous chapter). In that respect, the FF is a clear example of what we term a moralist SWF. 46



Australia’s Future Fund

It is argued that the FF is representative of two interrelated commitments made by its political sponsors. At one level, its long-­term mandate is framed by a commitment to intergenerational equity, which requires it simultaneously to manage competing claims for the spending of government revenue while conceptualizing what is meant by “the long term.” This frame sets the terms for understanding the purpose of the fund, and in so doing takes advantage of political support for the policy while effectively neutralizing opposition within and without the governing coalition.1 At another level, the government made a commitment to international best practice in the governance of the institution, thereby leading other similar institutions around the world and reinforcing its commitment to the overriding purpose of the fund. These moves are argued to have been strategic in that they represent choices made with respect to competing political claims but are underpinned by a principled approach to the inevitable claims and counterclaims for short-­ term political advantage. By this account, the fund’s strong score on disclosure and transparency is owed less to a concern that it be accorded international respect for its independence and professionalism and more to a realization by its founding political sponsors that, if successful, the fund could become a target for domestic political opportunism in regard to its “proper” investment goals and objectives. The FF is distinctive on a number of counts. While its initial funding was derived from burgeoning global commodity prices, its assets were separated from government accounts and given over to the FF management company before the global financial downturn exacted any claim on the budgetary position of the federal government. In addition, the FF was conceived to be a long-­term investor—­unlike some funds that are silent or ambivalent about their time horizons. The enabling legislation set 2020 and 2040 as reference points for realizing its goals and objectives. An accepted political principle provides the FF with its long-­term mandate even if that principle can be contested. We also show that the formal constitution of the fund reflects a series of choices made about the responsibility and accountability of board members that went beyond conventional expectations derived from trust law and pension plan governance. Recognizing that no parliament can tie the hands of future parliaments, the status and significance accorded to board members suggests that they represent a claim by future generations on current public policy—­the sponsors of the FF hope that board members will act as a more effective bulwark against short-­term expediency than would pension fund trustees (Clark 2009; Shiller 2002). These arguments are illustrated in a number of ways and refer to the choices made about the nature of investment and the exclusion of certain modes of investment that could confer upon board members significant political powers. Two caveats ought to be acknowledged from the outset. The first concerns the account of the motives underlying the conception of the FF. There are, no doubt, other ways of writing the story that dispute the significance, for

47

48

Chapter 4

example, of intergenerational equity. Likewise, whereas our story tends to treat the government of the day as a responsible custodian of the future, it is conceivable that the government was simply lucky rather than deliberately forward thinking in its economic policy. Secondly, this chapter is about the principles of institutional design in relation to long-­term investment. There remain, nevertheless, significant issues to be resolved if the value of the FF is to be realized over the long term. The chapter is less about performance before and after the global financial crisis than it is about the preconditions for effective long-­term performance in the face of political temptation (see Lerner, Schoar, and Wang 2008). Temptation, Principles, and Practice

As noted in previous chapters, the growth and increasing significance of SWFs can be seen as an expression of marked global imbalances between the West (favoring consumption over savings) and other resource-­rich, trade-­ rich, and exchange-­rich countries (favoring saving over consumption). Of course, there are significant differences among the various types of SWFs according to their sources of funds, the extent to which they are representative of long-­term structural imbalances, and the degree to which nations that have benefited from trade have captured the generated wealth in SWF institutions (see Eichengreen and Park 2006). Some countries have simply spent resource wealth whether for domestic political advantage or because of a pressing interest in maintaining fiscal commitments in the context of uncertain economic growth (arguably the case in the United Kingdom with respect to North Sea oil and gas tax revenues). Equally, the accumulation of national wealth can be seen as a result of the incorporation of countries’ economies into global commodity chains, trade, and exchange. Whether prompted endogenously or through the process of corporate off-­shoring and outsourcing from advanced economies, global economic integration over the past decades has greatly benefited Asian, Latin American, and (to an extent) African countries (see Grossman and Helpman 2005). For some countries, though, there have been significant problems associated with absorbing the wealth generated by trade recognizing the small size and immature nature of local market institutions. Concerns about national macroeconomic stability have also encouraged the formation of SWFs—­in effect, SWFs became a means of keeping assets from overwhelming local markets. It is not surprising, in this context, that offshore investment in the developed financial markets of the West was a favored strategy. In other countries, the burgeoning export of commodities was associated with windfall rents on nonrenewable resource endowments, rather than being seen as a reward for policies favoring long-­term labor productivity, investment, and development. The countries fueling the growth of China



Australia’s Future Fund

and India, the oil-­rich countries of the Middle East, and the staging posts of global trade arguably fall into this category. As noted below, policymakers from these states were very conscious of the contingent nature of these enormous windfalls; they could scarcely believe their luck and were wary about the predictability of such flows of earnings. As the global boom became a bubble, however, nation-­states that benefited from burgeoning global trade began to integrate optimistic revenue projections into governments’ recurrent revenue and expenditure plans. For some, especially those with a legacy of underdevelopment and a political culture of authoritarianism, dependence on such foreign earnings could come at a heavy price. For a number of countries, then, policymakers have faced a dilemma: they can treat foreign earnings as recurrent revenue but suffer the political consequences should the bubble burst (or when it bursts), or they can park the assets in special-­purpose long-­term investment vehicles but suffer the short-­ term political costs of ignoring the claims of entitlement by organized domestic interests. In modern democracies, which are subject to the ups and downs of electoral cycles, the short-­term political advantages of spending windfall earnings are readily apparent; it is also apparent that the beneficiaries of long-­ term investment are often not represented in the political process. Put more formally, the democratic political process heavily discounts the future—­the discount rate being the product of the length of the political cycle, the degree to which sectional interests underwrite the power of governing parties, and the synchronization of the political cycle with the economic cycle (Persson and Tabellini 2000). Managing temptation against long-­term commitment is one of the staples of political theory and philosophy and was discussed by the ancient Greeks as the tension between passion and reason (see Slote 1989 for a modern treatment).2 It is also apparent that conventional economic theory discounts the future, denying the relevance of sunk costs, thereby reinforcing the predilections of politicians in favor of short-­termism. In part, the choice of a high discount rate reflects rather simple-­minded assumptions about how people properly behave—­generalizing from everyday behavior to issues large and small that can be shown to have, nonetheless, long-­term consequences for their children and grandchildren. Equally, some analysts have argued that a commitment to the future is too vague and implies a historical contingency to behavior that runs against the grain of current methods of economic optimization (as evident in the economic debate over pricing climate change and the proper weight attributed to the future; see Schelling 1996 and Stern 2007). Laslett (1979, 40) captured this sentiment in the following statement: “[T]ime present is always sovereign, in respect to what is gone by, and of what is still to come.” The degree to which the costs of short-­termism loom large depends, in part, on the degree to which political elites expect to be directly accountable when these costs come due. In effect, they must find robust and convincing

49

50

Chapter 4

ways of separating the short term from the long term, such that the latter does not, under pressure, always collapse into the former. At one level, this problem can be seen as an issue of rhetoric—­that is, an issue of convincing political constituencies that the favored solution is plausible and beneficial to future generations (as suggested by Wolfe 2008). For some analysts, rhetoric is naturally associated with hypocrisy, in that any such solution involves in some form or another duplicity or worse. At another level, though, skepticism is the natural antidote to political hypocrisy—­in effect, politicians must mobilize constituents’ interests in ways that evidently govern their self-­interests, while holding out a solution to acknowledged temptation on both sides of the equation (Runciman 2008). Noting temptation, Nozick (1993, 10, 5–­6) points to the advantages of a principled approach to political decision-­making: “principles constitute a form of binding” ourselves to the future and are especially effective when chosen principles are characterized by “generality, no proper names, and no positional predicates.” A freely chosen principle that transcends the specific claims of an individual or a group, as well as the exigencies of the moment, will have the legitimacy to “constrain the influence of undesired or irrelevant factors” (p. 7) in favor of a commonly accepted goal or objective. If long-­ term investment is legitimated with reference to a principle or overriding goal that transcends the claims of special interests, such a principle may effectively “constrain” the temptation of giving in to claims for current consumption. For Nozick, not only was this logic a normative proposition about the proper role of institutions; but it also reflected the customary practice of many people self-­conscious about the (self-­defeating) costs of temptation (Schick 1997). Of course, a principled approach to governing temptation can be accused of being overly abstract and effectively empty when faced with the real world of reciprocal relationships (Blackburn 1998, ch. 4). Nozick observed that a principled approach to governing temptation depends upon four strategies or practices. In the first instance, the choice of an overarching principle must be justifiable. That is, it must be explained and debated so that whatever residual disagreement remains is effectively neutralized (if not denied) when implemented. In the second instance, the chosen overarching principle must be recognized as such, becoming a reference point for public discourse, thereby being accepted as a reason to trump the claims of special interests. Third, policymakers must be shown to have made a commitment to the principle, thereby translating often distrusted political rhetoric into accepted policy practice. And fourth, there should be clear instances of adherence to the principle, such that the public comes to expect it to govern behavior (their own included) when dealing with the relevant issues.3 In what follows, it is suggested that the political sponsors of the FF invoked a principle-­based approach to the establishment of the fund. They did so cognizant of latent political support among core supporters of the



Australia’s Future Fund

governing Liberal Party for managing the looming costs of an aging society, while recognizing the pressures within the governing coalition and the incentives faced by the Labor opposition to distribute the windfalls due to trade and privatization for short-­term political gain. The government did so in a strategic manner. But by adopting a principle-­based approach, it gave life to Scanlon’s (1998, 191) argument to the effect that the social contract that binds people together now and in the future is based on “principles which no one could reasonably reject.” This strategy was conceived in the context of pressing macro­economic issues and was implemented through a fund governance regime that promises to hold the government of the day accountable to the principled approach to policymaking. Economic Growth and Macroeconomic Management

Whereas global integration through trade and exchange was an integral part of Australia’s post–­1945 consensus in favor of liberalization and market development, it is arguable that geopolitics also played a crucial role in prompting the opening of Western markets to exports from less-­developed economies and to states previously excluded by reason of their alliances with the former Soviet Union and China. The consensus in favor of peace through trade and development was of great benefit to many countries seeking to export to Western markets. Perhaps less expected was the boom and then bubble over the past decade in the prices of some countries’ nonrenewable resources. Peter Costello (2008), the Treasurer of the Commonwealth of Australia over the period 1996–­2007, noted the parlous budgetary position of the government when he assumed office, a shrinking tax base against planned expenditures, and the political difficulties involved in carrying through management of the economy in the face of global economic and financial instability (see figure 4.1 and the accumulation of government debt through to 1997). Against expectations, however, the Australian government managed to return seven budget surpluses through to 2004 (see figure 4.1). Whereas austerity was Costello’s initial budget strategy, by 2001 tax revenue had begun to grow faster than expected on the back of the export of raw commodities such as coal and iron ore to Northeast Asia. So significant was the inflow of tax revenue that the Australian government was able to retire most of its inherited debt by 2004. In fact, the government decided not to retire all its debt, only because of concerns over the consequences of such a move for the efficient pricing of domestic financial securities. Instead of paying down all debt, the government decided to collect its growing receipts into an arms-­ length investment fund—­the FF—­for the stated purpose of funding the costs of unfunded defined-­benefit (DB) pension liabilities associated with federal government civil servants. Even with the closure of the scheme to new

51

Chapter 4

25,000 Federal government cash balance

20,000 15,000 10,000 5,000 0

2006

2004

2002

2000

1998

1996

1994

1992

–5,000

1990

Australian dollars (millions)

52

–10,000 –15,000

–20,000 –25,000

Balance on goods and services

–30,000 Figure 4.1. Australian trade and government accounts (1990–­2008). Source: Australian Bureau of Statistics

participants in 2006, it was estimated that the costs of such pensions will reach AUS$140 billion by 2040. The governing Liberal Party was dependent upon a coalition with a small party based upon rural interests for its majority in the House of Representatives and the passage of legislation through the Senate. In addition, because of competition between the treasurer and the prime minister for power within the governing coalition, and deepening poverty in certain pockets of major cities, responsible national financial management was contested at each phase in the transition from budget crisis to establishing the FF. Notwithstanding the windfall in tax revenue, the government was constrained in spending its surplus revenue for two reasons. When elected, the Liberal government devolved responsibility for interest-­rate setting to the Reserve Bank of Australia (anticipating the U.K. Labor government’s 1997 action). The Reserve Bank proved to be a strong player in macroeconomic policy, willing to increase and decrease interest rates at any stage in the electoral cycle. This “external” discipline empowered the treasurer in dealing with colleagues’ claims for increased government spending given the ever-­present threat of inflation (see figure 4.2).



Australia’s Future Fund

180 160 140

Consumer price index

Index

120 100 80 60

Private housing investment

40 20 0

2006–07

2004–05

2002–03

2000–01

1998–99

1996–97

1994–95

1992–93

1990–91

Figure 4.2. CPI and housing investment (Australia 1990–­2008). Source: Australian Bureau of Statistics

Also important was that the Australian economy is rather small relative to the growth in export revenue; this is not an argument about economic immaturity, but one about the inability of the economy to absorb the volume of exogenously generated wealth. As unemployment dipped to historical lows, as real income began to grow, and as property prices took on expectations of growth well beyond acknowledged shortfalls in supply in regional markets, government saving through budget surplus and the pay down of debt were the obvious options for reigning in burgeoning domestic demand (see figure 4.3). The increasing value of the Australian dollar against the U.S. dollar, and, to some extent, European currencies, did little to dampen domestic demand. In this sense, the creation of an SWF to store excess national wealth may have become government policy for macroeconomic reasons, rather than for achieving the stated purpose of funding long-­term pension liabilities. Here, though, a further issue loomed large. Whereas many countries that created SWFs over the past twenty years did so in the hope that such an institution would also stimulate the development of their financial systems, Australia has had a highly developed financial market with large financial institutions and deep liquidity, provided, in part, by the compulsory second-­ pillar-­defined contribution pension system. From a modest beginning in the mid-­1980s, the growth in superannuation contributions, the returns generated by improving markets over the late 1990s through to the global credit crisis and the concentration of assets in a relatively small number of large cost-­conscious providers saw financial assets grow from 30 percent of GDP in

53

Chapter 4

45,000

Real net national disposable income per capita

12.0

40,000 10.0 35,000 30,000

8.0

25,000 6.0 20,000 Unemployment rate

15,000

Percent

Australian dollars

54

4.0

10,000 2.0 5,000 0.0

0 2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

Figure 4.3. Income and unemployment (Australia 1990–­2008). Source: Australian Bureau of Statistics

1980 to 130 percent of GDP in 2007. Furthermore, anticipating developments in other Western countries, reforms to federal financial regulation through the 1990s, combined with a robust national competition regime, were conceived so as to encourage innovation across the financial sector while protecting against market volatility.4 The FF was not, however, designed to be a lender of last resort should the national financial system be adversely affected by global financial events. In fact, the FF was formed in the context of a sophisticated and growing domestic financial system with unrestricted access to global financial markets (as evident in the growth of global infrastructure investment groups). With an initial endowment provided by government, combining tax receipts with its share of the outstanding stock of the privatized telecommunications company (Telstra), the FF could claim the interest of leading investment houses without dominating the domestic financial system. Moreover, as noted later, its long-­term mandate provided a rationale for investment management rather different from that apparent in the hurly-­burly of the short-­term competition for assets among the large pension providers. With his decision to locate the fund in Melbourne rather than Sydney (the largest Australian city and most significant financial center), the treasurer exercised his residual



Australia’s Future Fund

power over his Sydney-­based rival—­the prime minister—­to reinforce the place of his home city in the global economy. Intergenerational Equity

By this account, the FF was the product of national macroeconomic management, fortuitous global circumstances, and the strategic management of political interests that would have otherwise spent the largesse of economic growth in the highly contested short-­term Australian political cycle. As such, the notional object of the FF—­federal government unfunded DB pension liabilities—­was a debt of convenience rather than the rationale for establishing the fund. In less fortuitous macroeconomic circumstances, it is doubtful whether the government would have been willing or able to sequester such financial resources. As the gathering global financial crisis has come to dominate the Australian economy and government finances, the FF has also become the object of claims made on behalf of current taxpayers to discount the costs of the recession. It is arguable that the legitimacy of the FF was underwritten by a more substantial claim than macroeconomic imperatives and expediency. In an inter­ view, Peter Costello, the previous treasurer, made an explicit link between the Liberal government’s early commitment to intergenerational accounting and the full funding of long-­term federal superannuation obligations, arguing that the expected value of those obligations was such that they would be an unjustified burden on the welfare of future generations. In the first Intergenerational Report (Commonwealth of Australia 2002), produced as a Budget Paper for 2002–­2003 and presented in parliament by the treasurer, the government emphasized the long-­term prospects for Australia in the context of an aging society, declining fertility, and the sensitivity of immigration to economic conditions. In doing so, the government matched concerns expressed by the World Bank (1994) and amplified by other multilateral institutions over the 1990s that current government spending and the expected value of future entitlements may not be economically sustainable. The implications of this proposition for government finances has been used to scrutinize the current funding and long-­term sustainability of countries’ social security and healthcare systems (see Leibfritz et al. 1995; Gruber and Wise 1999). It became an essential reference point for the reform of many countries’ pensions systems, and was especially important in continental Europe (see Clark 2003). In Australia’s case, however, pension reform had taken place in the 1980s with the adoption of a compulsory second-­pillar pension system and a compulsory national healthcare insurance scheme. Nonetheless, three related implications for government finances were drawn from the 2002 Intergenerational Report. First, the management and paying down of current debt was an essential ingredient in planning for the future; second,

55

56

Chapter 4

Australia’s international competitiveness depended on maintaining its reputation as a “lower taxing and spending country”; and third, promoting long-­ term economic growth was crucial if the expected costs associated with an aging population were to be met without impoverishing future generations. The logic of intergenerational accounting is explained in Auerbach, Kotlikoff, and Leibfritz (1999), in their early work separately and together (see Auerbach, Gokhale, and Kotlikoff 1994; Kotlikoff 1992), and is applied to Australia by Ablett (1999). In summary terms, intergenerational accounting applied to government expenditure can be thought to be based upon four principles: transparency, comprehensiveness, discipline, and a distinction between current spending and investment. Transparency refers to itemizing and accounting for the cost of current and future commitments; comprehensiveness refers to a full accounting of all obligations whether “on the books” or not; discipline refers to the political temptations of engaging in spending policies that carry moral hazard; and the distinction between current spending and investment refers to allocating the burden of paying for different types of public goods where the costs and benefits of investment may be distributed far into the future. In their international comparison of generational balances, Kotlikoff and Leibfritz (1999, 85, 99–­100) concluded that Australia, like a number of other countries, faced a “substantial imbalance” favoring current generations over future generations. Foreshadowing legislation establishing the FF, the treasurer in answer to a question in parliament observed that the FF was “designed to fund Australia to meet the costs of the ageing of the population” and “in particular, unfunded superannuation liabilities.” In doing so, Costello invoked a principled approach to policymaking augmented by his hard-­earned reputation for fiscal responsibility over the past decade. Though silent on the specific constituency to which his argument was addressed, it appears that he appealed to core supporters of the Liberal Party, specifically those retired and the baby-­boom generation, who were the beneficiaries of the past decade of rising incomes and house prices. Although the Labor opposition noted that this initiative was accompanied elsewhere in the budget with superannuation reforms and tax concessions aimed at those constituents, the opposition focused on the logic of the initiative rather than antagonize voters, whom it would have to win over at the next election. To emphasize the significance of the initiative, Costello contended that the “Commonwealth’s unfunded superannuation liabilities (were) at the moment AUS$90 billion” and were “expected to grow by 2020 to AUS$140 billion” (Hansard, December 6, 2005, p. 3). These figures were disputed in both the House of Representatives and the Senate. Lindsay Tanner, the Labor Party spokesman on finance, argued in the House that the percentage share of government outlays due to superannuation was just a “couple of points and was not likely to grow to more than 3.5 percent” (Hansard, February 7, 2006, p. 42). In the Senate it was claimed, in fact, that by 2041 these liabilities would



Australia’s Future Fund

halve in value against expected GDP (Hansard, February 7, 2006, p. E18). For Tanner, unfunded obligations could be paid for out of future economic growth encouraged by an FF focused upon “investment in infrastructure” (Hansard, February 7, 2006, p. 48).5 At issue for Tanner and the Labor opposition (which won the 2008 federal election) was whether the establishment of an investment fund would be an effective way of realizing the future value of what they deemed to be windfall gains from the “spectacular boost in commodity prices driven by demand in China” (Hansard, February 7, 2006, p. 48). There were other options, including passing on the initial allocation of AUS$18 billion to a combined federal government employees’ pension fund, thereby using the administrative and investment resources of the existing defined contribution scheme to manage the DB liability. The government, however, sought to distinguish between individual account-­based pension fund investment and the liabilities associated with DB schemes, arguing that the governance of these schemes was not compatible.6 It was also contended that the FF would not perform any better than the long-­term government bond rate, in which case it would be better to use the assets to sustain the infrastructure necessary to realize a higher overall rate of economic growth. The government suggested that the Labor Party’s claim for infrastructure was “code” for pork-­barrel politics. The possibility that FF assets could be subverted by special interests was raised on both sides of the House. For this reason, the government’s enabling legislation excluded the fund from directly owning real assets like property and infrastructure. Nonetheless, the Labor opposition thought that even this provision could be “very easily circumvented” using “modern financial instruments” and suggested that the coalition partners, the National Party, would find ways to raid the fund “for political purposes” (Hansard, February 7, 2006, p. 47).7 Both sides of the House agreed that the governance of the fund was to be a crucial bulwark against political temptation and the means by which the fund’s assets would be properly managed on behalf of future generations of Australians. Time and again, the principle was invoked to frame the terms of the political debate. Best-­Practice Governance

Throughout the passage of the FF legislation, consideration was given to the proper governance of the fund. On this matter the government referred to expert advice received from a number of sources, including the international investment and pension fund consulting firm Towers Watson. This company has led industry consulting on the issue, having recently published research on best-­ practice investment management (see Clark and Urwin 2008a, 2008b). Our research has established a twelve-­point list of criteria for evaluating standards of fund governance, including a set of three issues sensitive to

57

58

Chapter 4

both the size of funds (asset value) and the goals and objectives of the sponsoring institutions (see Appendix). It should be noted, moreover, that while these standards were framed with reference to pension funds, endowments, and related beneficial institutions, the criteria established were intended to apply to a wide variety of investment institutions, including SWFs. The design of an institution for a new function is a rare event. More often than not, institutions, once created, claim new responsibilities, carrying with them the compromises and conditions at the time of establishment amplified or dampened by experience (see, more generally, Roe 2006). In this case, the government took the opportunity to follow industry best practice without the obligation to match or copy established pension funds. The resulting governance framework and management structure have been assessed and scored by a number of commentators. For example, Truman (2008) gave the fund a score of 26.5 out of a possible 33, suggesting that its governance regime was, perhaps, less effective than a number of other similar institutions (such as the Canadian CPPib and CalPERS) but far more effective than other nonpension-­ related SWFs, especially those from Asia and the Middle East. Notwithstanding the recent establishment of the fund, Truman indicated that there were some shortfalls in governance in the reporting of investment activities.8 Scoring is a useful means of institutional comparison. But to the extent that this practice seeks to be all-­encompassing in terms of the criteria used to judge institutional form and functions, scoring tends to weigh equally all criteria regardless of importance. As well, in using a common format for scoring each criterion, the distinctive characteristics of different funds may be ignored, notwithstanding the apparent functional commonalities shared by institutions. More problematic, however, is the assumption that scoring is meaningful without a deep understanding of each and every fund. Using the best-­practice framework developed in Clark and Urwin (2008a) as a reference point, we also scored the FF and gave it a score of 12.9 out of 15, a score that placed it among the very best institutions that we know and have evaluated.9 Using this framework, we emphasize certain aspects of the FF that are innovative with reference to comparator institutions. In the best-­practice framework, elements of “good” governance were arranged under three headings: (1) institutional coherence, referring to the framing of investment decision-­making; (2) people, referring to those responsible and involved in decision-­making; and (3) process, referring to the mechanisms by which investment is managed and implemented. Elsewhere, this framework is developed by focusing upon the role of leadership in rationalizing the management of investment under risk and uncertainty (Clark and Urwin 2008b). For present purposes, we emphasize certain aspects of the three elements of good governance, especially (1) the clarity of the fund’s mission statement (institutional coherence), (2) the size and composition of the fund board (people), the role of board members in relation to the real-­time execution of investment management, and (3) the choice made to manage



Australia’s Future Fund

investment through a network of external providers rather than manage assets internally or through a mix of internal and external management (process). The mandate of the fund was set in the legislation (February 2006) and is found in detail in the first ministerial investment mandate of directions issued in May 2006. As set out in Section 15 of the Act, the “main” objective of the fund is to “enhance the ability of the Commonwealth to discharge unfunded superannuation liabilities,” subject to Section 18 wherein (1) “the responsible Ministers may give the Board written directions about the performance of its (the fund’s) investment functions’’ and (2) in doing so, “responsible Ministers must have regard to: (a) maximising the return earned on the fund over the long term, consistent with international best practice for institutional investment; and (b) such other matters as the responsible Ministers consider relevant.” In the Investment Mandate, the benchmark rate of return was set at Consumer Price Index (CPI) plus 4.5 to 5.5 percent subject to a long-­term asset allocation strategy and an acceptable level of risk “measured in terms such as the probability of losses in a particular year.” A series of conditions were set, including assurance that the fund did not adversely affect the efficient functioning of Australian financial markets. In these ways, the mandate of the fund was set in principle and in practice. The objective was unequivocal and the investment process was given a behavioral logic (maximizing returns), a strategic template (long-­term asset allocation and risk management), and a return target (range of returns). As such, the investment mandate matched similar frameworks found in other countries among pension-­related investment institutions (see, for example, CPPib and MassPRIM; Clark 2008). The mandate also gave clear guidance in regard to avoiding, as much as possible, adverse outcomes that may have political costs for the government sponsor. For example, the board was required to limit yearly reported losses, minimize the effects of its actions on Australian stock markets, and restrict its holding of domestic companies’ stock such that it does not trigger Australian takeover rules and regulations, while limiting its holding of foreign-­listed firms’ common stock to no more than 20 percent. The enabling legislation also established the Future Fund Management Agency, an entity operating within the ambit of the federal government and “responsible for assisting and advising the Board.” This agency is, effectively, the operational arm of the board subject to the direction of the chair of the board as head of the agency. The enabling legislation simply set out the functions of the agency such that Section 75 detailed seven such functions, while allowing for other functions incidental to the performance of those enumerated functions. In terms of its operational role, the board published in November 2008 a statement of objectives regarding the investment approach of the FF Management Agency. Here, five points were made. First, that the agency would emphasize long-­run, total portfolio risks rather than asset-­specific risks (assuming the long run is ten years). Second, the agency acknowledged the limits of relying upon historical data on risk and return, especially over the long term. Third,

59

60

Chapter 4

given the long term, the agency would ensure portfolio diversification in relation to key macroeconomic indicators such as inflation, growth, and market liquidity. Fourth, rather than rely upon asset classes, the agency would use strategies such that asset classes would be the components of long-­term investment. And fifth, the fund would take advantage of its long-­term time horizon in being the investor of choice for third parties. To realize these objectives, the board decided not to become an institution with its own investment capacity (unlike the CPPib) but to rely upon the market for investment management. Board Structure and Responsibility

Perhaps the most important innovation in the governance of the FF came with the size and composition of the board and the government’s conceptualization of its responsibilities: board members were deemed “guardians” rather than trustees. In countries with a strong English common-­law heritage, members of pension fund boards are trustees in that they act as fiduciaries with respect to the interests of beneficiaries. In many jurisdictions, pension fund boards combine representation with expertise—­board members are selected on the basis of the stakeholder group they represent and the expertise they may bring to board deliberations (Clark 2007). In DB plans, this dual role or function can produce quite large boards with rather heterogeneous skills and expertise. In some jurisdictions, the premium on representation in multiemployer public sector plans can result in boards with as many as fifteen to twenty-­one appointed members. Not surprisingly, there can be significant coordination problems with such boards, especially given that large numbers encourage the shirking of responsibilities and grandstanding in deliberations (Clark and Urwin 2008b). In theory, at least, the optimal number of members of boards that rely upon collegial or collective decision-­making is in the order of five to seven with an independent chair (see Clark and Urwin 2008b on the ecology of pension fund decision-­making and Sunstein 2005a on the related evidence gleaned from psychology and organizational theory). As for the FF, the board has six members with an independent chair appointed by the government rather than elected from within the board. The chair was appointed in the first instance for five years, while three board members were selected for an initial three-­year term and the other three for an initial five-­year term. It is anticipated that, if desired by the board members, the group of three appointed for three years will be reappointed. Ideally, the term of appointment will be five years with renewal on the basis of a performance review. Research on the competence and consistency of pension fund decision-­ making suggests that effective investment decision-­making under risk and uncertainty depends on board members’ skills and education (Clark, Caerlewy-­Smith, and Marshall 2007). It would appear that experience without



Australia’s Future Fund

formal training, and general knowledge of the field without task-­specific experience, means that many boards are unable to deal with the contingency of financial markets (see Wagner 2002 on the nature of expertise, and Clark 2008 on the distinctive characteristics of financial markets and the implications for board member expertise). In terms of the Future Fund Act, Act 12 of 2006 (Section 38), to be eligible for appointment as an FF board member, such persons must have “(a) substantial experience or expertise; and (b) professional credibility and significant standing in at least one of the following fields: (c) investing in financial assets; (d) the management of investment in financial assets; (e) corporate governance.” In many jurisdictions, there are no such “qualifications” to be a trustee. Instead, trustees are simply required to act in a prudent manner consistent with common sense.10 In an interview, Peter Costello observed that, all things being equal, board members could come from a variety of states and meet community expectations regarding diversity. Crucial, though, was the expectation that board members would have the presence of mind and independence of thought to stand against the government of the day to protect the integrity of the FF. As acknowledged on both sides of the debate in parliament, governments will be tempted to influence investment decision-­making and siphon off assets for their immediate political advantage. Being appointed a “Guardian” is to stand guard against short-­term political interests, a mandate for behavior that references community norms and expectations and that goes well beyond the requirements of simply being a “professional” (see Clark 2008 on the significance of this type of norm for governing institutions). In a number of ways, the government sought to protect board members from immediate political affect, and sustain their legitimacy. So, for example, the five-­year term of appointment with the prospect of renewal was expected to sever the link with the short-­term political cycle. The required expertise of board members and the presumption in favor of their independence from political commitment was deemed to match the successful reform of the Reserve Bank of Australia initiated by Peter Costello in his first year of appointment as federal treasurer (emulated by the U.K. Labor government with respect to the independence of the Bank of England). The small size of the board, the premium on expertise and experience, and the personal accountability of board members for investment strategy may enable the development of a collective sense of guardianship often missing in large pension fund boards, wherein the competing claims of various represented interests can lead to consensual decision-­making such that dissent is registered by silence or the search for the lowest common denominator (Clark and Urwin 2008b). Crucially, the FF is not a pension fund in two respects. If nominally established to meet the long-­term superannuation liabilities of the closed Common­wealth DB plan, participants in the plan have no claim on the assets of the FF. Their pension entitlements remain a claim on the plan sponsor (the Commonwealth government) and its future tax receipts. The plan is

61

62

Chapter 4

unfunded and is administered as a pay-­as-­you-­go system with the prospect of funding from 2020. As such, the pension entitlements of participants are not reliant upon the performance of the FF. One implication of this arrangement is that risk management is not a function of short-­term and long-­term asset-­liability matching. Risk management is important, but not in the same sense as existing pension plans (Bauer et al. 2006). In this respect, the FF is an investment platform much like the Canadian CPPib, shorn of responsibility for administering the underlying pension fund and focused exclusively on maximizing the rate of return subject to an appropriate level of risk. Equally important is the fact that the FF exists and will continue to exist at the will of the government of the day and ultimately parliament. Time and again in debate it was observed that “a parliament can not commit a future parliament legislatively” (see, e.g, the 7 February 2006 Senate hearings and the exchange between Senator Ursula Stephens for New South Wales and an expert witness; Hansard February 7, 2006, pp. E16-­17). In essence, other than the contractual commitments made by the fund to investment providers, a future parliament could alter the form and functions of the fund and indeed close the fund and claim the assets. By this logic, the responsibility of guardians is a responsibility to future generations of taxpayers to ensure that the best intentions of the government in establishing the fund are honored notwithstanding the legitimacy of future claims that might be made on those assets for other reasons and other uses. Guardians may act like trustees in that they act as fiduciaries. Nonetheless, their commitment is to the future welfare of Australians, not the entitlements of plan participants. Long-­Term Investment

Given the significance of intergenerational equity for the establishment of the FF, it is clear that the fund will be held to account for its contribution to the welfare of future generations of Australians. This is a rather abstract time ­horizon, although the period through to 2040 (the date when the payment of superannuation benefits is likely to conclude) could be thought to encompass two or perhaps three future generations: those born but not yet taxpayers, those to be born through to 2030, and those to be born after 2030. To the extent that the FF enables future governments to release scarce resources for investment in the development of Australia, thereby doing more than simply paying the retirement benefits of retirees, it is also arguable that investment in the fabric of economic development will benefit generations born beyond 2030. More specifically, the long term was formally identified in the government’s commentary on the enabling legislation as 2020 (the likely date when the balance of income and benefit payments is to switch to net outflow) and 2040. The latter date has a degree of certainty because the plan is closed to new members; while benefits may accrue, mortality tables can



Australia’s Future Fund

give reasonable though not entirely dependable estimates about the expected longevity of plan participants. While obviously important, neither the claims of future generations nor the plan’s trigger dates are operational definitions of long-­term investment. In this case, the board, considering the various options, chose ten years as the effective long-­term time horizon for planning investment risk-­adjusted rates of return. Given the short time horizons of Australian super funds, being largely preoccupied with quarter-­to-­quarter returns, it is arguable that the FF has no obvious Australian peers. Its peers are large pension-­related SWFs from other countries. The board also decided to pursue an absolute return strategy subject to an explicit risk-­budget rather than use industry or institutional benchmarks. This issue was debated at length at the board—­benchmarks are standard practice in the investment management industry (Clark 2000; Shleifer 1985). However, it has been observed by industry commentators that benchmarking can encourage backsliding on any commitment to invest over the long term (Shiller 2002). In any event, since the FF relies upon the financial market for investment management, to use yearly or even triannual benchmarks would be likely to reinforce the short-­termism and predilections for churning portfolios observed in the industry. Here, the fund’s risk-­budget is the governing instrument and is set in relation to long-­term economic movements in the desired balance between asset classes. Note: the board is sensitive to short-­ term volatility in fund performance because of the questions that might be prompted about its underlying competence and success. Whether the long term is defined by reference to generations, the onset of expected liabilities, or operational targets, ten years out is a highly unusual time horizon. It is a time horizon sensitive to structural change, technological innovation, and demographic transformation. As such, the implication is plain: if acted upon, investment is about placing bets on the map of global climate change, the winners at the frontier of technology and innovation, and the place of Australia in relation to the global economy. At the same time, the long term is also sensitive to the pace of global economic integration and stability of financial markets. In this respect, a ten-­year time horizon could encompass two or three economic cycles, a boom and bust, and a global crisis. A ten-­year time horizon is also sensitive to the global coordination of economic regulation as well as to the degree to which one kind of regulatory regime for a block of countries may, or may not, be a winning model over other kinds of regulatory regimes. La Porta et al.’s (1997) maps of finance may be a template for fund investment. Whereas the implied scope of a rolling ten-­year investment program is structural and global, it is also entirely plausible that since the fund is one of just a few institutions with such scope of activity, it has, as a consequence, some responsibility for contributing to the realization of long-­term economic and environmental goals. More to the point, in the second Intergenerational Report (Commonwealth of Australia 2007) the government sought

63

64

Chapter 4

to establish a connection between the apparent goal of fiscal sustainability introduced in the first Intergenerational Report, of 2002–­2003, and the “well-­ being of successive generations” which “requires sustainable economic, social and environmental conditions” (2007, 1). If the second report reads as an election manifesto promoted by the treasurer seeking to supplant the incumbent prime minister and win the election on his own account, the extended definition of intergenerational equity is unmistakable. In doing so, the overarching principle legitimating the FF was extended to include long-­term social and environmental conditions—­points of reference not included in the more limited initial financial conception of intergenerational equity. This suggests, however, a rather broader set of responsibilities for the FF than that set in statute and by the Investment Mandate. Whereas it is clear that the long-­term investment horizon of the fund will involve taking bets on the map of climate change, the second Intergenerational Report suggests that the fund has, as well, an obligation to ensure that its investments are “sustainable” in the sense that either these commitments do not harm the prospects of future generations (Norton 1989) or contribute to the cultural and ecological heritage that we pass from one generation to the next (Weiss 1984). If challenging in terms of its scope and implied obligations, long-­term investment involves much more than exploiting the map of opportunities. Indeed, Weiss (1984, 581) suggested that we (the current generation) are the trustees for future generations and, as such, “have a fiduciary obligation to conserve this heritage for future generations.” Few public institutions have both the mandate and the obligation to do so as does the FF.11 It may be argued, of course, that the purpose of the fund was limited to realizing future superannuation commitments. But, as noted earlier, the government invoked the principle of intergenerational equity to transcend expectations that the fund was just another pension fund in disguise. In any event, recognizing the rolling ten-­year investment time horizon, there can be little doubt that investing in structural change may mean, as well, investing in technological innovation conceived to solve or at least benefit from attempts to mitigate the effects of climate change. By this logic, such an investment strategy would be consistent with the past government’s preferred definition of intergenerational equity. But it may have significant consequences for the FF’s investment strategy if the anticipated frontier of innovation results in the long-­term discounting of the value of the inherited fossil fuel economy (the basis of much of Australia’s foreign earnings and the endowment of the FF). Conclusions

In many respects, the Australian FF is the latest institution in a line of similar institutions conceived and designed by Western governments to manage, politically and economically, the windfall benefits of commodity endowments



Australia’s Future Fund

and trade. Compared to the Alberta Heritage Fund, the Alaska Permanent Fund, and the Norwegian SWF, the government sponsor of the FF tackled directly some of the political issues that have bedeviled the effective operation of other, older institutions. So, for example, using a principle-­based approach enables the government to focus on the long-­term, holding at bay the claims of organized groups for a share in current investment earnings. Similarly, barring the direct ownership of real assets strengthens the hand of the FF’s board and management in resisting political claims that the institution should invest in public and private projects deemed important for national development.12 One way or another, its best-­practice governance is an expression of lessons learned from other jurisdictions. It has been argued by some observers that the Australian FF is just a pension fund. This interpretation is encouraged by the legislative goals and objectives of the fund, namely the funding of the unfunded DB pension liabilities of federal government employees. Reference to 2020 as the expected date when the payments of benefits will first outweigh the inflow of contributions, and reference to 2040 as the likely date when the government’s commitments will be exhausted, were clearly important for the government when setting the investment mandate for the fund. Nonetheless, the underlying principle legitimating the establishment of the fund was intergenerational equity and not the government’s obligations to its employees. It was argued here that invoking this principle served two purposes: to sustain the government’s intended meaning of the long term and, thereby, to provide a principled defense of the integrity of the fund in the face of likely political interests in suborning the fund’s assets for other purposes. The principle of intergenerational equity stands against another basic principle underpinning Westminster democracies: that parliament cannot bind the hands of future parliaments. While contracts written in the past must be honored by present governments (or compensation paid to affected parties), parliaments have the right to rewrite and discard past legislation in favor of the policies of the day. In this respect, the FF is more vulnerable than a pension fund to the political winds of change. In many jurisdictions, pension plan participants have, at least, a legal claim on the assets of their pension plan; in effect, their promised benefits or their account balances are “property” protected by statute and common law. In this case, government employees do not have a claim on the assets of the FF. This fact is apparent in the choice made by the government to label board members “guardians” rather than “trustees.” By our interpretation, the government meant to invest the role of its guardians with a higher purpose than that attributed to pension fund trustees. In these ways, the government sought to tame politics and govern temptation. It did so mindful of the short-­term political benefits of spending its windfall from the remarkable burst in revenue associated with the boom in nonrenewable resource exports to China. It did so with the grudging support

65

66

Chapter 4

of the opposition Labor Party, which became the governing party in 2008. Peter Costello was able to enlist their support, in part because of the appeal of the notion of intergenerational equity and in part because of their fascination with the apparent political machinations within the governing parties over the competing claims for spending the money. We argued, though, that the principle of intergenerational equity carries with it a larger scope than the funding of future pension obligations. That is, the principle can be interpreted more broadly than the simple statements of commitment made in the enabling legislation. This is apparent in the rewritten conception of intergenerational equity underpinning the 2007 report. There, fiscal sustainability is joined by social and environmental sustainability, providing a broad rationale for investment. Whether this principled approach to the establishment of the FF will be an effective governing device remains to be seen. Care must be taken not to idealize either the design of the institution or its capacity to realize its founders’ intentions. The global financial crisis, which came almost immediately after the establishment of the fund and the first steps in developing its investment strategy, will be a test of the current government’s commitment to the institution and the degree to which a principle adopted in certain circumstances can hold back or should hold back changing economic imperatives. In crisis, governments have claimed back committed public and private resources—­ witness the Argentine government’s expropriation of the assets of private pension plans.

5 The Ethics of Global Investment: Norway’s Government Pension Fund

A recurrent theme in commentary about SWFs is the global power associated with their vast financial resources and the fear that SWFs may be the strategic instruments of their sovereign sponsor’s geopolitical interests (Aizenman and Glick 2008; Drezner 2008). When an SWF announces the acquisition or intended acquisition of a country’s infrastructure assets, one response is to suppose that behind the assessment of risk and return is an interest in acquiring a strategic foothold that will pay political dividends for the national sponsor in the future. A second, related, theme is about the effective independence of SWFs from national political interests. There is a fear that SWFs may be subject to the latest fad or fancy of their political masters. Best-­practice investment management has it that clarity of mandate and the formal division of authority and responsibility are essential in driving performance over the long term. The Norwegian GPF-­G is not a pension fund in the sense that pension funds normally have designated beneficiaries, are ruled by the principle of fiduciary duty, and have well-­defined time horizons over which they must realize their commitments (Clark 2000). In fact, the GPF-­G is a deposit account with the Norwegian Central Bank: its assets are managed by Norges Bank Investment Management (NBIM), which is, in the first instance, responsible to the bank’s governor and board and ultimately to the Minister of Finance. It neither has an independent board of trustees nor does it hire its CEO and CIO; those employed in the NBIM are employees of the bank and are subject to the bank’s employment policies and practices. Furthermore, NBIM investment is subject to ministry policies, including quantitative rules regarding the allocation of assets as well as mission-­led policies regarding ethical investment that derive from the national parliament. Since the fund is required to invest its assets outside Norway, its ethical investment policies seek to give global effect to national values and commitments. 67

68

Chapter 5

Given the huge size of the fund (approximately US$572 billion in 2011) and the ethics policy whereby the fund may be required to exclude certain companies from its investment portfolio, the process of “naming and shaming” can make headlines around the world. For some commentators, notably Backer (2010), the GPF-­G challenges conventional boundaries between private investment and public responsibility for global social and environmental standards. As such, it is both an instrument of long-­term national welfare and an expression of Norway’s commitment to global justice; hence, we categorize the fund as a moralist SWF. In contrast to other similar funds found in the West, the Norwegian GPF-­G is also enmeshed in the machinery of government and is subject to the play of democratic debate over investment in companies around the world that are deemed to violate widely held national standards. Unlike other similar funds, the GPF-­G is not protected from parliament and public opinion through statutory powers invested in its trustees (as is the case of the Australian FF discussed in the previous chapter). We accept that governments may have a legitimate interest in affecting the nature and scope of the investment of public assets. We also accept that governments may wish to give effect to the values of their citizens through the investment policies of responsible agencies and instrumentalities. These propositions form the background to this chapter: our focus is on the legitimacy and governance of the GPF-­G through the system of agencies and institutions that in sum amount to the pension fund. In doing so, we are most concerned with the process of decision-­making, rather than the fund’s financial performance. This is because we believe that the apparent bipartisan political support for the GPF-­G and its ethical policies relies upon the representation of public interests in investment decision-­making and the accountability of the fund to the responsible minister. In this sense, its legitimacy is reliant upon the political process more than on its functionality, if measured in terms of the risk-­adjusted rate of return. In this chapter, we suggest that the governance of the fund reflects a public commitment to procedural democracy and, in particular, what Estlund (2008, 6–­7) refers to as “epistemic proceduralism”: the notion that institutional legitimacy is a product of the procedures whereby decisions are made and the correctness of those decisions. As Norwegian society came to grips with the discovery of North Sea oil and gas reserves in the late 1960s, the government recognized that this wealth would profoundly distort the Norwegian economy and society. The capitalization of resource earnings in the GPF, which was later renamed GPF-­G, sought to impose discipline on budget planning in a manner consistent with intergenerational equity. If a rational solution to the costs of short-­termism, it is apparent that the application of ethical criteria to investment management transgresses conventional boundaries between professional management and political interest in deliberately integrating global social and environmental standards into the investment process. We seek to show, however, that there



Norway’s Pension Fund

is a tension embedded in this policy. Notwithstanding a recent review sponsored by the Ministry of Finance (2008), there are two separate policies under the banner of ethical or socially responsible global investment. One is focused on corporate governance that seeks to affect the market performance of companies, which are managed in ways inconsistent with long-­term value, and the other is focused on foreign-­listed companies deemed to act in ways inconsistent with widely shared Norwegian expectations of proper behavior. The Ministry of Finance oversees these policies through an unusual model of investment management. If there are costs associated with the Norwegian governance model, we suggest that the functionality of the investment management process is more likely to be associated with political legitimacy than with the efficacy of financial decision-­making. Presumably, any costs associated with this governance system are costs willingly borne by the public, given the significance associated with accountability and the pursuit of shared values in the global arena. In conclusion, this chapter suggests that the opportunity costs of the Norwegian model may be growing as the structure and performance of global financial markets change in ways unanticipated by those who rely upon a historical approach to the issues. Political Legitimacy

The idea that SWFs are the geopolitical instruments of their national sponsors, and the idea that SWFs may be subject to the arbitrary influence of organized domestic interests, are ideas often supplemented with another argument: that investment management is an exacting discipline and should be protected from the general public because of their lack of knowledge and expertise. In part, this is an argument about the costs of ignorance. It is also an argument familiar to many political theorists: some aspects of modern life are so complex and so significant for public welfare that it is far better if informed experts perform these tasks (see, e.g., Sunstein 2005b, 85–­87). In its broadest form, this argument maintains public authority and responsibility while recognizing those matters best delegated to others to manage. At the limit, expert management of the economy and financial markets could be thought essential for effective public participation in the daily life of culture and society. A good example of this argument realized in practice is the current independence of many Western countries’ monetary policy committees. This argument does not always find favor with democrats (see Cohen 2009). Liberal political theorists believe that modern states owe their legitimacy to public participation in the process of decision-­making, whether it be about economic, financial, or social matters. If sometimes cast in populist terms, these types of arguments carry, more often than not, exacting expectations of the public good, including social justice (Cohen 1986).

69

70

Chapter 5

Even so, it is apparent that financial markets are especially demanding environments for public decision-­making, given the prevailing risks and uncertainties that characterize domestic and international markets (Allen and Gale 2007). Periods of market stability may, nonetheless, encourage broadening of responsibility for decision-­making only to be disturbed in unpredictable ways by episodes of market volatility, instability, and crisis. Lessons learned in one period about the theory and practice of investment management may not translate to subsequent periods when both the nature and probability of global financial crises change in unpredictable ways (see Barro 2006 and the lessons drawn for financial governance by Clark and Urwin 2010). Whereas democratic societies may value participation in, or at least public representation on, the institutions responsible for financial management, there may be significant costs associated with policies that favor participation over the timely application of expertise. Elsewhere, it has been shown that the skills of untrained but representative U.K. pension fund trustees were little better than the skills of neophytes (Clark et al. 2007). One implication to be drawn is that the balance between representation and expertise may have to be recast if pension funds are to be effective institutions in the context of market uncertainty. This argument goes against the policies of the previous Labor government, which placed a premium on representation over expertise, supposing that common sense is sufficient to adjudicate among differing expert opinions. More recently, it has been shown that funds that sought through innovation to enhance their performance in the context of the global financial crisis have done so in part by mimicking best practice in corporate governance, where the selection, compensation, and allocation of responsibilities to board members reflects their expertise and their domain-­specific skills (Clark and Urwin 2010). Here, the question of public participation and representation could be resolved by discriminating among those eligible to represent the public interest according to their qualifications. In a similar vein, Estlund (2008) has argued that the principle that Western democracies owe their legitimacy to the willing participation of the public in collective decision-­making is confounded by reality on two counts. Most democracies are complex entities necessarily reliant upon representation rather than direct participation; and in any event, participation is hardly an unalloyed good, given the possibility of poor decision-­making in circumstances that are subject to partisan control of the purpose and prospects of public institutions. He might have also noted that many issues are so difficult to understand and require the skills and expertise associated with domain-­specific knowledge that common sense or a common commitment to the public good are not adequate bases for collective decision-­making. In this respect, it may be the case that the value attributed to common sense in deliberative democracies may overwhelm the best interests of those who stand to benefit (or otherwise) from the collective decision-­making process (see Cohen 2009 with Sunstein 2005b).



Norway’s Pension Fund

In any event, few of us have the opportunity to act in a manner consistent with the tenets of deliberative democracy. One conclusion to be drawn is that implied consent rather than public participation in collective decision-­making is the most common metric of legitimacy (as suggested by nineteenth-­century political philosophers). Therefore, states may owe their legitimacy to the process of representation and the extent to which the resulting actions of governmental institutions have some validity beyond the obvious interests of those involved and the various options considered. For Estlund, validity hinges on the existence of an acceptable moral template for decision-­making that has widespread support if not universal acclaim. While he is properly concerned about the possible tyranny of well-­entrenched minorities, his procedural model of democracy combines a commitment to an open or transparent process of decision-­making with a test of the value of the decision-­making process. It is important to stress, however, that tests of value may be quite broad (in a sense, society must also decide). Moreover, tests of value need not be based on outcomes per se. So, for example, in the Norwegian case it is apparent that the value attributed to ethical standards in the investment mandate of the GPF-­G is, on one side of the equation, a moral value and not a financial issue. That is, the chosen ethical standards signal areas of investment that the public would not accept as part of the GPF-­G investment universe. As such, these standards are not subject to a profit and loss statement. It is also apparent that there is a premium on the transparency and accountability of the process whereby ethical issues are evaluated. In fact, we would argue that the process is more important than any outcome in these circumstances. Put slightly differently, the degree to which the public trusts the process of evaluation determines the degree to which the public takes up the opportunity to dispute resulting ministerial decision-­making. If after the process of assessment and consultation it is recommended not to exclude a company from the GPF-­G mandate, the integrity of the process should be such that even those against the decision may be willing to accede to the decision. We examine the governance of the GPF-­G, beginning with its formation as what was then known as the GPF. We focus on the governance process, including its constituent institutions and the mechanisms of accountability, precisely because the process is a constitutive element of the legitimacy of the whole edifice. As such, the GFP-­G’s claims to be heard on matters relating to ethical standards in the rest of the world are based, in part, on the legitimacy (at home) of the process used to evaluate the ethical standing of identified companies from other jurisdictions. Such is the transparency and accountability of the governance process that the fund scores highly in independent tests of governance quality. We would contend, however, that the impetus for such transparency is more about domestic political legitimacy than it is about the performance of investment management.

71

72

Chapter 5

Establishment of the Petroleum Fund

In 1990 an act of the national parliament (Storting) established the Norwegian GPF (see Backer 2010). The reasons for its establishment are, in retrospect, widely appreciated. One reason references the potential costs of long-­term resource wealth for the structural configuration of any economy that has to absorb such riches. Eriksen (2006) from the Norwegian Ministry of Finance rehearses the argument made by many to the effect that resource wealth may distort the economy, discounting the value of agriculture and industry as well as the benefits of education for long-­term individual human capital and social development. Although not mentioned directly, Eriksen effectively explains the establishment of the GPF as a policy designed to ameliorate the “curse” of resource wealth. As Skancke (2003, 326) notes, the “Dutch disease” can result in the “weakening of international exposed industries” and “substantial restructuring costs and unemployment.” A second reason for establishing the fund was to manage the potential short-­term costs of fluctuating revenues and thereby achieve a certain measure of macroeconomic stability. For such a small economy, the volume and volatility of resource earnings posed a threat to domestic economic stability. This point has been made in a number of other smaller, developed countries such as Australia and Singapore. So, for example, the Australian FF was established, in part, to dampen the flow-­on effects of booming resource prices on an already capacity-­constrained economy. For Norway, the issue of macroeconomic stability was particularly acute because of the significant and sustained increase in public spending based on resource earnings over the late 1970s through the 1980s. The increasing reliance of the public fisc on resource earnings for social welfare threatened to amplify the volatility of international resource prices through the Norwegian domestic economy. Given the fixed nature of public spending when channeled through multiyear commitments, unpredictable foreign earnings can result in accumulated public indebtedness as unfunded government spending seeks to dampen the effects of price volatility. At the time the GPF was established, two political rules were applied to manage the public budget and the flow of earnings to the fund. In the first instance, to constrain the future reliance of government spending on oil and gas revenues, a notional long-­term share of resource wealth was set. In the second instance, to impose discipline on the year-­to-­year budget process, the flow of earnings to the fund was made dependent upon year-­to-­year budget surplus. That is, only in the event of a budget surplus would financial assets be allocated to the fund. For Skancke (2003, 320), these two rules and the fund itself could be “seen as a fiscal management tool to ensure transparency in the use of petroleum revenues.” He contends that policymakers believed that the fund should be closely aligned with the budget process and noted that “a



Norway’s Pension Fund

budget surplus is the only way a government can accumulate financial assets on a net basis.” Fiscal discipline in the face of resource wealth was sustained through a comprehensive financial management process rather than sequestering windfall assets into a self-­governing independent fund.1 Because of the global recession that lasted from late 1989 through the early years of the 1990s, the Norwegian government budget did not return to surplus until 1995, when the first allocation was made to the GPF. Thereafter, reserves grew dramatically. In figure 5.1, the combination of earnings inflows and returns on investment are depicted showing that the fund grew from NOK48 billion in 1996 to just over NOK1,000 billion in 2004, and then doubled in value through the onset of the global financial bubble through to 2008, only to slow in terms of growth in asset value through the consequent downturn. In the first instance, assets were invested in Central Bank currency reserves. In 1998, the government allowed investment in foreign equities with an initial allocation of between 30 and 50 percent (and the equity portion of the benchmark portfolio was 40 percent) of assets. It is notable that the fund is required to invest in traded foreign securities subject to the interplay between strategic asset allocation and actual market performance. We return to this issue in later sections, especially in regard to the implications of such holdings for meeting ethical commitments. In 2006, the GPF was renamed the GPF-­G. The renaming of the fund reflected strategic issues concerning the long-­term economic and financial prospects of the country. Eriksen (2006) observes that by 2005 the petroleum sector accounted for 25 percent of the Norwegian GDP and that the net cash flow of oil and gas revenue accounted for 33 percent of the government’s 3,500

3312 3077

3,000

2640 2275 2019 1784

2,000

1399

1,500

2011

2010

2009

2008

2007

2006

2005

1016

2004

614 609

845

2003

386

2000

1999

1998

1996

0

172 222 48 113 1997

500

2002

1,000

2001

NOK billion

2,500

Figure 5.1. Year-­end market value of the GPF-­G (NOK billion). Source: Norges Bank Investment Management, Government Pension Fund–­Global, Annual Reports 2007–­2011

73

74

Chapter 5

revenue. At the same time, Eriksen notes that both crude oil and gas production were close to achieving their likely peaks in production and that there were some uncertainties over the future scope and size of reserves (depending on the rate of exploration and exploitation). Forecasts of future production by the Ministry of Petroleum and Energy cited by Eriksen suggested that the volume of oil production was likely to decrease by as much as 66 percent through to 2030, and that the volume of gas production was likely to decrease through to 2030 by about 25 percent. Inevitably, net earnings would follow production and the global prices for these resources. By this account, the rate of growth in Norway’s accumulation of wealth was likely to decline as well. As noted in many studies of the spending patterns of Western governments, the aging of the baby-­boom generation and the increasing longevity of each cohort as they age through retirement implies a growing liability against a likely absolute decline in most European countries’ total population (Tanzi and Schuknecht 2000). Norway will be similarly affected by these trends, leading to a twofold growing liability: making good on the costs associated with the retirement of expanding public sector employment and making good on the costs of increasing longevity for those who stand to benefit from these promised benefits. In the context of declining (in relative terms) expected resource revenues and increasing commitments to the retired population, the Norwegian government, like a number of governments, has sought to invest for the future. Skancke (2003) argued that an important purpose of the GPF is to insure the payment of those long-­term obligations and hence protect the welfare of future generations of Norwegian citizens. Structure, Control, and Accountability

The parliament established the status and powers of the Norwegian Government Pension Fund. Therein, a distinction is made between the GPF-­G, which holds the flow of net receipts from Norway’s petroleum reserves, and the GPF-­Norway, which holds the assets and liabilities of the government’s National Insurance Scheme (NIS). Together, the purpose of the fund is “to support government savings to finance the pension expenditure of the NIS and long-­term considerations in the spending of government petroleum revenues” (Ministry of Finance [Norwegian] 2009, 11). Further, the Ministry of Finance is charged with the responsibility for the management of the fund, including its investment strategy, the regulation of investment, and its ethical guidelines. Operationally, the GPF-­G is managed by the Norges Bank through Norges Bank Investment Management (NBIM) and is accountable to the Minister through the bank’s governor and board. Figure 5.2 (effective 2012) maps the various institutions involved in the governance of the fund, including the hierarchical status attributed to the NBIM (manager), the Ministry of Finance (principal), and the Norwegian Parliament (legislator).



Norway’s Pension Fund

Stortinget (Norwegian Parliament) – Act relating to the Government Pension Fund

– National budget – Annual report to the Stortinget

Ministry of Finance – Regulations – Supplementary provisions – Management Agreement – Quarterly and Annual Report – Investment strategy advice

Norges Bank Figure 5.2. Structure, authority, and responsibility. Source: Norges Bank Investment Management, Government Pension Fund–­Global, Annual Report 2008

The ministry has a secretariat dedicated to the management and regulation of the fund staffed by permanent civil servants. There are advisors to the ministry on matters pertaining to the management of the fund including the Council on Ethics (and the reestablished Strategy Council on Investment). Both councils have members appointed by the minister for fixed terms with mandates to advise the government on important policy issues (see the following four paragraphs). So, for example, in 2012 the Ethics Council comprised five appointed members, a staff of eight government employees, and an annual budget of approximately NOK10 million. Appointees to the Ethics Council are expected to be independent experts, with appropriate knowledge of ethics, finance, and economy, of Norway’s international commitments as evident in treaties and conventions, as well as of OECD and U.N. agreements and guidelines. The current council has three professors, two of whom have significant expertise in international law. In summary, “[T]he Council on Ethics provides evaluation (to the Ministry) of whether potential investments in financial instruments issued by specific issuers are inconsistent with the ethical guidelines” (Ministry of Finance [Norwegian] 2009, 12).

75

76

Chapter 5

Unlike some SWFs where government delegates the framing and execution of investment strategy to the designated responsible board, in Norway the government, through the Ministry of Finance and the Executive Board of Norges Bank (the central bank), provides NBIM with a formal Investment Mandate or “rulebook” governing the investment function. As amended (August 8, 2012) the Investment Mandate for the GPF-­G is organized into six chapters with detailed provisions in each regarding the formulation, limits, and execution of investment. Chapter 1, “General Provisions,” provides that “NBIM shall seek to achieve the highest possible return after costs measured in the GPF-­G’s currency basket. NBIM shall make investment decisions independently of the Ministry of Finance.” Nonetheless, this same set of provisions requires the fund manager to comply with the relevant laws and regulations in the markets in which the fund invests. Chapter 2 requires the fund manager to be a “responsible investor,” an “active owner,” and to be deliberate about its environment-­related investments. Chapter 3 specifies the relevant benchmarks for fixed income and equity investments; provides a detailed set of management restrictions, including the appropriate risk factors and management thereof; and specifies a range in which equities may be represented in the overall investment portfolio, as well as limits on counterparty risk, leverage, securities borrowing, fees, etc. Chapter 4 sets out provisions regarding the fund manager’s exposure to real estate assets, including a definition of what constitutes real estate; general limits and constraints; country and sector allocations, return objectives, and so forth. Chapter 5 establishes the limits on counterparty risk, the relevant measures thereof, and the process whereby exemptions are to be reported. Chapter 6 establishes the date at which this mandate becomes effective. The appendices provide further details for each and every requirement. These detailed requirements, definitions, constraints, and limitations are remarkable when considered in light of standard practice throughout much of the global investment management industry. In many countries, the regulation of asset allocation and investment management through rules on asset allocation, risk, and permissible behavior have been discounted and then withdrawn as global financial integration has been deliberately fostered and encouraged by national governments. In a similar manner, most private clients of the global investment management industry simply set mandates based on target rates of return, holding back responsibility for strategic asset allocation in relation to expected obligations or liabilities. Delegation of and deference toward the ruling principles, reducing mandates to very simple terms and conditions, are governed by contract. Rulebooks are now exceptional, even in the largest of financial institutions. The level of oversight of NBIM reflects, however, the significance of the GPF-­G for Norwegian society and its visibility in the political and administrative machinery of government. Furthermore, it represents the premium attached to accountability by government and the Norwegian political culture.



Norway’s Pension Fund

The overarching objective of the Norwegian Government Pension Fund Global is to be realized with regard to long-­term risk factors, including sustainable development whether economic, environmental, or social. Furthermore, the NBIM is required to take into account the consequences of its actions with regard to “well functioning, legitimate and effective markets.” In these ways, the NBIM is required to act as a “responsible owner” consistent with its interest in the long-­term management of its investments (as stated in the NBIM policy document regarding responsible investment, last updated May 2011). Given the systematic use of rules and regulations governing the management of the fund, it is not surprising that there is a set of provisions regarding the nature and scope of responsible investment. In part, these rules focus upon the internal operations of the NBIM; but reference is also made to appropriate international standards and regulations. Being a responsible investor requires being an active owner, involving the use of ownership rights to engage with companies on a worldwide basis regarding their actions and policies. Being a global portfolio investor, the NBIM holds the publicly traded stock of thousands of companies. While there are rules and constraints regarding holding individual stocks (in relation to the volume of outstanding stock, and the market capitalization of such stocks), there is a presumption that the NBIM will draw upon the available research on ESG risk factors and act where appropriate, so as to give voice to the NBIM’s interest in managing idiosyncratic risk while ensuring that its actions are consistent with well-­functioning securities markets. Clearly, there are limits to corporate engagement. Nonetheless, it is noted in the “responsible investor” policy and procedures document that significant holdings (more than 5 percent of outstanding stock) require “special care.” Elsewhere, special consideration is given to “environment-­related investments” (Investment Mandate, August 2012). These risk factors could include, for example, water management, waste management, pollution, energy efficiency, and climate change. In these ways, the fund is required to act in ways consistent with what Hawley and Williams (2005) term as “universal owners”—­institutional investors that, by reason of their size, scope of holdings, and reliance upon well-­functioning markets, set the standards by which other investors ought to be judged. Of course, the fund is more than a responsible investor. As noted earlier, it is also an ethical investor in that the Ministry of Finance, acting on the advice of the Council of Ethics, may require Norges Bank and hence the NBIM to exclude specific companies from the universe of potential stocks available for investment. Much has been written about the Council of Ethics, its mandate, and the process whereby companies are assessed as being “unacceptable” in terms of their contribution to or responsibility for violating human rights, promoting war or conflict, causing environmental damage, fostering corruption, and any other particular issue that represents the violation of some fundamental ethical norm (Guidelines, adopted by the Ministry of Finance,

77

78

Chapter 5

March 2010). Over time the number of companies excluded from the universe of potential investment has grown, covering a wide variety of industries and sectors, including tobacco, weapons production, and minerals and resources companies. If politically contentious, inside and outside of Norway, the process whereby the Ethics Council considers each and every case carries with it a high premium on evidence and deliberation. Furthermore, exclusion would seem to be more about Norwegian values and international commitments than the imposition of a penalty or cost upon specific companies. Importantly, the process of company assessment (to exclude or not) is undertaken by experts independent of the investment process. As such, investment professionals are simply required to adhere to the principles of responsible investment, leaving to others the issues of ethical investment. In part, this division of responsibilities reflects the fact that the Ministry of Finance shoulders the political burden of deciding on the merits of each case in the full glare of the public spotlight. It also represents a desired division of expertise and judgment maintaining a distinction between the world known to and understood by investment professionals and the broader issues of social values and objectives. Note that it would be difficult to show that the exclusion of any individual company would have, or has had, a material impact upon the long-­term rate of return of the fund. In any event, there is a balance to be struck between current societal values and commitments and obligations owed to future generations of Norwegians. Governing Ethics

As one of the world’s largest SWFs, the GPF-­G is widely recognized as a remarkably transparent and well-­governed financial institution. By Truman’s (2007) assessment, based on publicly available information, the GPF-­ G scored 92 out of a possible 100 in terms of its adherence to best practice. In doing so, it came second only to the Alaska Permanent Fund (which scored 94). By contrast, the average score across thirty-­four nonpension funds was 46—­the Alberta Heritage Fund scored just 77 against Truman’s criteria. The GPF-­G has also led the development of the Santiago Principles, arguing for the importance of agreed principles and practices consistent with global best practice. Indeed, international conventions loom large for the GPF-­G: shared principles and practices are referenced time and again in official statements that justify investment decision-­making with an explicit ethical component. If these statements have a rhetorical element, there is little doubt that they are underpinned by broad bipartisan political support (see Runciman 2008 on rhetoric as a substantive commitment). By ministry edict, the GPF-­G is required to keep any individual equity holding to less than 10 percent of outstanding shares. As such, the GPF-­G is always in a minority position, and for the vast majority of holdings its claim



Norway’s Pension Fund

on outstanding shares is less than 1 percent. Nonetheless, in some cases to hold 5 to 10 percent of a company may provide the GPF-­G with considerable power over management, especially if combined with the holdings of other large institutional investors. It is not surprising that “there are concerns reflecting the view that the growing size of SWFs matters and that sovereign fund management may be motivated by non-­economic considerations, deviating from conventional wealth maximization” (Aizenman and Glick 2008, 23). On the ethics issue, however, it is arguable that the principles and practices followed by the Council on Ethics and the Ministry of Finance are such that negative screening and exclusion have the virtues of deliberation and transparency. That is, it is arguable that the process of review, recommendation, and ministry decision-­making is such that the application of ethical principles to GPF-­G investment can claim both virtue and integrity. In large part, the government established the Council on Ethics to deal with a controversial issue: investment in Total, the French energy company with significant investment in Myanmar (Burma), and the ensuing claims that it was complicit in the military regime’s suppression of human rights (see also Chesterman 2008). At the time, there was considerable political pressure on the Minister of Finance personally to direct NBIM to exclude Total from the GPF-­G portfolio. The formation of the council, its mandate, and the appointment of members with acknowledged expertise in ethics and inter­ national law provided the ministry with an opportunity to postpone any decision and deflect claims made on the minister. However, it is apparent that the formation of the council meant that the government could hardly reject out of hand any recommendation. This is recognized by the major political parties, and has been acknowledged as government has changed hands between the parties. From this issue, the Council on Ethics developed a multistage process of review and assessment designed to identify the crucial issues and apply a ­series of decision-­rules that provide for robust and defensible recommendations. The Minister of Finance may ask the council to consider a specific case, and the council may identify an issue and company that it considers significant (given the limits of time, expertise, and institutional capacity). The council maintains a regular scanning process conceived to keep members abreast of the issues on a worldwide basis. Given the various issues and companies identified by the scanning process, the council undertakes research to understand better the significance of the identified issues, drawing upon the enormous flow of information available on the web and from NGOs. As targets for assessment and evaluation are identified, the council limits disclosure of their interest so as to dampen speculation and political maneuvering. Having decided there is a case to be considered, given the terms of the council’s mandate, a factual case is developed, focused in part on the extent to which the company is directly involved in the ethical violation. The last stage in the process normally involves contacting the target company with a view to

79

80

Chapter 5

eliciting a response. Thereafter, the case is formally presented at the council, and the members make their determination as to whether a recommendation for exclusion should go forward to the minister. Over the period 2005 to 2009, the council recommended that a number of companies be excluded. In table 5.1, the companies, the issue that was the basis of a council recommendation for exclusion, and the date of exclusion are summarized. In almost all instances, the minister accepted the council’s recommendation. Note that the companies excluded come from a variety of jurisdictions, although the largest single group comprises U.S. corporations (reflecting, perhaps, the significance of U.S. corporations in the weapons industry and their market capitalization). Here it is useful to emphasize three aspects of the Council on Ethics’ business. The council has limited time, expertise, and institutional capacity. Inevitably, it has had to choose among a large number of possible issues and cases. As noted elsewhere, large companies with recognized names are attractive targets given their public visibility (Clark, Salo, and Hebb 2008). The council is also concerned to distinguish between “association” and “causality”: that is, their case is believed strengthened when it can be shown that the target company has a direct connection with the circumstances giving rise to the ethical assessment. Most importantly, the council sees its recommendations as an expression of the public interest in “proper” behavior, according to the criteria set out in the ethical guidelines. As such, the council is not concerned to affect corporate behavior except in the sense that naming and shaming may prompt companies to reconsider their alliances and management performance (Braithwaite 1989). By contrast, the NBIM’s commitment to global standards of corporate governance seeks to affect the structure and performance of the companies that are targets of actions and campaigns. This can be justified on efficiency grounds, as well as ethics. It is widely accepted that well-­governed firms are more likely to enhance shareholder value (Bebchuk 2005). Equally, it is widely accepted that some governance regimes are more likely to protect the interests of minority shareholders than others, such that reform of the regulation of corporate governance in favor of global best practice is consistent with the long-­term efficiency of global capital markets and the interests of large institutional investors (Gordon 2004). In this context, the actions of the NBIM in exercising the GPF-­G’s ownership rights through proxy voting, sponsoring and supporting shareholder resolutions, and corporate engagement have the virtue of promoting the GPF-­G’s financial interests as well as acting consistently with respect to collective welfare.2 In practice, the NBIM has relied upon international standards of corporate governance to motivate its campaigns for best-­practice corporate governance. In part, this is because recognized international standards allow for coalition ­building among large institutional investors that have a global mandate. In part, these standards allow for third-­party validation of campaigns, especially as events prompt shareholder response to apparent instances of



Norway’s Pension Fund

Table 5.1. Companies excluded from the investment universe by the Ministry of Finance upon recommendation by the Council of Ethics Production of weapons that through their normal use may violate fundamental humanitarian principles Antipersonnel land mines –Singapore Technologies Engineering (April 26, 2002) –Production of cluster munitions –Alliant Techsystems Inc. (August 31, 2005) –General Dynamics Corporation (August 31, 2005) –Lockheed Martin Corporation (August 31, 2005) –Raytheon Co. (August 31, 2005) –Poongsan Corporation (November 30, 2006) –Hanwha Corporation (December 31, 2007) –Textron Inc. (December 31, 2008) Production of nuclear arms – BAE Systems Plc (December 31, 2005) – Boeing Co. (December 31, 2005) – EADS Co. (December 31, 2005) – EADS Finance BV (December 31, 2005) – Finmeccanica Sp. A. (December 31, 2005) – Honeywell International Corporation (December 31, 2005) – Northrop Grumman Corporation (December 31, 2005) – Safran SA. (December 31, 2005) – Gen Corporation Inc. (December 31, 2007) – Serco Group Plc. (December 31, 2007) Sale of weapons and military material to Burma –Dongfeng Motor Group Co. Ltd. (February 28, 2009) Production of tobacco –Alliance One International Inc. (December 31, 2009) – Altria Group Inc. (December 31, 2009) – British American Tobacco BHD (December 31, 2009) – British American Tobacco Plc. (December 31, 2009) – Gudang Garam tbk pt. (December 31, 2009) – Imperial Tobacco Group Plc. (December 31, 2009) – ITC Ltd. (December 31, 2009) – Japan Tobacco Inc. (December 31, 2009) – KT&G Corporation (December 31, 2009) Source: Ministry of Finance, Norway

– Lorillard Inc. (December 31, 2009) – Philip Morris Cr AS. (December 31, 2009) – Philip Morris International Inc. (December 31, 2009) – Reynolds American Inc. (December 31, 2009) – Souza Cruz SA (December 31, 2009) – Swedish Match AB (December 31, 2009) – Universal Corporation VA (December 31, 2009) – Vector Group Ltd. (December 31, 2009) – Shanghai Industrial Holdings Ltd. (March 15, 2011) – Gruppo Corso SAB de CV (August 24, 2011)

Actions or omissions that constitute an unacceptable risk of the Fund contributing to the following: Serious or systematic human rights violations –Wal-Mart de Mexico SA de CV (May 31, 2006) – Wal-Mart Stores Inc. (May 31, 2006) Severe environmental damages –Freeport McMoRan Copper & Gold Inc. (May 31, 2006) – Madras Aluminium Co. (October 31, 2007) – Sterlite Industries Ltd. (October 31, 2007) – Vedanta Resources Plc. (October 31, 2007) – Rio Tinto Ltd. (June 30, 2008) – Rio Tinto Plc. (June 30, 2008) – Barrick Gold Corporation (November 30, 2008) – Norilsk Nickel (October 31, 2009) – Samling Global Ltd. (August 23, 2010) – Lingui Development Berhad Ltd. (February 16, 2011) Other particularly serious violations of fundamental ethical norms –Elbit Systems Ltd. (August 31, 2009) – FMC Corporation (December 6, 2011) – Potash Corporation of Saskatchewan (December 6, 2011) Serious violations of the rights of individuals in situations of war or conflict –Africa Israel Investments Ltd. and Danya Cebus Ltd. (August 23, 2010) – Shikun & Binui Ltd. (June 15, 2012)

81

82

Chapter 5

malpractice. So, for example, the expectation that the chair and CEO of major corporations be separate people with distinct roles and responsibilities has been an important reference point in motivating shareholder actions. Given limited time, expertise, and institutional capacity, the NBIM office tends to focus its voting activities upon the world’s five hundred largest companies, representing approximately 80 percent of the market value of the total equity portfolio of the GPF-­G. Moreover, the NBIM has sought to influence not only individual companies but also whole industries, especially those with distinctive characteristics (e.g., seed producers). The goal is to safeguard the GPF-­G’s financial assets and to add value over the long term, recognizing that investment strategies that rely upon the performance of whole markets typically depend upon regulation and investor vigilance. Recently, the NBIM strategy of active ownership has been revised (by the executive board) and broadened. More specifically, the NBIM focuses upon six areas: the first set of three relates to capital market performance and the second set of three relates to substantive issues, which represent for the fund areas of significant risk regarding safeguarding the long-­term value of the portfolio. The first set of three are (1) equal treatment of shareholders, (2) shareholder influence and board accountability, and (3) well-­functioning, legitimate, and efficient markets. Making up the second set are (4) children’s rights, (5) climate change, and (6) water management. So, for example, protecting children’s rights could involve major corporations that have extensive supply networks through to the developing world. Based upon ILO conventions, the NBIM has sought information on sectors’ child labor practices, the extent of company monitoring of this issue, and disclosure on existing practices and intended policies. As noted elsewhere, these issues can have significant implications for sectors of the economy where value is a product of corporate reputation and consumer tastes. In this respect, reputation can be a significant albeit intangible asset (Clark and Hebb 2005). The NBIM agenda is about protecting and creating long-­term value. If relevant in this respect, ethical commitment has more to do with the long-­term consequences of corporate engagement than the virtues of acting in a manner consistent with social values. In this respect, the NBIM is consequential in intention whereas the council is deontological in intention. This distinction goes to the heart of differences in intended effects between the two arms of Ministry of Finance policy. Even so, in the external assessment of Articles 3 and 4 of the “Ethical Guidelines,” the independent Review Panel (Ministry of Finance [Norwegian] 2008) recommended the allocation of resources to manage coordination better. Whether these efforts will result in effective cooperation will depend upon reconciling very different professional expectations regarding the logic of global financial markets and the mechanisms used to integrate shareholder activism into the disciplines of active and passive investment—­issues that are quite problematic (see the independent assessment of NBIM investment strategy: Ang, Goetzmann, and Schaeffer 2009).



Norway’s Pension Fund

Conclusions

One way of justifying public institutions is to test their legitimacy against independent norms, including functionality. When coupled with unambiguous goals and objectives, the test of functionality allows observers (even voters) to discriminate between competing institutional forms and attribute to those that are found superior appropriate support. If this logic depends upon the existence and routine application of a public ethic of perfectionism, it has broad support across the social sciences, including that of financial theorists (Merton and Bodie 2005). Few public institutions begin life in such a manner, and it is arguable that over time public institutions might become increasingly encumbered with various amendments to their mandates such that their functional effectiveness is increasingly constrained. On one level, this is a realist observation about the life of institutions in Western democracies. On another level, it draws upon theories of institutional formation and interest-­group representation that are arguably essential in understanding the nature of public regulation (Roe 2006). In this chapter we have sought to analyze the legitimacy of the Norwegian SWF from a rather different standpoint, arguing that public support for its existence depends upon the process whereby the public interest in its decision-­making is governed. It was shown that there is a premium on public accountability, represented by the Minister of Finance and the accountability of the minister to government and ultimately parliament. This process-­based claim of institutional legitimacy has been quite successful; witness the bipartisan support for the institution and its commitment to intergenerational equity and to global justice. As such, the Ministry of Finance is at the center of a web of governmental entities, all of which have a role in either implementing or overseeing the GPF-­G’s activities. It was also argued that this institutional framework is representative of what Estlund (2008) and others have termed epistemic proceduralism: a means of legitimating institutions by virtue of the processes used to represent the public interest in realizing the public good, rather than the functionality of those institutions against measured performance criteria. There is a paradox embedded in the governance of the GPF-­G. On one side of the equation, it is clear that the procedures developed to give effect to the public interest in ethics and global justice have been very important in representing shared commitments to Norway’s international obligations. The recommendations of the Council on Ethics on GPF-­G investment are taken very seriously by the Ministry of Finance and serve as a vital element in screening and excluding companies from the GPF-­G’s investment portfolio. Even so, it is apparent that naming and shaming hardly ever moves markets, unless enormous financial assets are used against those firms over the long term (Clark and Hebb 2005). Further, there is no evidence that naming

83

84

Chapter 5

and shaming increases the long-­term cost of capital for the affected companies unless accompanied by the systematic destruction of shareholder value. Nonetheless, naming and shaming is an essential ingredient in their process-­ model of institutional legitimacy: the council’s recommendations mean to represent public values. Whether or not these recommendations exact a penalty on the targeted companies is much less important. The transparent nature of Norway’s SWF decision-­making and its apparent accountability to the democratic process are widely cited and score highly in comparative studies of SWF governance (witness the Truman 2007 scores). On another level, however, there are reasons to doubt the functionality of the process of accountability and transparency for timely and resource-­efficient long-­term investment. Whereas the GPF-­G may score highly on accountability, it is not as clear that it would score as highly on functionality. Given the premium attributed to epistemic proceduralism, this may be entirely appropriate and a cost willingly borne by the public. But in a resource-­constrained environment with the consequences of the global financial crisis evident in the flow of resource income to the Norwegian government, can the costs of epistemic proceduralism be borne indefinitely without the fracturing of the political consensus that has made the complex system of governance so desirable? A distinction might also be drawn between the high premium on timeliness and decision-­making effectiveness in short-­term investment management and the ethos of long-­term investment that is meant to take a strategic perspective on short-­term volatility. We note that the NBIM’s asset allocation formula is based on the finding made popular by Dimson, Marsh, and Staunton (2002) that over the past one hundred years equities have outperformed bonds and that trading for short-­term advantage incurs both high direct costs and high opportunity costs relative to holding stocks over the long term. In basing the fund’s investment strategy on this argument, the NBIM has been able to buy the time needed to negotiate with its various stakeholders the formulation and implementation of investment strategy. However, there is considerable debate over the degree to which the past one hundred years are an adequate recipe for the next one hundred years (see Borio 2006). The relevance of Dimson et al.’s (2002) findings hinge on the moment in which we may find ourselves in the past 100 years, and the degree to which globalization may have accelerated the integration of global capital markets such that financial crises will be more common and more rapidly propagated through global markets. It may be the case that the costs of Norway’s epistemic proceduralism have been relatively low over the past decade because of the particular circumstances dominating global financial markets, but these costs may not be nearly as low in the future as investors come to rely upon markets at the margins of the developed



Norway’s Pension Fund

economies of the world (see Barro 2006 in relation to Ang et al. 2009, 26). If so, the claimed basis of GPF-­G legitimacy may be self-­defeating. As such, the political legitimacy of the GPF-­G may so threaten the fund’s functional performance that its very existence is imperiled. If so, another way may have to be found for Norwegians to give effect to their ethical commitment to international justice.

85

6 Insurer of Last Resort: Singapore’s Government Investment Corporation

As the assets of SWFs grew over the years leading up to the global financial crisis, commentators in the West raised doubts about the intended objectives of these funds. For some, the rapid accumulation of financial assets in a relatively small number of foreign, state-­run institutions threatened the power and prerogatives of domestic institutional investors (representing the fifth stage of capitalism; see Clark and Hebb 2004). If nonetheless largely compliant, being enmeshed in the reciprocal interests of complacent boards of directors (Bogle 2005), domestic institutional investors saw the incursion of outside SWFs into Western capital markets as a threat to their hegemony. When combined with political fears about SWFs becoming owners of so-­ called “strategic” assets, the legitimacy of SWFs became an important issue for sponsors and for nation-­states concerned about the influence of SWFs in domestic and international capital markets (Monk 2009b). The onset of the global financial crisis, however, saw a rapprochement between SWFs and Western capital markets. Desperate for market liquidity and for fresh injections of cash in struggling banks and insurance companies, a number of SWFs took significant positions in these firms only to see their stakes massively discounted by the effective failure of the U.K. and U.S. banking systems. As SWFs lost confidence in the performance and regulation of Western capital markets, their inflows of cash turned to a trickle when international trade stalled and commodity prices declined. It became clear that SWFs were unlikely (and unable) to rescue Western markets; indeed, it became apparent that their assets would be conserved in the interests of their sovereign sponsors—­some SWFs appear to have become “sovereign welfare funds.” This chapter looks at the retreat of SWFs from Western capital markets, arguing that, in a number of cases, they were brought home to act as insurers of last resort. If surprising to a number of Western commentators, it is noted 86



Singapore’s Investment Corporation

that this role derives from an implicit or explicit commitment of a number of East Asian governments to underwrite national welfare, given their experience of global financial markets throughout the 1990s. Aizenman and Lee (2008, 593–­94) refer to this policy as a form of foreign reserve “hoarding” wherein “precaution against financial fragility” has been amplified by mercantilist competition between nation-­states. This stands in contrast to the recent experience of Western countries, especially the United Kingdom and the United States, where the lack of domestic savings, and institutions holding assets outside of government budgetary processes, has meant that the public assumption of private debt (due to the global financial crisis) is to be paid for out of the current and future earnings of taxpayers. This is, perhaps, preferable to expropriating or discounting pension assets and benefits (see, respectively, the recent experience of Argentina and Ireland). As a member of the International Working Group on SWFs, which developed the Santiago Principles, Singapore’s commitment to the principles has helped to underwrite the international legitimacy of its SWFs. Against those principles, the Government Investment Corporation (GIC) has demonstrated a commitment to improving its disclosure and transparency. Indeed, 2008 saw the release of its first-­ever report describing how the fund is managed and governed. While such disclosure is encouraging, this chapter is more specifically about the Singapore government’s own legitimacy in the context of the structure and performance of global financial markets. Barro (2006) demonstrated that the probability of global financial crisis is higher than often assumed. It has also been observed that East Asian economies are more vulnerable than most developing economies to financial volatility because of their long-­term export development strategies. As such, we suggest that there is an important role for SWFs as insurers of last resort in underwriting domestic economic growth and consumption. Following the suggestion made by Aizenman and Marion (2004) among others, we consider that development strategy and market exposure may give rise to problems of political instability if not anticipated by a sinking fund of some kind. We suggest that state legitimacy depends upon the extent to which government meets the fundamental interests of its citizens, and the extent to which it can claim a sphere of autonomy in relation to other nation-­states and multilateral institutions. The first condition reflects conventional expectations regarding the proper relationship between the state and its citizens. We suggest that the second factor is crucial in understanding the importance of the GIC. As a small country, dependent upon the effective functioning of the global economy for its long-­term welfare, Singapore—­like other entrepôts—­faces an ever-­present threat: failure to be globally competitive, or, for that matter, overexposure to a failing global economy, could result in its being held hostage to the policies of multilateral institutions or, far worse, the gradual erosion of national sovereignty. It has been observed, for example, that the IMF claimed considerable influence over policymaking in a number of larger

87

88

Chapter 6

Asian economies in the aftermath of the 1997 Asian financial crisis (Higgott 1998). As is shown in the following section, this incursion and the fear of future incursions into states’ sovereignty is what underpins reserve accumulation and the development of SWFs around Asia. We then introduce our notion of institutional legitimacy, distinguishing between two somewhat different approaches—­the normative and the realist, or instrumental. Our approach joins the two notions together, arguing, in the case of Singapore, that the GIC was conceived to sustain state legitimacy in the sense of underwriting autonomy and social welfare (stable and smooth consumption) in a manner consistent with a rule-­based process of institutional decision-­making. This is followed by a discussion of the circumstances facing the Singapore nation-­state, drawing upon the literature on East Asian development and the implications of the financial crises of the 1990s for state autonomy. We argue that the vulnerability of Singapore to financial markets and their near-­neighbors explains the significance of the GIC as an investment institution for the future. This discussion is augmented with an analysis of rule-­based decision-­making, drawing upon recent research on best-­practice fund governance. These arguments are illustrated by recent events and the consequences of the global financial crisis for national solidarity. Implications are drawn for the role and nature of SWFs by virtue of national development policy and economic trajectory. Legitimacy of Institutions

For liberal theorists, the legitimacy of an institution can be thought to hinge on two rather different reference points: it could be judged against societal norms, including moral and political expectations as to proper roles and responsibilities, or it could be judged against accepted standards of performance, focusing upon its organization and instrumental effectiveness (­Coleman 2001). The first theory of institutional legitimacy is essentially normative in that it refers to what an institution should be in some ideal sense. For those concerned about the legitimacy of the nation-­state through the Cold War and beyond, this issue was conceived in normative terms because debate about legitimacy was more concerned with ideological commitment than what states did or did not do. These issues preoccupied liberal theorists as much as neo-­ Marxists, both sides being joined together in debate over state legitimacy in the context of the global struggle for hegemony among capitalism, socialism and communism (Clark and Dear 1984). That moral philosophy, social norms, and the state are so entwined with institutional legitimacy reflects the history of modern nations; their relevance for Western democracies is matched by their relevance to Central and Eastern European remnants of the Soviet Union and East Asian countries that



Singapore’s Investment Corporation

mix authoritarianism with paternalism in state capitalism (Reus-­Smit 1999). Crucially, the normative foundations of state legitimacy are reflected in political rhetoric, even if rhetoric deliberately obscures the exercise of state power. Runciman (2008, ch.6) suggests that one reason writers such as George Orwell are held in such high esteem is because of their ability to hold a mirror to modern society so as to demonstrate the hypocrisy of state power and individual complicity. If a reference point for social analysts seeking to expose gaps between the normative bases of state legitimacy and the exercise of state power, there is a core principle that underpins this approach: the legitimacy of state institutions is bound up in social norms that are, no doubt, country-­ and culture-­specific. This theory of legitimacy, however, is open to charges of academic irrelevance and naïveté. The counterargument goes roughly that states are what states do, just as institutions are what institutions do. This realist conception of legitimacy works inside and outside institutions. Legitimacy is claimed by those who control the effective instruments of power in relation to the interests they serve external to state organizations, and the ways in which they serve those interests through their relationships with other related institutions. So, for example, it could be argued that nation-­states claim legitimacy with respect both to protecting the domestic and international interests of local elites and to preserving their social and political status. In a way, this is an extreme form of functionalism: it treats social norms as simply tools of popular control, wherein institutions take advantage of shared commitments—­whether implicit or explicit in social contracts—­to deliver benefits to their clientele under the cover of moral commitment. The second theory of legitimacy takes as given the purpose of an institution and asks whether the institution is in some way effective in realizing that purpose. This suggests that institutions claim their mandates on the basis of their functional effectiveness; it also suggests that institutions are not permanent but can be made and remade as the underlying purpose changes and as other, more effective, institutions are built to implement that purpose. So, for example, having accumulated foreign reserves over and above short-­term needs, nation-­states maintain their autonomy and political stability all the while delivering on their commitment to smooth and stablize consumption. However, these countries face the issue of how properly to manage those reserves with respect to national objectives (Truman 2007). An SWF can serve several purposes: it may be the custodian of those assets; it may be a means of separating assets from short-­term public spending; it may be the means of managing the costs of holding reserves; and it may be the mechanism for investing those assets in domestic or international financial markets. SWFs are probably not, however, institutions for domestic or international economic development, where needed skills and expertise are related to long-­term project management rather than portfolio design, financial arbitrage, or trading.

89

90

Chapter 6

This is, quite clearly, a functionalist conception of institutional legitimacy. As such, it makes three assumptions. First, it assumes that the underlying purpose of the institution is unproblematic or, if contentious, it is assumed that resolution of any related problems is not found in the realm of functional effectiveness. Either way, the purpose of an institution is set outside the organization. SWFs are set up to facilitate nation-­state objectives; so the institution’s warrant is located elsewhere. Second, the design of an institution for a given purpose is a deliberate act of institutional design, although it may happen in many different ways reflecting specific national traditions. Third, there are (probably) standards of performance that guide the design process and the subsequent evaluation of institutional effectiveness. Indeed, institutional purpose, design, and performance are intimately linked to the overarching claim of nation-­state legitimacy. This is a recipe for institutional legitimacy that makes an explicit connection between ends and means in a utilitarian manner (Coleman 2001, 36–­37). For financial theorists concerned about the functional performance of markets in the context of behavioral anomalies, institutional legitimacy is also a question of efficiency. Merton and Bodie (2005), for example, argue that as markets are prone to aberrant behavioral effects, and because many people now rely upon financial markets for their long-­term welfare, institutions can play a significant role in dampening the worst effects of behavioral anomalies. By their account, institutions not only frame behavior but also are conceived within certain cultural, political, and social settings to play crucial roles in promoting economic growth. To the extent that institutions sustain market efficiency and social welfare, their functional effectiveness on these counts are two measures of their legitimacy. Note, though, that institutions cannot be fixed in form and functions; as behavior evolves, as markets change and adapt to new situations, and as new threats to social welfare become apparent, the functional legitimacy of any institution depends upon its capacity either to anticipate or at least respond to new realities (Clark and Urwin 2010; Lo 2004). But, of course, forming definitions is not so simple. Roe (2002), for example, disputes any idealization of the design process, arguing that, in most cases, institutional form and functions are not governed by a single coherent purpose. In any event, institutions are rarely, if ever, so transparent about their activities and are rarely systematically held to account to the design moment. Institutions have their own lives, foster distinctive decision ecologies, and are subject to considerable ambiguity over how their functions cohere with abstract ideals (March 1997; Kunreuther and Meszaros 1997). Not surprisingly, in terms of institutional performance, tests of institutional legitimacy have tended to focus upon third-­party standards of governance and decision-­making. At the limit, institutional legitimacy is based upon following the rules (Zhou 1997).



Singapore’s Investment Corporation

Financial Crisis and State Autonomy

Our discussion of institutional legitimacy is based upon a distinction between the purpose of an institution and its functional efficiency. This two-­sided conception of institutional legitimacy has a number of virtues, not least of which is the realization that institutions can be thought to operate simultaneously in separate political spheres governed by rather different claims on their performance. In this section, we consider more closely the issue of purpose before returning in subsequent sections to the institutional performance of SWFs, and especially the GIC. Here we seek to show that, notwithstanding the merits of these two theories of legitimacy, the development trajectory of Singapore and the geopolitics of the region in relation to near-­neighbors and multilateral institutions in the context of global financial crises have been such that the Singapore nation-­state claims two related purposes: maintenance of the nation-­state’s autonomy and the long-­term stabilization of domestic welfare, which we conceive as smooth and reliable consumption over time. The GIC is an institution designed to follow through on these commitments. Emerging-­market financial crises typically occur when large-­scale capital inflows suddenly reverse and become outflows. In the 1997 Asian financial crisis, Indonesia, Korea, Malaysia, the Philippines, and Thailand saw 1996 net capital inflows of US$93 billion switch to a 1997 net capital outflow of US$12.1 billion. At the time, short-­term foreign exchange liabilities had either grown larger or roughly equal to foreign exchange assets, leaving them extremely vulnerable to capital withdrawals of any kind (Radelet and Sachs 1999). When the sudden and unexpected shift in capital flows took place, it provoked economic contractions throughout the region. Even countries with sound economic fundamentals, such as Taiwan, Hong Kong, and Singapore, saw their economies contract considerably due to contagion (see table 6.1). As a result, Table 6.1. Asian economic growth: GDP (in national currency), per cent change Country Hong Kong

1995

1996

1997

1998

1999

2000

2.3

4.2

5.1

–6.0

2.6

8.0

Indonesia

8.2

7.8

4.7

–13.1

0.8

5.4

Korea

9.2

7.0

4.7

–6.9

9.5

8.5

Malaysia

9.8

10.0

7.3

–7.4

6.1

8.7

Philippines

4.7

5.8

5.2

–0.6

3.4

6.0

Singapore

8.2

7.8

8.3

–1.4

7.2

10.1

Taiwan

6.5

6.3

6.6

4.5

5.7

5.8

Thailand

9.2

5.9

-1.4

–10.5

4.4

4.8

Source: IMF, World Economic Outlook

91

92

Chapter 6

the Asian crisis was a catalyzing event for many emerging-market countries, as they recognized the importance of accumulating and holding international reserves. Going forward, developmental nation-­states saw that hoarding international reserves was an essential precautionary practice if they were to avoid becoming ensnarled with the IMF and all such entanglements implied for their autonomy. The main objective of the IMF (Article 1) is “to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” In the Asian crisis, the IMF’s response was in two phases. First, between August and December 1997 it offered three urgency lending agreements to Thailand, Indonesia, and Korea. This involved US$17 billion for Thailand, US$35 billion for Indonesia, and US$57 billion for Korea (the actual disbursements were much lower). According to Radelet and Sachs (1999), the first phase of the IMF bailout largely failed to stabilize currency markets and was followed by a second program, based on different principles. In the second phase of the bailout, Radelet et al. (1998, 60) noted that “[s]ome principles, though, remain unchanged, in particular, the targeting of exchange rate stability through high interest rates and restrictive domestic credit policies; and the implementation of a wide range of structural measures in finance, trade, and corporate governance.” In short, in both phases the IMF sought structural changes to the domestic economic policies of these countries. If the IMF is lender of last resort, its support comes with strings attached—­ when it provides resources to a member country, the funding arrangements specify the conditions underpinning support. Known as “IMF conditionality,” this may include specifying policies that the member country will need to carry out before the arrangement takes place or policies that must be implemented before follow-­on disbursements of IMF resources are made. The legal justification for conditionality is found in Article 5 of the IMF Articles of Agreement, which requires adequate safeguards that provide plausible assurances that the money will be paid back. Embedded in conditionality, however, is an assumption that the cause of a crisis is endogenous to the member country (or countries) that seek financial assistance. Reforming a country’s economic policies was thus seen as necessary in order to place the country (and the global economy) on a sounder economic footing that would allow it to weather the current storm and be more resilient in the face of likely future global financial volatility. Systemic global crisis had not been faced until the onset of the current crisis. In effect, the IMF has used its leverage to effect changes in countries’ internal policies and institutions. This meant, in some cases, that countries seeking IMF assistance were required to adopt policies or to undertake certain reforms championed by the IMF that they would not have otherwise adopted.



Singapore’s Investment Corporation

Mussa and Savastano (1999, 84), two IMF employees, conceptualized conditionality as a mechanism for achieving sound economic policies in political environments that might not be able (or willing) to implement such reforms: “[n]ational authorities may modify policies to comply with IMF conditionality when it would be difficult to find domestic political consensus in the absence of external pressure  .  .  . the IMF and its conditionality become a scapegoat on both sides of the bargain. That such a scapegoat can be useful in securing necessary or desirable, but unpopular, policy adjustments is clear.” The IMF recognizes that it has sought to impose its will on sovereign states: intrusion into domestic politics has been deemed permissible so as to facilitate good governance. With respect to the Asian crisis, “the IMF’s principle strategy for the three countries hardest hit . . . was to overhaul their financial systems” (Radelet et al. 1998, 1). Conditionality is a controversial aspect of the IMF mandate (Buira 2003), wherein relying upon the IMF is seen to involve “a loss of national sovereignty over policy” (Bird and Mandilaras 2005, 88). In this vein, Feldstein (1998) offers a critique of conditionality. First, he questions whether an international agency such as the IMF should impose any policies of a domestic nature on sovereign countries. Second, he questions the morality of taking advantage of short-­term financial crises in such a manner. Finally, he argues that the legitimate political institutions of the country seeking IMF assistance should determine the nation’s economic structure and the makeup of its institutions: “[i]mposing detailed economic prescriptions on the legitimate governments would remain questionable even if economists were unanimous about the best way to reform the countries’ economic policies” (28). The Asian crisis taught a valuable lesson to many countries’ policy­makers: that avoiding the IMF-­sponsored insurance regime and the associated conditionality programs were in their countries’ interest (R. W. Stone 2008). If they saw their governments’ legitimacy in terms of the agreed purpose(s) of the nation-­state and the institutional capacity to realize those objectives, ensuring nation-­state autonomy would be a crucial means of doing so. Precautionary Strategy in an Uncertain World

The Asian crisis led to “profound changes in the demand for international reserves, increasing over time the hoarding by affected countries” (Aizenman and Lee 2007, 192). Hoarding was driven by a recognition among Asian countries that self-­insurance was preferable to IMF conditionality and the associated loss of sovereignty. Nevertheless, holding reserves is not without its own costs. Indeed, taken as a whole, Rodrick (2006) estimates that reserve accumulation costs emerging-market countries 1 percent of GDP annually. At this elevated price, countries begin looking for innovative ways to keep these costs down. This is the origin of reserve investment corporations. Countries

93

94

Chapter 6

hoped costs could be minimized by investing a portion of their reserves in higher-­yielding asset classes in international markets. Paradoxically, while many SWFs were conceived (in part) to be a part of emerging-markets’ self-­ insurance policies, underwriting national sovereignty in times of financial crisis, the opportunity costs of such strategy has had to be realized through investment in global financial markets.1 In this respect, the case of Singapore illustrates the utility of hoarding reserves, as the Asian crisis left the island nation relatively unscathed compared to its neighbors (see table 6.2). In fact, Singapore actually participated as a creditor in the IMF-­led programs, promising loans of US$1 billion to Thailand and US$5 billion to Indonesia. This is not to say that Singapore did not feel any of the ramifications from the crisis; the Singapore dollar depreciated by roughly 15 percent relative to the U.S. dollar (between July 1997 and March 1999), and Singapore’s economic growth slowed from 8.3 percent in 1997 to −1.4 percent in 1998. However, the economy managed 7.2 percent growth in 1999 and 10.1 percent in 2000. In comparison to the other regional economies, this was a remarkable achievement; a performance that reinforced the importance of holding reserves (for Singapore and its neighbors). Indeed, Jin (2000) explicitly cited Singapore’s “huge foreign exchange reserves” and “substantial budget surpluses” as being important factors in the country’s resilience during the crisis (see also Rajan, Sen, and Siregar 2002). The origins of Singapore’s precautionary policies are to be found in the actions and intentions of its founding prime minister. The Chairman of the GIC and former Prime Minister Lee Kuan Yew (2006), in an address commemorating the twenty-­fifth anniversary of the GIC, noted that it was established in 1981 “in a turbulent international financial market.” He commented on the significance, at that time, of oil price inflation, the possibilities of Latin American sovereign default, banking insolvencies, and the problems then facing the U.S. economy. In that context, he stated that “my cardinal objective for GIC was not to maximise returns but to protect the value of our savings and earn a fair return on capital.” Close to the peak of the subprime-­fueled global financial bubble in asset prices, he reported that the GIC managed over US$100 billion in assets and had produced an average annual rate of return on foreign reserves of 9.5 percent (in U.S. dollar terms) over the period 1981–­ 2006. The GIC is now one of the world’s largest SWFs and can claim to be one Table 6.2. Singapore macroeconomic indicators 1995

1996

1997

1998

1999

2000

Real GDP Growth (%)

8.2

7.8

8.3

–1.4

7.2

10.1

Inflation Rate* (%)

1.7

1.4

2.0

–0.3

0.0

1.3

Source: IMF, International Financial Statistics Yearbook * Average consumer prices



Singapore’s Investment Corporation

of the best managed, even if its governance score placed it below average for nonpension SWFs (Truman 2008). Being an export-­led economy, Singapore imports virtually all of its raw materials and energy. As such, it relies upon the Middle East for oil imports and upon Malaysia and Indonesia for natural gas imports, representing in total 10 percent of annual export earnings (Truman 2008). Singapore’s reliance upon its near-­neighbors for natural resources, including water, is one element in its complex political relationships with the world’s largest Muslim democracy (to the south) and its former Federation partner (to the north). A small country of 4.6 million people, Singapore has a GDP per capita that matches that of Western European countries, whereas Malaysia (25.7 million) and Indonesia (240 million) reported in 2008 GDP per capita of, respectively, US$15,000 and US$3,900 (Truman 2008). Recognizing Singapore’s vulnerability, in its 2007–­2008 annual report, the GIC noted that “with no natural resources to keep the country going in times of crisis or severe economic dislocation, these (foreign) reserves are a nest egg, a safeguard against unforeseen circumstances, and the means to mitigate shocks that might hit Sing­ apore’s small and open economy.” The current prime minister of Singapore, Lee Hsien Loong, also noted in parliamentary debate over the FY2009 budget that “the reserves are something which we have built up for a rainy day because we are highly dependent on imports. We have no natural resources” (Singapore Parliament Reports [Hansard] Annual Budget Statement, May 2, 2009, www.parliament.gov.sg). Conceptualizing the GIC as a strategic institution for managing the possible adverse consequences of living in an uncertain world has been an effective way of legitimating the GIC and separating a portion of foreign earnings on trade and exchange from current revenue and expenditure. It could be argued that this strategy is similar to that of the conservative Liberal government in legitimating the establishment of the Australian FF in the mid-­ 2000s. In effect, both governments have been able to separate a portion of the earnings from trade from the domestic political pressures to spend the money for short-­term political advantage. But note two distinctive aspects of the Singapore case: Singapore’s geopolitical vulnerability in having no natural resources, and the more limited role of parliamentary democracy in the life of Singapore government and politics. In the first instance, there is an unstated but apparent threat from near-­neighbors should Singapore not be financially resilient. If this seems rather abstract and perhaps distant, given the mutual benefits in promoting trade and development involving the immediate and adjacent regions of northern Indonesia and southern Malaysia, history can be invoked to tell a more realist story of geopolitics. (By this logic, the GIC could even be conceived as a mature reflection of a postcolonialist SWF. Singapore’s other SWF, Temasek Holdings, could be classed a territorialist SWF). In the second instance, it is arguable that secure, long-­term prosperity is the promised benefit of a limited form of popular politics. Were the Singapore

95

96

Chapter 6

government forced to rely upon the IMF in the case of financial crisis, it is arguable that it would be vulnerable twice over: to external geopolitical forces and to internal political dissent. Here, it is also arguable that the unstated social contract binding the government to its citizens is one where the state is presumed to protect the interests of its citizens from external threats in exchange for the compliance of the population—­by this reading of the “deal” struck when the GIC was established, notwithstanding the apparent constraints of current consumption, foreign earnings have served to sustain the bargain made by the public with its state. Remarkably, the recent global financial crisis has served to reinforce further the utility of Singapore’s SWFs to the government, as it tapped its reserves for the first time so as to stave off economic dislocation. As such, we might agree with Reus-­Smit (1999, 32–­33) that the moral purpose of the state is realized through the agreement of the public about what counts as its substantive goals. In Singapore’s case, smooth consumption, autonomy, and political stability are important components of that larger purpose.2 In a precarious world, SWFs are important economic tools to ensure that these political and social objectives are met. Governmentality and Functional Legitimacy

Apart from its location at the interstices of global trade, Singapore’s comparative advantage is its human capital. This has three dimensions, the most obvious being its highly educated workforce augmented by a strategic immigration policy designed to fill identified skill shortages (Vietor 2007). A second element in Singapore’s human capital strategy is to be found in attempts to foster skill-­based industrial development focused upon industries and sectors consistent with Singapore’s entrepôt status in the global system of trade and exchange (linking Western multinational companies with the burgeoning consumer markets of Southeast and Northeast Asia). The third element, and crucial for our analysis of Singapore’s formation and management of the GIC, has been its governmentality: that is, the Singapore government’s capacity to conceive development and investment strategies, ensure their effective implementation, and realize the benefits of those strategies over the long term rather than spending benefits as windfalls so as to buy political commitment by sectional interests. While politically expedient, this strategy necessitates a certain threshold of institutional efficiency in order to achieve domestic legitimacy (even if the SWFs’ purpose is likely to be the most compelling criterion in Singapore). As such, we explore here the structure and management of the GIC in light of whether it conforms to best-­practice models of investment management, as defined both by the Santiago Principles and the principles for investment management by Clark and Urwin (2008a).



Singapore’s Investment Corporation

The form of an institution is important: witness the significance of this issue for the Santiago Principles, and specifically GAPP 1, which states that “the legal framework for the SWF should be sound and support its effective operation and the achievement of its stated objective(s)” (http:www.iwg.swf .org/pubs/gapplist.hltm). Formally, the GIC has many of the best features of Anglo-American financial institutions, including being managed as a separate (but wholly owned) company of the Singapore government with a board of directors and with investment, risk, and remuneration subcommittees. As in U.K. corporate law, the board is composed of executive and nonexecutive members, in this case split among three government members, four independents, and six GIC executives. The functions of chairman and CEO are separate, although there are, in fact, nominally three “chairs” (the founding prime minister, a deputy, and the GIC executive director). The investment subcommittee is chaired by the deputy chairman and executive director of the GIC and combines three government ministers with three external advisors, two independent directors, and one executive director. The risk subcommittee is chaired by a government minister and is composed of two independent directors and one external advisor. The formal division of powers between different types of directors and advisors could be thought to combine the legitimate interests of the government as the sole shareholder with senior managers and knowledgeable independent directors and external experts. However, it is arguable whether the independent directors are as independent as expected in Anglo-­American corporations—­both the CEO of Singapore Airlines and the CEO of the Singapore Exchange have close relationships with government, given that it holds a majority of shares in both companies. Questions could also be raised about the actual influence of independent expert advisors, given that they do not actually sit on the main board of the institution. Even so, it should be acknowledged that Anglo-­American companies may be faulted on a number of counts: some companies have combined the roles of chair and CEO, non­executive board members have not been as independent as desired, the interests of shareholders have been ignored, and external advice has been discounted by entrenched interests (see Sants 2009 on recent U.K. experience). Despite the domestic backlash against the GIC’s investment performance in the crisis, it actually matches up well to international standards of practice. Clark and Urwin’s (2008a) principles of best-­practice pension fund investment are especially relevant, in part because a number of the leading SWFs are, in fact, sovereign pension funds (see Truman 2008). Based on these benchmarks (see Appendix), the GIC appears effective at its job. These principles of best practice take as given the goals and objectives of funds and seek to evaluate operational form and functions. As such, a more contentious issue, and one that animated the development of the Santiago Principles, concerns the operational goals of SWFs: GAPP 19 states that “SWF’s investment decisions should aim to maximize risk-­adjusted financial returns in a manner consistent with

97

98

Chapter 6

its investment policy, and based on economic and financial grounds.” This is consistent with Clark and Urwin’s (2008a) argument in favor of clarity of mission, even if best practice is not necessarily about maximizing returns—­there being considerable differences between institutions and jurisdictions over the relevance of this particular goal. For example, it is arguable that asset-­liability matching is at least as important if not more important than maximizing returns within certain financial institutions, such as pension funds (see Bauer, Hoevenaars, and Steenkamp 2006). In the Singapore case, of course, this objective is too simple: it fails to recognize the long-­term, precautionary purpose of the GIC and the stated goal of balancing returns against security of assets.3 A variety of rationales have been offered justifying the twenty-­four Santiago Principles. In the 2008 report of the International Working Group of SWFs (involving twenty-­three countries, including Australia, China, and Singapore, and another five observer countries and institutions) reference was made to the stability of the global financial system, maintenance of an “open and stable (global) investment climate,” and the value of “a sound governance structure that separates the functions of the owner, governance body(ies), and management (that) facilitates operational independence.” As noted earlier, the research by Clark and Urwin (2008a) on best-­practice investment management clearly supports the importance of effective governance. Truman’s (2008) work on scoring sovereign ­wealth ­fund best practice also supports effective governance. In his case, though, there is also considerable emphasis on accountability and disclosure, justified by reference to global financial stability and the IMF’s (1998, v) statement, in the aftermath of the Asian financial crisis, to the effect that transparency and accountability “might have helped to prevent the build-­up of financial and economic imbalances, induced a prompter adjustment in policies, and limited contagion.” To the extent that the Santiago Principles are consistent with Clark and Urwin’s (2008a) principles of best-­practice investment management, they cohere with claims of legitimacy based upon functional effectiveness. Even so, the finance minister of Singapore, in supporting the Santiago Principles, noted that key components of the principles were public disclosure and accountability and that, subject to Singapore’s long-­term interests, the GIC (and Temasek Holdings) would “adhere to these principles and practices” (Cooke et al. 2009). The Singapore Government’s support of the Santiago Principles suggested that, for the world at large, the legitimacy of SWFs hinges on the underlying purpose of those funds and that functional performance is a secondary test of legitimacy. Constitutional Integrity of the GIC

The foregoing principles and practices represent mechanisms through which the GIC has sought to achieve international legitimacy and, to some extent,



Singapore’s Investment Corporation

domestic legitimacy through functional efficiency. Nevertheless, domestic legitimacy is based on more than just performance. As such, the government of Singapore has taken its own steps to ensure that the GIC’s purpose, mandate, and accountability structure, which are crucial components of institutional legitimacy, are enshrined in the country’s constitution. Reserves are accumulated in the key statutory boards and government companies (SBGCs) listed under the Fifth Schedule (such as the GIC) of the Singapore Constitution. There are various checks and balances by the Singa­ pore Constitution that safeguard these reserves from misuse. In fact, the constitution actually ties the hands of all future governments with respect to using reserves, allowing them to draw down on only the reserves accumulated during the term of office of the government. In this way, Singapore is stricter with its reserves than some of our other case studies, such as Australia, which holds to the principle that the current parliament cannot tie the hands of future parliaments. Past reserves in Singapore may not be drawn down without fulfilling a specifically defined protocol based largely on a two-­key system. The government and the President of Singapore each holds keys that must be turned simultaneously to unlock the reserves. In short, past reserves can be accessed only if both the government and the president agree that the current conditions warrant such a decision and that the programs being considered meet certain specifications and do not violate prior commitments. This safeguard relies on the political independence of the president from the government, which is why the president is directly elected and forbidden from being a politician or member of a political party, or from holding any government jobs at the time of his election or during his tenure as president (see Section 19(2)f,g). These constitutional arrangements were designed to ensure that the president remains focused on his primary objective: protecting the integrity of Singapore’s strategic assets, as described in the constitution. Indeed, according to Section 17 and Section 21 of the constitution, the President of Singapore shall exercise certain powers over government-­run companies and assets. The president receives regular and detailed accounts of the GIC. Moreover, he has the right to ask for additional information about the GIC to fulfill his duty of protecting Singaporean assets and reserves. The Minister for Finance, Accountant-­General, and Auditor-­General are also required to update him on any proposed transaction that could draw on past reserves. The GIC’s annual budgets and appointment of board members/company directors also require the approval of the president. Specifically, the president may withhold his assent to certain bills, budgets, and appointments to statutory boards and government companies (22A and 22C). Sections 22B and 22D of the constitution, in effect, give the president the right to refuse any budget or supplementary budget of any statutory board or government company if, in his opinion, the budget is likely to draw on reserves that were not accumulated during the current term of office of

99

100

Chapter 6

the government. The exception to this occurs if the government seeks the president’s approval for a budget or policy that specifically seeks to draw on past reserves (see 22(B)7 and 22(D)7). In this case, the president still acts in his capacity as guardian of these reserves, but he also evaluates the merits of the government’s case. In this instance, if the president agrees to using the past reserves, he must publish why he approves tapping past reserves in the Government Gazette. Since the constitution enables the government but not the president to propose the drawdown of foreign reserves, this provides a de facto constraint on public claims on GIC assets while the president’s powers of review provide an explicit constraint on the government’s revenue and spending intentions. This begs the question: when can the government tap reserves? Here, some ambiguity remains. The Government recently sought to clarify what, in its terms at least, would not qualify as legitimate draw-­downs on foreign reserve assets. In the context of the global financial crisis, Senior Minister Goh Chok Tong indicated that there were three situations or claims for support where GIC reserves should not be sourced.4 First, the minister indicated that reserves could not be drawn down to support social assistance programs. In the context of the current stimulus, however, the reserves did indeed go to some social welfare programs, such as workfare subsidies, job credits, and direct assistance to families. Second, the minister indicated that reserves should not be drawn down for permanent government programs, as these should be funded out of current revenues and reserves. This appears to have held up during the current stimulus. Third, reserves cannot be used in any situation that is not a “dire circumstance,” requiring reserves to ward off catastrophe or prevent irreparable damage to the economy. This seems to be the primary consideration for using past reserves. So, while the generic basis for tapping reserves is enshrined in the constitution, the foregoing illustrates that some of the protocols remain poorly defined. Indeed, the constitutional process through which the president decides whether to turn his key and release the reserves is unclear. According to President S. R. Nathan, “the Constitution does not prescribe the process for dealing with a request for using past reserves beyond the need for me to consult with the Council of Presidential Advisers and to publish my view that there is a draw on past reserves when I so approve a draw” (Nathan 2008). In the crisis, the decision to unlock past reserves took just eleven days, which raised concern within Singapore’s government. Opposition MP Low Thia Khiang noted that “past reserves are supposed to be protected by a two-­key system. The government holds one key, while the President holds the second key. But the speed at which the two-­key system can unlock the reserves is too fast for comfort” (quoted in Ling 2009). Furthermore, according to nominated MP Siew Kum Hong, “there has been precious little information about the deliberations of the President or of the Council of Presidential Advisers in giving in-­principle approval to use the reserves.” In



Singapore’s Investment Corporation

effect, the two-­key system rests on the credibility of the government and of the elected president and his advisers. Moreover, the integrity of this safeguard relies on the political independence of the president from the government, which some commentators suggest does not exist (see Tan and Lam 1997). Notwithstanding these concerns, the GIC and the reserves it manages have been constitutionally protected from immediate political claims so as to ensure that the country holds onto its autonomy and lives up to its commitment of smoothing consumption. Domestic political legitimacy is thus based on the GIC’s role as insurer of last resort, conceived in the first instance to protect Singapore’s savings in an uncertain financial world, insure its independence from near-­neighbors and distant suppliers, and capitalize the benefits of long-­term growth in case of “unforeseen circumstances.” The actions of the IMF in countries most affected by the Asian financial crisis of the late 1990s represented for Singapore the kind of threat to its sovereignty that the GIC was established to insure against. Granted, Singapore did not claim the financial support of the IMF or have to agree to the policies of the multilateral institution in order to deal with the crisis. Nonetheless, commentaries in Singapore and in the informed policy community at the time suggest that without the existence of the GIC as “insurer of last resort” the Singapore government could have been forced to accept IMF support, thereby compromising the autonomy of Singapore’s government in favor of the IMF’s neoliberal agenda (see Rajan et al. 2002; Jin 2000). Conclusions

Our analysis of Singapore’s GIC was premised upon a two-­sided conception of institutional legitimacy: one focused on the purpose of the investment institution, and the other focused on the functional arrangement of its management and responsibilities. By our assessment, the purpose of the GIC is plain—­to be the nation-­state’s insurer of last resort in the context of an uncertain world. In part, this assessment is driven by the stated purpose of the GIC as articulated by the founding prime minister and the experience of Singapore and its East Asian neighbors through the 1997 Asian financial crisis. Being insurer of last resort has meant underwriting the autonomy of the nation-­state’s government as well as the long-­term welfare of its citizens. We argue that these two elements are closely related, reflecting an implicit social contract between the state and its constituents: the state is accorded significant powers in relation to a possible hostile world in exchange for its commitment to the long-­term well-­being of its constituents. Notice, though, that this commitment is an agreed constraint on current consumption; not all Singaporeans would agree with this deal. Indeed, Singapore’s SWFs have been the subject of criticism by certain Singaporean constituencies.

101

102

Chapter 6

In terms of functional efficiency, we assessed the GIC’s management and responsibilities against two standards—­those proposed by Clark and Urwin (2008a) concerning best-­practice investment management and those proposed by the International Working Group on SWFs concerning the accepted Principles of Management. Here, we noted that the GIC’s formal allocation of powers and responsibilities between its board and its managers matches, in many respects, the best-­practice standards articulated by Clark and Urwin. It is also apparent that the Santiago Principles have been accepted by the Singapore government and the GIC. But it is suggested that the Santiago Principles may be more related to the external legitimacy of SWFs in a world hostile to their emerging power than to these funds’ functional effectiveness. Similarly, given the focus of the Santiago Principles on disclosure and transparency, it is possible that embedded in these principles is a conception of the modern state that owes more to Western notions of liberal democracy than the culture and traditions of SWF sponsors. It is arguable that Singapore’s commitment to self-­insurance is a reflection of its size, geopolitical setting, and lack of resources in a region of the world that could be hostile to its pretensions to independence and economic prosperity. Being insurer of last resort, the GIC has the financial assets not only to underwrite state autonomy and long-­term welfare but also to underwrite the stability of the nation-­state’s financial system and its banking institutions. When combined with the apparent constraints on domestic consumption affected by the sequestering of foreign earnings, the government has effectively invented a means of managing financial stability and macroeconomic management. In a way, this is an “unintended” result of Singapore’s geopolitical strategy. But it paid dividends in the global financial crisis, and reflects a commitment to macroeconomic management and stability that was a motivating force in the formation of Australia’s FF. By contrast, the recent experience of Western economies and in particular that of the United Kingdom and the United States suggests that the lack of an effective national insurer of last resort has proven to be a real threat to economic prosperity. In these countries, nation-­states became by default the insurers of last resort, offering up their current and future tax revenue as the means of underwriting the stability of their financial systems. It would appear that the prior stress-­testing of countries’ financial systems (if any) was directed at the resilience of individual banks rather than whole systems, focusing upon the distribution of idiosyncratic risks instead of the robustness of national regulatory systems in the face of systemic risk. As has become apparent, the global scale of the crisis and the overwhelming size of banks deemed too large to fail by their national sponsors are such that leveraging nation-­state tax revenue proved to be inadequate in the face of the looming disaster. Furthermore, possible solutions to the crisis canvassed by nation-­ states facing much higher levels of indebtedness are likely to destabilize macro­economic conditions over the near term, producing increasing levels



Singapore’s Investment Corporation

of inequality among different classes of citizens more or less vulnerable to these conditions. Obviously, there is more to the global financial crisis than nation-­state banking regulation and solvency. Nonetheless, a contrast can be drawn between Singapore’s precautions taken to protect national sovereignty and stability in the case of a global or regional financial crisis and the willingness of Anglo-­American governments to spend current and future income on consumption as if financial instability could be absorbed within existing national regulatory institutions. It is instructive that two of our SWF case studies—­Australia’s FF and Singapore’s GIC—­have seen their respective governments make deliberate choices about the mix between current consumption and future national welfare, managing the political process in each country so as to balance temptation against national sovereignty. Evidently, the balance struck between short-­term political opportunism and the long-­ term common good is contestable—­most obvious, perhaps, in Australia but nonetheless embedded in the polity of Singapore. It is intriguing that, in both the United Kingdom and the United States over the first decade of the twenty-­first century, majority political parties were not able to look beyond short-­term interests. Our case study suggests that no country, however large, can afford not to build institutions that may act as insurers of last resort. As Barro (2006) has noted, financial crises are endemic to the world economy and may be more so as globalization draws into the center of trade and exchange national failures of financial management. At one level, this may require national policies that balance short-­term consumption in favor of long-­term saving (as suggested earlier). But, of course, it is the case that both the United Kingdom and the United States (and other Western countries) have had active policies that promote saving; the difference is that these policies have promoted private pension saving through individual and collective contracts. So successful, in fact, have these policies been that these countries’ economies have been refashioned in the face of the imperatives driving pension fund capitalism (Clark 2000). The issue here is problematic: the extent to which private pension saving institutions, albeit underwritten by generous government tax provisions, should or could be mobilized to underwrite financial stability where governments are unable to do so. Can these types of financial institutions act as insurers of last resort as has the Singapore GIC? If we refer back to an institution’s objectives and mandate, the only answer that would preserve legitimacy and maintain the integrity of governance would be “no.” By answering “yes”—­as Ireland recently did—­the government would be expropriating pension savings (future income) to save current welfare. While this may seem appropriate given current circumstances, it contradicts the very foundations of the institution, which draw its domestic legitimacy from the fact that it was set up to resolve future economic problems (e.g., an unfunded pension liability) not today’s.

103

104

Chapter 6

The other alternative is, of course, the notion of an international lender of last resort (Fischer 1999). For all its current significance and the recurrent nature of financial crises that have exacted significant welfare costs on the peoples of the globe, there remain considerable hurdles to be overcome in realizing its promise. One that is to be learned from our Singapore case study is that when the benefits and costs of self-­insurance are located close to the polity, there may be a better realization of the need to manage consumption over the short term and the long term. Likewise, given the opportunity costs of sacrificing current welfare for future welfare in the context of managing an uncertain world, it may be the case that some polities are better able to realize the advantages than others may be—­moral hazard being an ever-­present danger in such arrangements—­paradoxically the others being more often those found in the countries that seem to dominate the world.

7 Legitimacy, Trade, and Global Imbalances: The China Investment Corporation

As the global financial crisis accelerated through the second half of 2007, the newly established China Investment Corporation (CIC) took a US$5 billion stake in Morgan Stanley. Like many other U.S. institutions, Morgan Stanley was vulnerable to the discounting of its subprime mortgage investments and experienced rapidly eroding confidence in its capacity to withstand the rigors of market volatility. In exchange for the CIC’s investment, Morgan Stanley gave up nearly 10 percent of its common stock. With other, similarly high-­profile investments in financial institutions Blackrock and JC Flowers, the Chinese government announced, in effect, that its sovereign wealth would be used to claim a share of the global financial industry. While the CIC attempted to justify its behavior on commercial and financial grounds, it has become clear that the investments were made for their strategic value. By “strategic” we mean that the success of the fund’s investments was (and is) determined from not only the perspective of shareholder value but also national stakeholder value. Indeed, as one of the world’s largest SWFs, the CIC has eschewed conventional portfolio investment in developed financial markets for strategic investment in industries and jurisdictions deemed essential to China’s long-­term growth. The CIC is one element in the strategy of the Chinese government’s commitment to maximizing the country’s rate of economic growth. The U.S. response to these investments was muted when compared to the hostility shown to proposed investments by Middle Eastern SWFs in U.S. infrastructure a couple of years prior to the financial meltdown. In some quarters, it was hoped that the CIC and other large SWFs might underwrite global financial stability, using their resources to take long-­term positions in the core institutions of the global economy. It was also hoped that these investments and government-­led initiatives to stabilize financial markets might forestall a deeper crisis, one that threatened to fracture the global hegemony 105

106

Chapter 7

of the Anglo-­American system of financial intermediation and market exchange. These hopes were not realized, as it would be another twenty-­four months before markets rallied and there was some semblance of confidence in the U.S. economy and the global banking industry. In 2008–­2009, the Chinese fund broadened its strategic focus to include the resource sector (see Haberly 2011), which was deemed to be an industry of importance for the country’s long-­term development objectives. Indeed, unlike the majority of countries that sponsor SWFs, the CIC’s assets are not owed to Chinese resource endowments. Its assets derive from the accumulated dollar-­denominated foreign currency reserves held by the Chinese government due to the export of consumer products by state-­owned enterprises and Western corporations to developed economies’ consumer markets. In this chapter, we offer an innovative account—­rooted in international political economy, economic geography, and geopolitics—­of the rise of the CIC. We argue that the CIC is not an investor governed only by concerns for long-­term risk-­adjusted rate of return on its investment portfolio. Rather, this chapter views the CIC as an arm of the Chinese government, which just like other state-­owned enterprises, is concerned with the country’s resource needs and its status as a global power. The CIC may thus be thought of as a means of realizing economic and geopolitical advantage, legitimized perhaps by an expressed, but limited, concern for the long-­term rate of return on invested assets, hence our classification of the CIC as a productivist SWF. We develop this argument by first exploring the nature of the “deal” that was struck when U.S. markets were opened up to China, as the origins of the CIC can be found, in part, in a U.S. commitment to “normalize” China’s role in the global economy. We then review recent research that emphasizes the costs and consequences of Chinese export-­led development policy and in particular its reliance upon export-­growth pegged to the U.S. dollar. Next, we situate the CIC within the shifting power relations of the global economy’s economic powerhouses, and offer some description of its strategic role for the state. This role is crystallized through an in-­depth case study of the CIC’s governance, which is the result of elite interviews both in China and inter­ nationally. This case study demonstrates that, while theoretically autonomous, the CIC is functionally beholden to the State Council, which offers some justification for the CIC’s strategic investment approach. The Development of Chinese-­U.S. Trade Relations

The intimate economic and political relationship between China and the United States would surely be judged a surprising turn of events by Cold War warriors of the 1950s and early 1960s. Some fifty years ago, the Chinese communist revolution, together with the uneasy standoff with the USSR in post–­ World War II continental Europe, framed international relations among



The China Investment Corporation

nation-­states. From sport, to trade, to cultural exchange, and to military expenditures, the world was divided into two camps: one centered on the United States and the other on the USSR. The world was divided into simple ideological categories, with intense competition between capitalism and communism, thereby framing what counted as acceptable economic institutions through to political and social aspirations. Inevitably, diverse traditions and institutions among nations as well as rivalries and tensions among countries within these two blocks were largely ignored in this simple conceptualization of Cold War politics. In the West, capitalism was judged legitimate and communism judged illegitimate in the sense that the former was believed consistent with the values of liberal democracy whereas the latter was conceived in terms of authoritarianism and totalitarianism. This simplistic bipolar conception of the world was exploded by President Richard Nixon when he surprised the U.S. public and its allies by visiting China in February 1972. In doing so, the simmering rivalry between the USSR and China over border-­demarcation, regional insurgency, and leadership of the communist bloc was given expression in rapprochement with the West (see Kissinger 1982 for a detailed exposition of these issues). It was now possible for nation-­states to have specific interests that went beyond being members of one bloc or the other; the United States and China could agree to cooperate in certain domains and not in others, which discounted the rigid conception of a divided world. Nixon’s visit to China suggested that countries need not share the same ideological commitments to be accepted into the international community of nations. Coming almost twenty years before the Iron Curtain crumbled into disarray, the United States offered Chinese leaders entry into the international community separate from the U.N. and the USSR. On offer was the option to join the international community and its established systems of cooperation, commerce, and negotiation. By the time the Berlin Wall was taken apart by Germans seeking to reunite with the political traditions of Western Europe, China had found its way to economic cooperation with the United States and, crucially, status as one of a number of nations accorded normal trade relations.1 This afforded the right to export to the single-­largest consumer market in the world. Few at the time (1990) would have imagined that the right to trade with the United States would be significant for Chinese economic development and for the hegemony of the United States in the early twenty-­first century. It is remarkable that it took an investment bank, Goldman Sachs, to recognize that China, along with Brazil, Russia and India (the “BRICs”) would effectively reshape the structure of the global economy through the twenty-­first century, undercutting the role and significance of the United States as the global superpower of the second half of the twentieth century. This brief recounting of the evolution of China-­U.S. relations suggests three points of mutual interest: the formation of a sphere of cooperation

107

108

Chapter 7

distinct from U.S.-­USSR relations; a role for China in the international community, even if limited to mutual tolerance if not respect; and the opportunity for China to trade with the rest of the world. In this sense, as befitting its power in the global economy, the United States conferred on China a rudimentary form of legitimacy: it provided international acceptance that China was “entitled to participate in international relations” (I. Clark 2005, 2). To illustrate China’s path to international legitimacy, consider the history of China-­U.S. trade relations through the medium of what was known as Most Favored Nation (MFN) status or what is now termed as Normalized Trade Relations (NTR) status. As is well established, this status confers on designated countries the right to trade with the United States without being subject to discriminatory taxes and tariffs on exports to the U.S. market. In brief, China’s MFN status was “suspended” in 1951 and then restored in 1980 subject to annual renewal and “compliance” with the Jackson-­Vanik amendment that requires China’s observance with certain conditions on emigration, as well as “a bilateral trade agreement between the two countries” (Pregelj 2001). Over the years, U.S. presidents have been able to renew China’s MFN trade status and, for a number of years, obtain waivers on the Jackson-­Vanik requirement. In the aftermath of the 1989 Tiananmen Square revolt, however, Congress sought to revoke MFN status but was unable to overcome the presidential veto. For many in the Democratic Party and NGOs, the annual review was an occasion to press for extending the terms and conditions of China’s trade status to include human rights and labor standards—­some of the shared norms that arguably bind nations together in an international community (Brannelly 2002). If often debated, strict terms and conditions of normalization were, more often than not, set aside in favor of free trade.2 In testimony before the U.S. Senate Commerce Committee, an NGO representative put the issue succinctly: “[A]re we going to have a commercial policy or a broader relationship that looks at the national interest” and “the zeal to do a policy with China [that] suits companies that want to relocate investment to China and guarantee permanent, unconditional access back into the U.S.?”3 The deal struck between the Clinton administration and China over trade linked U.S. support for China’s accession (in 2001) to the WTO and U.S. Congressional approval of Permanent Normalized Trade Relations (PNTR).4 Here, the Republican Chairman of the Senate Commerce Committee John McCain in his opening statements argued that accession to the WTO and PNTR would be powerful U.S. levers on the Chinese government to adopt tariff reforms, approve foreign investment, and protect intellectual property. He also suggested that WTO membership would undercut the dominance of the Communist Party and that greater “transparency and reforms are the price of China’s entry into the global trading system.” He went on to link the China-­U.S. trade relationship to the reform of human rights and labor standards.5



The China Investment Corporation

Economic Imbalance between China and the United States

If Sen. John McCain, Republican from the State of Arizona was confident that China was willing to pay the “price” for normalization, Sen. Ernest Hollings, Democrat from South Carolina, was not convinced. In his testimony and written statement, Hollings rehearsed the case for free trade and focused upon the costs and consequences of that policy for the welfare of U.S. communities dependent upon labor-­intensive industries (such as textiles in South Carolina). He noted that the standard free trade argument assumes the composition of trade changes as the low-­skill ­labor-­intensive industries of developed economies (U.S.) shift off shore, replaced by highly skilled capital intensive industries that claim their share of the global marketplace. With increased economic growth due to the efficiency-­premium on the geographical dispersal of production and exchange, employment growth should compensate for local job losses. For Hollings, the plausibility of this process depends on developing countries being willing to take up their share of exports from the developed world—­something he doubted.6 Invoking the Japanese case, he believed China would not honor their side of the deal. He forecast that the Chinese trade surplus with the United States of US$68 billion would “spiral out of control” should the permanent normal trade relations (PNTR) initiative be accepted.7 It turns out that Hollings was correct. After 2001 the terms of trade exploded in China’s favor, with exports to the United States accelerating far beyond expectations, reaching nearly US$300 billion in 2007 (just before the onset of the global financial crisis) (see figure 7.1). Reasons for the explosion in Chinese exports over the first decade of the twenty-­first century are many and varied.8 Most obviously, growth in the volume of exports reflected official Chinese development policy mimicking, in part, the earlier success of the Asian newly industrialized economies (NIEs) of Hong Kong, Korea, Singapore, and Taiwan in using exports to the West as the engine of growth (see Chow and Kellman 1993; IMF 1993). However, in a study of the economic forces shaping the success of the Asian NIEs, Webber (1996) argues that the initial massive imbalance between exports and imports that marked the first phase of NIE growth would soon pass. In the second phase of development, imports essential to production should rise to match exports; equally, as labor resources become increasingly scarce, increasing real wages should prompt increasing demand for Western consumption goods. Figure 7.1 shows the development of massive imbalances. However, two other factors should also be taken into account. Sustaining the growth in exports to the United States was the Chinese government’s policy of pegging the local currency (RMB) to the U.S. dollar with a fixed exchange rate. In figure 7.2, we display the temporal pattern of the major currencies against the U.S. dollar since 1994. For the most part, governments’ willingness to let currency

109

Chapter 7

400,000 300,000

Imports

200,000 100,000 0 –100,000 –200,000

Exports 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

U.S. dollars (millions)

110

Balance

–300,000 Figure 7.1. U.S. trade with People’s Republic of China 1984–­2008 (US dollars). Source: Authors’ calculations of IMF and the People’s Bank of China data

markets set currency rates is reflected in the volatility and trends in currencies against the U.S. dollar. For the RMB, however, the Chinese government has sought to fix the U.S. dollar exchange rate (see 1995–­2005) and sought to manage currency appreciation against a basket of currencies, in particular as exports to the United States exploded in volume and value after 2005. In effect, China’s currency regime has been used to enhance its claim on U.S. consumer markets against Europe and Japan while holding firm the price advantage enjoyed by exporters to the United States relative to U.S. domestic producers.9 As such, it has been a policy designed to hold in abeyance the immutable forces of economic correction inherent in the export-­led model of growth (see Stiglitz 2009, 228–­29). Not only did this policy accelerate the growth in the trade surplus with the United States, in the context of the global financial crisis, holding firm to such an absolute trade advantage, China risked protectionism or even a trade war with the West. Goldstein and Lardy (2006) suggest that this policy has contributed to internal problems of macroeconomic stability in China, including wage-­price and property-­price inflation. By limiting currency appreciation in the context of the burgeoning demand for imports of raw materials from countries such as Australia, China has lost an opportunity to discount the costs of those commodities, as the Australian dollar (among a number of other country currencies) appreciated against the U.S. dollar.10 They also suggest that this policy has been pursued to protect the domestic banking system from the possible consequences of currency revaluation for fixed asset values, exchange-­rate speculation, and capital flight. We return to this issue in the next section. Through its domestically focused subsidiary, Central Huijin



The China Investment Corporation

1.5

U.S. dollar exchange rate

1.4 JPY

1.3

AUD

CNY

1.2

EUR

1.1 1.0 0.9 0.8

GBP

0.7

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

0.6

Figure 7.2. U.S. dollar exchange rates (normalized to base 1, 1994). Source: Authors calculations’ of IMF and the People’s Bank of China data

Investment Ltd, CIC has made significant investments to support the domestic banking system. Commentators have been split on whether the dollar-­peg is sustainable, whether it has significantly distorted the Chinese economy, and whether it is likely to persist. Further, it has been noted that China is hardly the only country to have pursued such a growth strategy (Reinhart, Rogoff, and Savastano 2003). Dooley et al. (1996, 2004) suggest that, following the Second World War in reconstruction, Germany and Japan also pursued a dollar-­peg economic growth policy aided and abetted by the U.S. government. More generally, Dooley et al. suggest that this policy tends to run its course such that established dollar-­peg economies will eventually move from the periphery of the world economy to the core of the world economy, wherein their own currencies become partners with the U.S. dollar in underwriting foreign trade and exchange. In Dooley et al.’s history of the post–­1945 economy, it is assumed that dollar-­peg economies buy U.S. securities, in part, to manage official currency exchange rates and in part to underwrite the resulting gross imbalances in trade between dollar-­peg economies and the United States. There is, then, a reciprocal relationship between Dooley et al.’s core and periphery model of neo-­mercantilism, which is congruent with Aizenman and Lee’s (2008) mercantilism applied to SWFs as a twenty-­first-­century mechanism for hoarding capital. However, this reciprocity between China and the United States was thrown out of equilibrium due to the imbalances that grew through the first decade of the twenty-­first century.

111

112

Chapter 7

The massive growth of Chinese exports to the U.S. economy after 2000 began to affect the capacity of the U.S. government to control aspects of its own economy—compared to Germany and Japan immediately after the Second World War, the rapid growth of the Chinese economy threatened to overturn the core-­periphery relationship before the periphery was economically mature and willing and able (in a regulatory sense) to float its own currency. Expansionary macroeconomic policy combined with the unrestrained growth in household indebtedness produced a surge in U.S. demand for consumer goods that China was only too willing to meet, whatever the short-­ term costs in terms of its own macroeconomic stability. Therefore, the surge in imports could be seen both as a reflection of U.S. monetary policy and household indebtedness (Taylor 2009) and a willingness to postpone on both sides of the Pacific the inevitable readjustment for short-­term political purposes (Bordo 2005; Truman 2005; L. H. Summers 2006).11 Funding and Governance of the CIC

The imbalanced nature of the economic relationship between China and the United States is ultimately responsible for the CIC’s existence. However, the relationship between trade, foreign earnings, and the funding of the CIC is more complicated than may appear to be the case. As the volume of trade between the United States and China has grown, the pressure on the RMB has also grown such that selling dollars and buying RMB should change the exchange rate in favor of the RMB (it becomes relatively more expensive). Of course, this would have two benefits for those that hold RMB: it would make imports to China relatively less expensive and, in effect, it would increase the real value of wages paid to Chinese workers. For the Chinese, however, it would also make it harder to sell Chinese goods in the U.S. market, undercutting the value of an export-­led development policy and placing a premium on local labor productivity and domestic consumer demand (Stiglitz 2009). For an immature economy like China’s, which is currently subject to inflation and has problems mobilizing and allocating financial assets to the real economy, one solution is to maintain an official exchange rate (dollar peg) and defend that exchange rate by buying U.S. securities.12 To purchase dollar-­ denominated securities, the Chinese government has been printing money and offering RMB-­denominated bonds to the Chinese market. Printing money without sterilizing its effects has the potential to amplify domestic inflation while the purchase of dollar-­denominated securities can be helpful in containing domestic inflation in that the collected assets are spent overseas. One way or the other, China faces strong short-­term incentives to purchase dollar-­denominated assets. If it was simply a matter of protecting China’s trade position of 2000, the accumulation of foreign reserves may have been manageable against the terms and conditions of its WTO and PNTR status.



The China Investment Corporation

However, the loose-­money policies of the U.S. Fed in the aftermath of 9/11 meant that the Chinese government, in effect, had to accelerate its dollar purchases and local sterilization. This, in turn, has led to a dramatic increase in China’s dollar-­denominated foreign exchange reserves. The CIC fulfils a special purpose for investing the excess portion of these foreign reserves. The nominal allocation of assets to the CIC has been relatively modest in relation to the accumulated value of foreign reserves. Moreover, there are other institutions, such as the State Administration of Foreign Exchange, the National Social Security Fund, and the China Development Bank, that hold the assets domestically and internationally and even compete against the CIC for the right to manage the country’s reserves. Unlike many other SWFs, the CIC is not intended to be the insurer of last resort underwriting the autonomy of the nation-­state in relation to the uncertainties of global financial markets and the potential intrusion of the IMF into domestic affairs. Instead, the notional mandate of the CIC is to operate as the government’s investment agency with special reference to the government’s “excess” international reserves and global interests. As such, the CIC is perhaps better conceived of as the strategic investment arm of the Chinese government. It is important not to overestimate the CIC’s functional autonomy and the operational significance of its mandate. Consider again the logic embedded in Clark and Urwin’s (2008a) model of best-­practice investment, which assumes that any effective investment institution has a properly defined mandate with a delegated sphere of responsibility consistent with realizing that mandate. We suggest that mandates are most effective when translated into a target rate of return or some similar goal or set of goals that have well-­defined time horizons such that they can be used to rationalize the inevitable internal conflicts and disagreements over the most appropriate investment strategy. We have noted that this framework has been used in a number of sovereign institutions to enhance institutional transparency and accountability. Nonetheless, this assumes that government should be conceived of as a set of goal-­oriented agencies and institutions with boards of directors and managers whose roles and responsibilities are thought out in relation to those mandates. If representative of Western principles of good governance, functional efficiency is not a complete explanation of the form and functions of many institutions (see Clark and Urwin 2008a with Merton and Bodie 2005). The distinction drawn here is between the formal statement of the CIC’s mandate and its corporate governance, and the place of the CIC in the structure of the central government. Formally, the mandate of the CIC’s board includes approving investment strategy, its implementation, the appointment of management and the delegation of tasks to managers, and reporting to the State Council. In fact, the chairman and CEO and the deputy CEO of the CIC are in constant contact with senior officials of the National Development Reform Commission (NDRC), the Ministry of Finance, and the State Administration of Foreign Exchange (SAFE) when it comes to responding

113

114

Chapter 7

to government, reporting on actions taken, and negotiating investments in response to government policy.13 These individuals owe their careers to the Communist Party and government, just as board members owe their current roles and responsibilities and future opportunities to the party and government. As for the Executive Committee, they also owe their careers to the party, and act in accordance with their roles and responsibilities, in the first instance accountable to the chairman and CEO but ultimately accountable to the central government. By this logic, the decisions taken by the CIC are the result of compromise and consultation among the various government institutions involved. Figure 7.3 provides a schematic description drawn from the CIC’s (2008) Annual Report. The relationship between the board, the Executive Committee and the CEO are arranged in a manner that seems to suggest a corporate governance structure consistent with Anglo-­American expectations; that is, the CEO is responsible to the board, which has the authority and responsibility to hire and fire the CEO. However, this formal arrangement does not accord with the substantive arrangement of powers and the intimate relationship between the CEO, the board, and the central government. In a similar way, the Board of Supervisors, which appears parallel to the Board of Directors in capitalist enterprises, may have more symbolic significance than substantive powers. Notionally, the Board of Supervisors brings together stakeholders from related Board of Directors Remuneration Committee International Advisory Council

Board of Supervisors

Executive Committee Chief Executive Officer

Supervision Committee

Audit Committee

Chairman of Board of Supervisors Board of Supervisors Office/ Internal Audit Department

Investment Committee

Chief Investment Officer

Risk Management Committee

Deputy Chief Investment Officer

Chief Risk Officer

Chief Operating Officer

Counselor

Figure 7.3. Schematic of CIC governance (excluding Central Huijin Investment). Source: China Investment Corporation, Annual Report 2008, p. 17.



The China Investment Corporation

and overlapping central government institutions. However, the similarities between the CIC’s Board of Supervisors and the corporate supervisory boards of continental Europe are a reflection of the central government’s intention to underwrite the legitimacy of the CIC through recognized institutional forms. Notwithstanding the skills and qualifications of the financial specialists who are notionally responsible for its operational performance,14 elite interviews with stakeholders suggest that the central government directly and indirectly influences CIC decision-­making. In contrast to other accounts of the structure and management of the CIC, we have argued that central government is able to sustain control of the CIC by virtue of the Communist Party’s claim on the career prospects of senior officials and the overarching importance attributed by the party to Chinese economic growth (and all that is implied in terms of China’s geopolitical status). This does not necessarily mean that bureaucratic conflict is neutered by party incentives; there are, of course, various factions that coexist and compete for power in central government, in its administrative units, and in state-­owned enterprises (SOE) (Eaton 2010; Koppell 2007). This account contributes to an understanding of how and why the CIC’s supervisory board is functionally less significant than the formal structure of management suggests. Whatever its role in legitimizing the actions of the CIC in relation to the interests of other government entities, when setting strategic policy it may come late in the chain of negotiation and compromise that links CIC’s senior staff to the central government—­a prospect that also faces senior professional staff of the CIC.15 CIC as a Strategic Investor

When first mooted, it was hoped that the CIC would become a global portfolio investor, matching the investment practices of other large SWFs. Because so much of Chinese foreign reserves are held in U.S. dollars, a related expectation was that the CIC would place those assets in Western securities markets in the manner consistent with other large, globally focused diversified investors. Whether by implication or by virtue of the first steps taken in the establishment of the CIC, these expectations were fueled by the active involvement of the CIC in the negotiation and proclamation of the Santiago Principles. So, for example, it was hoped that the CIC would rely upon global financial markets in a way similar to the Norwegian NBIM’s reliance on them, even if there would be differences based upon the origin of assets and the possible significance of home bias in the focus of investment portfolios. Reflecting back to the financial crisis, it is reasonable to suppose that expectations on both sides of the Pacific were not realized: the Chinese central government was not willing to meet the liquidity demands of global financial markets, and, as the crisis accelerated and deepened, the U.S. government could not be relied upon to generate financial returns for Chinese investments

115

116

Chapter 7

in the United States. Amplifying Chinese uncertainty, perhaps, was a realization that the newly established CIC had neither the internal decision-­making capacity nor the necessary trusted relationships with independent Western expert investment advisors to be able to gauge the risks involved in further commitments to Western financial institutions.16 If the Chinese government had relied upon their friends in U.S. banking and government circles for advice on taking positions in companies like Morgan Stanley, it is likely that Chinese government officials then realized the crisis was far deeper than had been portrayed in confidential briefings. Despite all this, the CIC has not been prepared to become a passive portfolio investor and retreat to an investment strategy rooted in conservatism. Rather, it has adopted a strategic approach to its investment policies, by which we mean that the success of the fund’s investments was (and is) determined not only from the perspective of shareholder value but also national stakeholder value. Its single largest holding, believed to be in the order of US$120 billion, is the Central Huijin—­core to the domestic banking system.17 Notable but much smaller investments were in U.S. investment banks during the first stages of the global financial crisis. In addition, it has invested heavily in the resource sectors around the world. Haberly’s (2011) observation offers some evidence of this strategic behavior: CIC has been advertised by China as a normal financially-­oriented institutional investor, operating according to global commercial standards, and independently of political interference. In practice, however, it has not conformed to these claims. While formally autonomous from state interference, CIC is in fact tightly controlled by the Chinese political leadership, and often applied to specific political tasks . . . Network mapping lends weight to widespread suspicions that CIC is being employed strategically in the raw materials and energy sectors . . . Until CIC’s announcement of a joint venture with Intel in early 2010, 100% of non-­financial sector direct investments identified by the author were in the resource extractive and energy sectors. The assumption embedded in Haberly’s account is that dollar-­denominated assets were funneled through the CIC to purchase significant stakes in the overseas finance, energy, and resource sectors vital for future Chinese economic development (see table 7.1).18 Therefore, the stakes taken in U.S. finance firms were for its global reach through financial intermediaries rather than for their U.S. market value. On the one hand, China legitimizes these investments through a well-­articulated (and potentially sincere) profit motive. However, on the other hand, China’s dearth of financial institutions and acumen made these assets integral to its longer-­term development plans (King and Levine 1993a), and thanks to the global financial crisis, U.S. banks were available and at bargain prices. Another argument is plausible. Chinese economic growth will continue to require enormous volumes of other countries’ resources, which may be a



The China Investment Corporation

Table 7.1. CIC—Strategic investments by purchase price (2007–2009) Purchase Price ($million)

Industry

Country

Year

Morgan Stanley

5000

Finance

United States

2007

JC Flowers & Co., LLC

4000

Finance

United States

2008

Blackrock

3000

Finance

United States

2007

AES

2151

Energy / Resources

United States

2009

PT Bumi Resources

1900

Energy / Resources

Indonesia

2009

Teck Resources

1740

Energy / Resources

Canada

2009

Songbird Estates

1400

Real Estate

United Kingdom

2009

Oaktree

1000

Finance

United States

2009

Apax

956

Finance

United Kingdom

2010

JSC KazMunaiGas

939

Energy / Resources

Kazakhstan

2009

Noble

850

Energy / Resources

Hong Kong

2009

GCL-Poly Energy

710

Energy / Resources

Hong Kong

2009

Poly Hong Kong

710

Real Estate

Hong Kong

2009

Iron Mining International

700

Energy / Resources

Hong Kong / Mongolia

2009

SouthGobi Energy Resources

500

Energy / Resources

Canada

2009

Goodman Group

159

Real Estate

Australia

2009

China Railway Group

100

Transportation / Shipping

Hong Kong

2007

Visa, Inc.

100

Finance

United States

2008

Company

Source: Authors’ analysis (from news articles)

better strategic option than the expected return on U.S. dollar-­denominated reserves. Hence, investments in resource-­rich economies like Australia and Canada may be thought representative of a long-­term policy of resource acquisition and security. Instead of thinking of the CIC as an investor governed by the long-­term risk-­adjusted rate of return on its investment portfolio, it may be better to think of the CIC as an arm of the Chinese government, just like other SOEs concerned with its resource needs and its status as a global power. As such, it is arguable that the Chinese government, due to growing frustration with U.S. policymaking, has sought to broaden the nature and scope of its bilateral relationships around the world so as to discount its reliance upon the United States as its sponsor in the international community.19 Dollar-­denominated assets invested through the CIC can thus be thought of as a means of realizing economic and geopolitical advantage, legitimized,

117

118

Chapter 7

perhaps, by an expressed but limited concern for the long-­term rate of return on invested assets. This argument does not, of course, exclude the possibility of the CIC returning to global financial markets as a portfolio investor once its own competence and capacity to sustain such a role is believed useful to the government. In fact, there is plenty of evidence to show that it has done so in the past few years. Nonetheless, our account of the CIC as a strategic investor suggests that the worst fears of China’s critics inside and outside of the U.S. Congress may be realized. Whereas prior to the financial crisis, the United States had the ability to bind China to the original terms of the deal to normalize China’s role in the international community, the new realities of the twenty-­first century are that China need not honor the implicit commitments it made to the international community during this process. Indeed, such is the disarray in global financial markets that global strategic investment for long-­term growth would seem to be an entirely reasonable strategy—­albeit unavailable to the United States and its Atlantic neighbors facing the costs of the crisis for the robustness and integrity of financial markets. Conclusions

For a number of countries, their SWFs are essential institutions for underwriting financial stability and economic growth. One lesson of the 1997 Asian financial crisis was that smaller countries exposed to the vagaries of global financial markets need SWFs to act as insurers of last resort (Aizenman and Marion 2003). In this respect, in establishing SWFs countries have sought to avoid reliance upon the multilateral institutions and in particular the IMF. Whether nation-­states have sought to protect their sovereignty or because reliance upon the IMF brings with it terms and conditions that disturb domestic political alliances and commitments, self-­insurance is perceived to be the first best option (assuming little can be done to impose discipline on how global financial markets price countries’ currencies, debt, and economic growth prospects). Viewed from a distance, one lesson of the recent global financial crisis is that a number of European countries, including Ireland, the United Kingdom, and the European Union may have benefited from the existence of such an institution. For many countries that sponsor SWFs, the assets of these institutions come from some natural resource or a distinctive national attribute of the global trade regime, which results in the accumulation of “excess” wealth. So, for example, the Norwegian SWF owes its assets to the country’s oil and gas reserves. In China’s case, however, the assets of the CIC can be thought to be “earned” income from China’s development strategy and, in particular, its exports to the United States. In this sense, these assets are not “windfalls” or “rents” derived from China’s resource endowments; in fact, it is arguable that



The China Investment Corporation

China’s economic development, including the rapid pace of urbanization, is driving the accumulation of resource “rents” in a number of countries and regions, including Australia, Brazil, and parts of Africa. Moreover, China’s accumulation of foreign earnings and the funding of the CIC are owed to the bilateral relationship struck between China and the United States in the early 1970s for reasons of mutual geopolitical advantage. In this context, it is remarkable that there is so much discussion about so-­called global “imbalances” in the context of the global financial crisis—­ the presumption being that resolution of these imbalances would return the global economy to a period akin to the last decade of the twentieth century. In fact, it is arguable that any such resolution would effectively create a bipolar world where China and the United States would have equal status as global superpowers, notwithstanding apparent differences in wealth and military might. Resolution of global imbalances would require, in part, the depreciation of the U.S. dollar against the Chinese RMB and a retreat by China from an economic growth strategy based upon massive export to the United States and Western Europe and the de facto “regulation” of imports to China (see Eichengreen 2006; Feldstein 2008). Whereas rebalancing may provide the United States with a means of economic recovery from the predations of the global financial crisis, it would also reshape the relationship between China and the United States from one of dependency to one of bilateral equality underpinned by separate but contested spheres of global influence.20 In this chapter, we have offered an innovative account of the shifting power relations between the global economic powerhouses as well as the role of the CIC therein. We suggest that China’s relationship with the United States was part of the deal struck by the two countries for mutual advantage: for China, it was part of a strategy of geopolitical realignment with the West (in relation to the USSR), matching the export-­led development policies of its nearest neighbors while, for the United States, trade with China was a means of discounting the relationship among communist allies and of establishing a policy of U.S. sponsorship of China in the international community of nations. As we suggest, geopolitics dominated the U.S. trading relationship with China notwithstanding the apparent unease of some in the U.S. Congress about the economic consequences of unfettered exports to the U.S. market. Basically, geopolitics created the Chinese economic miracle and with it the prospect of an SWF or funds capable of affecting the path of global financial markets. Here is a rather different way of conceptualizing the significant role of the CIC—­seeing it as derivative of geopolitics and embedded in the bilateral relationship between the United States and China. For these reasons, the CIC is less important than imagined, especially for Western forces that might like to “regulate” its actions by virtue of conditions imposed upon its disclosure and transparency. While no doubt an issue of significance when seen in the context of claims of legitimacy by other, much smaller, countries’ SWFs, the issue of Chinese legitimacy was, in the first

119

120

Chapter 7

instance, a geopolitical question resolved by the relationship brokered with the United States. Thereafter, as each and every review of that relationship occurred through what was once termed as China’s MFN status, geopolitics trumped concerns about Chinese domestic politics and policies just as it trumped anxieties about the potential impacts of unfettered export to the U.S. consumer market. Put slightly differently, attempts to impose conditions or international norms on CIC conventions, such as the Santiago Principles, have come too late in the evolving geopolitical relationship between China and the United States and the rest of the world. That is, the CIC is an expression of the deal done long ago for a special China-­U.S. relationship. Therefore, we would suggest that the policies and prospects for the CIC make it apparent that it is deeply embedded in the structure of central government. Unlike many SWFs, the CIC does not stand apart from its responsible ministries, claiming a measure of autonomy by virtue of the professional disciplines that proscribe standards of financial investment and the regulation of global financial markets. It is one element in a much larger commitment to maximizing the rate of economic growth and China’s claim for superpower status. If so, it is not surprising that its investments are largely strategic in nature rather than conforming to the standards of portfolio investment management that underpins its closest rivals in the international economy. As such, the CIC’s commitment to the Santiago Principles may be less about substantive policy than it is about claiming external legitimacy. We do not doubt the Chinese commitment made to the process whereby the Santiago Principles were conceived and agreed. Nor do we doubt the value of the principles in dampening political concerns expressed in the West about the lack of transparency and accountability of SWFs when investing outside of their home jurisdictions. However, we contend that, for the CIC, the Santiago Principles are an extension of the fund’s practice of matching its institutional form with international standards for the purpose of legitimacy instead of drawing its inspiration from effective investment decision-­making. This is part of a more general process of normalizing relationships with the West rather than a commitment to Western norms for financial management.

8 Modernity, Imitation, and Performance: The Gulf States’ Funds

There have been two remarkable episodes of oil price speculation since the 1970s. The first occurred in the mid to late 1970s and created havoc in Western economies, prompting a burst of inflation alongside stagnating economic growth rates and rising unemployment. At the time, the Organization of the Petroleum Exporting Countries (OPEC) was pilloried in the media and attacked by Western governments as holding advanced economies hostage to Middle Eastern sources of crude oil.1 Whatever the interpretation of events, Gulf States reaped considerable windfall revenues stemming from the spike in oil prices. However, the benefits of this sudden rush of wealth were ephemeral, as the revenue was largely lost through a combination of corruption and ineptitude. Put simply, the inherited financial structures and institutions of most oil-­rich economies were rather primitive: they were ill equipped to secure, manage, and govern the sudden rush of income offered in exchange for their natural resources. Thirty years later, a second spike in oil prices associated with the global financial bubble matched the levels (in real annual prices) of the first spike. However, this episode was different as it was accompanied by a burst of institution building. As prices rose, there was, at hand, a tried-­and-­true institution that could secure the flow of revenue and manage the assets in ways that could add to the long-­term welfare of the sponsoring states: the SWF. From Alaska and New Mexico to Norway and Kuwait, governments have used these funds as a tool for converting physical assets into financial assets for the purpose of macroeconomic stability, intergenerational savings, economic diversification and more (see chapter 2). SWFs are emblematic of the new global financial order that is dominated by the finance industry and its various institutions and agents. While these funds provide useful services to the sponsoring governments, they are also a 121

122

Chapter 8

symbol of a state’s modernity. In large part, this is due to the fact that the SWF is an institution conceived in Western terms. And yet, while adopting such institutions in non-­Western jurisdictions may have reputational benefits, the functionality of these institutions may be compromised by the institutional contradictions embedded within the SWF and the sponsoring society. Indeed, non-­Western countries that have established SWFs have struggled to achieve Western levels of efficiency and performance with their funds. This stems from the mix of ingredients required to make funds work. Put another way, the idealized Western form of an SWF may not be a recipe for effective performance in non-­Western jurisdictions. Notwithstanding these challenges, the Gulf States have turned to these funds to help manage resource revenues. Throughout the region, governments can boast more than ten funds that fit the definition of an SWF. However, academic theory suggests that the transposition of institutions conceived and developed in certain macroregulatory environments may be quite ineffective by virtue of the very different norms and traditions that characterize adopting jurisdictions (Gertler 2001). As such, the dissemination of the institution throughout the region raises some important questions: How has the adoption of this Western institution in the heart of the Middle East been realized in practice? What problems have these governments faced in adopting the institution? How are these problems being dealt with? And what is needed for these countries to realize the promise of SWFs? In order to answer these questions, this chapter first looks at the problems associated with managing resource riches, referencing the academic literature that coined the phrase “Dutch disease” (resource wealth may be lost by virtue of institutional incapacity and the adverse effects of unmanaged income flows through the domestic economy). We then turn to the issue of institutional innovation, noting that while a couple of Middle Eastern countries were early adopters of the SWF institution, the establishment of such funds was driven in large part by Western interests in the region. Only later, when the flow of funds came to dominate Gulf States’ macroeconomic planning and development, did the sudden increase of SWF adoption take place. Hence, the SWF is inherently Western. Our case studies in the Gulf support Gertler’s (2001) argument. Nonetheless, the Gulf States appear committed to Western economic norms and institutions, if not Western conceptions of liberal democracy. Resource Dependence

There is compelling logic for Gulf States to save current resource revenues for the future. First, oil reserves are, in some sense, finite resources. Given the rate of exploitation and estimates of the available oil stocks, forecasts abound about the likely exhaustion of those stocks (Hubbert 1956). In this context, current revenue expenditures that lock in long-­term obligations need to be



The Gulf States’ Funds

balanced against the unvoiced claims of future citizens who may not be as privileged by virtue of the exploitation of a scarce resource. Second, the small size of many oil-­rich Gulf States and their distinctive cultural and economic heritages may conspire to limit the translation of abundant current income into long-­term export-­led economic development (in the manner of East Asian developmental states; see Woo-­Cumings 1999). Third, resource dependence can affect the evolving path of whole economies (Corden 1984; Corden and Neary 1982): lack of local backward and forward linkages, the limited employment effects of resource development, and low returns on education can effectively bifurcate the host economy and isolate inherited nonresource physical and human assets from the global economy (Auty and Kiiski 2001). As Karl (1997) has observed, burgeoning resource wealth can also affect the structure and shape of the relationships between government, corporations, and civil society. Countries at the mercy of volatile global resource prices are particularly vulnerable, as windfalls in one year are too often followed by years of depressed resource prices, which can leave resource-­dependent states in a precarious position, from both an economic and political perspective. Year-­to-­year price volatility has been common over the past few decades. In figure 8.1, the path and volatility of crude oil prices are depicted from 1861 through to the end of 2009. As shown, the past forty years have witnessed two

120

U.S. dollars per barrel

100

80

60 2010 dollars 40

20

0 1860

Money of the day 1880

1900

1920

1940

1960

1980

2000

Figure 8.1. Trends and volatility of crude oil prices 1861–­2010. Source: BP Statistical Review of World Energy

123

124

Chapter 8

remarkable peaks in oil prices quite unlike the past 100 years (comparing the period 1880 through 1970).2 Not only has volatility been an issue; it would appear that there was a step-­change in the underlying floor of oil prices through the period 1970 to 2010. In episodes of rapidly increasing resource prices with the attendant flow­on effects for government revenue, there has been considerable political conflict over how best to manage those assets and in whose interests and over what period those assets should be put to use. In some cases, resource riches have been subverted by privileged elites whose claim on the instruments and institutions of power has translated into a disproportionate share of national income due to the exploitation of resources. Some governments claim legitimacy and the loyalty of citizens by distributing income beyond the reach of their core constituencies (see discussion in chapter 3 on rentier SWFs). But in doing so, governments have become hostage to the volatility of oil prices, particularly when price spikes or bubbles have been dramatically deflated, returning the flow of resource income to normal. In these situations, the volatility of government expenditure may mimic prices, which, in turn, may amplify economic cycles.3 In this context, countries with weak institutions have seen resource riches lead to resource dependence, rentierism, and what has come to be known as the “resource curse.” Conversely, countries with strong institutional foundations have fared well. With the discovery of large fields of oil and gas in the North Sea during the late 1960s, a number of countries stood to receive large unearned windfalls beginning in the early 1970s and lasting through at least 2030. In Norway, for example, from 1971 to 1972, the annual real rate of growth in government revenue jumped from 12 to 72 percent. As a result, in 1973 real expenditure rose 61 percent. Yet, in the years following this spike in revenue, Norway managed to integrate its new resource riches into its economy without too much disruption to inherited norms. Then and now, these windfalls were absorbed into an established nation-­state characterized by deeply held democratic traditions, a well-­defined and accepted social contract, and a relatively conservative administrative system. In large part, it was Norway’s institutional sophistication, and specifically the governance of its SWF, that allowed for effective management of resource revenues (see chapter 5). In a bid to replicate Norway’s success, vulnerable resource-­rich countries, particularly those in the Gulf, have adopted the type of institution that worked for Norway and other modern states. As the case of Norway illustrates, SWFs are key institutions for managing resource revenues for the long-­term interest of the state, maintaining a balance between current expectations and long-­ term commitments. Equally, SWFs contribute to macroeconomic stability while acting as a switch point for assets flowing into the nation-­state and then flowing out to global financial markets. Finally, SWFs can also serve as a strategic investor underwriting the long-­term transformation of the domestic



The Gulf States’ Funds

economy in relation to the global economy. In these ways, SWFs are capable of dampening or managing the negative consequences of resource wealth. Institutional Adoption

It is arguable that the weakness of Gulf States’ political and economic institutions prompted the search for new institutional forms capable of assuming responsibility for long-­term income stabilization as well as development. Moreover, there is evidence to suggest that Middle Eastern states were actually early adopters of the SWF institution, such as in Kuwait in 1953. In table 8.1, these states are identified with the dates of formation and current assets under management (AUM). This table suggests that SWFs are organic to the Middle East and inherently non-­Western. However, we do not ascribe to this interpretation of history. Instead, we give initial credit for the SWF institution to the United Kingdom and the United States. It is often suggested that the first SWF was the idea of the forward-­thinking ruler of Kuwait in the early 1950s, Sheikh Abdullah Al-­Salem Al-­Sabah. Sheikh Abdullah apparently decided that the state’s money should be set aside for the long-­term welfare of the people of Kuwait. We do not doubt this logic. However, we note that this SWF, which was originally known as the Kuwait Investment Board, was established eight years before the country attained independence from the United Kingdom and was actually established in London. Here, we can assume a British influence over the fund’s establishment and design. The second country to establish an SWF, in 1956, was Kiribati. In this case, the fund was set up to help manage phosphate mining revenue. At the time, Kiribati was under British rule (until 1971); the British administration was behind the levy on phosphate exports that ultimately led to the Kirabati Revenue Equalisation Reserve Fund. In short, the United Kingdom played a crucial role in conceptualizing and designing SWFs in these early years.4 These funds were based on prefunded pensions (that offered income smoothing and precautionary saving), which had become popular in Canada, the United Kingdom and the United States.5 As history suggests, SWF adoption reflects the influence of global policy networks that have championed the virtues of Western institutions around the world. Indeed, the policy transfer process may be thought to reflect the proliferation of policy entrepreneurs in the context of what Stone (2008a, 19) has called the “global Agora”—­the various and growing “transnational policy spaces where global public policies occur.” As evidence, there are various actors and entities involved in promoting policy innovation and the diffusion of institutional templates and ideal forms. Those involved may include multilateral institutions like the IMF, international organizations like the OECD, NGOs, consultants and private agents that set norms and standards well beyond the interests and expectations of their sponsoring nation-­states (see Chwieroth

125

126

Chapter 8

Table 8.1. Gulf States’ adoption of SWFs Sovereign Wealth Fund

Date of Creation

Origin

AUM US$ Billion

Investment Style

Entity/ Structure

Bahrain

Mumtalakat Holdings

2006

Oil

9.1

Portfolio

Corporate

Iran

Iran Oil Stabilization Fund

1999

Oil

23

—

Corporation

Kuwait

Kuwait Investment Authority

1953

Oil

296

Mostly Portfolio

Fund

Oman

Oman Investment Fund

2006

Oil, Gas

—

—

Fund

Oman

Oman State General Reserve Fund

1980

Oil, Gas

8.2

—

Fund

Qatar

Qatar Investment Authority

2005

Oil

100

—

—

Saudi Arabia

Public Investment Fund

2008

Oil

5.3

—

—

Saudi Arabia

SAMA Foreign Holdings

N/A

Oil

523

—

Fund in Central Bank

United Arab Emirates

Emirates Investment Authority

2007

Oil

—

—

—

UAE - Abu Dhabi

Abu Dhabi Investment Authority

1976

Oil

627

Mixed

Fund

UAE - Abu Dhabi

Abu Dhabi Investment Council

2007

Oil

—

—

—

UAE - Abu Dhabi

International Petroleum Investment Company

1984

Oil

14

Portfolio

Corporate

UAE - Abu Dhabi

Mubadala

2002

Oil

13.3

Portfolio

Corporate

UAE - Dubai

Dubai World Holdings Ltd

2006

Oil

—

Portfolio

Corporate

UAE - Dubai

Investment Corporation of Dubai

2006

Oil

70

Portfolio

Corporate

UAE - Ras Al Khaimah

RAK Investment Authority

2004

Oil

1.2

—

—

Country

Source: SWF Institute



The Gulf States’ Funds

2009 on the role and significance of the IMF over the postwar era). It has also been noted that the diffusion and adoption of policies and institutions may be prompted by coercion, competition, and emulation through to shared learning. Among public policy specialists, it has been observed that nation-­states have become increasingly open to the diffusion of policies and institutions whose origins lie outside immediate domestic concerns and, more often than not, are to be found in a variety of international institutions and policy networks (Stone 2004, 2008b). In part, the policy transfer process may be thought to reflect more general imperatives associated with globalization and the increasingly contingent effectiveness of national economic policies (Meseguer and Gilardi 2009). We have noted elsewhere that the Asian financial crisis of the late 1990s prompted a number of affected countries to establish SWFs because intervention by the IMF in the case of another financial crisis would have been accompanied by national shame and significant domestic political conflict (see chapter 6). As well, we noted that a number of smaller Asian countries, recognizing their vulnerability to regional geopolitical power plays, sought ways of sustaining their independence through the adoption of an institutional form that owed its origins to the international financial community rather than domestic interests. In this respect, the adoption of an SWF may reflect competition among nation-­states for regional and global power and influence (see chapter 3), if not dominance (as suggested in our case study of the China Investment Corporation in chapter 7). The data presented in table 8.1 shows that most Gulf SWFs were established in a short space of time, effectively from 2002 through 2008 (leaving aside the Kuwait Investment Authority and Abu Dhabi Investment Authority). For instance, the UAE’s Mubadala was established in 2002, followed by the RAK Investment Authority in 2004, Qatar Investment Authority in 2005, Bahrain’s Mumtalakat and the Oman Investment Fund in 2006, the Abu Dhabi Investment Council and Emirates Investment Authority in 2007, and, finally, the Saudi Arabian Public Investment Fund in 2008. Simply invoking the functional value of an SWF in the context of burgeoning earnings from exporting oil resources may not be a complete explanation of both the timing and the pattern of adoption (country by country) within the region. This point has been made by Chwieroth (2010), who suggests that the adoption of the SWF institution should also be considered as a process of emulation through policy transfer. Based upon an analysis of 140 countries throughout the period 1984 to 2007, he concluded that there is a “neighborhood effect” in the rate of adoption, just as the source of national wealth creates a club-­like effect. He demonstrates that these effects were most apparent among oil and gas exporters. For Chwieroth (2010), emulation is related to peer-­based “standards of behavior as well as the desire to maintain or enhance esteem, pride, prestige, and status.” In a region where competition among elites for international recognition and acceptance extends to the purchase of Western trophy assets and the cultivation of formal and informal cultural, educational, and military alliances,

127

128

Chapter 8

it should not be surprising that the adoption of SWFs may be part of the fads and fashions that characterize status-­seeking behavior. If entirely believable, this explanation discounts the significance of the SWF as an institution that is symbolic of countries’ modernity. While we accept that emulation is a form of status-­seeking behavior, we would also suggest that in this particular case the SWF institution represents a form of organization that is believed by domestic elites to signal to local stakeholders, neighboring countries, and to the rest of the world that its country has attained a level of maturity consistent with the leading edge of global innovation. The adoption of SWFs can be construed as a symbol of the global “centrality” of the adopting country. Symbol and Form

The SWF institution has distinctive attributes and constituent features (form) that mark it as different from conventional banks and related institutions. By “form” we mean that it is a “purposive systematic arrangement” with explicit and implicit institutional boundaries that distinguish it from other related organizations and thereby provide it with a mandate to perform certain tasks and functions using recognized instruments (R. S. Summers 2006, 5). Certain forms may be more effective in realizing certain functions. In the case of the SWF, its form is both symbolic of the development of modern financial management and can be shown to be more effective than treasury agencies in realizing certain functions. As such, form and function are related even if form is not uniquely determined by function.6 For instance, national treasury agencies that undertake similar functions as SWFs appear to be quite different organizations. Treasury agencies are typically staffed by their national government civil service, have no independent powers from their ministries, and are subject to instruction by the responsible minister—­they do not have the formal powers and responsibilities as well as the organizational structures of SWFs. Indeed, reading the Santiago Principles highlights the significance of claims for the independence and autonomy of decision-­making embedded in formal conceptions of the SWF institution. As such, the form of the SWF represents an opportunity for governments to remake the past in relation to the country’s blueprint for the future, one that is not compromised by inherited traditions. From our field research, it would appear that the Gulf States assumed that breaking with the past by adopting the SWF institution was preferable to remaking their inherited institutions. By this logic, the SWF is symbolic of a commitment among the Gulf states to adopt the instruments of advanced financial management to facilitate the modernization of what were otherwise semifeudal states. The SWF is more than just a tool for managing resource wealth; it is a step toward modernity and economic development.



The Gulf States’ Funds

If emulation of modern financial management has a hollow ring in the aftermath of the global financial crisis, it should be acknowledged that from the mid-­1980s onward the financial growth and development of Anglo-­ American economies represented, for many, a mode of capitalism that was to sweep away vestiges of the past. So, for example, this point has been made with respect to the transformation of U.K. and U.S. corporate capitalism, reengineered in the name of shareholder value and accountability (Jensen 1993, 2000). Equally, it has been widely observed that financial interests fueled wave upon wave of mergers and acquisitions. The global hegemony of financial capitalism has been widely discussed, particularly with reference to the discounting of other “varieties” of corporate capitalism apparent in Germany and Japan (Dore 2000; Dixon 2011, 2012). In short, finance-­led capitalism has been attributed unparalleled significance in the global economy over the past few decades. Through the global financial crisis of the first decade of the twenty-­first century, the pervasive influence of finance on individuals, corporations, and even governments is all too apparent. We should not be surprised by this fact of life: the size of the financial economy was estimated to be nearly three times larger than the real economy in 2007 (Lee et al. 2009). Moreover, the significance of institutional investors in global financial markets is well documented (see Hawley and Williams 2005). It is appropriate, then, that twenty-­first-­century capitalism is portrayed as the era of financial capitalism; which is another way of explaining why production and trade, often described as the core attributes of the “real economy,” are no longer the dominant forces in the global economy. This is not to say that the real economy has lost its importance for understanding the global economy; but its relevance as the catalyst for policy formation has fallen in favor of finance. As Dore (2007) puts it, the global economy has moved away from industrial relations toward investor relations. In our view, SWFs represent the high-­water mark of financialization and are the next installment of capitalist development following in the wake of Clark’s (2000) pension fund capitalism. Governments have sought to plug in and reap the benefits of financial capitalism through their SWFs, assuming these funds have a form that is fit for purpose in relation to the imperatives driving global financial markets. However, Gertler (2001, 15–­16) argues that idealized institutional forms cannot be easily transferred between jurisdictions. He suggests that adoption of external institutions depends upon the larger macroregulatory environment and institutions that frame society. He also suggests that transposing “a distinctive set of practices from one national space to another  .  .  . where the institutional environment is not as conducive or supportive of such practices will be limited at best.” The successful transfer of policies and institutional forms between home and host jurisdictions thus depends upon shared cultures and traditions, or what Gertler refers to as “institutional thickness.” This implies that SWF adopters in non-­Western jurisdictions face a variety of challenges that may constrain the effectiveness of their new institutions.

129

130

Chapter 8

The Challenges of Adoption

Even in the West, establishing an effective financial institution is challenging. It requires a mix of rare inputs and complex design features that, in combination, produce the foundation for effective institutional behavior. Taking inspiration from and extending Clark and Urwin’s (2008a) principles of best-­ practice investment management, three characteristics stand out as being important for the success of SWFs. We refer to these as the Three Ps: 1. People: SWFs must be able to attract, motivate, and retain talented individuals with the necessary skills and competences for managing modern financial institutions operating in the global economy. As public organizations tasked with investing in private markets, they must find ways to fill public sector jobs with individuals who can compete in and with the private sector. This can be quite challenging, as fund sponsors are loathe to pay employees private sector rates of compensation. However, talent, or human capital, is paramount for success in financial markets and arguably in modern economies (see Teece 2000). 2. Process: Financial institutions also require highly developed decision-­ making frameworks and risk mitigation capabilities in order to manage the complexities of investing. Successful investment management within institutional investors is a function of how decision-­making is framed, routinized, and implemented.7 Scholars have recognized the importance of governance for institutional performance for many years (see North 1990; Williamson 1996). Research has also unequivocally demonstrated a correlation between good investment governance and positive financial returns (see Hsin and Mitchell 1997; Mitchell and Hsin 1997; Iglesias and Palacios 2000; Ammann and Zingg 2010). Innovation in governance is particularly important in overcoming inherited institutional and organizational features, so as to ensure functional performance (Clark and Urwin 2010). 3. Politics: One of the obvious factors that may constrain a sovereign fund is the role that politics can play in the investment decision-­making process. To suggest that these funds can be entirely apolitical is, in our view, naive, notwithstanding the objective of the Santiago Principles. Every government fund is the product of a political decision. However, close ties with policymakers can be damaging to returns if close relationships distort the investment decision-­making of skilled professionals (Berstein et al. 2009). Indeed, research in a rather different domain shows that political influence can have negative impacts on the financial returns of government pension funds (see Romano 1993). If these Three Ps can be realized through sound investment governance and organizational design, funds can operate in financial markets effectively. As



The Gulf States’ Funds

such, this raises the question of how the Gulf States have responded to these imperatives in SWF design and implementation. There are two distinct views on how this process has unfolded: the official view and the view of current and former employees at the Gulf SWFs. According to official literature and formal communications, the process of SWF adoption appears to be going extremely well. On the surface, these funds are operating like any other globally oriented financial institution. SWFs have investments across a range of asset classes on a global scale, some outsourced to asset managers and some done by in-­house teams. They have sophisticated and talented staff. They have dedicated investment departments, risk committees, investment committees, and due diligence teams; and they even share a variety of formal decision ­hierarchies that reinforce the impression of best-­practice investors operating in the region. Finally, respondents note the clear separation of funds from political leadership. At this level of analysis, Gulf States would appear to have met the Three Ps. Upon deeper examination, interviews with current and former financial market-­oriented employees at Gulf States’ SWFs have identified a variety of problems with these official characterizations. While funds’ communications teams have grasped the importance of the Three Ps in their outward-­focused statements, funds’ departments and operations managers are constrained in a number of ways. 1. People: It appears that attracting high-­quality talent to work at these funds is a serious problem. The small pool of local talent available in the region is particularly problematic. Moreover, those employed within these funds from the Gulf often have work norms that are not aligned with the norms typical of Western financial institutions. In order to overcome this problem, Gulf SWFs’ human resource strategies rely almost entirely on expatriate labor: funds recruit overseas for the talent needed to sustain the SWFs’ functions. However, this arrangement generates a variety of internal tensions and agency issues. 2. Process: Notwithstanding formal organizational charts, the decision-­ making frameworks within Gulf funds are, for the most part, idiosyncratic and unpredictable. The publicly available organizational maps simply do not do justice to the actual decision-­making processes and protocols that dominate the funds examined. There is a common inclination (in practice) to forgo formalization and, instead, base decisions (both in terms of hiring and investments) on a variety of local heuristics. In particular, it would appear that personal relationships and cultural symbols of trust often trump fundamental analysis. Rather than relying upon the domain-­specific knowledge of financial experts inside and outside the Gulf State SWFs, there is a tendency to discount the evaluation of relevant knowledge in decision-­making; that is, expertise is often subject to the play of interests inside and outside the funds.

131

132

Chapter 8

Knowledge and information about global market performance is not only “sticky” in the sense of being attached to expertise (von Hippel 2005), but its status and efficacy easily degrade in the face of arbitrary decision-­making. 3. Politics: SWFs in the Gulf have an intimate relationship with political elites. The political leadership feels obliged to watch over the operations of these funds, either personally or through the nomination of close political allies who run departments or serve as funds’ managing directors. Clearly, the close relationship between government and SWFs can (but need not) damage returns due to complications in the investment decision-­making process. In fact, leaders appointed to run the various departments are there because of their personal relationships and political identities, not their financial expertise. As a result, there is a mismatch between individuals with final authority over investment decisions and their expatriate employees. The complex and time-­sensitive decisions typical of large global financial institutions are often caught up in fundamental disagreement over investment principles and policies. In sum, there is a contradiction between Gulf State norms and those of Western financial institutions and markets. In the parlance of Gertler (2001), the effectiveness of Gulf SWFs has been affected by the larger macroregulatory environment and institutions that mark Anglo-­American countries as different from the Gulf States, and many other non-­Western countries for that matter. Realizing the Promise of Finance

It is tempting to suggest Gulf SWFs are uniquely dysfunctional: that Gulf funds will never be able to adapt to the norms of Western finance. We do not subscribe to this view; our findings constitute evidence that realizing the promise of finance, be it in the Gulf or elsewhere, is extremely challenging. While some jurisdictions, such as in the Gulf, may take decades to develop the necessary ingredients for best-­practice SWFs, some Western funds have also struggled to overcome inherited institutional commitments. One of the lessons from our research program on the design and governance of pension and sovereign funds has been that effective financial management in financial markets is enormously demanding. Good investment governance, talented investment professionals, and competent leaders are in short supply. For example, the representative inclinations within U.S. public pension funds are a constraint on investment performance. The firefighter or history teacher who serves as a trustee on multibillion-­dollar pension boards is, in our experience, no better at making an investment decision than a sheikh from the Gulf. Both are there for who they are and not for what they can



The Gulf States’ Funds

do or what they know. Similarly, there are a variety of Western jurisdictions that struggle with the talent issue. Attracting savvy financiers from core financial markets to help manage funds in peripheral locations has been challenging. For instance, the Norwegian SWF has also established investment teams around the world. In this and other cases, the geography of talent is closely allied to the geography of finance: an inability or unwillingness to adapt to this imperative is, more than likely, a constraint on institutional effectiveness. The institutional distance from the Gulf to Western markets amplifies these problems. To be sure, this has been recognized by Gulf States. The cultural and institutional starting point forty years ago was diametrically different from where it is today. Even if the tents and nomads have been replaced with skyscrapers and palatial hotels, inherited commitments are not so easily discounted (just as new institutions are not so easily constructed). It is challenging to the leadership of these countries, who come from the pre-­oil period, to manage multibillion-­dollar financial institutions, just as it is too much of a burden to place on an American firefighter or police officer. Nevertheless, the investment committees that have final say over nearly all investments made within Gulf funds remain almost entirely local (with some rare exceptions). Gulf elites are unwilling to hand supervision and management of their funds to expatriates, due to the obvious agency issues. Significantly, the solution to the problems in the Gulf is the same as the solution to the problems facing Western funds: the management of scarce human capital. With talented employees and competent leaders, the design, governance, management, and policy implementation will inevitably follow. Significantly, the Gulf funds recognize this and are working to develop domestic expertise through a variety of policies that seek to train a new generation of local financiers. Indeed, decisions have been made at the highest levels to forgo some financial returns in the short and medium term in order to provide valuable experience to locals. This is seen as an investment in human capital. Even so, in many cases appointment is an opportunity to engage in patronage, reciprocity, and gestures of tribal and ethnic loyalty. Realizing the promise of finance, then, is a function of education and political development. Put another way, a country cannot hope to truly realize the benefits of its SWF without first attaining certain levels of competence and governance. In this regard, establishing and managing SWFs in the Gulf represents an important symbol of modernity. On the one hand, the adoption of an SWF demonstrates to the world that these regions have (or are developing) the capabilities to run these financial institutions and play their role in global financial markets. Access may be constrained by a variety of limitations in the short term, much as they are for public pension funds in the United States, but the symbol remains important. The trillions of dollars sitting in financial institutions have undoubtedly raised the global status of the Gulf States.

133

134

Chapter 8

On the other hand, the adoption of an SWF may be used to demonstrate to the local populace a commitment to a new path for the nation: integration into the global economy and modernity. Through reference to these funds, local leaders may claim legitimacy if not common acceptance by all sections of the community. In a manner of speaking, then, the SWFs in the Gulf are part of a long-­term institutional transformation of the region. The purpose is to reshape domestic institutions to cope with the looming challenges of modern financial capitalism, if not liberal democracy. Here, we take a long-­term perspective on the issue of institutional convergence. It is apparent that these countries have made a commitment to finance and financial markets, which will require breaking with the past (in one form or another). Conclusions

Over the past decade, more SWFs have been created than ever before and, in sum, more than the previous forty years put together. Countries around the world look to these institutions as representatives of modern finance designed and managed so as to place these countries in global financial markets. For some countries, SWFs are more than instruments adopted to solve problems: they represent to their own constituents and to the outside world a commitment to modernity in that they emulate the form and functions of Western institutions. If the problems of resource wealth are pressing and of enormous importance for sponsoring governments, accepted institutional solutions to these problems carry a great deal of weight in the multilateral forums that join together the West with the East and the Middle East. In effect, the adoption of SWFs by the Gulf States is a gesture aimed at facilitating their inclusion in the international community of nations. While the accepted form of SWFs is well known, and based upon the principles and practices of modern financial theory, we have suggested in this chapter that the establishment of SWFs can be quite problematic when considered in the light of the people, processes, and politics of institutional formation. The experience of the Gulf States suggests that no institution, however idealized in terms of its form, can be implemented such that form and function trump inherited traditions and established cultural practices. This conclusion should not surprise social scientists aware of the challenges that face countries when establishing institutions that are modeled on some idealized form and function. Inevitably, for institutions to be effective, they must be embedded in their host societies (notwithstanding the costs and consequences that might come with being embedded). To think otherwise, to think that these institutions can float free of the established order and its constituents, would seem to ignore the history and geography of institutional innovation (Gertler 2001). Our argument should not be interpreted as suggesting that Gulf States’ SWFs must fail in the future. Whatever the form of the SWF institution, its



The Gulf States’ Funds

functions remain crucial to the long-­term development of the Gulf States in the context of the global economy. That is, whether or not SWFs succeed, the functions performed within its institutional domain are vital for the future of the Gulf States. Take, for example, the need to modernize and deepen the inherited financial systems of many of the Gulf States; the evidence suggests that many of these states’ financial systems are relatively immature and unlikely to prosper at a level consistent with the long-­term diversification of states’ industry structures without government-­led initiatives to promote financial development (Beck 2010). As such, to the extent that the SWF form is consistent with realizing the functions needed for a modern economy to participate in global financial markets, this institution could play a significant role in promoting local financial expertise and capacity. The adoption of the SWF form is not only a gesture in favor of modernity, it is a commitment to economic development. However, we must take care not to idealize or in some sense fix SWFs’ form and functions. One lesson from the global financial crisis has been that institutional innovation has been a necessary response to the challenges supplied by the crisis; to imagine that institutions can or should remain fixed in terms of their form and functions, given the changing global financial environment, would be to consign these institutions to failure (over the long term). More importantly, to hold constant institutional form and functions in the face of changing market imperatives may be to set in motion a crisis that would profoundly discount the realization of the purposes or goals that animated the establishment of these institutions in the first instance. For the Gulf States, as for other resource-­rich but small economies, the adoption of the institution must also be accompanied by institutional innovation consistent with the leading edge of global markets. Otherwise, these countries will not be able to manage their resource wealth in a manner consistent with the interests of future generations. Elsewhere, we have argued that one characteristic of global financial markets is their unceasing evolution. That is, endogenous changes in structure and performance that discount the effectiveness of inherited theories and practices are widespread (Clark and Urwin 2010). As the global financial crisis has demonstrated, holding to conventional policies and practices may come at a very heavy price. Equally, the global financial crisis has demonstrated that financial markets can penalize those institutions and their sponsors who would wish to hold constant inherited forms and conventional functions. Having adopted the SWF as a commitment to modernity, the Gulf States have also to make a commitment (if unacknowledged) to the pathways of global financial integration. Whether they are able to manage the people, processes of decision-­making, and domestic politics in ways consistent with such innovation remains to be seen. Here, then, is a significant implication from our discussion about the apparent challenges facing the Gulf States when establishing SWFs. Whereas,

135

136

Chapter 8

in the short term, establishing such institutions in the context of inherited traditions and commitments requires institutional innovation within the organization, making good on the promise associated with SWFs also requires institutional innovation consistent with changes in the local operating environment. In other words, there are organizational workarounds in the short term, such as the importation of talent, but in the long term the local environment will need to evolve so that the inputs for a successful financial institution are readily available. As such, the challenges associated with the adoption of SWFs are not trivial: on one level, building an institution consistent with the effective realization of its desired functions, and, on the other level, building an institution that, once established, is able to adapt and develop its functional performance in ways consistent with the changing environment. It may turn out that this second imperative is more difficult to achieve than the first, in that the compromises needed to make good on the first may inhibit institutional innovation in the long term.

9 Conclusion: Form and Function in the Twenty-­First Century

The global financial crisis has challenged those who believe in the integrity of financial markets, those who hold the commonplace presumption in favor of light-­touch regulation, and those who believe that markets are valuable mechanisms for managing and distributing risk. Alan Greenspan’s recanting of his hitherto unquestioned belief in the rationality of market agents is emblematic of the reregulation of banking institutions as well as the compensation practices of the global financial industry.1 Notwithstanding the scope and depth of the global financial crisis, and the debate over its causes and consequences, recent years have also seen the continued growth and development of SWFs. As these funds indicate, nation-­state sponsors have not lost faith in financial markets. In fact, some would say the appeal of these financial institutions has risen over the past few years. For example, Merton (2009) has suggested that the United States should establish an SWF to hold and manage assets acquired through the crisis, eschewing government management in favor of autonomous investment so as to realize the value of those assets as markets recover. The rationale underpinning Merton’s recommendation is a firmly held belief that there are governance pitfalls associated with public investment. For Merton, the recent experience of the US Pension Benefit Guarantee Corporation (PBGC) is a salutary lesson in how not to design and govern investment strategy, noting that approval by the PBGC Board and the Secretaries of Commerce, Labor and the Treasury for increased equity exposure came in February 2008 (nine months short of the notional trough of the crisis; see French et al. 2010). By implication, and by reference to the logic justifying the establishment of SWFs around the world, there is something special about the form and functions of SWFs that distinguish this type of institution from its close cousins within government, including the currency reserve funds of 137

138

Chapter 9

central banks. As we have noted previously, one claimed virtue of SWFs is to be found in their relative isolation from political influence. Moreover, the quasi-­governmental status of these institutions facilitates a level of sophistication in investment and operations typically not found within government, thanks to SWFs’ claimed commitment to best-­practice standards of governance and transparency (including the Santiago Principles). Sovereign sponsors often have a specific purpose (or purposes) when establishing an SWF. For example, the Singapore government established the GIC so as to insure the welfare of its citizens against global economic and financial instability as well as regional political instability. The Norwegians established the NBIM so as to manage resource wealth and underwrite government pension obligations on behalf of future generations. Similarly, Australia established the FF so as to promote intergenerational equity while ensuring macroeconomic stability in the face of burgeoning public and private wealth. For the Gulf states, SWFs were established, in part, to preserve their resource wealth given past experience of windfalls lost to corruption, poor investment, and arbitrary decision-­making. China has sought to realize value from its U.S. dollar holdings through the CIC, while maintaining domestic economic stability. Sovereign sponsors have sought, through their SWFs, rates of return above the notional risk-­free rate of return on government-­backed securities or, more precisely, a real rate of return on financial assets higher than the rate of national economic growth. These goals and objectives are to be realized through the medium of global financial markets and, in particular, the dominant markets of the West: London and New York (Wójcik 2011). Whereas many nation-­states are wary of emerging markets, Western markets promised the opportunity to realize their ambitions through markets deemed highly efficient, well regulated, and relatively transparent in terms of the rights of minority shareholders (La Porta et al. 1997, 1998).2 As is widely recognized, the post-­1945 map of twentieth-­ century economic crises was biased toward Latin America and Asia; these crises were managed in ways that sought to discount the flow-­on effects to the core financial markets (Barro 2006). Recent history suggests, however, a rather different geography of financial crisis, wherein the core markets of developed economies may also drive financial instability: “financial liberalisation may have made it more likely that financial factors in general, and booms and busts in credit and asset prices in particular, act as drivers of economic fluctuations” (Borio 2006, 3408). Having invested heavily in the integrity of Western financial markets, the global financial crisis could have sapped the confidence of sovereign sponsors such that SWFs may have turned away from those markets in favor of other kinds of investment institutions and opportunities. The financial crisis did prompt a number of funds to pull back their exposure to Western markets and return assets to their sponsors to stabilize macroeconomic circumstances (as in Singapore). But some SWFs took the opportunity to raise their stakes



Conclusion

in markets otherwise subject to diminished expectations and uncertainty. Looking forward, then, it is important to gauge the likely impact of the global financial crisis on SWFs’ form and function. Accordingly, we need to look beyond the crisis to consider the various options open to these institutions in the context of markets subject to more stringent regulation and low-­growth economic prospects. After all, SWFs were conceived at a time when Western financial markets appeared to define the frontiers of investment. One of the challenges facing SWFs is whether they will continue to rely on Western markets and adopt Western institutional forms or if they will instead create new pathways for investment of sovereign wealth. The form and functions of SWFs represent a shared commitment, deliberate or otherwise, to a certain kind of institution and a particular view of the proper governance of investment separate from the sovereign. Indeed, it might be reasonably suggested that the SWF phenomenon is yet another instance of the hegemony of financialization. As such, SWFs may be taken to represent the high-­water mark of this phenomenon and, if they are to prosper in the aftermath of the global financial crisis, must evolve on their own account. After all, the establishment of any SWF is likely to be accompanied by rhetorical gestures and political commitments; nation-­states are hardly disinterested principals when they put at arm’s length an important lever in global financial markets. Therefore, the formation of any SWF represents, inevitably, a political moment in the life of a nation-­state, which means that these institutions carry with them those interests whether explicitly or implicitly represented in the governance and organization of the institution. This final chapter looks to the future and rehearses the argument about form and function, recognizing that today’s ideal form of the SWF is based on two sets of rules: those related to who is responsible for investment decision-­ making and those related to the conceptual foundations of investment practice. Thereafter, the chapter suggests that the form of SWFs may not be stable over the long term; the challenge facing SWFs is, in part, about transcending traditional forms of investment management in favor of a genuine commitment to long-­term investment in the interest of both the SWF and the sovereign. We suggest, in fact, that transcending the current paradigm may necessitate the transformation of the form of SWFs such that they become strategic investors rather than portfolio investors, knitting together their sponsors’ geopolitical interests with investment management. Form and Function

The form of an institution refers to the blueprint or principles underpinning its establishment. In theory, institutional form provides a certain identifiable shape or structure to an organization such that it can be copied or imitated by others. Ostrom (2000, 149) identifies several important principles of

139

140

Chapter 9

institutional design that help us understand better the current form of SWFs. She begins with the most obvious but crucial design principle: setting the boundaries of an institution such that it is clear “who is in and who is out of a defined set of relationships.” Broadly interpreted, this can be applied to SWFs for distinguishing their mandates, the roles and responsibilities of governing boards, and the delegated powers of investment executives. A related design rule refers to the source and volume of resources available for institutional decision-­making, while another rule refers to the mechanisms by which members of an institution can modify its formal structure and organization. In many respects, SWFs begin with a set of resources from their sponsors and, over time, effectively generate their own resources for decision-­making from assets under management and investment performance. Few, if any, SWFs have the authority to vary their responsibilities and organizational structure. In other words, their intended function is often as rigidly defined as the fund’s form is designed. It is commonplace to suggest that form and function are intimately related such that function follows form, and form is conceived in relation to planned functions. So, for example, recognizing that most SWFs were conceived to isolate or ring-­fence the management and investment of national assets from direct political influence, this function has obvious implications for the formal design of the institution and in particular the boundaries of SWF institutions relative to their nation-­state sponsors. At the same time, having established the formal constitution and membership of an institution, its functions could be thought to follow from its original purpose, assuming that those responsible seek to match their formal responsibilities with their apparent competencies. That is, institutional form can effectively set boundaries to the scope of functions consistent with the inherited form of an organization. For Merton and Bodie (2005), functional efficiency is the hallmark of an effective institutional environment. Their manifesto for institutional design has the goal of producing individual and collective decision-­making consistent with accepted theories of financial market structure and performance. So, for example, acknowledging behavioral constraints on effective individual decision-­making, they argue that institutional design can compensate for biases and anomalies such that collective decision-­making may dampen or even eliminate those biases. In effect, they assume that collective decision-­making tends to exclude extremes, relying upon the search for consensus to evaluate the options while applying expert judgment about causes and consequences in ways that tend to exclude individual prejudice. Whether this is, in fact, a plausible argument is subject to debate, especially in the area of pension fund and endowment fund investment management (see Clark et al. 2006, 2007 disputing the claimed “wisdom of crowds”). Nonetheless, it is a crucial argument made in favor of separating the management of sovereign assets from the political process—­it



Conclusion

is presumed that expert investment boards are not subject to the same pressures as their political masters and are, as a consequence, more rational.3 Merton and Bodie (2005) idealize institutional design and the process of collective decision-­making. Those knowledgeable about the process of designing and establishing financial institutions reject idealism in favor of a more realistic conception of the bargains struck and the compromises made to produce an agreement to establish a certain type of institution for an agreed-­upon set of purposes (Roe 2006). Considering the establishment of SWFs, we have shown that the political process remains connected with the institution even if that institution was conceived to be relatively autonomous. In some cases, moreover, these institutions are thoroughly integrated with the political process or, at least, with the machinery of government (as in Norway and China). Whereas Merton and Bodie suggest that institutions can, if properly designed, mediate or eliminate decision biases, the design process itself is likely to be implicated in the relationships and commitments that were the basis for establishing the institution. As such, the design process tends to produce imperfect institutions that, in some cases, may actually amplify decision-­making biases and anomalies and reinforce the compromises that the institution was intended to avoid. In this context, the approach taken by Clark and Urwin (2008a, 2010) has been to accept institutional form—­the inherited constitution and structure of the organization—­as a given, and to focus upon the governance of SWFs in the hope that effective governance can compensate for both imperfections in the design process and apparent biases and anomalies in individual and collective decision-­making. Here, we assume that effective financial institutions have well-­defined purposes, even if there may be conflict or at least tensions among stated purposes. We also contend that reform is always difficult, given an institution’s heritage, and that a governance approach focused upon the coherence of decision-­making may be able to improve the functional performance of financial institutions and thereby better realize their goals. Most importantly, we accept that institutional form tends to be rather static compared to the pace of innovation in financial markets (Merton 1995); governance can compensate for the fixed form of institutions by adapting to the imperatives driving financial markets (see Lo 2004). Elsewhere, we suggest that the decision-­making process be hierarchically ordered so as to allocate responsibility for decision-­making between different tiers of financial organizations according to their time-­sensitive and resource-­intensive characteristics (Clark and Urwin 2008b). This approach has certain advantages, notably its instrumentalist conception of agency over inherited structure and its recipe for effective policies and procedures (standards of best practice). It does depend on a couple of unstated assumptions, however. Most obviously, our governance perspective assumes that institutional form is neither determinant of behavior nor an

141

142

Chapter 9

outright impediment to incremental adaptation. This two-­part assumption cuts against standard analytical treatments of bureaucracies, which assume that bureaucracies are static and antithetical to reason (see Wilson 1989). Further, it suggests a degree of separation from political sponsors that may not be plausible in some cases (as in the CIC). Institutional form could limit incremental adaptation, and governance could be captured by vested interests. Even so, our governance perspective assumes that functional effectiveness is a necessary (but not sufficient) condition for any institution’s claim of legitimacy; as such best-­practice governance can be seen, in some cases, as a gesture designed to claim institutional legitimacy. There is, however, a larger unstated assumption shared by Merton and Bodie, Clark and Urwin, and political elites who believe in the mission of SWFs: that is, financial institutions offer a viable means of realizing a premium on sovereign states’ financial assets.4 More generally, there is a common belief that financial markets are an efficient mechanism for pricing and distributing risks, and that failures in these markets can be reasonably explained by reference to market maturity, idiosyncratic factors having to do with the failures of particular institutions (like Long-­Term Capital Management), and poor governance and regulation. Otherwise, financial markets are an efficient mechanism for allocating resources, representing an institutional innovation consistent with long-­term development (King and Levine 1993a). Recognizing the advantages of financial markets for investing sponsors’ assets, the adoption of an SWF model based on accepted institutional designs and combined with a commitment to best-­practice governance is likely to realize a premium on a country’s resources. SWFs as Market Makers

SWFs will be a force to be reckoned with as financial markets recover from the global financial crisis. Renewed commitments made by many sovereign entities to their SWFs as well as the recently established SWFs suggest that the institution has not been as compromised by the turmoil in global markets as other types of funds. If anything, it seems that their significance has been strengthened by the increasing reliance of the financial services industry on their growing assets and their commitment to portfolio investment. In a survey of the global investment industry, Towers Watson (2010) charted the relative growth in assets held by SWFs as the volume of assets held by conventional pension funds and insurance companies have declined in absolute and relative terms. Most importantly, the growing volume of assets is held by a small number of institutions when compared to the number of similarly sized pension and insurance funds and the average size of a top ­one thousand listed pension fund (see table 2 in Towers Watson 2010).



Conclusion

Not surprisingly, there is a close relationship between these institutions and the global investment industry. The average size and commitment of SWF assets is crucial to this relationship. But there is more to the relationship than size: because SWFs are not constrained by burgeoning liabilities, as is the case with many DB pension plans; because they are not managed in relation to participants’ account balances, as is the case with defined contribution pension funds; and because they are not subject to increasing solvency requirements, as is the case with insurance companies and banks, SWFs can be thought to have greater discretion over tactical and strategic asset allocation (Campbell and Viceira 2002). Such capability can be seen as affecting the nature of the risks that SWFs are willing to bear, the time horizon of investment, the benchmarks (if any) used to evaluate performance, the demand for innovation in investment management, as well as the nature of products offered to SWF clients. If otherwise risk-­averse in relation to the possible political costs (borne directly or indirectly) of high-­profile failures of investment strategy, SWFs have the power and position to drive the frontiers of global investment management. As already suggested, our assessment of the prospects for SWFs in the global economy is based upon the supposition that the form of SWFs is an essential element of the story. That is, as SWFs mimic and match the institutional logic and organization of related institutional investors, they also rely upon what MacKenzie (2006) and others have referred to as the shared norms and intellectual foundations of investment practice. The standard example illustrating this argument is, of course, the Black-­Scholes option pricing model, which is used throughout the Western financial sector to set market prices of future positions. For many institutions, Black-­Scholes is the reference point, as well, for exchange and trading under risk and uncertainty. So widely accepted is this model that it has morphed from being an instrument to being a constitutive element of institutional decision-­making and market behavior. It is no less important for the inherited form of investment management than the bricks and mortar of financial markets like London and New York, and the electronic architecture of internal and external networks (see also Merton and Bodie 2005). More generally, we contend that the SWF form is an intellectual edifice perched on three pillars. The first is modern portfolio theory (MPT). Attributed to Harry Markowitz (1952), MPT provides a recipe for investors in constructing their investment portfolios, distinguishing between the risks associated with any one investment and the risks associated with the entire portfolio. At the limit, the total portfolio of an institutional investor could be the twelve thousand or so traded securities available on global financial markets. More often, portfolios are constructed by jurisdiction and market capitalization where, for example, the FTSE100, the S&P500, and the DAX30 represent the major stocks traded, respectively, on the London, New York, and Frankfurt stock markets.

143

144

Chapter 9

The second pillar is the so-­called efficient markets hypothesis (EMH), which represents the fact that markets are information-­processing machines (Wilhelm and Downing 2001), and that market prices reflect the available information about individual stocks (Fama 1970). In combination, MPT and the EMH are the foundations for what Merton and Bodie (2005, 4) termed as the “neoclassical model” or “approach” to investment management.5 If widely disputed and deeply implicated in both the LTCM and the global financial crisis (Lowenstein 2000, 2010), these two pillars are the norms under­pinning the management of investment risk and the integrity of market prices. For institutional investors like SWFs, these propositions frame the nature of institutional decision-­making, how they manage the investment process, and their reliance upon the market pricing of assets. The third pillar reinforces the two previous pillars: asset allocation is deemed the crucial strategic decision when setting funds’ investment programs. This is justified by reference to MPT in that the diversification of assets among more-­or-­less correlated asset classes is believed to be an efficient way of managing total portfolio risk. It is also justified by reference to the long-­run returns on different asset classes, often looking back over 50 to 100 years comparing equities against bonds (for example). In this respect, Dimson et al. (2002) provided the seminal academic treatment of the issue, setting out the case for the existence of a long-­term equity premium.6 Notice, strategic asset allocation is also deemed consistent with the investment goals of many SWFs; it is a recipe for long-­term investment. Accordingly, the form of SWFs is a mixture of the rules governing institutional decision-­making and the rules governing the investment process. As such, there is a close, reinforcing relationship between these two sets of rules, in that the rules governing decision-­making are legitimated by the expertise and knowledge believed to underpin the rules governing investment. Consequently, it should not be surprising that many SWFs have seen the global financial crisis as an opportunity to realize their long-­term investment objectives. The alternative, which would be to abandon global financial markets and discount the value of the three pillars of neoclassical finance, would be an attack on the very rules justifying their existence and the relative autonomy that this type of institution enjoys from their political sponsors. Importantly, the rules governing decision-­making combined with the rules of investment are also a means of justifying a long-­term perspective against short-­term market volatility, as well as a means of justifying an investment strategy in favor of equities (for example) at a time when markets are beset by pessimism. More generally, our conception of the rule-­based form of SWFs goes some way toward undercutting the commonplace assumption of a categorical distinction between this type of institution and global financial markets. We have suggested that SWFs are constituted, in part, in relation to the structure



Conclusion

and performance of global financial markets as if SWFs do not have a role in constituting the structure and performance of markets. And yet, given their increasing size and the scope of their investments, financial markets have come to rely (in part) upon the flow of assets from SWFs into both the developed markets of the West and, increasingly, the emerging markets of the East and the South. This fact of life was noted in a comment made by Gillian Tett in the Financial Times (July 15, 2010, p. 6) to the effect that Asian SWFs were very influential in the decision made by European governments to go ahead with the stress-­testing of their banks despite uncertainty over the prospects of the Euro. Tett cites the purchase by China’s SAFE (a quasi-­SWF) of Spanish bonds as evidence for the market-­making capacity of these government actors in situations where market players from developed countries are unable or unwilling to take risks. From this discussion, we draw three obvious implications for the future of SWFs. First, to the extent that SWFs are constituted by the rules governing investment, their longer-­term prospects depend upon those rules realizing expected rates of return on SWF assets. Second, to the extent that SWFs constitute global financial markets, SWFs have an interest in ensuring that the rules of the game underpinning market structure and performance are consistent with the rules of investment that legitimate their institutional form. Third, given their reliance upon financial markets, SWFs also have an interest in promoting the development of emerging markets in ways consistent with the presumed optimal institutional structure of developed markets. In combination, SWFs together and separately have an interest in realizing the promise of neoclassical finance, even if this means promoting the institutional design and governance of global financial markets in ways that sovereign governments may find inconsistent with their interests.7 As such, SWFs are faced with a dilemma: in the aftermath of the global financial crisis they may benefit from exploiting the apparent gaps in and between markets, the risk-­aversion of established market players, the obvious reliance of sovereign nations on SWFs as market-­makers for offered government bonds, and the increasing reliance of certain companies on SWFs to act as investors of last resort. But the position of power in global financial markets carries risks as well as rewards—­there is a danger that public recognition of SWF market-­making may prompt the same kind of reaction as when Middle Eastern investors sought to buy so-­called U.S. strategic infrastructure assets. Moreover, for a large SWF to apply leverage to the global market for sovereign bonds may bring it into conflict with its political masters as well as its intended targets. Equally, sovereign sponsors may seek to integrate SWF investment strategy into their geopolitical ambitions. Either way, the rules of institutional form would be violated; the autonomy claimed by SWFs by reason of their expertise and knowledge of markets would give way to the absorption of SWFs into government treasuries.

145

146

Chapter 9

New Realities of Global Finance

Anecdotal evidence suggests that, in the depth of the global financial crisis, some of the world’s largest SWFs effectively underwrote the liquidity of global equity and bond markets. And, today, it is arguable that SWFs remain a vital element in the core markets of advanced economies and, in particular, the U.S. dollar and the euro. With a strong market position come market anxieties. It is not surprising that some of the largest funds have sought to influence the debate over the global regulatory response to the financial crisis and national regulatory reforms. Being dependent upon major markets for returns on assets invested, some of the largest SWFs have emerged as “universal owners” in the lexicon coined by Hawley and Williams (2007). This discussion has brought into the open a dilemma that goes to the heart of SWF form. To the extent that SWFs are constituted in terms of the imperatives driving global financial markets and, in turn, constitute the functional performance of those markets, the responsibility for reform remains in the hands of sovereign nation-­states whose interests are, in no small measure, driven by domestic and geopolitical interests (Rajan 2010). Furthermore, those countries whose markets are at the very core of the global market system do not sponsor SWFs and, through the crisis, more often than not opted for short-­term solutions to long-­term problems. Western governments have recognized that many of the largest SWFs have few options other than investment in core markets. Implicit in nation-­state policies that have sought to underwrite short-­term macroeconomic conditions is the assumption that SWFs and other private investors, like pension funds and endowments, are hostages to fortune—­they cannot retreat from markets and thereby realize losses on their portfolios, nor can they find refuge in ready-­made alternatives (whether emerging markets, private placements, etc.).8 Their long-­term investment programs are, in effect, a form of insurance for the short-­term prospects of whole nations. It is little wonder that the Chinese government has been resistant to calls to discount the value of the renminbi. In carrying U.S. government bonds, the government, through the CIC and SAFE, have underwritten the assumption of debt by the U.S. government to reflate the domestic economy. For the Chinese government to initiate the revaluation of the renminbi against the U.S. dollar would simultaneously discount the value of their U.S. government bond holdings while discounting the competitiveness of Chinese producers relative to Western markets. The primary beneficiary of such a policy would be the U.S. government. While such reasoning may well be judged to be an expression of self-­defeating ­neo-­mercantilism, at odds with twentieth-­century notions of global economic and financial integration, it reflects the dilemma facing large holders of financial assets (made more acute, no doubt, by the geopolitical interests of SWF sponsors).



Conclusion

Through the crisis and now the putative economic recovery, the rationale behind Western governments’ expansionary macroeconomic policies is readily apparent: indebtedness is preferable to precipitating another great depression. If subject to political debate and dispute in the West, it has been accepted by countries such as China, recognizing their medium-­term dependence upon Western consumers for economic prosperity. Accompanying this argument has been another, more controversial, argument to the effect that the financial crisis was an event whose genesis in U.S. subprime housing mortgages provides a rationale for confidence in the long-­term prospects of developed economies’ financial markets. By this logic, failures of U.S. regulation and market oversight, together with the self-­seeking behavior of financial producers and consumers alike, combined to amplify the ever-­present but normally benign behavioral biases and anomalies evident in financial markets (Lee et al. 2009). As such, to the extent that the regulatory response is effective in limiting the possibilities of such an event recurring in the future, the integrity of financial markets will be protected and the loyalty of investors to financial markets enhanced. For those convinced that the financial crisis was less of an event than an instance of the disequilibrium effects of global imbalances, recovery from the crisis is a structural problem not simply a short-­term macroeconomic fix (Stig­litz 2010). That is, economic and financial stability is to be found by redressing the savings deficit in the United States and the savings surplus of China and the exporting countries of the rest of the world (including Germany and Japan). At issue then is the need to reduce leverage: on one side, the leverage of Western governments on capital inflows, the leverage of Western consumers on future earnings, and the leverage of Western banking and investment houses on financial market expectations; on the other side, the reliance of governments on export earnings, the reliance of the emerging middle classes of East Asian countries on economic growth, and the reliance of surplus saving countries on the developed financial markets of the West for superior rates of return. In this respect, SWFs are more than storehouses of financial assets; they are also representative of unsustainable trade imbalances and expectations regarding the risk-­adjusted rate of return to be found in the highly leveraged markets of the West. Implied, then, is a larger argument to the effect that financial instability is not simply event-­driven but is symptomatic of Eastern neo-­mercantilism and Western financialization. In fact, it is arguable that Western financialization has encouraged asset-­driven Eastern neo-­mercantilism. Consider the thesis advanced by Borio (2006) and his colleagues at the IMF. In essence, their thesis is about the interaction between macroeconomic regulation and the booms and busts in asset prices. The first half of their argument notes that Western countries have been extremely successful in conquering inflation. Not only has this success stabilized growth in output, but it has also encouraged a shift in expectations from cyclical to structural change.

147

148

Chapter 9

Moreover, macroeconomic policy success has underwritten the real value of financial assets. Reinforcing this effect, financial liberalization has given license to an enormous burst in financial product innovation and the shift in household and business balance-­sheets toward financial assets over real assets. Success in the West on these counts, however, has not always been matched by success in emerging markets, which are characterized by far greater economic and financial instability and policy and regulation immaturity. For Borio and his colleagues, financial liberalization has greatly facilitated the access to credit for households and businesses, reinforcing expectations of wealth supported by leverage in so-­called real assets. He notes, moreover, that the risk ­appetite of the private sector rises as economic growth accelerates, reinforcing cross-­sectional expectations in financial markets and drawing into markets even more financial assets in the search for the premium on market expectations. As a result, the equity premium is much less important than the premium on expectations. Asset bubbles are dashed by events that in some way or another expose the fact that these bubbles are unsustainable. Basically, Borio has developed a theory of endogenous booms and busts centered on the developed financial markets of the world. By contrast, much of the history written about financial market booms and busts over the twentieth century shows that bubbles were transmitted from the periphery of the global economy to the core markets of the Western world (Barro 2006). As such, financial crises in the West are less about economic underdevelopment and more about the financial and institutional evolution of Western economies (see Clark 2000). In many respects, Borio and his colleagues have challenged the status quo of macroeconomic regulation hitherto dominant in Western countries. Whereas it was an article of faith that macroeconomic policy was properly focused on real indicators like employment, inflation, and economic growth, Borio suggests that managing the interaction between the real and financial sectors of Western economies is an essential role for central banks. Whereas it was assumed that macroeconomic stability was a condition for economic growth and the realization of investment objectives, financial markets have emerged to rival economic growth as the source of asset appreciation and wealth. In this context, the regulatory response to the financial crisis may have far-­reaching implications: if conceived in terms of the event rather than the systemic relationship between the real economy and financial markets in Western economies, it seems likely that there will be other booms and busts, new financial crises, and more market volatility. It is arguable that the patchwork quilt of national responses to the crisis, focusing on elements of the crisis rather than its underlying causes, will do little to dampen the systemic causes of the crisis (French et al. 2010). By this logic, the promise of superior returns through well-­regulated and stable Western markets may not be realized over the long term for SWFs.



Conclusion

Just as importantly, the intellectual foundations of Merton and Bodie’s (2005) neoclassical finance may not be an adequate recipe for investment management or a justifiable rationale for the current form of many SWFs. If trapped by past commitments, necessitating the deepening of market relationships and investment management, SWFs may have to remake themselves to cope with the new realities of global financial markets.9 SWFs as Strategic Investors

Looking forward, it is useful to remind the reader about the obvious functions of SWFs—­the apparent shared goals and objectives of these institutions when first established by their respective sovereign sponsors. In our case studies, we have identified five common functions more or less shared between the SWFs according to their host countries’ particular circumstances, political traditions, and places in the world. These functions can be listed in the following order (a logical order though not necessarily the order relevant to specific countries). • SWFs are a means of realizing a long-­term premium on a nation’s wealth over and above the projected real rate of national economic growth. This premium is realized through financial assets invested in a broad portfolio of assets, representing the potential of global economic integration rather than the potential of one country or region. • SWFs are a means of separating a portion of a nation’s accumulating wealth from the real economy by placing those assets outside the economy so as to promote long-­term macroeconomic stability.10 • SWFs are a means of insuring the future economic prosperity of a ­sovereign entity in the context of global economic and financial instability and the limits of nation-­state power in the international community of nations. • SWFs are a means of storing a nation’s wealth separate from the short-­ term exigencies and political commitments that characterize the life of a sovereign nation; in this sense, SWFs are an endowment fund for the conservation of wealth. • SWFs are a means of distributing current national wealth, often due to the exploitation of finite resources, to future generations either through discounting the value of accumulated liabilities or by maximizing the future value of current assets. These five functions do not, of course, exhaust the list of possible SWF functions. For example, some SWFs underwrite the current welfare of citizens over and above that which is possible through the local economy. Other SWFs underwrite certain government commitments, especially in circumstances where cycles in government revenue and expenditure are so severe

149

150

Chapter 9

that realizing spending commitments can be found only in insulating government from the local economy. Do these functions necessarily imply a certain institutional form? Can these five common functions be realized through another institutional form or forms? For that matter, do these functions require SWFs that invest in global financial markets? Consider the options. Each of these five functions makes a distinction between the short term and the long term, local commitments as opposed to global commitments, and the investment returns to be found in the global economy as opposed to the sovereign sponsor’s economy. Does this mean that SWFs should be or are by necessity portfolio investors in the manner suggested by Merton and Bodie’s (2005) neoclassical finance? Surely there are alternatives. For example, instead of owning a global portfolio of traded securities conceived in terms of the efficient frontiers of modern portfolio theory, SWFs can take large stakes in relatively few companies either on the equity (ownership) side or on the debt (creditor) side. Having a controlling interest in a relatively small number of global corporations would allow the SWF to realize the sovereign’s needs, while allowing it to take long-­term positions without being captive to the ever-­present threat of turmoil in global financial markets (see the Qatar Investment Authority as an example of an SWF that has moved in this direction). Here, we can discern a gap between the touted goals and objectives of SWFs and their market behavior. While committed, as noted earlier, to realizing long-­term rates of return at a premium on sovereign sponsors’ expected rate of national economic growth, being in the market means, more often than not, acting as portfolio investors in relation to short-­term market movements. Moreover, ambiguity over the desired premium on national economic growth in many countries often translates into an objective function that matches the objective function of many other institutional investors: maximization of the risk-­adjusted rate of return against accepted market benchmarks. This is, of course, consistent with the ideal “form” of institutional investment that dominates Western markets. It is also consistent with the expectations and expertise of the global financial services industry. But, as a practice, it may be judged to be inconsistent with the putative functions of many if not most SWFs. Long-­term investment is more than a beta strategy—­that is, a market-­ following strategy based upon the changing composition of traded securities. It is also a strategy that seeks refuge from events, is cognizant of cycles in the real economy, and is aware of the underlying structural trajectory of industries, regions, and the global economy. Put slightly differently, a long-­term investment strategy seeks to realize the benefits of technological innovation and the fundamental drivers of economic competitiveness rather than patching together the long term out of successive (and often volatile) short-­term positions. If conceived in this manner, the related commitments of sovereign sponsors to issues such as ethical investing as well as global concerns such as



Conclusion

climate change can be seen as reflections of long-­term value. So, for example, climate change can be a long-­term investment opportunity instead of an ineffective short-­term screen on the global portfolio of an investment manager (service provider). At issue is the technological frontier rather than the immediate environmental costs of resources. This topic has garnered considerable attention in the aftermath of the global financial crisis (Stern 2009). Its popularity is, in part, a function of what it seeks to avoid: dependence upon an industry and its markets that many believe are subject to incentives and recurrent events that discount value. At this point, it is not important to set out in detail the logic and character of long-­term investment. Rather, our point here is simply to suggest that if SWFs are to be long-­term investors in a manner consistent with the five functions listed in this chapter, it may be the case that the current form of many SWFs is antithetical to realizing in a systematic fashion those functions. If so, the future form of SWFs will look less like that which has been inherited from modern financial theory and practice and more like merchant banks, whose relationships with their clients are framed by reciprocal commitment rather than anonymity. Put slightly differently, the future form of SWFs may have the depth of expertise and knowledge consistent with their commitments rather than their relationships with the financial services industry. There are three obvious objections to this model of the future. One is simply that the depth of expertise and knowledge needed to be effective strategic investors is in short supply and, in any event, such experts would not be attracted to SWFs because of their complex structures of decision-­making. Both aspects of this argument are credible, although we should note that through the crisis SWFs have strengthened their human resources considerably. But it is also apparent that the type of expertise and knowledge consistent with long-­term investing is different in type from the expertise and knowledge currently demanded by global portfolio investors. Equally, it is arguable that the autonomy sought by market traders, typical of some of the largest global banks over the past decade or so, is both inconsistent with risk-­management and inconsistent with the significance of individual investments taken in an institution committed to selected long-­term stakes. Another objection is that once an institution moves away from the norms and protocols of neoclassical finance, its investment process becomes much harder to govern against third-­party standards of performance. This may be true; it is a challenge that faces a number of larger institutions in moving from benchmark measures of performance to absolute measures of performance based upon a priori target rates of long-­term return. Assessment of performance in this model of institutional investment becomes a data-­and time-­intensive process governed by investment beliefs and tests of competence, rather than the virtual and often automatic peer-­group measures of performance that currently dominate the investment management industry.

151

152

Chapter 9

A third objection would be that once an SWF makes a commitment to long-­term investment based upon a small portfolio of projects, the way is opened for the SWF to become noncommercial (i.e., strategic instead of portfolio). Here lie, then, the anxieties of many in the West who believe that SWFs are an extension of sovereign interests, legitimated today only by their apparent acceptance of the form of the modern institutional investor (see Santiago Principles). But if the price of legitimacy is reliance upon Western financial markets and providers, the price (returns discounted by volatility) may be too high when set against the desired functions of SWFs (including intergenerational equity). Some of the world’s largest pension funds, especially those from Canada and Australia, have become strategic investors with significant stakes in selected firms and industries. In a similar manner, but perhaps more hidden behind the veil of ignorance, Chinese development banks, the CIC, and related institutions have taken significant stakes in African resource companies and countries. At base, the objection is geopolitical and reflects the strains on the global hegemon as it comes to terms with the changing balance of power in the global economy. In short, if a form of SWF was to be adopted that met its functions, we would expect to see a slow but profound shift in the geographical locus of investment. Instead of relying upon Western financial markets, the premium would be on those firms, industries, and regions that fit with national development strategies, such as those at the center of the “emerging” global economy of the twenty-­first century (Scott 1998). Of course, these opportunities may be found in the West. But, given the trajectory of Western economic growth, population, and development, their home jurisdictions would be less important than their integration with the East and, to a lesser extent, the South. In these ways, the withdrawal of SWFs from Western markets is likely to discount the significance of these market institutions as the hubs to global capital spokes. As such, the short-­term response of SWFs to the crisis will prove to be a false dawn. Conclusions

SWFs can be seen as a reflection of global economic integration—­being the stores of assets derived from trade and exchange. For some countries, resource endowments have provided windfall revenue flows to nation-­state coffers. For other countries, the export of produced goods and services has created public and private wealth, some of which has been diverted from consumption to capital appreciation. For yet other countries with high levels of domestic saving and a geopolitical location at the interstices of global trade, SWFs have been created to smooth the ups and downs of the global economy. For some countries, their SWFs are at the very heart of their long-­term plans for economic development; the assets held and invested by their SWFs are



Conclusion

a means of reconciling current generations’ commitment to sovereign autonomy and the welfare of future generations. For other countries, however, their SWFs might as well be savings banks rather than strategic instruments bound up with the aspirations of their political masters. As we suggested, SWFs can be characterized and distinguished according to their shared functions. For example, the Australian FF shares with a number of other SWFs the function of holding financial assets that would otherwise overwhelm macroeconomic stability. We think of this function as a default function in that it reflects the limits of nation-­state policymaking and economic conditions. Significantly, though, the Australian FF was conceived to enhance the interests of future generations by paying off the accumulated liabilities associated with current generations of federal government employees. As we demonstrated, future generations have a financial stake in the future; they also have a broader interest in the sustainability of the Australian way of life. As such, it is not surprising that a number of SWFs that have a future-­seeking mandate have come to read that mandate in broader ways than perhaps financial professionals find congenial. In this respect, the legitimacy of an SWF may well be based upon national values and commitments (as in the Norwegian NBIM). These functions are matched with a shared institutional form: it is the relationship between form and function that defines what is and what is not an SWF. In its simplest conception, SWFs share many of the attributes of large pension funds, endowments, and insurance companies: being institutional investors, these entities combine asset management with the discipline imposed by accepted theories of portfolio investment—­especially those related to what Merton and Bodie (2005) termed as neoclassical finance. We sketched the principles and practices consistent with the accepted form of SWFs to emphasize the distinctiveness of SWFs (compared to other nation-­state asset management) and their reliance upon the structure and performance of global financial markets. In many cases, an important shared function of SWFs is their search for a premium on assets invested over and above that which is available in their home jurisdictions due to capacity constraints, economic growth, and development. That there is, or should be, such a premium is one of the beliefs that justified the formation of SWFs in the first place.11 Textbooks abound with related topics such as the equity premium, the historical significance of asset allocation for portfolio investors, and tactical and strategic investment (Goetzmann and Ibbotson 2006). These topics are representative of the global financial services industry and the academic establishment that sustains it; these topics also represent the type of conceptual discipline often imposed on SWF investment by managers and consultants alike. In this manner, the form of SWFs is constituted by the enabling legislation or administrative orders that established these institutions and by the intellectual foundations of investment management that provide protocols for behavior and decision-­making. As constituted, SWFs rely upon global

153

154

Chapter 9

financial markets for the opportunities to place investments and realize their goals and objectives. Indeed, the intellectual foundations of investment management match in form and substance related expectations concerning the structure and performance of developed financial markets. Hence, the form and functions of SWFs are intimately related to finance-­led capitalism. It should not be surprising that in the aftermath of the global financial crisis it would appear that SWFs may well strengthen their relationships with the global financial services industry. On one level, these relationships are vital if SWFs are to take advantage of the market turmoil occasioned by the crisis. On another level, though, given the form and functions of SWFs, it would seem inevitable that their response would be to realize their commitments in the form of a deepening relationship to markets and service providers. We also sought to suggest that the future of SWFs is more open and more in flux than this logic would suggest. One lesson of the crisis has been that SWFs, despite their status as investors without liabilities, can be extremely vulnerable to market ups and downs. In fact, when considered over the past fifteen years or so, it is arguable that financial markets have hardly returned anything more than the global real rate of economic growth (taking account of volatility, inflation, and the costs of investment management). In this context, it is not obvious that a traditional financial institution, which is how we would label the current form of SWFs, remains the only form consistent with sovereign interests. Accordingly, we foresee an eventuality whereby SWFs, cognizant of the fact that Western markets no longer offer a reliable investment risk premium, will evolve into different institutions in the coming decades. In effect, we envisage SWFs transforming themselves into long-­term investors whose holdings are selected on the basis of their strategic interests (of the fund and the nation) rather than the principles underpinning modern portfolio theory. If so, the future of SWFs will be more like that feared by their critics in the West than the ideal form argued to be consistent with a symbiotic relationship with the West. The costs of this transformation will be felt by global financial markets as liquidity ebbs away and SWFs, rather than market arbitrage and speculation, forge their own paths in the world of economic development.

Appendix Scoping Best Practice

Throughout the book we refer to the principles of best-­practice investment management developed by Clark and Urwin (2008a), as an analytical framework for assessing the governance architecture of the SWFs that we have studied. We reproduce a slightly modified version of certain portions of this work below to facilitate a more refined reading of the text. This research established a twelve-­point list of criteria based on the identification of exemplars of best practice by class of institution for evaluating standards of fund governance. The selection targeted different types of institutions, including corporate pension plans, public pension plans, sovereign funds, and endowment funds, taken from six different countries dispersed across North America, Europe, and the Asia Pacific region. We must stress that Clark and Urwin (2008a) is written in a specific style and to a specific audience—­partly to interested academics, but more importantly to the wider institutional investment industry and associated stakeholders. In that respect, it is an agenda-­setting piece that, while based on empirical research and an inductive analytical logic, is to a certain extent normative in its aims. When taken together, the principles are idealistic on two fronts. First, none of the exemplars could be said to be at the leading edge of each and every component of best practice. Second, the list presented here is premised on significant internal resources, which many funds do not have available or are unable to mobilize. Notwithstanding these aspects, Clark and Urwin (2008a) provide a useful template for understanding the governance of institutional investors in contemporary global financial markets. The twelve points are divided into three domains institutional coherence, people, and process. But before introducing these twelve points, it is necessary to provide the model of governance that underpins their significance and the governance challenges facing institutional investors. 155

Appendix

Our model of governance is based on three principles: • Governance is a finite and conceptually measurable resource, and the size of this resource—­the governance budget—­is associated with ­expected performances. • A certain size governance budget is best matched with a certain investment style and strategy, consistent with other budgets that recognize limited resources and the need for skill. • There are ways to adapt the governance budget over time with implications for long-­term investment performance and payoffs. The challenge of governance is more than the generic issues that afflict all modern organizations—­pension funds and SWFs operate in global financial markets where the management of risk and uncertainty is crucial to the creation of long-­term value. Figure A.1 demonstrates that governance can create and destroy value, shifting the risk-­adjusted rate of return above or below the “gain line” (depending on the risk budget and the governance budget). Working from a resource-­based perspective (see, e.g., Foss 1997; Wernerfelt 1984), the implications of this proposition are twofold: first, risk-­taking against well-­ defined objectives is an essential ingredient in any well-­governed financial institution; and, second, the extent to which risk-­taking is a deliberate and managed activity depends upon the governance budget allocated to this function within the institution. Poorly governed entities rarely take risk-­planning seriously and wrongly economize on the governance budget treating it as a cost that limits net financial performance. Governance is taken, then, as an issue of the proper resourcing of particularly tasks and activities necessary to operate effectively in global financial markets subject to risk and uncertainty. Risk management focus. More generally, institutional investors must be sensitive to the distinctive attributes of financial markets and behavior. While theories of financial market structure and performance abound, it is The gain line Value creation/destruction is a function of governance budget

Return

156

Risk budget Risk Figure A.1. Schematic of governance budget and risk budget



Scoping Best Practice

important that fund decision-­makers be able to distinguish between moments of “normal” risk and moments of uncertainty. In addition, this determination must encompass regime shifts in pricing and risk, and their consequences for non-­normal return distributions and investing in extreme conditions. The challenge in risk management could be summarized as employing both quantitative and qualitative disciplines in analyzing many fast-­moving parts of markets—­economic, behavioral, and organizational (Shiller 2002). The governance challenge here is to function efficiently in the fast-­changing risk domain, adapting effectively to market signals. Time horizon focus. Just as importantly, reaping long-­term higher-­than-­ average rates of return requires integrating short-­term positions with long-­ term goals thereby being sensitive to the sequential nature of investment decision-­making. A characteristic of poor performing institutional funds is that advisors, decision-­makers, and stakeholders tend to come to premature conclusions (Wagner 2002). Long-­term optimizing must accommodate short-­term opportunism while recognizing that the short time horizons of many stakeholders conditions behavior, such that these actions may not be aligned with long-­term goals. Therefore, decision-­makers have to make a very big adjustment to take a longer-­term view that risks being “wrong” in the short term. The governance challenge here is to act in the short term with respect to long-­term goals, utilizing decision-­procedures to exploit immediate opportunities but penalize impulsiveness. Innovative capability. It is widely recognized that financial markets are “innovation machines” that test investors’ fitness to succeed—­there are significant rewards for those who are able to identify and exploit unacknowledged market opportunities just as there are enormous rewards for those who create markets and financial products to price and distribute risk (as in alternative investments, infrastructure, derivates, etc.). Recognizing the increasing clock speed of markets and strategies places real-­time processes at an advantage. Many funds use calendar-­time processes, often through a quarterly meeting cycle, making their decisions insufficiently responsive to opportunities and threats. The governance challenge here is to exploit the premium from innovation through the application of judgment and experience to new opportunities, recognizing that conventional risk-­related procedures may be poorly tuned to the frontiers of finance. Alignment with a clear mission. Perhaps the greatest governance challenge is to be effective in responding to these governance issues in organizations whose original design, mission, and current size and composition of skills and experience are less than perfect (Clark, Caerlewy-­Smith, and Marshall 2006). For many reasons, SWFs and pension institutions often have a variety of constituents, stakeholders, and even competing objectives in the real world of inherited institutions, procedures, and expectations. The governance challenge here is to build alignment behind clear statements of mission-­critical goals, particularly in dealing with multiple stakeholders and complex dependencies,

157

158

Appendix

recognizing that “reform” is normally an ongoing process of accommodation and only rarely a once-­and-­for-­all instance of idealism. Effective management of external agents. Achievement of goals is unrealistic for the vast majority of funds without external delegation. The characteristic approach of the best-­practice fund is to employ external managers in a lineup emphasizing diversity to limit risk. In assessing the wide field of choices of investment firms, funds need particular skills and processes for dealing with agency issues, given the informational asymmetries about each manager’s value proposition. The processes that have evolved to deal with these decisions have been unsystematic. The governance challenge here is managing the considerable agency issues in using a lineup of managers and other agents who collectively can support the organization’s overall goals. Principles of Best Practice: Investment Management Best Practice: Institutional Coherence

The challenge for many institutions, public and private, is to ensure a match between what is inherited with respect to the long-­term interests of beneficiaries and other stakeholders. 1. Clarity of the mission and the commitment of stakeholders to the mission statement. In exemplary cases, abstract golden rules such as maximizing beneficiary welfare are augmented with second-­order mission statements such that board members, the senior staff, and stakeholders inside and outside of the institution are able to match the golden rule with an accepted operational goal, such as a target yearly real rate of return allowing for liabilities subject to agreed risk parameters. Such funds also maintain a set of other supporting goals to support success with their primary goals. 2. Exemplars have a highly competent investment function tasked with clearly specified responsibilities and with clear accountability to the institution. This arrangement often includes an explicit “map” of institutional authority, distinguishing the responsibilities of boards, executives, and service providers. In some cases, there are formal “charters” providing each element in the governance chain with a mandate for their tasks and functions. In other cases, where charters are not incorporated into standing orders, trust boards seek to provide a clear demarcation of responsibilities typically distinguishing between strategy and its implementation and execution. The key element for most funds is the executive group, including a chief investment officer with significant delegated responsibility. Exemplars seek to “govern” their management by reference to delegated tasks and responsibilities, specified by



Scoping Best Practice

contract and set in relation to the mission statement and operational goals of the institution. 3. Most importantly, institutional coherence is sustained by resourcing each element in the investment process and governance chain with an appropriate time and resources budget. Unfortunately, resourcing is often seen as a cost to the institution rather than a long-­term investment in the coherence of the institution as a functional entity. Exemplars demonstrate a keen awareness of the value that could be created by internal resources if appropriately targeted. Best Practice: People

It is, perhaps, a truism that the human capital or talent of any organization is its most important asset. This is certainly an important theme in contemporary research on industry and firm-­related differences in productivity and market performance and is especially important in the financial and service-­related industries that overlap with pension and retirement income institutions. 4. Leadership has a strong and demonstrable effect on institutional performance, being evident at the board level (particularly in the activities of the chairperson) through to the execution of delegated tasks and functions. Exemplars seek out highly qualified and respected board chairpersons and charge them with encouraging a culture of accountability and responsibility among board members. 5. To the extent that trust chairpersons and their boards are able to select their colleagues, three desired qualities guide selection: demonstrable numeric skills, a capacity for logical thinking, and an ability to think about risk in the probability domain. Collegiality is important, but it was often noted that shared competencies combined with peer ­recognition for experience and ability tended to enhance collective decision-­making whereas disparate and unmatched abilities tend to be a drag on board decision-­making (Clark et al. 2006). This issue is under-­recognized, with many institutions assuming that commitment, training, and experience can overcome deficiencies. Exemplars recognize that these competencies are not easy to instill, and so selection of board and staff becomes a critical function. In some cases, exemplars are able to fashion human resource policies that take advantage of the unique characteristics of their institutions while shaping tasks and functions that are different from those of financial institutions. 6. Effective compensation practices are used to build bench strength and align actions to the mission, with different strategies working according to fund context. Compensation is an important issue. Whatever the strategy that is used, systems of “reward” are explicitly linked to the mission

159

160

Appendix

and performance of the institution and the sense of common responsibility for its performance against objectives. Best Practice: Process

Institutional coherence and the people involved in decision-­making are essential preconditions for a high-­performance financial institution. Without a clear mission statement and operational goals, and without the people to frame and implement an appropriate investment strategy, a disciplined investment process will not deliver desired results. On the other hand, with both preconditions in place the evidence suggests that the process of investment decision-­making is the most important means of reaping the potential value of an institution. 7. Exemplars rely upon a process centered on strong beliefs and an investment philosophy claiming fund-­wide support that aligns with operational goals and informs investment decision-­making. Only with a clear and accepted belief structure can an institution sustain its competitive edge in financial markets. Exemplars focus upon four main areas of this issue: (1) asset class and security pricing, including the “fair” prices of investment opportunities, the reasons why mispricing can occur, and the degree to which mispricing is a systematic fact of life; (2) the fund’s ability (or its comparative advantage) in exploiting such identified opportunities; (3) how the fund might develop and integrate these beliefs into its investment strategy; and (4) what these strategies can produce in value-­added and risk terms, across the whole portfolio. Many institutions distinguish among different types of strategic issues and the appropriate location of decision-­making relevant to those issues particularly between investment committees and the executive. For example, in many cases the most developed investment beliefs are located at the executive level. But it is still critical for an informed board to build their own beliefs and deal effectively with those of the executive. 8. Exemplars frame the decision-­making process by reference to the institution’s comparative advantages and disadvantages. Few investment institutions are able to operate effectively in all investment domains (some are better suited to public markets, whereas others may have the capacity to operate most effectively in private markets or exotic products). The best-­practice process of decision-­making takes into account an institution’s own capacities and its acknowledged limits and acts accordingly. This includes deciding on the degree of delegation, choosing to act in a primary investment role selecting individual investments in some areas, or acting as a manager of managers in other areas where investments would be selected by outside managers.



Scoping Best Practice

9. Exemplars frame the investment process by reference to a risk budget aligned to fund goals incorporating an accurate and integrated view of alpha and beta. Many exemplar institutions utilize an absolute return ethos, constrained by a risk budget that is explicit about the desired relative contributions of alpha and beta to overall fund performance. This is a quantitative decision-­making framework reinforcing the significance of trustee skills and qualities that sustain consistent method-­ based decision-­making (Clark et al. 2007). 10. Recognizing the time-­dependent nature of investment performance, best-­ practice institutions utilize decision-­making systems that function in real time not calendar time. There are various ways of doing this, including devolving decision-­making to expert subcommittees, most of which involve greater delegation of time-­dependent decision-­making to executives or external firms subject to board oversight. However, calendar-­ time governance is typical of most funds; the crucial issue here is how that is reconciled with real-­time markets. 11. Best practice masters the effective use of external managers through clearly defined mandates, aligned to goals, and selected with rigorous application of fit-­for-­purpose criteria. In other words, best-­practice institutions distinguish between the nature and types of decision-­making by operational entities taking care not to compromise decision-­making on one level by poor decision-­making on other levels. Characteristically, best-­practice asset owners employ external managers in a lineup emphasizing diversity so as to limit risk. Mandate specification is one area of importance. Also, fit-­for-­purpose assessment of firms and products is important. Typically, three aspects of suitability are found: (1) investment efficiency, allowing fully for costs; (2) alignment to the fund’s needs to achieve sustainability of performance goals; and (3) an appropriate transparency of process, allowing for an assessment of the product according to its manager skills (alpha) and market return (beta) drivers. While acknowledging that the selection of managers is always problematic, exemplars show considerable rigor in applying fit-­ for-­purpose assessment of outside firms and their investment products. They also reference the importance of the “de-­selection” process as well as the selection process. 12. In terms of investment decision-­making, best-­practice institutions work within a learning culture, which deliberately encourages change and challenges the commonplace assumptions of the industry. In part, this means that past decisions are evaluated against actual outcomes so as to calibrate the decision-­making process while allowing appropriately for noise and signal issues (Clark 2004). In part, this also means that institutions are routinely turned inside-­out by challenging trustee boards and senior executive staff to be innovative within the bounds

161

162

Appendix Table A.1. Best-practice factors 1. Mission clarity

Clarity of the mission and the commitment of stakeholders to the mission

2. Investment executive

The use of a highly competent investment function tasked with clearly specified responsibilities, with clear accountabilities to the investment committee

3. Effective time budget

Resourcing each element in the investment process with an appropriate budget considering impact and required capabilities

4. Required competencies

Selection to the board and senior staff guided by: numeric skills, capacity for logical thinking, ability to think about risk in the probability domain

5. Leadership

Leadership, being evident at the board, investment committee and executive level, with the key role being the investment committee Chairman

6. Effective compensation

Effective compensation practices used to build bench strength and align actions to the mission, different strategies working according to fund context

7. Strong beliefs

Strong investment philosophy and beliefs commanding fundwide support that aligns with operational goals and informs all investment decision-making

8. Competitive positioning

Frame the investment philosophy and process by reference to the institution’s comparative advantages and disadvantages

9. Risk budget

Frame the investment process by reference to a risk budget aligned to goals and incorporate an accurate view of alpha and beta

10. Real-time decisions

Utilize decision-making systems that function in real time not calendar time

11. Manager line-up process

The effective use of external managers, governed by clear mandates, aligned to goals, selected with rigorous application of fit-for-purpose criteria

12. Learning organization

Work toward a learning culture that deliberately encourages change and challenges the commonplace assumptions of the industry

of institutional capacity. Accelerating change is a given of the funds industry; technology is always moving forward and its effect on the growth of knowledge is positive at an accelerating pace. Knowledge of what works and what does not work in investment is at a premium and is time-­sensitive; there is added value in changing with new knowledge and opportunities.

Notes

Chapter 1. Introduction

1. Entering the most recent crisis, it was demonstrated again that the holders of financial reserves were more resilient economically than those without reserves (see Frankel and Saravelos 2010). 2. See http://www.iwg-swf.org/tr/swftr0802.htm. 3. See http://www.iwg-swf.org/pr/swfpr0808.htm. 4. See: http://oxfordswfproject.com/2008/11/06/qa-with-kathryn-gordon-senior -economist-at-the-oecd/. 5. Trust is not the same as legitimacy. Trust develops when a legitimate institution acts in accordance with its accepted and predetermined rules. So, labeling the problem faced by SWFs as an issue of “distrust” implies that SWFs have already performed in a way that contradicts Western norms and expectations. Conversely, labeling the problem “legitimacy” suggests that—­while SWFs may not have invested improperly to date—­the principles and practices that underpin these institutions are the focus of concern. Indeed, legitimacy is not about norms of performance (as is the case with trust). Rather, it is about the norms, or principles and practices, underpinning the actions of the institution and is considered the reflection of these principles and practices within the target operating environment. In this conceptualization, the expectations of the target environment for the norms of operation (principles and practices) are crucial in establishing legitimacy and then trust. 6. Legitimacy is a fundamental concern across the social sciences (see, for useful treatments, Weber et al. 1978; Weatherford 1992; Suchman 1995; Hurd 1999; Pauly 1997; Zimmerman and Zeitz 2002; Tucker and Hendrickson 2004). 7. It should be noted that this is a liberal democratic perspective on “good governance.”

163

164

Notes to Chapter 2

Chapter 2. The Rise of Sovereign Wealth Funds

1. See http://www.reuters.com/article/marketsNews/idUSL3028241920080630. 2. Note that in this chapter we do not address specifically the rise of sovereign development funds or sovereign holding companies, such as Temasek, Khazanah, Mubadala, or Central Huijin. 3. The following show the diversity of SWF definitions. SWFs are investment vehicles funded by foreign exchange assets and managed separately from official reserves (U.S. Department of Treasury, 2007). SWFs are government-­owned investment funds established for a variety of macroeconomic purposes (IMF, 2008). SWFs are special-­ purpose investment funds or arrangements that are owned by the general government (International Working Group of Sovereign Wealth Funds, 2008). SWFs are “pools of assets owned and managed directly or indirectly by governments to achieve national objectives” (Organization for Economic Cooperation and Development [OECD]: Blundell-­Wignell et al. 2008). SWFs are “pools of money governments invest for profit” (Council on Foreign Relations: Teslik 2008). SWFs are saving funds controlled by sovereign governments that hold and manage foreign assets (Aizenmen and Glick 2008). 4. This definition consciously excludes any reference to “foreign assets,” since many SWFs, such as Temasek, begin as domestically oriented funds and grow to include foreign assets. Our view is that the definition should include these funds from their inception rather than when they decide to invest overseas. 5. Nevertheless, as the section on liabilities implies, sources still do have a role in this definition. Indeed, whether the money comes from within or without the government has implications for the categorization. 6. Rather, we would argue that the Canada Pension Plan is not an SWF because the government has no claims to the assets in the plan, the assets are contributed by employees and employers, it receives no general tax revenues, and, by law, it is not managed according to the interests of the sponsor but to maximize investment returns for beneficiaries. 7. SWFs have been set up in response to the accumulation of wealth, while other types of funds are set up for the purpose of wealth accumulation. This differentiation has led Ambachtsheer (2008) to refer to SWFs as “accidental financial tourists.” While it is true that some SWFs were thrust onto the global stage before they had a chance to set up the appropriate governance mechanisms, this is not how SWFs should be categorized—­it simply helps to explain current practice. 8. According to Esping-­Andersen et al. (2001), systems of social protection may hinder rather than promote employment growth and knowledge-­intensive economies, which has raised the possibility of a “race to the bottom” in social welfare provision (see Greider 1997). Other commentators are more optimistic about the sustainability of social welfare institutions, viewing path-­dependent, idiosyncratic outcomes for institutions rooted in different varieties of capitalism (see Hall and Soskice 2001). Some commentators view claims about a “race to the bottom” to be premature (Ferrera et al. 2001; Baldwin and Krugman 2002). 9. Institutions and organizations come together in a recognizable space, which some call organizational fields (see also DiMaggio and Powell 1983). 10. According to Greenwood et al. (2002), cognitive legitimacy could also fit into a separate category.



Notes to Chapter 4

11. To be sure, institutions like SWFs are crucial for dealing with time inconsistency problems, such as the inability to write fully contingent contracts between generations (Spiller 1996). This is, undeniably, a useful policy tool in a globalizing economy, as intertemporal choices have been shown to be important for the wealth of nations (Frederick et al. 2002). 12. Researchers from a variety of backgrounds see institutional contradictions as key to understanding institutional change (see Seo and Creed 2002 for a review of the literature). 13. See R. Ramesh, “Paradise Almost Lost: Maldives Seek to Buy a New Homeland,” The Guardian, November 10, 2008. Available at http://www.guardian.co.uk/environment/ 2008/nov/10/maldives-climate-change; accessed accessed June 4, 2012. 14. For those critical of this latest phase of capitalist development, it is surely remarkable that state sponsors of SWFs come, more often than not, either from the margins of the developed world or from countries that are beholden to the developed world for their economic growth (and for the prices of their scarce resources). Chapter 3. Rethinking the “Sovereign” in Sovereign Wealth Funds

1. We are leaving aside the conventional state apparatus required of any capitalist economy. 2. This is open to significant debate, particularly as emerging markets are increasingly leveraging their weight in international politics as key drivers of global growth and ultimately economic recovery in the West. 3. The investment by the Qatar Investment Authority in Volkswagen is an obvious example in this regard. 4. In addition, an SWF may also provide privileged access to important nonstate institutions (e.g., multinational firms or international organizations). Furthermore, an SWF may provide access to those networks of actors with access to these different sites of power. 5. Petroleum Fund of Timor-­Leste Quarterly Report 7(20), December 31, 2011. 6. Timor-­Leste Petroleum Fund Law No. 9/2005, preamble. 7. As this suggests, not all commodity-­based SWFs fall under the heading of “­rentier SWF.” Indeed, some states may possess significant natural resource wealth, and sponsor an SWF, but are still not rentier states. 8. See http://www.kia.gov.kw/En/About_KIA/Tansparency/Pages/default.aspx; accessed June 17, 2010. 9. See speech of French President Nicolas Sarkozy, “Le Fonds Stratégique d’Investissement,” delivered to the employees of Daher, November 20, 2008, at Montrichard, France. 10. See “Les Orientations Stratégiques du Fonds Stratégique d’Investissement,” available at http://www.fonds-fsi.fr/upload/Orientations_strategiques_du_FSI.pdf; accessed June 20, 2010. Chapter 4. The Virtues of Long-­Term Commitment: Australia’s Future Fund

1. The significance of “framing” for negotiation and subsequent agreement is developed by Sebenius (1996) in his account of how coalitions are built to achieve

165

166

Notes to Chapter 4

certain outcomes by those who have the power to set the initial terms of debate. The issue of framing is also associated with decision-­making under risk and uncertainty; for the seminal treatment see Kahneman and Tversky (1979). 2. Elsewhere this issue is discussed in terms of “weakness of will,” wherein the problem to be resolved is how and why people may choose a course of action for their long-­term benefit, only to be swayed at the last minute by some immediate payoff. See Ainslie (2001) for the seminal treatment and Ainslie (2005) for the debate that this argument has engendered. 3. This last point is important in the sense that it suggests that governments can, and should, promote shared expectations of proper behavior such that, over time, those expectations become integral to common understandings of what is right and proper. See George (1993, 44–­45) on the distinction between regulating behavior through the rule of law and inculcating a “good moral ecology [that] benefits people by encouraging and supporting their efforts to be good.” 4. The Wallis Inquiry into financial regulation was established by Treasurer Costello when the Liberal party assumed office in 2006. The report of the inquiry sought to modernize regulation, recognizing the significance of new forms of communication, the growing role of intermediation, and the growth of different types of financial institutions. See Commonwealth of Australia (1997). It took seriously the functional model of finance developed by Merton (1993, 1995) and his colleagues; see, more recently, Merton and Bodie (2005). 5. This remains a significant point of contention, with some commentators arguing that infrastructure investment that boosts labor productivity has a more beneficial effect for the whole economy than a finance sector that invests assets through capital markets. There is considerable academic debate about this issue; see King and Levine (1993a, 1993b). Tanner was then appointed Finance Minister with the election of the Labor government in 2008. 6. In theory, it is clear that institutions are better governed if they have unambiguous mandates or objective functions. This point is developed in Clark and Urwin (2008a) with respect to best-­practice pension fund governance, and it serves to underline the relevance of the argument that DB and defined contribution pension plans serve very different interests over distinctly different time horizons. 7. When the government came to sell the third tranche of Telstra shares, the National Party negotiated the establishment of another endowment fund whose income would be invested in rural telecommunications infrastructure. That fund was abolished with the support of the Liberal Party when the Labor opposition assumed government. We are indebted to Nick Howarth for pointing this out. 8. In fact, close scrutiny of Truman’s scoring suggests that the zero values attributed to four elements of transparency and accountability were mistaken, given the recent establishment of the fund and the constitution of its long-­term mandate. If that is the case, the FF would have scored the same as the CPPib and the New Zealand Superannuation Fund. 9. The Clark-­Urwin governance scoring system is a proprietary model developed by Towers Watson as a diagnostic tool for evaluating the form and functions of investment institutions, including SWFs, pension funds, and endowments. It was developed from our work on global best practice, and the nature of institutional innovation in the context of the global financial crisis (see Clark and Urwin 2008a, 2010).



Notes to Chapter 6

10. Note that each board member is also required to “discharge his or her duties with the degree of care and diligence that a reasonable person would exercise.” See Section 56 of the Act. Elsewhere in the Act (Section 24), the board is required to formulate “written policies” pertaining to the investment strategy of the fund in a manner consistent with “international best practice for institutional investment.” 11. We are grateful to Claire Molinari for making this point and identifying the relevant literature. 12. Another interpretation of this provision (suggested by Eric Knight) is that it means that the fund would not be a direct competitor to private infrastructure investors such as Macquarie Bank; rather it will rely upon this growing sector of the Australian finance industry. Chapter 5. The Ethics of Global Investment: Norway’s Government Pension Fund

1. Rule-­based constraints on short-­term government spending can be thought of as an implicit contract between political elites on behalf of the national best interest. Its robustness depends upon a deliberate though often unstated denial of the advantages of mobilizing vocal minority interests for immediate political gain. Coleman and Ferejohn (1986) discuss the virtue of these devices in terms of social contract theory, but doubt the stability of such non-­binding agreements in democracies. 2. In these matters, the NBIM is an active investor—­the 2008 Annual Report of the GPF-­G noted that the fund voted on more than 68,000 items at more than 7,500 annual meetings around the world. This role is shared by a number of other, very large institutional investors from the United Kingdom, United States, Canada, and Australia. The most active institutional investors tend to be pension funds rather than SWFs and are motivated, in part, by the fact that their investment performance is dependent upon the efficient functioning of home and global financial markets. See Clark and Hebb (2005) and Hawley and Williams (2000) for accounts of this development. Chapter 6. Insurer of Last Resort: Singapore’s Government Investment Corporation

1. There are other benefits to self-­insurance as well: relying on domestic institutions affords countries more flexibility, as they are seen to be more nimble in times of crisis—­when speed of policy implementation is crucial—­than the IMF (see Mishkin 1999). 2. We could also analyze the contribution of Singapore’s SWFs to the growth of the city-­state as a financial center in Southeast Asia. In this chapter, however, that particular part of the story is less significant than the issue of macroeconomic stability. See Lee Kuan Yew’s (2000) account of the creation of the SWFs and their importance in underwriting the Singapore financial services industry. 3. Throughout the commentary offered by the International Working Group of SWFs on the rationale underpinning the Santiago Principles, the focus was on the interests of “home countries” and “recipient countries” and the prospect for establishing “trust” between the two (see chapter 4). Implied is a fear that SWF investments may precipitate protectionist sentiment if the objectives of SWF investors are either

167

168

Notes to Chapter 7

obscure or are counter to the conventional ethos of maximizing returns that dominates the Anglo-­American investment management industry (see Litterman 2003). 4. See http://app.mof.gov.sg/data/FY2009_Budget_Debate_Round_Up_Speech.pdf. Chapter 7. Legitimacy, Trade and Global Imbalances: The China Investment Corporation

1. The reasons for European reintegration and the putative failure of the Russian empire are many and varied. It is important to acknowledge that the economic failure of the “East” was as much the cause of reintegration as liberal democracy was the beacon for Eastern European aspirations. As Scharpf (1999) noted some time ago, the fragility of Western European democratic traditions and the limited depth of economic prosperity have undercut the legitimacy of liberal capitalism. 2. See Xie (2006) on a study of voting in the House and the Senate for MFN status and permanent normal trade relations, where it is shown that party differences and an ideological commitment to free trade dominated voting such that domestic economic and political interests were often marginalized. 3. Testimony of Lori Wallach, Director, Public Citizen’s Global Trade Watch, at p. 69, for U.S. Senate Hearing 106–­1108—­Permanent Normalized Trade Relations with the People’s Republic of China, Tuesday, April 11, 2000. 4. The precise terms of this “deal” remain subject to debate. As public debate over the issue gathered momentum in late 1999, the Chinese government through its U.S. Embassy spokesman indicated that the “deal” with Clinton was binding in that WTO status without PNTR status was unacceptable given the concessions made by the Chinese government on tariffs and the like. Much of the debate seemed to center on the interpretation of Clinton’s “commitment” and whether PNTR was actually relevant once China was accepted into the WTO. See Wallach testimony (pp. 87–­88) cited in note 3 of this chapter. 5. Ibid., pp. 1–­3. 6. Ibid, pp. 4–­6. But see also Bown (2010) on the reasons why China sought WTO accession, arguing that it also faced significant barriers to the export of goods, including impediments imposed by developed economies such as Australia, Canada, the European Union, and the United States, and those imposed by developing economies such as India, Argentina, and South Africa. 7. At the time, it was widely believed that the growth of Chinese exports to the United States would be modest and would be accompanied by lower Chinese tariffs on imported goods. Hollings’s prediction was well beyond the bounds of conventional expectations (see Saaty and Cho 2001). 8. The growth and composition of Chinese exports has been the subject of considerable research; see, for example, Amiti and Freund (2010) who show that over the period 1992 to 2005 Chinese exports became more capital intensive, specialized, and reliant upon the processing of intermediate goods. Grossman and Helpman (2005) and Grossman and Rossi-­Hansberg (2008) provide a useful theoretical treatment of the fragmentation of international trade around tasks and functions as opposed to final goods, while Dean and Lovely (2010) reference the relevant empirical literature and demonstrate the significance of the issue for Chinese trade and environmental policy.



Notes to Chapter 7

9. Reporting on the undervalued RMB, Goldstein and Lardy (2006, 423 ftn. 2) suggested the RMB was undervalued against the U.S. dollar in 2005 by as much as 43 percent. There have been other estimates and techniques for determining the extent of undervaluation (see Bowles and Wang 2006). See also Cheung et al. (2010, 232) for an analysis (end 2008) in which they concluded that the RMB may be undervalued by as much as 50 percent, although they also note that this estimate may not be statistically robust given mean estimates and sensitivity to “substantial revisions to the underlying data.” More recently, Goldman Sachs (2010) suggested that the RMB “no longer seems strongly undervalued (against the U.S. dollar),” but also proposed that it may be “revalued in a one-­off move, and then allowed to trade in a wider band, perhaps being truly managed on a trade-­weighted basis.” 10. See Garton and Chang’s (2005, 85) assessment of the so-­called liberalization of China’s currency peg regime since 2005 and their conclusion that “in practice, the bilateral US dollar rate has continued to be tightly managed and further RMB appreciation against the (US) dollar has so far been limited.” 11. Elsewhere Cooper (2007) explains how and why foreign investors are (were) willing to continue to underwrite the U.S. economy, referencing the preference for security of investment over the risks associated with investment in other jurisdictions with less secure institutions. Obstfeld and Rogoff (2005) look in detail at the issue of high household indebtedness. 12. Here, we use the term “immature” in a manner consistent with King and Levine’s (1993a, 735) argument to the effect that financial development is an important ingredient in promoting economic efficiency and growth. They conclude by suggesting that “the data are consistent with the view that financial services stimulate economic growth by increasing the rate of capital accumulation and by improving the efficiency with which economies use that capital.” This argument is developed in their related paper on the relationship between financial development and innovation (King and Levine 1993b). See Liang and Teng (2006), who contest the applicability of this model to China, and Deidda and Fattouh (2002) and Huang et al. (2010), who suggest, respectively, that the relationship may be nonlinear and affected by inflation (itself a proxy for the maturity of banking institutions and policymaking). 13. See Hu (2010) for an account of the significance and status of SAFE. 14. Emblematic of this point is the official announcement made in November 2007 by the Vice Minister of Finance Li Yong concerning the intended investment strategy of the CIC. It is apparent from his statement that central government has direct control over strategic and tactical asset allocation, something not countenanced by many Western governments when establishing their own SWFs. 15. In a related way, the International Advisory Council mimics similar arrangements in other SWFs and meets the expectations of multilateral organizations in terms of promoting best practice. The IAC can be interpreted as a means of claiming external legitimacy for the CIC, bringing together people with credible expertise and, most importantly, access to government policymaking in the Americas, Asia, and Europe. 16. A reader of a previous draft of this chapter objected to this statement arguing that, surely, the CIC’s stakes in U.S. investment banks had given it this type of expertise. We note, however, that it widely acknowledged in the global banking industry that even having a “majority” stake in an investment house is no guarantee of being

169

170

Notes to Chapter 8

part of the “inside story” on investment strategy and tactics. Here, the Chinese have held “minority” stakes with little in the way of expertise and experience in “governing” their relationships with Western institutions to their advantage. 17. Huijin controls the Bank of China, the Industrial and Commercial Bank of China, and the China Construction bank. The Bank of China also has branches in the United States. Without exemption from the Bank Holding Company Act, which provides for extensive operating and reporting requirements, it is believed that the central government would have had to rely upon foreign banks to manage their international (U.S.) foreign currency reserves. In effect, the control of the Huijin gave the CIC and central government an operating arm at the core of Western markets. 18. See also the article “What those CIC stake holding disclosures say about its strategy,” Wall Street Journal, February 9, 2010. The article reports that the CIC typically held less than 1 percent of the target companies’ outstanding stock. It is suggested that “the CIC is giving its in-­house portfolio managers a chance to construct investing strategies,” thereby gaining knowledge and experience that may be used some time later. We are not so sure. 19. See, for instance, commentary in J. Dean, J. T. Areddy, and S. Ng, “Chinese Premier blames recession on US actions,” Wall Street Journal, January 29, 2009; and D. Lee and B. Demick, “China’s Wen Jiabao concerned about stability of US debt,” Los Angeles Times, March 14, 2009. 20. It should be stressed, though, that this “recipe” for U.S. prosperity is partial in that another requirement may be regulatory reform of the financial sector and the discounting of household indebtedness (Stiglitz 2009). Whether there is the political will for the United States to realize such a reform agenda is one of the most important issues that will affect the long-­term relationship between it and China. Chapter 8. Modernity, Imitation and Performance: The Gulf States’ Funds

1. In the context of continuing Cold War–­hostilities with Russia and (to a lesser extent) the People’s Republic of China, the OPEC cartel was seen as a geopolitical intervention as much as an attempt by resource-­rich economies to claim their share of global growth prospects. See Yergin (1992). 2. This figure is taken from http://www.bp.com/popupimage.do?img_path+ liveassets/bp_internet/globalbp and is best seen as a characterization of the path and volatility of global oil prices expressed in U.S. dollars against the 2009 reference date. See also Dvir and Rogoff (2010), who use the same database to give a broader characterization of oil prices over the past 150 years. There are more sophisticated and perhaps more complete series, although few have the global scope and temporal reach as this figure. See also the International Energy Agency website www.iea.org/topics/ oil, and http://omrpublic.iea.org. 3. See Landon and Smith (2010) on the causes and consequences of procyclical government spending in Alberta, Canada. 4. It is also true that the Abu Dhabi Investment Authority was established in 1976, but, there again, it is probably reasonable to suggest that the British had some influence in that decision, as the UAE had a “special treaty” with the United Kingdom until 1971. 5. Interestingly, the third country to set up an SWF, in 1958, was the United States via the U.S. state of New Mexico. Next was the U.S. state of Wyoming in 1974, which



Notes to Chapter 9

was in turn followed by Alaska and the Canadian province of Alberta in 1976. The genesis of SWFs makes ironic the current view in the West that SWFs are “foreign” and “non-­Western.” 6. For Merton and Bodie (2005), there is an intimate, even unique relationship between form and function such that the design of an institution (form) is conceived in relation to a priori defined functions. Indeed, by their account, the logic or imperatives involved in realizing certain functions provide the rationale for the design of the institution itself. In this respect, their argument represents a larger commitment to understanding financial systems by virtue of their functions rather than concentrating on institutional forms, thereby emphasizing the commonalities between financial systems rather than their apparent formal differences. 7. Governance refers to the inputs and the frameworks for making investment decisions within a financial institution (see, e.g., Ambachtsheer et al. 2008). Chapter 9. Conclusion: Form and Function in the Twenty-First Century

1. Reported by Kara Scannell and Sudeep Reedy, “Greenspan admits errors to hostile House panel,” Wall Street Journal, October 28, 2008. Available at http://online.wsj .com; accessed October 7, 2009. 2. The claimed virtues of Western financial markets, and especially Anglo-­ American markets, were widely cited as reasons for the apparent success of the United States in technological innovation, economic growth, and the attraction of talent (on a global scale) through the 1980s and 1990s, and up to the financial crisis. Continental European nations were deemed far less competitive as a consequence, driving “reform” in financial systems and investment practice that can be thought partly responsible for the vulnerability of German regional banking systems to the U.S. subprime crisis. See Clark and Wójcik (2007) on this debate. 3. Whereas much of the relevant literature is preoccupied with the issue of rationality, we argue that it is a matter of competence rather than rationality or irrationality. Financial markets are remarkable environments; being subject to risk and uncertainty, effective decision-­making requires a level of expertise and judgment well beyond that found in everyday life (Kahneman and Tversky 1979). 4. Embedded in many accounts of the theory and practice of investment management is the belief that “neoclassical theory is approximately valid for determining asset prices and resource allocations” (Merton and Bodie 2005, 6). 5. The efficient markets hypothesis has been subject to a great deal of debate, especially in relation to the global financial crisis (Rajan 2010, 146). For some, the global financial crisis is evidence that the EMH was at best misleading and at worst the motivating logic of corporate and governmental hubris. At this point, we should note that the EMH does not necessarily promise socially desirable outcomes. Moreover, to the extent that market pricing is information-­sensitive, the quality, quantity, and price of the available information are obviously crucial variables affecting the decisions of market agents (who may be also subject to behavioral biases and anomalies; see ­Hilton 2003). 6. For the latest installment, see Dimson et al. (2010) on the recovery of markets since the global financial crisis. They emphasize the relationship between developed and emerging financial markets, and the relationship between economic growth and

171

172

Notes to Chapter 9

market performance (arguing that the former drives the latter). They also emphasize continuity with the past and the ever-­present tendency of markets (within and between) toward mean-­reversion. 7. The failure to produce a coherent global regulatory response to the financial crisis will have a number of pernicious consequences, one of which may be the reemergence of interjurisdictional arbitrage. Banking institutions may, in effect, side with their SWF consumers rather than their “host” nations, using differences between countries’ banking and financial regulation to claim advantage either through the threat of relocation in favor of their clients or by leveraging the reliance of their host nations on the flow of funds generated by SWF investment for special consideration. 8. A thread in public commentary on the causes and consequences of the global financial crisis emphasizes the close relationships between U.S. political and financial elites, arguing that they were able to exploit the reliance of foreign investors on Western (and especially U.S. markets) to the benefit of U.S. banks and financial service companies (and indirectly, political elites). The prices charged to other investors, and the perception that U.S. banks trading on their own account were able to benefit at the expense of “external” investors, have encouraged SWFs to look more closely at the “value for money” proposition underpinning continuing commitment to Western markets and service providers. See generally Simon Johnson, “The Quiet Coup,” Atlantic Monthly, May 2009, available at www.theatlantic.com; accessed August 5, 2010. 9. In a related vein, Clarida (2010) and El-­Erian (2010) disparage the idea that markets will return to “normal,” a world characterized by relatively low market volatility and low-­impact events that do little to disturb confidence in market pricing. Their world of the “new” normal is anything but normal: historical low rates of economic growth, periodic bursts of price inflation, and sovereign defaults where “the distribution of outcomes is flatter and the tails are fatter” (Clarida 2010, 2). At one level, their argument is informed by investment practice. At another level, it is informed by a realist conception of the unthinkable. 10. See Bernanke’s August 2, 2010, comments to a group of Southern U.S. state governors suggesting that, in the future, they may wish to build up sizable reserve funds so as to deal with the prospect of greater economic volatility. This has been characterized by some as a “save for a rainy day” strategy and is found in the motives of some nation-­states when establishing SWFs. This point was put as advice “on camera” by the previous president of Chile to the then-­prime minister of Great Britain, Gordon Brown. See Rajan (2010, 201–­2) for related advice. Presumably any such strategy would require an institution like an SWF insulated from political pressures. See www. marketwatch.com; accessed August 3, 2010. 11. In the literature this premium is typically identified as the equity risk premium (see Dimson et al. 2002). Recent research on the nature and value of such a premium has cast doubt on its size (Fama and French 2002), how best to estimate it (Campbell 2008), and its characteristics by jurisdiction (Gregory 2007). In their assessment of investment strategy for the Norwegian SWF, Ang et al. (2009) suggest that it may be better to refer to the risk premium on investment than an equity risk premium.

References

Ablett, J. 1999. Generational Accounting in Australia. In Generational Accounting around the World, Auerbach, A. J., Kotlikoff, L. J., and Leibfritz, W. (eds.). Chicago: University of Chicago Press, pp. 141–­60. Adnett, N. 2001. Modernizing the European social model: Developing the guidelines. Journal of Common Market Studies 39(2): 353–­64. Aghion, P., Bacchetta P., Ranciere, R., and Rogoff, K. 2009. Exchange rate volatility and productivity growth: The role of financial development. Journal of Monetary Economics 56(4): 494–­513. Agnew, J. 1994. The territorial trap: The geographical assumptions of international relations theory. Review of International Political Economy 1: 53–­80. ———. 2005. Sovereignty regimes: Territoriality and state authority in contemporary world politics. Annals of the Association of American Geographers 95(2): 437–­61. Ainslie, G. 2001. Breakdown of Will. Cambridge: Cambridge University Press. ———. 2005. Précis of Breakdown of Will. Behavioral and Brain Sciences 28(5): 635–­73. Aizenman, J. 2008. Relative Price Levels and Current Accounts: An Exploration. Working Paper. August. Available at SSRN: http://ssrn.com/abstract=1282222. Aizenman, J., and Glick, R. 2008. Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance. NBER Working Paper No. 14562. Cambridge, MA: National Bureau of Economic Research. ———. 2009. Sovereign wealth funds: Stylized facts about their determinants and governance. International Finance 12(3): 351–­86. Aizenman, J., and Lee, J. 2007. International reserves: Precautionary versus mercantilist views, theory and evidence. Open Economies Review 18(2): 191–­214. ———. 2008. Financial versus monetary mercantilism: Long-­run view of large international reserves hoarding. The World Economy 31(5): 593–­611. Aizenman, J., and Marion, N. 2003. The high demand for international reserves in the Far East: What is going on? Journal of the Japanese and International Economies 17(3): 370–­400.

173

174

References

Aizenman, J., and Marion, N. 2004. International reserve holdings with sovereign risk and costly tax collection. The Economic Journal 114(497): 569–­91. Alberola, E., and Serena, J. M. 2008. Reserves, sovereign wealth funds and the resilience of global imbalances. Economic Notes 37(3): 315–­43. Al Khouri, R. 2008. Rentierism revisited. Arab Reform Bulletin. Available at http:// carnegieendowment.org/sada/2008/09/09/kuwait-rentierism-revisited/6bfx. Allen, F., and Gale, D. 2007. Understanding Financial Crises. Oxford: Oxford University Press. Ambachtsheer, K. 2008. Sovereign Wealth Funds: Friends or Foes? The Ambachtsheer Letter 264: 1–­4. Ambachtsheer, K., Capelle, R., and Lum, H. 2008. The pension governance deficit: Still with us. Rotman International Journal of Pension Management 1(1): 14–­21. Amiti, M., and Freund, C. 2010. The Anatomy of China’s Export Growth. In China’s Growing Role in World Trade, Feenstra, R. C., and Wei, S.-­J. (eds.). Chicago: University of Chicago Press, pp. 35–­56. Ammann, M., and Zingg, A. 2010. Performance and governance of Swiss pension funds. Journal of Pension Economics and Finance 9(1): 95–­128. Ang, A., Goetzmann, W. N., and Schaefer, S. M. 2009. Evaluation of Active Management of the Norwegian Government Pension Fund-­Global. Oslo: Norwegian Government. Auerbach, A. J., Gokhale, J., and Kotlikoff, L. J. 1994. Generational accounting: A meaningful way to evaluate fiscal policy. Journal of Economic Perspectives 8(1): 73–­94. Auerbach, A. J. and Kotlikoff, L. J. 1999. The Methodology of Generational Accounting. In Generational Accounting around the World, Auerbach, A. J., Kotlikoff, L. J., and Leibfritz W. (eds.). Chicago: University of Chicago Press, pp. 31–­42. Auerbach, A. J., Kotlikoff, L. J., and Leibfritz W. (eds.). 1999. Generational Accounting around the World. Chicago: University of Chicago Press. Auty, R. M., and Kiiski, S. 2001. Natural Resources, Capital Accumulation, Structural Change, and Welfare. In Resource Abundance and Economic Development, Auty, R. M. (ed.). Oxford: Oxford University Press, pp. 19–­35. Auty, R. M., and Mikesell, R. F. 1998. Sustainable Development in Mineral Economies. Oxford: Clarendon Press. Backer, L. C. 2010. Sovereign wealth funds as regulatory chameleons: The Norwegian sovereign wealth funds and public global governance through private global investment. Georgetown Journal of International Law 41(2): 425–­547. Baldwin, R. E., and Krugman, P. 2002. Agglomeration, Integration and Tax Harmonization. NBER Working Paper No. 9290. Cambridge, MA: National Bureau of Economic Research. Barnett, W. P. 2008. The Red Queen among Organizations: How Competiveness Evolves. Princeton: Princeton University Press. Barro, R. J. 2006. Rare disasters and asset markets in the twentieth century. Quarterly Journal of Economics 121(3): 823–­66. Barroso, J. M. 2008. Sovereign Wealth Funds: No European Legislation but Rather a Common Approach. Speech delivered to the European Commission, Oslo, Norway, February 25, 2008. Available at http://ec.europa.eu/commission_barroso/ president/pdf/statement_20080225_02_en.pdf. Bathelt, H. 2006. Geographies of production: Growth regimes in spatial perspective 3 –­toward a relational view of economic action and policy. Progress in Human Geography 30(2): 223–­36.



References

Bauer, R., Braun, R., and Clark, G. L. 2008. The emerging market for European corporate governance: The relationship between governance and capital expenditures, 1997–­2005. Journal of Economic Geography 8(4): 441–­69. Bauer, R., Hoevenaars, R., and Steenkamp, T. 2006. Asset Liability Management. In The Oxford Handbook of Pensions and Retirement Income, Clark, G. L., Munnell, A. H., and Orszag, J. M. (eds.). Oxford: Oxford University Press, pp. 417–­40. Bebchuk, L. A. 2005. The case for increasing shareholder power. Harvard Law Review 118(3): 835–­914. Beblawi, H. 1990. The Rentier State in the Arab World. In The Arab State, Luciani, G. (ed.). Berkeley: University of California Press, pp. 85–­98. Beck, R., and Fidora, M. 2008. The impact of sovereign wealth funds on global financial markets. Intereconomics, 43(6): 349–­58. Beck. T. 2011. Finance and Oil: Is There a Resource Curse in Financial Development? European Banking Center Discussion Paper No. 2011–­2004. January 25, 2011. Available at SSRN: http://srrn.com/abstract=1763809. Beckfield, J. 2003. Inequality in the world polity: The structure of international organization. American Sociological Review 68: 401–­24. Behrendt, S. 2009. Gulf Arab SWFs—­Managing wealth in turbulent times. Policy Outlook. Washington, DC: Carnegie Endowment for International Peace. Berg, E., and Kuusk, E. 2010. What makes sovereignty a relative concept? Empirical approaches to international society. Political Geography 29: 40–­49. Bernanke, B. 2005. The Global Saving Glut and the U.S. Current Account Deficit. Sandridge Lecture, Virginia Association of Economics, Richmond, VA, Federal Reserve Board, April. ———. 2010. Challenges for the Economy and State Governments. Remarks to the Annual Meeting of the Southern Legislative Conference of the Council of State Governments, Charleston, SC, August. Berstein, S., Lerner, J., and Shoar, A. 2009. The Investment Strategies of Sovereign Wealth Funds. NBER Working Paper No. 14861. Cambridge, MA: National Bureau of Economic Research. Bhagwati, J. N. 1988. Protectionism. Cambridge, MA, and London: MIT Press. Biersteker, T. J. E., and Weber, C. E. 1996. State Sovereignty as Social Construct. Cambridge: Cambridge University Press. Bird, G., and Mandilaras, A. 2005. Reserve accumulation in Asia: Lessons for holistic reform of the international monetary system. World Economics 6(1): 85–­99. Bisch, D. 2008. Viewpoint: Identity Crisis. Benefits Canada 32(2): 70–­7 1. Blackburn, S. 1998. Ruling Passions. Oxford: Oxford University Press. Blundell-­Wignall, A., Hu, Y.-­W., and Yermo, J. 2008. Sovereign Wealth and Pension Fund Issues. Working Papers on Insurance and Private Pensions, No. 14. Paris, France: Organization for Economic Co-­operation and Development (OECD) Publishing. Bogle, J. C. 2005. The Battle for the Soul of Capitalism. New Haven: Yale University Press. Bordo, M. D. 2005. Historical Perspective on Global Imbalances. NBER Working Paper No. 11383. Cambridge, MA: National Bureau of Economic Research. Borio, C. 2006. Monetary and financial stability: Here to stay? Journal of Banking and Finance 30(12): 3407–­14. Bowles, P., and Wang, B. 2006. ‘Flowers and criticism’: The political economy of the renminbi debate. Review of International Political Economy 13(2): 233–­57.

175

176

References

Bown, C. P. 2010. China’s WTO Entry: Antidumping, Safeguards, and Dispute Settlement. In China’s Growing Role in World Trade, Feenstra, R. C., and Wei, S.-­J. (eds.). Chicago: University of Chicago Press, pp. 281–­344. Braithwaite, J. 1989. Crime, Shame and Reintegration. Cambridge: Cambridge University Press. Brannelly, J. M. 2002. The United States’ grant of permanent normal trade status to China: A recipe for tragedy or transformation? Suffolk Transnational Law Review 25(3): 565–­85. Bremmer, I. 2010. The End of the Free Market: Who Wins the War between States and Corporations? New York: Portfolio. Brenner, N. 1999. Beyond state-­centrism? Space, territoriality, and geographical scale in globalization studies. Theory and Society 28: 39–­78. Bryant, R. C. 2004. Demographic Pressures on Public Pension Systems and Government Budgets in Open Economies. Brookings Discussion Papers in International Economics No. 164. Buira, A. 2003. An Analysis of IMF Conditionality. G-­24 Discussion Paper Series No. 22. The International Group of Twenty-­four on International Monetary Affairs and Development (G-­24). Campbell, J. L. 2004. Institutional Change and Globalization. Princeton: Princeton University Press. Campbell, J. Y. 2008. Viewpoint: Estimating the equity premium. Canadian Journal of Economics 41(1): 1–­21. Campbell, J. Y., and Viceira, L. M. 2002. Strategic Asset Allocation: Portfolio Choice for Long-­Term Investors. Oxford: Oxford University Press. Chance, C. 2008. China’s sovereign wealth fund takes shape. Asian Investor (February 22). Available at http://www.asianinvestor.net/News/103599,chinas-sovereign -wealth-fund-takes-shape.aspx. Chesterman, S. 2008. The turn to ethics: Disinvestment from multinational corporations for human rights violations—­The case of Norway’s sovereign wealth fund. American University International Law Review 23(3): 577–­615. Cheung, Y.-­W., Chinn, M. D., and Fujii, E. 2010. China’s Current Account and Exchange Rate. In China’s Growing Role in World Trade, Feenstra, R. C., and Wei, S.-­J. (eds.). Chicago: University of Chicago Press, pp. 231–­80. Chow, P. C., and Kellman, M. 1993. Trade: The Engine of Growth in East Asia. Oxford: Oxford University Press. Christopherson, S. 2002. Why do national labor market practices continue to diverge in the global economy? The ‘missing link’ of investment rules. Economic Geography 78(1): 1–­20. Chwieroth, J. M. 2009. Capital Ideas: The IMF and the Rise of Financial Liberalization. Princeton: Princeton University Press. ———. 2010. Fashions and fads in finance: Contingent emulation and the political economy of sovereign wealth fund creation. Available at SSRN: http://ssrn .com/abstract=1643861. Clarida, R. H. 2010. The Mean of the New Normal Is an Observation Rarely Realized: Focus also on the Tails. PIMCO Global Perspectives. Available at http:// media.pimco.com/Documents/PIMCOGlobalPerspectives07-2010New Normal_Clarida.pdf.



References

Clark, G. L. 2000. Pension Fund Capitalism. Oxford: Oxford University Press. ———. 2003. European Pensions and Global Finance. Oxford: Oxford University Press. ———. 2004. Pension fund governance: Expertise and organizational form. Journal of Pension Economics and Finance 3(2): 233–­53. ———. 2005. Money flows like mercury: The geography of global finance. Geografiska Annaler Series B, Human Geography 87(2): 99–­112. ———. 2007. Expertise and representation in financial institutions: UK legislation on pension fund governance and US regulation of the mutual fund industry. 21st Century Society: Journal of the Academy of Social Sciences 2(1): 1–­23. ———. 2008. Governing finance: Global imperatives and the challenge of reconciling community representation with expertise. Economic Geography 84(3): 281–­302. ———. 2009. Risk Management and Institutional Investors. In Managing Financial Risks: From Global to Local, Clark, G. L., Dixon, A. D., and Monk, A. H. B. (eds.). Oxford: Oxford University Press, pp. 69–­91. ———. 2011. Myopia and the global financial crisis: Context-­specific reasoning, market structure, and institutional governance. Dialogues in Human geography 1(1): 4–­25. Clark, G. L., Caerlewy-­Smith, E., and Marshall, J. C. 2006. Pension fund trustee competence: Decision-­making in problems relevant to investment practice. Journal of Pension Economics and Finance 5(1): 91–­110. ———. 2007. The consistency of UK pension fund trustee decision-­making. Journal of Pension Economics and Finance 6(1): 67–­85. Clark, G. L., and Dear, M. J. 1984. State Apparatus: Structures and Language of Legitimacy. London: Allen and Unwin. Clark, G. L., Dixon, A. D., and Monk, A.H.B. (eds.). 2009. Managing Financial Risks: From Global to Local. Oxford: Oxford University Press. Clark, G. L., and Hebb, T. 2004. Pension fund corporate engagement: The fifth stage of capitalism. Relations Industrielles/Industrial Relations 59(1): 142–­7 1. ———. 2005. Why should they care? The role of institutional investors in the market for corporate global responsibility. Environment and Planning A 37(11): 2015–­31. Clark, G. L., and Kim, W. B. (eds.). 1995. The Asian NIEs in the Global Economy: Industrial Restructuring and Corporate Strategy in the 1990s. Baltimore: Johns Hopkins University Press. Clark, G. L., and Monk, A. H. B. 2009. The Oxford Survey of Sovereign Wealth Funds’ Asset Managers. July 1. Available at SSRN: http://ssrn.com/abstract=1432078. Clark, G. L., Salo, J., and Hebb, T. 2008. Social and environmental shareholder activism in the public spotlight: US corporate annual meetings, campaign strategies, and environmental performance, 2001–­04. Environment and Planning A 40(6): 1370–­90. Clark, G. L,. and Urwin, R. 2008a. Best-­practice pension fund governance. Journal of Asset Management 9(1): 2–­21. ———. 2008b. Making pension boards work: The critical role of leadership. Rotman Journal of International Pension Management 1(1): 38–­45. ———. 2010. Innovative models of pension fund governance in the context of the global financial crisis. Pensions: An International Journal 15(1): 62–­77. Clark, G. L., and Wójcik, D. 2007. The Geography of Finance: Corporate Governance in the Global Marketplace. Oxford: Oxford University Press.

177

178

References

Clark, I. 2005. Legitimacy in International Society. Oxford: Oxford University Press. Coe, N. M., Dicken, P., and Hess, M. 2008. Global production networks: Realizing the potential. Journal of Economic Geography 8(3): 271–­295. Coe, N. M., Hess, M., Yeung, H.W-­C., Dicken, P., and Henderson, J. 2004. ‘Globalizing’ regional development: A global production networks perspective. Transactions of the Institute of British Geographers 29(4): 468–­84. Cohen, B. J. 1986. In Whose Interest? International Banking and American Foreign Policy. New Haven and London: Yale University Press for the Council on Foreign Relations. ———. 2009. Sovereign wealth funds and national security: The great tradeoff. International Affairs 85(4): 713–­31. Coleman, J. L. 2001. The Practice of Principle: In Defence of a Pragmatist Approach to Legal Theory. Oxford: Oxford University Press. Coleman, J. L., and Ferejohn, J. 1986. Democracy and social choice. Ethics 97: 6–­25. Commonwealth of Australia. 1997. Financial System Inquiry Final Report. Canberra ACT: Australian Government. ———. 2002. Intergenerational Report 2002–­2003. Budget Paper No. 5. Canberra ACT: Australian Government. ———. 2007. Intergenerational Report 2007. Canberra ACT: Australian Government. Cooke, S., Sibbett, B. K., Taylor, L., and Taylor, M. 2009. Sovereign wealth funds and the Santiago Principles. Risk Management 56(3): 44–­48. Cooper, R. N. 2007. Living with global imbalances. Brookings Papers on Economic Activity 2: 91–­107. Corden, W. M. 1984. Booming sector and Dutch disease economics: Survey and consolidation. Oxford Economic Papers 36: 359–­80. Corden, W. M., and Neary, P. J. 1982. Booming sector and de-­industrialisation in a small open economy. Economic Journal 92(368): 825–­48. Costello, P., with Coleman, P. 2008. The Costello Memoirs. Melbourne: Melbourne University Press. Crouch, C. 2005. Capitalist Diversity and Change: Recombinant Governance and Institutional Entrepreneurs. Oxford: Oxford University Press. Davis, B. 2008. State Funds May Not Bolster Freedoms. Wall Street Journal (Eastern edition), February 11, p. A2. Davis, E. P., and Steil, B. 2001. Institutional Investors. Cambridge: MIT Press. Dean, J. M., and Lovely, M. E. 2010. Trade Growth, Production Fragmentation, and China’s Environment. In China’s Growing Role in World Trade, Feenstra, R. C., and Wei, S.-­J. (eds.). Chicago: University of Chicago Press. Deephouse, D. L. 1996. Does isomorphism legitimate? Academy of Management Journal 39(4): 1024–­39. Deidda, L., and Fattouh, B. 2002. Non-­linearity between finance and growth. Economics Letters 74(3): 339–­45. Devlin, W., and Brummitt, B. 2007. A few sovereigns more: The rise of sovereign wealth funds. Economic Round-­up (Spring 2007): 119–­36. Canberra: Australian Treasury. DiMaggio, P. 1988. Interest and Agency in Institutional Theory. In Institutional Patterns and Organizations, Zucker, L. (ed.). Cambridge, MA: Ballinger, pp. 3–­22. DiMaggio, P. J., and Powell, W. W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review 48(2): 147–­60.



References

Dimson, E., Marsh, P., and Staunton, M. 2002. Triumph of the Optimists: 101 Years of Global Investment Returns. Princeton: Princeton University Press. ———. 2010. Emerging Markets and Economic Growth. In Credit Suisse Global Investment Returns Yearbook 2010. London: Credit Suisse. Dixon, A. D. 2008. The rise of pension fund capitalism in Europe: An unseen revolution? New Political Economy 13(3): 249–­70. ———. 2011. Variegated capitalism and the geography of finance: Towards a common agenda. Progress in Human Geography 35(2): 193–­210. ———. 2012. Function before form: Macro-­institutional comparison and the geography of finance. Journal of Economic Geography. 12(3): 579–­600. Dixon, A. D., and Monk, A. H. B. 2009. The power of finance: Accounting harmonization’s effect on pension provision. Journal of Economic Geography 9(5): 619–­39. Dooley, M., Fernández-­Arias, E., and Kletzer, K. 1996. Is the debt crisis history? Recent private capital inflows to developing countries. World Bank Economic Review 10(1): 27–­50. Dooley, M. P., Folkerts-­Landau, D., and Garber, P. 2004. The revived Bretton Woods System. International Journal of Finance and Economics 9: 307–­13. Dore, R. P. 2000. Stock Market Capitalism: Welfare Capitalism—­Japan and Germany versus the Anglo-­Saxons. Oxford: Oxford University Press. ———. 2007. Inevitability. Bologna: Mulino. Dowling, J., and Pfeffer, J. 1975. Organizational legitimacy: Social values and organizational behavior. Pacific Sociological Review 18(1): 122–­36. Drezner, D. 2008. Global finance: Sovereign wealth funds and the (in)security of global finance. Journal of International Affairs 62(1): 115–­30. Dvir, E., and Rogoff, K. S. 2010. The Three Epochs of Oil. Cambridge: Department of Economics, Harvard University. Eaton, S. 2010. A principal-­agent analysis of China’s sovereign wealth system: Byzantine by Design. Review of the Internation Politcal Economy 17(3): 481–­509 Edmondson, A. C., Roberto, M. A., Bohmer, R. M. J., Ferlins, E. M., and Feldman, L. R. 2005. The Recovery Window: Organizational Learning Following Ambiguous Threats. In Organization at the Limit: Lessons from the Columbia Disaster, Starbuck, W. H., and Farjoun, M. (eds.). Oxford: Blackwell Publishing, pp. 220–­45. Eichengreen, B. 2006. Global imbalances: The new economy, the dark matter, the savvy investor, and the standard analysis. Journal of Policy Modeling 28(6): 645–­52. ———. 2008. Should There Be a Coordinated Response to the Problem of Global Imbalances? Can There Be One? DESA Working Paper No. 69. Eichengreen, B., and Park, Y. C. 2006. Global Imbalances: Implications for Emerging Asia and Latin America. Mimeo. Berkeley: Department of Economics, University of California. Eifert, B., Gelb, A., and Tallroth, N. B. 2002. The Political Economy of Fiscal Policy and Economic Management in Oil-­Exporting Countries. World Bank Policy Research Working Paper No. 2899. El-­Erian, M. A. 2010. Sovereign wealth funds in the new normal. Finance & Development 47(2): 44–­47. Eriksen, T. 2006. The Norwegian petroleum sector and the Government Pension Fund-­ Global. Oslo: Ministry of Finance, Norwegian Government. Available at http://www.regjeringen.no/upload/FIN/Statens%20pensjonsfond/The _Norwegian_Petroleum_Sector_te.pdf.

179

180

References

Esping-­Andersen, G. 1996. Welfare States without Work: the Impasse of Labour Shedding and Familialism in Continental European Social Policy. In Welfare States in Transition: National Adaptations in Global Economies, Esping-­Andersen, G. (ed.). London: Sage Publications, pp. 66–­87. Esping-­Andersen, G., Gallie, D., Hemerijck, A., and Myles, J. 2001. A New Welfare Architecture for Europe? Report submitted to the Belgian Presidency of the European Union. Estlund, D. M. 2008. Democratic Authority: A Philosophical Framework. Princeton: Princeton University Press. European Commission. 2008. A Common European Approach to Sovereign Wealth Funds. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, and the Committee of the Regions, COM(2008) 115 provisional EN. Fama, E. 1970. Efficient capital markets: A review of theory and empirical work. Journal of Finance 25(2): 383–­417. Fama, E., and French, K. 2002. The equity premium. Journal of Finance 57(2): 637–­59. Fasano, U. 2000. Review of the Experience with Oil Stabilization and Savings Funds in Selected Countries. IMF Working Paper WP/00/112. Feldstein, M. 1998. Refocusing the IMF. Foreign Affairs 77(2): 20–­33. ———. A self-­help guide for emerging markets. Foreign Affairs 78(2): 93–­109. ———. The NBER-­Sloan Project on Productivity Change. AEA Introduction. Available at http://www.nber.org/sloan/AEAintro.html. Feldstein, M. S. 2008. Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate. NBER Working Paper No. 13952. Cambridge, MA: National Bureau of Economic Research. Ferrera, M., Hemerijck, A., and Rhodes, M. 2001. The future of the European “social model” in the global economy. Journal of Comparative Policy Analysis: Research and Practice 3(2): 163–­90. Fischer, S. 1999. On the need for an international lender of last resort. Journal of Economic Perspectives 13(4): 85–­104. Foss, N. J. 1997. Resources, Firms, and Strategies: A Reader in the Resource-­Based Perspective. Oxford: Oxford University Press. Franke, A., Gawrich, A., and Alakbarov, G. 2009. Kazakhstan and Azerbaijan as post-­ Soviet rentier states: Resource incomes and autocracy as a double “curse” in post-­Soviet regimes. Europe-­Asia Studies 61(9): 109–­40. Frankel, J., and Saravelos, G. 2010. Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008–­09 Global Crisis, NBER Working Paper 16047. Cambridge, MA: National Bureau of Economic Research. Frederick, S., Louwenstein, G., and O’Donoghue, T. 2002. Time discounting and time preference: A critical review. Journal of Economic Literature 40(2): 351–­401. Freeman, J., Carroll, G. R., and Hannan, M. T. 1983. The liability of newness: Age dependence in organizational death rates. American Sociological Review 48(5): 692–­7 10. Freeman, R. B. 1998. War of the models: Which labour market institutions for the 21st century? Labour Economics 5(1): 1–­24. French, K. R., et al. 2010. The Squam Lake Report: Fixing the Financial System. Princeton: Princeton University Press.



References

Fukuyama, F. 1992. The End of History and the Last Man. New York: Free Press. Future Fund. 2008a. Annual Report 2007/08. Canberra ACT: Australian Government. ———. 2008b. Statement of Investment Policies. Melbourne: Australian Government. Galani, U., and Nixon, S. 2008. Don’t Fear the Sovereigns. Wall Street Journal, January 26, p. B18. Garton P., and Chang, J. 2005. The Chinese currency: How undervalued and how much does it matter? Economic Round-­up (Spring 2005): 83–­109. Australian Treasury. Available at http://www.treasury.gov.au/documents/1042/PDF/08 _RMBundervaluation.pdf. Gave, C., Kaletsky, A., and Gave, L.-­V. 2005. Our Brave New World. Hong Kong: GaveKal Research. Gelpern, A. 2010. Sovereignty, Accountability, and the Wealth Fund Governance Conundrum. American University, WCL Research Paper No. 2010-­21. Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1639119. George, R. P. 1993. Making Men Moral: Civil Liberties and Public Morality. Oxford: Oxford University Press. Gertler, M. S. 2001. Best practice? Geography, learning and the institutional limits to strong convergence. Journal of Economic Geography 1(1): 5–­26. Gertler, M. S., and Wolfe, D. A. 2004. Local social knowledge management: Community actors, institutions and multilevel governance in regional foresight exercises. Futures 36(1): 45–­65. Gieve, J. 2008. Sovereign wealth funds and global imbalances. Speech by Sir John Gieve, Deputy Governor of the Bank of England, to Sovereign Wealth Management Conference, London, 14 March. ———. 2009. Regulating the banks’ calls for an attack on inertia. Financial Times, London, June 26, p. 11. Gjessing, O.P.K., and Syse, H. 2007. Norwegian petroleum wealth and universal ownership. Corporate Governance: An International Review 15(3): 427–­37. Goetzmann, W. N., and Ibbotson, R. G. 2006. The Equity Risk Premium: Essays and Explorations. Oxford: Oxford University Press. Goldman Sachs. 2010. Global Economics Weekly. Issue no. 10/09, March 3, 2010. London. Goldstein, M., and Lardy, N. 2006. China’s exchange rate policy dilemma. American Economic Review 96(2): 422–­26. Gordon, J. N. 2004. The international relations wedge in the corporate convergence debate. In Convergence and Persistence in Corporate Governance, Gordon, J. N., and Roe, M. J. (eds.). Cambridge: Cambridge University Press, pp. 161–­209. Government Accountability Office (GAO). 2008. Sovereign Wealth Funds: Publicly Available Data on Sizes and Investments for Some Funds Are Limited. Report to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. U.S. Government Accountability Office: GAO-­08–­946. Green, R., and Torgerson, T. 2007. Are High Foreign Exchange Reserves in Emerging Markets a Blessing or a Burden? U.S. Department of the Treasury—­Office of International Affairs. Occasional Paper No. 6, March. Greenwood, R., and Hinings, C. R. 1996. Understanding radical organizational change: Bringing together the old and the new institutionalism. Academy of Management Review 21(4): 1022–­54.

181

182

References

Greenwood, R., and Suddaby, R. 2006. Institutional entrepreneurship in mature fields: The big five accounting firms. Academy of Management Journal 49(1): 27–­48. Greenwood, R., Suddaby, R., and Hinings, C. R. 2002. Theorizing change: The role of professional associations in the transformation of institutionalized fields. Academy of Management Journal 45(1): 58–­80. Gregory, A. 2007. How Low Is the UK Equity Risk Premium? Exeter, England: XFi Centre for Finance and Investment. Greider, W. 1997. One World, Ready or Not: The Manic Logic of Global Capitalism. London: Allen Lane. Griffith-­Jones, S., and Ocampo, J. A. 2010. International financial architecture seen through the lens of economic crisis: Achievements and numerous challenges. Presented at Conference on Development Cooperation in Times of Crisis, June 9–­10, Madrid. Grossman, G. M., and Helpman, E. 2005. Outsourcing in a global economy. Review of Economic Studies 72(1): 135–­59. Grossman, G. M. and Rossi-­Hansberg, E. 2008. Trading tasks: A simple theory of offshoring. American Economic Review 98(5): 1978–­97. Gruber, J., and Wise, D. A. (eds.). 1999. Social Security and Retirement around the World. Chicago: University of Chicago Press. Gunn, G. C. 2008. “Trophy capitalism,” Jefrinomics, and dynastic travail in Brunei. The Asia-­Pacific Journal: Japan Focus. Available at http://www.japanfocus.org/ site/view2696, posted March 12, 2008. Gylfason, T. 2001. A Nordic Perspective on Natural Resource Abundance. In Resource Abundance and Economic Development, Auty, R. M. (ed.). Oxford: Oxford University Press, pp. 296–­311. Haberly, D. 2011. Strategic sovereign wealth fund investment and the new alliance capitalism: A network mapping investigation. Environment and Planning A 43(8): 1833–­52. Hall, P. A., and Gingerich, D. W. 2009. Varieties of capitalism and institutional complementarities in the political economy: An empirical analysis. British Journal of Political Science 39(3): 449–­82. Hall, P. A., and Soskice, D. W. 2001. An Introduction to Varieties of Capitalism. In Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Hall, P. A., and Soskice, D. W. (eds.). Oxford: Oxford University Press, pp. 1–­68. Hall, P. A., and Thelen, K. 2009. Institutional change in varieties of capitalism. Socio-­ Economic Review 7: 7–­34. Hamilton, J. 2008. Buffett Blames US Policy for Rise of Sovereign Wealth Funds. Bloomberg.com, March 3. Available at www.bloomberg.com. Harris, J. 2009. Statist globalization in China, Russia and the Gulf States. Science & Society 73(1): 6–­33. Hawley, J. P., and Williams, A. T. 2000. The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic. Philadelphia: University of Pennsylvania Press. ———. 2005. Shifting ground: Emerging global corporate-­governance standards and the rise of fiduciary capitalism. Environment and Planning A 37(11): 1995–­2013. ———. 2007. Universal owners: Challenges and opportunities. Corporate Governance: An International Review 15(3): 415–­20.



References

Hay, C. 2004. Common trajectories, variable paces, divergent outcomes? Models of European capitalism under conditions of complex economic interdependence. Review of International Political Economy 11(2): 231–­62. Helleiner, E. 2009. The geopolitics of sovereign wealth funds: An introduction. Geopolitics 14(2): 300–­304. Helper, S. 2000. Economists and field research: “You can observe a lot just by watching.” American Economic Review 90(2): 228–­32. Hemerijck, A. C., and Schludi, M. 2000. Sequences of Policy Failures and Effective Responses. In Welfare and Work in the Open Economy: From Vulnerability to Competitiveness, vol. 1., Scharpf, F. W., and Schmidt, V. A. (eds.). Oxford: Oxford University Press, pp. 125–­228. Henderson, J., Dicken, P., Hess, M., Coe, N., and Yeung, H.W-­C. 2002. Global production networks and the analysis of economic development. Review of Inter­ national Political Economy 9(3): 436–­64. Herb, M. 2005. No representation without taxation? Rents, development, and democracy. Comparative Politics 37(3): 297–­316. Hess, M. 2004. ‘Spatial’ relationships? Towards a reconceptualization of embeddedness. Progress in Human Geography 28(2): 165–­86. Higgott, R. 1998. The Asian economic crisis: A study in the politics of resentment. New Political Economy 3(3): 333–­56. Hilton, D. J. 2003. Psychology and the Financial Markets: Applications to Understanding and Remedying Irrational Decision-­making. In The Psychology of Economic Decisions. Volume 1: Rationality and Well-­being, Brocas, I., and Carrillo, J. D. (eds.). Oxford: Oxford University Press, pp. 273–­97. Holzmann, R., and Hinz, R. P. 2005. Old-­Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform. Washington, DC: World Bank. Hsin, P.-­L., and Mitchell, O. S. 1997. Managing Public-­Sector Pensions. In Public Policy Toward Pensions, Schieber, S. J., and Shoven, J. B. (eds.). Twentieth Century Fund. Cambridge, MA: MIT Press, pp. 247–­66. Hu, Y.-­W. 2010. Management of China’s Foreign Exchange Reserves: A Case Study of the State Administration of Foreign Exchange. Mimeo. Asian Development Bank Institute. Huang, H.-­C., Lin, S.-­C., Kim, D.-­H., and Yeh, C.-­C. 2010. Inflation and the finance-­ growth nexus. Economic Modelling 27(1): 229–­36. Hubbert, M. K. 1956. Nuclear Energy and the Fossil Fuels. Meeting of the Southern District Division of Production, American Petroleum Institute San Antonio, Texas, Publication No. 95. Houston: Shell Development Company, Exploration and Production Research Division. Hurd, I. 1999. Legitimacy and authority in international politics. International Organization 53(2): 379–­408. Iglesias, A., and Palacios, R. 2000. Managing Public Pension Reserves Part I: Evidence from International Experience. Social Protection Discussion Paper Series, Social Protection Discussion Paper no. 0003, Washington, DC: World Bank. Inayatullah, N., and Blaney, D. L. 1995. Realizing sovereignty. Review of International Studies 21: 3–­20. Ingram, P. 1998. Changing the rules: Interests, organizations, and institutional change in the U.S. hospitality industry. In The New Institutionalism in Sociology,

183

184

References

Brinton, M. C. and Nee, V. (eds.). Stanford: Stanford University Press, pp. 258–­76. International Monetary Fund (IMF). 1993. World Economic Outlook. Washington, DC. ———. 1998. Report of the Working Group on Transparency and Accountability. Washington, DC. ———. 2008. Sovereign Wealth Funds—­A Work Agenda. Washington, DC. International Working Group of Sovereign Wealth Funds (IWG). 2008. Sovereign Wealth Funds: Current Institutional and Operational Practices. Report Prepared by the IWG Secretariat in Collaboration with the Members of the IWG, September 15. Jackson, R. H. 1990. Quasi-­states: Sovereignty, International Relations and the Third World. Cambridge: Cambridge University Press. Jacques, M. 2009. When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World. London: Penguin Books Ltd. Jensen, M. C. 1993. The modern industrial revolution, exit, and the failure of internal control systems. Journal of Finance 48(3): 831–­80. ———. 2000. A Theory of the Firm. Cambridge: Harvard University Press. Jepperson, R. L. 1991. Institutions, Institutional Effects, and Institutionalism. In The New Institutionalism in Organizational Analysis, Powell, W. W., and DiMaggio, P. J. (eds.). Chicago: University of Chicago Press, pp. 143–­63. Jin, N. K. 2000. Coping with the Asian Financial Crisis: The Singapore Experience. Institute of Southeast Asian Studies, Visiting Researchers Series No. 8. Johnson, S. 2009. The Quiet Coup. Atlantic Magazine, May 2009. Available at http:// www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/. Kahneman, D., and Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47(2): 263–­92. Kaina, V. 2008. Legitimacy, trust and procedural fairness: Remarks on Marcia Grimes’ study. European Journal of Political Research 47(4): 510–­21. Karl, T. L. 1997. The Paradox of Plenty: Oil Booms and Petro-­States. Berkeley and Los Angeles: University of California Press. King, R. G., and Levine, R. 1993a. Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 108(3): 717–­37. ———. 1993b. Finance, entrepreneurship and growth: Theory and evidence. Journal of Monetary Economics 32(3): 513–­42. Kingsbury, B. 1999. Sovereignty and Inequality. In Inequality, Globalization, and World Politics, Hurrell, A. and Woods, N. (eds.). Oxford: Oxford University Press, pp. 66–­94. Kingsbury, D. 2009. East Timor: The Price of Liberty. New York: Palgrave Macmillan. Kissinger, H. 1982. Years of Upheaval. Boston: Little Brown. Koppell, J.G.S. 2007. Political control for China’s state-­owned enterprises: Lessons from America’s experience with hybrid organizations. Governance 20: 255–­78. Kostova, T., and S. Zaheer. 1999. Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review 24(1): 64–­81. Kotlikoff, L. J. 1992. Generational Accounting. New York: Free Press. Kotlikoff, L. J., and Leibfritz, W. 1999. An international comparison of generational accounts. In Generational Accounting around the World, Auerbach, A. J., Kotlikoff, L. J., and Leibfritz, W. (eds.). Chicago: University of Chicago Press, pp. 73–­102.



References

Krasner, S. D. 1999. Sovereignty: Organized Hypocrisy. Princeton: Princeton University Press. ———. 2004. Sharing sovereignty: New institutions for collapsed and failing states. International Security 29(2): 85–­120. Kunreuther, H., and Meszaros, J. 1997. Organizational Choice under Ambiguity: Decision Making in the Chemical Industry Following Bhopal. In Organizational Decision Making, Shapira, Z. (ed.). Cambridge: Cambridge University Press, pp. 61–­80. Lake, D. A. 2003. The new sovereignty in international relations. International Studies Review 5(3): 303–­23. Landon, S., and Smith, C. E. 2010. Energy Prices and Alberta Government Revenue Volatility. C. D. Howe Institute Commentary, No. 13, November 2010. Available at SSRN: http://ssrn.com/abstract=1719156. Langley, P. 2008. The Everyday Life of Global Finance: Saving and Borrowing in Anglo-­ America. Oxford: Oxford University Press. La Porta, R., Lopez-­de-­Silanes, F., Shleifer, A., and Vishny, R. W. 1997. Legal determinants of external finance. Journal of Finance 52(3): 1131–­50. ———. 1998. Law and finance. Journal of Political Economy 106: 1113–­55. Laslett, P. 1979. The Conversation between the Generations. In Philosophy, Politics & Society, Fifth Series, Laslett, P., and Fishkin, J. S. (eds.). New Haven: Yale University Press, pp. 36–­56. Lawrence, T. B., and Suddaby, R. 2006. Institutions and institutional work. In The SAGE Handbook of Organization Studies. 2nd ed.. Clegg, S. R., Hardy, C., Lawrence, T. B., and Nord, W. R. (eds.). London: Sage, pp. 215–­54. Lee Kuan Yew, 2000. From Third World to First: The Singapore Story: 1965–­2000. Singa­ pore: Harper Collins. ———. 2006. Keynote speech delivered to the GIC (Government of Singapore Investment Corporation), July 11, 2006. Available at http://www.gic.com.sg/news room/news/article/11-jul-2006. Lee, R., Clark, G. L., Pollard, J., and Leyshon, A. 2009. The remit of financial geography—­ before and after the crisis. Journal of Economic Geography 9(5): 723–­47. Leibfritz, W., Roseveare, D., Fore, D., and Wurzel, E. 1995. Ageing Populations, Pension Systems, and Government Budgets: How Do They Affect Saving? OECD Economics Department Working Papers No. 156. Paris: Organization for Economic Co-­operation and Development (OECD) Publishing. Lemos, M. C., and Agrawal, A. 2006. Environmental governance. Annual Review of Environment and Resources 31: 297–­325. Lerner, J., Schoar, A., and Wang, J. 2008. Secrets of the academy: The drivers of university endowment success. Available at SSRN: http://ssrn.com/abstract=1271374. Levi, M., and Stoker, L. 2000. Political trust and trustworthiness. Annual Review of Political Science 3: 475–­507. Levy, J. D. 2006. The State after Statism: New State Activities in the Age of Liberalization. Cambridge, MA, and London: Harvard University Press. Liang, Q., and Teng, J.-­Z. 2006. Financial development and economic growth: Evidence from China. China Economic Review 17(4): 395–­411. Ling, D. 2009. MPs welcome move to use reserves but warn against precedence. Singa­pore Enquirer, February 4. Available at http://sgblogs.com/entry/welcome -move-reserves-warn-against-precedence/285315.

185

186

References

Litterman, B., and the Quantitative Resources Group, Goldman Sachs Asset Management. 2003. Modern Investment Management: An Equilibrium Approach.  Hoboken, NJ: John Wiley & Sons. Lo, A. W. 2004. The adaptive markets hypothesis: Market efficiency from an evolutionary perspective. Journal of Portfolio Management 30: 15–­29. Lounsbury, M. 2002. Institutional transformation and status mobility: The professionalization of the field of finance. Academy of Management Journal 45(1): 255–­66. Lowenstein, R. 2000. When Genius Failed: The Rise and Fall of Long-­Term Capital Management. New York: Random House. ———. 2010. The End of Wall Street. New York: Penguin Press. Lyons, G. 2008. State capitalism: The rise of sovereign wealth funds. Law and Business Review of the Americas 14(1): 202–­38. MacKenzie, D. 2006. An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge: MIT Press. Maguire, S., Hardy, C., and Lawrence, T. B. 2004. Institutional entrepreneurship in emerging fields: HIV/AIDS treatment advocacy in Canada. Academy of Management Journal 47(5): 657–­79. March, J. 1997. Understanding How Decisions Happen in Organizations. In Organizational Decision Making, Shapira, Z. (ed.). Cambridge: Cambridge University Press, pp. 9–­32. Markowitz, H. 1952. Portfolio selection. Journal of Finance 7(1): 77–­91. Maslakovic, M. 2009. Sovereign Wealth Funds 2009. International Financial Services London Research Report, March 2009. Massey, J. E. 2001. Managing organizational legitimacy: Communication strategies for organizations in crisis. Journal of Business Communication 38(2): 153–­82. Mendoza, R. U. 2004. International reserve-­holding in the developing world: Self insurance in a crisis-­prone era? Emerging Markets Review 5(1): 61–­82. Merton, R. C. 1993. Operation and Regulation in Financial Intermediation: A Functional Perspective. In Operation and Regulation of Financial Markets, Englund, P. (ed.). Stockholm: Ekonomiska Rådet, pp. 17–­67. ———. 1995. Financial innovation and the management and regulation of financial institutions. Journal of Banking and Finance 19: 461–­81. ———. 2009. On the Science of Finance in the Practice of Finance: Challenges and Opportunities from the Financial Crisis. Van Lanschot Lecture. June 11, 2009, Tilburg University. Available at http://feweb.uvt.nl/ebcsite/Van%20Lanschot% 20Lecture%206.11.09.pdf. Merton, R. C., and Bodie, Z. 2005. The design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management 3(1): 1–­23. Meseguer, C., and Gilardi, F. 2009. What is new in the study of policy diffusion? Review of International Political Economy 16(3): 527–­43. Meyer, A. D. 1982. Adapting to environmental jolts. Administrative Science Quarterly 27(4): 515–­37. Meyer, A. D., Brooks, G. R., and Goes, J. B. 1990. Environmental jolts and industry revolutions: Organizational responses to discontinuous change. Strategic Management Journal 11 (special issue): 93–­110. Mikesell, R. F. 1997. Explaining the resource curse, with special reference to mineral-­ exporting countries. Resources Policy 23(4): 191–­99.



References

Ministry of Finance [Norwegian]. 2008. Assessment of Implementation of Articles 3 and 4 of the Ethical Guidelines for the Government Pension Fund-­Global. Report submitted by The Albright Group and Simon Chesterman. Oslo: Norwegian Government. ———. 2009. On the Management of the Government Pension Fund in 2008. Oslo: Norwegian Government. Mishkin, F. S. 1999. Lessons from the Asian crisis. Journal of International Money and Finance 18(4): 709–­23. Mitchell, J. 2010. Political and socioeconomic transformation in the GCC: Image and reality. History Compass 8: 275–­302. Mitchell, O. S., and Hsin, P.-­L. 1997. Public Pension Governance and Performance. In The Economics of Pensions: Principles, Policies, and International Experience, Valdes-­Prieto, S. (ed.). Cambridge: Cambridge University Press, pp. 92–­124. Monk, A.H.B. 2008a. The interplay between social welfare and competitiveness: The case of Canadian Medicare. Geoforum 39(6): 2009–­18. ———. 2008b. The knot of contracts: The corporate geography of legacy costs. Economic Geography 84(2): 211–­35. ———. 2009a. The financial thesis: Reconceptualizing globalisation’s effect on firms and institutions. Competition & Change 13(1): 51–­74. ———. 2009b. The geography of pension liabilities and fund governance in the United States. Environment and Planning A 41(4): 859–­78. Monk, A.H.B., Moore, S., and Xu, J. 2008. A review of “Chinese Language Literature on Sovereign Wealth Funds.” Oxford International Review Sovereign Wealth Funds Team Working Paper SWF001. Moorsteen, R. 1975. OPEC can wait—­We can’t. Foreign Policy 18: 3–­11. Moravcsik, A. 1997. Taking preferences seriously: A liberal theory of international politics. International Organization 51: 513–­53. Morrison, A., and Wilhelm, W. J. 2007. Investment Banking: Institutions, Politics, and Law. Oxford: Oxford University. Mussa, M., and Savastano, M. 1999. The IMF Approach to Economic Stabilization. NBER Macroeconomics Annual 14: 79–­122. Nathan, S. R. 2008. Concerns about economy go back to mid-­2008. Edited transcript of President’s press conference. The Straits Times, February 18. Available at http:// www.straitstimes.com/STI/STIMEDIA/sp/budget09/concerns about econ­omy go back to mid 2008.html; accessed September 15, 2009. Norges Bank Investment Management. 2008. Annual Report: Government Pension Fund-­Global. Oslo: Norwegian Government. North, D. C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. Norton, B. G. 1989. Intergenerational equity and environmental decisions: A model using Rawls’ veil of ignorance. Ecological Economics 1(2): 137–­59. Notermans, T. 2000. Money, Markets, and the State. Cambridge: Cambridge University Press. Nozick, R. 1993. The Nature of Rationality. Princeton: Princeton University Press. Nugée, J. 2008. The growing role of sovereign wealth funds. State Street Vision 3(2): 3–­12. O’Brien, R. 1992. Global Financial Integration: The End of Geography. New York: Council on Foreign Relations Press.

187

188

References

Obstfeld, M., and Rogoff, K. S. 2000. The Six Major Puzzles in International Macro­ economics: Is There a Common Cause? In NBER Macroeconomics Annual 2000, Bernanke, B. S. and Rogoff, K. (eds.). Cambridge: MIT Press. ———. 2005. Global current account imbalances and exchange rate adjustments. Brookings Papers on Economic Activity 1: 67–­146. Ocampo, J. A. 2007–­8. The instability and inequalities of the global reserve system. International Journal of Political Economy 36(4): 71–­96. Ohmae, K. 1990. The Borderless World: Power and Strategy in the Interlinked Economy. London: Harper Collins. Oliver, C. 1992. The antecedents of deinstitutionalization. Organization Studies 13(4): 563–­88. Ostrom, E. 2000. Collective action and the evolution of social norms. Journal of Economic Perspectives 14(3): 137–­58. Palacios, R. 2002. Managing Public Pension Reserves Part II: Lessons from Five Recent OECD Initiatives. Social Protection Discussion Paper Series No. 0219. Washington, DC: World Bank. Park, D. 2008. Capital Outflows, Sovereign Wealth Funds, and Domestic Financial Instability in Developing Asia. Asian Development Bank Economics Working Paper Series No. 129. Pauly, L. W. 1997. Who Elected the Bankers? Surveillance and Control in the World Economy. Ithaca: Cornell University Press. Peck, J., and Theodore, N. 2007. Variegated capitalism. Progress in Human Geography 31(6): 731–­72. Perrow, C. 1970. Organizational Analysis: A Sociological View. Belmont, CA: Wadsworth. Persson, T., and Tabellini, G. 2000. Political Economics: Explaining Economic Policy. Cambridge: MIT Press. Phelps, N. A. 2007. Gaining from globalization? State extraterritoriality and domestic economic impacts—­the case of Singapore. Economic Geography 83(4): 371–­93. ———. 2008. Cluster or capture? Manufacturing foreign direct investment, external economies and agglomeration. Regional Studies 42(4): 457–­73. Pregelj, V. N. 2001. Most-­Favored-­Nation Status of the People’s Republic of China. Washington, DC: Congressional Research Service. Available at http://www.au.af .mil/au/awc/awcgate/crs/rl30225.pdf. Radelet, S., and Sachs, J. 1999. What Have We Learned, So Far, from the Asian Financial Crisis? Harvard Institute for International Development, CAER Discussion Paper No. 37, presented at the Annual Meetings of the American Economics Association, January. Radelet, S., Sachs, J. D., Cooper, R. N., and Bosworth, B. P. 1998. The East Asian financial crisis: Diagnosis, remedies, prospects. Brookings Papers on Economic Activity 1: 1–­90. Rajan, R. G. 2010. Fault Lines: How Hidden Fractures Still Threaten the World Economy. Princeton: Princeton University Press. Rajan, R. S., Sen, R., and Siregar, R. Y. 2002. Hong Kong, Singapore and the East Asian crisis: How important were trade spillovers? The World Economy 25(4): 503–­37. Rawls, J. 2001. Justice as Fairness: A Restatement. Cambridge, MA, and London: Belknap Press. Reinhart, C. M., Rogoff, K. S., and Savastano, M. A. 2003. Addicted to Dollars. NBER Working Paper No. 10015. Cambridge, MA: National Bureau of Economic Research.



References

Reus-­Smit, C. 1999. The Moral Purpose of the State: Culture, Social Identity and Institutional Rationality. Princeton: Princeton University Press. Rodríguez-­Pose, A. 1999. Convergence or divergence? Types of regional responses to socio-­economic change in Western Europe. Tijdschrift voor Economische en Sociale Geografie 90(4): 363–­78. Rodrik, D. 2006. The social cost of foreign exchange reserves. International Economic Journal, 20(3): 253–­66 Rodrik, D., and Subramanian, A. 2003. The primacy of institutions (and what this does and does not mean). Finance & Development 40(2): 31–­34. Roe, M. J. 2002. Political Foundations for Separating Ownership from Control. In Corporate Governance Regimes: Convergence and Diversity, McCahery, J. A., Moerland, P., Raaijmakers, T., and Renneboog, L. (eds.). Oxford: Oxford University Press, pp. 113–­46. ———. 2006. Legal origins, politics, and modern stock markets. Harvard Law Review 120(2): 462–­527. Romano, R. 1993. Getting politics out of public pension funds and out of corporate board rooms. American Enterprise 4: 42–­49. Roubini, N., and Setser, B. 2004. The US as a Net Debtor: The Sustainability of the US External Imbalances. Working paper, Stern School of Business, New York University. Rozanov, A. 2005. Who holds the wealth of nations? Central Banking Journal 15(4): 52–­57. ———. 2008. A liability-­based approach to sovereign wealth. State-­Street Vision: ­Sovereign Wealth Funds 3(2): 15–­20. Runciman, D. 2008. Political Hypocrisy: The Mask of Power, from Hobbes to Orwell and Beyond. Princeton: Princeton University Press. Saaty, T. L. and Cho, Y. 2001. The decision by the US congress on China’s trade status: a multicriteria analysis. Socio-­Economic Planning Sciences 35(4): 243–­52. Sants, H. 2009. Delivering Intensive Supervision and Credible Deterrence. London: Financial Services Authority. Available at www.fsa.gov.uk/. Saunders, G. 2002. A History of Brunei. London: RoutledgeCurzon. Scanlon, T. M. 1998. What We Owe to Each Other. Cambridge: Harvard University Press. Scharpf, F. 1999. Governing in Europe: Effective and Democratic? Oxford: Oxford University Press. Schelling, T. C. 1996. Global Decisions for the Very Long Term: Intergenerational and International Discounting. In Wise Choices: Decisions, Games, and Negotiations, Zeckhauser, R. J., Keeney, R. L., and Sebenius, J. K. (eds.). Boston: Harvard Business School Press, pp. 152–­66. Schick, F. 1997. Making Choices: A Recasting of Decision Theory. Cambridge: Cambridge University Press. Schmidt, V. 2003. French capitalism transformed, but still a third variety of capitalism. Economy and Society 32(4): 526–­54. Schumer, C. E. 2008. Opening statement: Do sovereign wealth funds make the U.S. economy stronger or pose national security risks? Joint Economic Committee Hearing, U.S. Congress, February 13. Schwarz, R. 2008. The political economy of state-­formation in the Arab Middle East: Rentier states, economic reform, and democratization. Review of International Political Economy 15(4): 599–­621. Scott, A. J. 1998. Regions and the World Economy: The Coming Shape of Global Production, Competition, and Political Order. Oxford: Oxford University Press.

189

190

References

Sebenius, J. K. 1996. Sequencing to Build Coalitions: With Whom Should I Talk First? In Wise Choices: Decisions, Games, and Negotiations, Zeckhauser, R. J., Keeney, R. L., and Sebenius, J. K. (eds.). Boston: Harvard Business School Press, pp. 324–­48. Seo, M.-­G., and Creed, W.E.D. 2002. Institutional contradictions, praxis, and institutional change: A dialectical perspective. Academy of Management Review 27(2): 222–­47. Shiller, R. J. 2002. Bubbles, human judgment, and expert opinion. Financial Analysts Journal 58(3): 18–­26. Shleifer, A. 1985. A theory of yardstick competition. Rand Journal of Economics 16(3): 319–­27. Sidaway, J. D. 2003 Sovereign excesses? Portraying postcolonial sovereigntyscapes. Political Geography 22: 157–­78. Skancke, M. 2003. Fiscal Policy and Petroleum Fund Management in Norway. In Fiscal Policy Formulation, an Implementation in Oil-­Producing Countries, Davis, J. M., Ossowski, R., and Fedelino, A. (eds.). Washington, DC: International Monetary Fund, pp. 316–­38. Skocpol, T. 1985. Bringing the State Back In: Strategies of Analysis in Current Research. In Bringing the State Back In, Evans, P. B., Rueschemeyer, D., and Skocpol, T. (eds.). Cambridge: Cambridge University Press, pp. 3–­37. Slaughter, A.-­M. 2004. Disaggregated sovereignty: Towards the public accountability of global government networks. Government and Opposition 39: 159–­90. Slote, M. 1989. Beyond Optimizing: A Study of Rational Choice. Cambridge: Harvard University Press. Smaghi, L. B. 2008. The Financial Crisis and Global Imbalances: Two Sides of the Same Coin. Speech delivered at the Asia Europe Economic Forum conference, December 9, 2008, Beijing. Solow, R. M. 1986. On the intergenerational allocation of natural resources. Scandinavian Journal of Economics 88(1): 141–­49. Spiller, P. T. 1996. Institutions and commitment. Industrial and Corporate Change 5(2): 421–­52. Stacy, H. 2003. Relational sovereignty. Stanford Law Review 55: 2029–­59. Stern, N. 2007. The Economics of Climate Change: The Stern Review. Cambridge: Cambridge University Press. ———. 2009. A Blueprint for a Safer Planet. London: Bodley Head. Stevens, P. 2003. Resource Impact—­Curse or Blessing? IPIECA Working Paper, March 25. Stiglitz, J. 2009. Freefall: Free Markets and the Sinking of the Global Economy. London: Allen Lane. ———. 2010. Freefall: America, Free Markets, and the Sinking of the World Economy. New York: W. W. Norton. Stoker, G. 1998. Governance as theory: five propositions. International Social Science Journal 50(155): 17–­28. Stone, D. 2004. Transfer agents and global networks in the “transnationalization” of policy. Journal of European Public Policy 11(3): 545–­66. ———. 2008a. Global public policy, transnational policy communities and their networks. Policy Studies Journal 36(1): 19–­38.



References

———. 2008b. Global Public Policy and Transnational Policy Communities. In Governance and the Depoliticisation of Development. Hout, W., and Robinson, R. (eds.). London and New York: Routledge, pp. 63–­76. Stone, R. W. 2008. The scope of IMF conditionality. International Organization 62(4): 589–­620. Storper, M. 1997. The Regional World: Territorial Development in a Global Economy. New York: Guilford Press. Strange, S. 1991. Big business and the state. Millennium-­Journal of International ­Studies 20(2): 245–­50. ———. 1994. States and Markets. London: Pinter. Strauss, K. 2009. Gender, Risk, and Occupational Pensions. In Managing Financial Risks: From Global to Local, Clark, G. L., Dixon, A. D., and Monk, A.H.B. (eds.). Oxford: Oxford University Press, pp. 258–­79. Suchman, M. C. 1995. Managing legitimacy: Strategic and institutional approaches. Academy of Management Review 20(3): 571–­610. Summers, L. H. 2006. Reflections on Global Account Imbalances and Emerging Markets Reserve Accumulation. L. K. Jha Memorial Lecture, March 24, 2006 Reserve Bank of India, Mumbai. Available at http://www.hks.harvard.edu/fs/ lsummer/speeches/2006/0324_rbi.html. Summers, R. S. 2006. Form and Function in a Legal System: A General Study. Cambridge: Cambridge University Press. Sunstein, C. R. 2005a. Group judgments: Statistical means, deliberation, and information markets. New York University Law Review 80: 962–­1049. ———. 2005b. Laws of Fear: Beyond the Precautionary Principle. Cambridge: Cambridge University Press. Tan, K., and Lam, P. E. (eds.). 1997. Managing Political Change in Singapore: The Elected Presidency. London: Routledge. Tanzi, V., and Schuknecht, L. 2000. Public Spending in the 20th Century: A Global Perspective. Cambridge: Cambridge University Press. Taylor, J. B. 2009. Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. Stanford: Hoover Institution Press. Taylor, P. J. 1994. The state as container: Territoriality in the modern world-­system. Progress in Human Geography 18: 151–­62. ———. 1995. Beyond containers: Internationality, interstateness, interterritoriality. Progress in Human Geography 19: 1–­15. Teece, D. 2000. Managing Intellectual Capital: Organizational, Strategic, and Policy Dimensions. Oxford: Oxford University Press. Teslik, L. H. 2008. Sovereign Wealth Funds. Council on Foreign Relations Backgrounder. Washington, DC: Council on Foreign Relations. Thornton, P. H., and Ocasio, W. 1999. Institutional logics and the historical contingency of power in organizations: Executive succession in the higher education publishing industry, 1958–­1990. American Journal of Sociology 105(3): 801–­43. Tolbert, P. S., and Zucker, L. G. 1996. The Institutionalization of Institutional Theory. In Handbook of Organization Studies, Clegg, S. R., Hardy, C., and Nord, W. R. (eds.). Thousand Oaks, CA: Sage, pp. 175–­90. Towers Watson. 2010. The Global Asset Survey: 1000 Largest Funds. London.

191

192

References

Truman, E. M. 2005. Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances. Institute for International Economics, Washington, DC. Working Paper Series No. WP 05-­6. ———. 2007. Sovereign Wealth Funds: The Need for Greater Transparency and Accountability. Policy Brief PB07-­6. Washington, DC: Peterson Institute for Inter­ national Economics. ———. 2008. A Blueprint for Sovereign Wealth Fund Best Practices. Policy Brief PB08-­3. Washington, DC: Peterson Institute for International Economics. Tucker, R. W., and Hendrickson, D. C. 2004. The sources of American legitimacy. Foreign Affairs 83(6): 18–­32. U.S. Department of Treasury. 2007. Appendix III, Report to Congress on International Economic and Exchange Rate Policies. Washington, DC. Vietor, R.H.K. 2007. How Countries Compete: Strategy, Structure, and Government in the Global Economy. Boston: Harvard Business School Press. von Hippel, E. 2005. Democratizing Innovation. Cambridge: MIT Press. Wagner, R. K. 2002. Smart People Doing Dumb Things: The Case of Managerial Incompetence. In Why Smart People Can Be So Stupid, Sternberg, R. J. (ed.). New Haven: Yale University Press, pp. 42–­63. Weatherford, M. S. 1992. Measuring Political Legitimacy. American Political Science Review 86(1): 149–­66. Webber, M. J. 1996. Changing Places in East Asia. In Asian NIEs and the Global Economy: Industrial Restructuring and Corporate Strategy in the 1990s, Clark, G. L., and Kim, W. B. (eds.). Baltimore: Johns Hopkins University Press, pp. 22–­51. Weber, M., Roth, G., and Wittich, C. 1978. Economy and Society: an Outline of Interpretive Sociology. Berkeley and London: University of California Press. Weiss, E. B. 1984. The planetary trust: Conservation and intergenerational equity. Ecology Law Quarterly 11: 495–­581. Weiss, L. 2005. The state-­augmenting effects of globalization. New Political Economy 10(3): 345–­53. Wernerfelt, B. 1984. A resource-­based view of the firm. Strategic Management Journal 5(2): 171–­80. Wilhelm, W. J., and Downing, J. D. 2001. Information Markets: What Businesses Can Learn from Financial Innovation. Boston: Harvard Business School Press. Williamson, O. E. 1996. The Mechanisms of Governance. New York: Oxford University Press. Wilson, J. Q. 1989. Bureaucracy: What Government Agencies Do and Why They Do It. New York: Basic Books. Wójcik, D. 2011. The Global Stock Market: Issuers, Investors and Intermediaires in an Uneven World. Oxford: Oxford University Press. Wolfe, M.W. 2008. The shadows of future generations. Duke Law Journal 57: 1897–­932. Woo-­Cumings, M. 1999. The Developmental State. Ithaca: Cornell University Press. World Bank. 1994. Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. Washington, DC. Xafa, M. 2007. Global imbalances and financial stability. Journal of Policy Modeling 29(5): 783–­96. Xie, T. 2006. Congressional Roll Call Voting on China Trade Policy. American Politics Research 34(6): 732–­58.



References

Yates, D. A. 1996. The Rentier State in Africa: Oil Rent Dependency and Neocolonialism in the Republic of Gabon. Trenton, NJ: Africa World Press. Yergin, D. 1992. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster. Zhou, X. 1997. Organizational Decision Making as Rule Following. In Organizational Decision Making, Shapira, Z. (ed.). Cambridge: Cambridge University Press, pp. 257–­81. Zimmerman, M. A., and Zeitz, G. J. 2002. Beyond survival: Achieving new venture growth by building legitimacy. Academy of Management Review 27(3): 414–­31.

193

Index

Note: Page numbers followed by “t” refer to references to tables while page numbers followed by “f ” refer to references to figures Ablett, J., 56 Abu Dhabi, 4t, 6, 15t, 44–45, 126t, 127, 170n4 accountability: Australia and, 47, 61, 166n8; best practice and, 158–59; China and, 113, 120; concept of sovereign wealth funds and, 7, 17; control and, 74–78; Gulf States and, 129; Norway and, 68–69, 71, 74–78, 82–84; rise of sovereign wealth funds and, 7, 17; Singapore and, 98–99; structure and, 74–78 adoption, xiii; Australia and, 55; challenges of, 130–32; form/function and, 128–29, 137, 142; Gulf States and, xvi, 122, 125–36; institutional, 125–28; people and, 130–32; politics and, 130–32; process and, 130–32; promise of finance and, 132–34; rise of sovereign wealth funds and, 24; Three Ps of, 130–32 advocacy, 24–25 Agnew, J., 33 Aizenman, J., 19, 79, 87 Alakbarov, G., 38 Alaska Permanent Fund, 78 Almunia, Joaquin, 6 Al-Salem Al Sabah, Sheikh Abdullas, 125 Ambachthseer, K., 164n7, 171n7

Ammann, M., 130 Ang, A., 82 Angola, 4t, 21 arbitrage, xi, 89, 154, 172n7 Areddy, J. T., 170n19 Argentina, 66, 87, 168n6 Asian crisis, xi, xv, 2; China and, 118; contagion and, 91, 98; Indonesia and, 91; International Monetary Fund (IMF) and, 101, 127; Korea and, 91; Malaysia and, 91; Philippines and, 91; rise of sovereign wealth funds and, 18–19; Singapore and, 88, 101; Thailand and, 91 Asian miracle, xii assets under management (AUM), 125, 126t Auerbach, A. J., 56 Australia: accountability and, 47, 61, 166n8; banks and, 52, 55, 61, 167n12; beneficiaries and, 56, 60; best practice and, 47, 57–60, 65, 166n6, 166n9, 167n10; China and, 51, 57, 65–66; commodities and, 47–48, 51, 57, 64; competition and, xiv, 47, 52, 54–56, 60–63, 66, 167n12; consumption and, 48, 50; Costello and, 51, 55–56, 61, 66, 166n4; crisis and, 46, 48, 52–55, 63, 66, 166n9; debt and, 51, 53, 55; decision-making and, 50, 58,

195

196

Index Australia (continued) 60–61; defined-benefit (DB) pensions and, 9, 51, 55, 57, 60–61, 65, 166n6; democracy and, 46, 49, 65; equity and, 46–48, 55–57, 62–66; exchange rates and, 48, 51; exports and, 48, 51, 53, 65; form/function and, 58, 62, 138, 153; Future Fund (FF) of, xv, 15t, 21, 42, 46–66, 68, 72, 95, 102–3, 138, 153, 166n8; future generations and, 47, 50, 55–57, 62–64; global market and, 47–48, 54–55, 66; governance and, xiv–xv, 46–47, 51, 57–61, 65; gross domestic product (GDP) and, 53–54, 57; growth and, 48, 51–57, 60, 166n4; immigration and, 55; inflation and, 52, 60; innovation and, 54, 58, 60, 63–64, 166n9; institutions and, 46–50, 53, 55, 58–66, 166n1, 166n6, 166n9, 167n10; insurance and, 55; intergenerational equity and, 55–57, 63–64; investment and, xv, 46–51, 54, 56–66, 166n5, 166n9, 167n10; Labor Party and, 56–57, 66; legitimacy and, 46, 50, 55, 61–65; liabilities and, 51, 53, 55–65; Liberal Party and, 51–52, 56, 166n4, 166n7; National Party and, 57, 166n7; natural resources and, 117; parliament and, 46–47, 55–56, 61–62, 65; policy and, 47–53, 56; politics and, xiv, 46–51, 55–61, 64–66; portfolios and, 59–60, 63; reserves and, 52, 61; risk and, 58–62, 165n1; Russian alliance of, 51; savings and, 53; shortfalls and, 53, 58; short-termism and, 47, 49–51, 54–55, 61–65; sponsors and, 46–47, 50, 58–59, 61–62, 65; stability and, 48, 51, 63; telecommunications and, 54, 166n7; transparency and, 47, 56, 166n8; trust and, 50; trustees and, 47, 60–67; uncertainty and, 48, 58, 60; volatility and, 53–54; Wallis inquiry and, 166n4; welfare and, 46, 55, 62 authoritarianism, 1, 14, 38, 49, 89, 107 autocracy, 3, 17 autonomy, xii, xvii, 1, 11; China and, 106, 113, 116, 120; concept of sovereign wealth funds and, 32–33, 38; crisis and, 91–93; form/function and, 137, 141, 144–45, 151, 153; nation-states and, 87; rise of sovereign wealth funds and, 21, 26–27; Singapore and, 87–89, 91–93, 96, 101–2 Azerbaijan, 4t, 15t, 21

Backer, L. C., 72 Bahrain, 127 bailouts, 92 Bank Holding Company Act, 170n17 Bank of China, 170n17 Bank of England, 61 banks: Australia and, 52, 55, 61, 167n12; bailouts and, 92; central, xvi, 16–17, 19, 67, 73, 76, 138, 148; China and, 106–7, 110–11, 113, 116, 169n12, 169n16, 170n17; failure of U.S./U.K., xv; form/function and, 137–38, 143, 145, 147–48, 151–53, 171n2, 172n7, 172n8; Gulf States and, 128; living standards and, xv; Norway and, 67, 73–84, 115, 138, 153, 167n2; rise of sovereign wealth funds and, 9, 16–17, 19, 25; Singapore and, 86, 94, 102–3; solvency requirements and, 9 Barro, R. J., 70, 85, 87, 103 Bauer, R., 98 Beblawi, H., 38 beneficiaries, xiii; Australia and, 56, 60; best practice and, 158; Canada and, 164n6; form/function and, 146; investment and, 49 (see also investment); Norway and, 67; rise of sovereign wealth funds and, 16–17 Berlin Wall, 107 Bernanke, Ben, 3, 18, 172n10 best practice: accountability and, 158–59; alignment with clear mission and, 157–58; Australia and, 47, 57–60, 65, 166n6, 166n9, 167n10; beneficiaries and, 158; China and, 113, 169n15; Clark and, 155, 157, 159, 161; compensation and, 159–60; competition and, 157–62; decision-making and, 157, 159–62; exemplars and, 155, 158–61; form/ function and, 138, 141–42; global market and, 155–56; growth and, 162; Gulf States and, 130–32; innovation and, 157, 161; institutions and, 58, 155–62; investment and, 155–62; learning culture and, 161–62; liabilities and, 158; management of external agents and, 158, 161; Norway and, 67, 70, 78, 80; pensions and, 155–59; people and, 155, 159–60; politics and, 67–72, 76–79, 84–85; portfolios and, 160; process and, 155, 157–61, 162t; rise of sovereign wealth funds and, 8, 10; risk and, 156–62; Santiago Principles and, 98; short-termism and,

157; Singapore and, 88, 96–98, 102; time horizon focus and, 157, 159; transparency and, 161; trust and, 159; trustees and, 161; uncertainty and, 156–57; Urwin and, 155; welfare and, 158 Blackrock, 105 Black-Scholes model, 143 Bodie, Z., 113, 141–42, 144, 166n4, 171n6 Borio, C., 84, 138, 147–48 Bowles, P., 169n9 Bown, C. P., 168n6 Brazil, 1, 107, 119 BRIC (Brazil, Russia, India, China). See specific country Brunei Darussalam, 39 Brunei Investment Agency (BIA), 39 bubbles, 49, 51, 73, 94, 121, 124, 148 Burma, 79 CalPERS, 58 Campbell, J. L., 26 Canada, 167n2, 170n3, 170n5; Alberta Heritage Fund and, 15t, 65, 78; beneficiaries and, 164n6; Chinese exports and, 168n6; CPPib and, 58–60, 62, 166n8; natural resources and, 117; prefunded pensions and, 125, 152; rise of sovereign wealth funds and, 9, 15t, 17, 164n6 Canada Pension Plan, 164n6 capital flight, 110 capitalism, xii; China and, 107, 168n1; concept of sovereign wealth funds and, 30, 34, 45; dark side of, 2; fifth stage of, 86; form/ function and, 154; Gulf States and, 129, 134; legitimacy and, 88–89, 107; paternalism and, 89; rise of sovereign wealth funds and, 2–5, 9–12, 19, 25–29, 164n8; Singapore and, 103; socialism and, 88; Soviet Union and, 106–8, 119; state financial, 5; symbolism and, 129 Carnation Revolution, 37 causality, 18, 80 Chang, J., 169n10 Cheung, Y.-W., 169n9 Chile, 4f, 9, 15t, 172n10 China, xii; accountability and, 113, 120; Australia and, 51, 57, 65–66; autonomy and, 106, 113, 116, 120; banks and, 106–7, 110–11, 113,

Index 116, 169n12, 169n16, 170n17; best practice and, 113, 169n15; capitalism and, 107, 168n1; Clinton and, 168n4; Cold War and, 106–8, 119, 170n1; commodities and, 110; communism and, 106–8, 114–15, 119; competition and, 107, 113, 115, 118; consumption and, 109; crisis and, 105, 109–10, 115–16, 118–19; currency issues and, 106, 109–12, 169n10, 170n17; debt and, 112, 118, 146–47, 169n11, 170n19, 170n20; decision-making and, 115–16, 120; democracy and, 107–9, 168n1; exchange rates and, 109–12; exports and, 106–12, 118–21, 147, 168n6, 168n7, 168n8; floating and, 112; foreign exchange and, 106, 109–13; form/function and, 113, 138; gas and, 118; global market and, xvi, 105, 109–10, 113, 115–20; governance and, 106, 112–15; growth and, 105–6, 109–12, 115–20, 168n7, 168n8; hegemony and, 105–7; imports and, 109–12, 119; inflation and, 110, 112, 169n12; innovation and, 106, 119, 169n12; institutions and, 105, 107, 113–20, 169n11, 169n12, 169n16; insurance and, 118; International Monetary Fund (IMF) and, 109–13, 118; investment and, xv–xvi, 105–20, 169n11, 169n14, 169n16; Jackson-Vanik amendment and, 108; Kissinger and, 107; legitimacy and, 106–8, 115–20, 168n1, 169n15; Li Yong and, 169n14; Ministry of Finance and, 113; Most Favored Nation (MFN) status and, 108, 120, 168n2; National Social Security Fund and, 113; nation-states and, 107, 113, 118, 127; new realities of global finance and, 146–47; Nixon and, 107; normalization of, 106, 108–12, 118, 120, 168n3, 168n4; oil and, 118; pegging and, 106, 109–12, 169n10; Permanent Normalized Trade Relations (PNTR) and, 108–9, 112, 168n4; policy and, 106–20, 168n8, 169n12, 169n15; politics and, 106–8, 112, 114–20, 168n2, 170n20; portfolios and, 105–6, 115–18, 120, 170n18; renminbi (RMB) and, 109–12, 119, 169n9; rents and, 118–19; reserves and, 106, 111–13, 115, 117–18, 170n17; rise of sovereign wealth funds and, 9; risk and, 106, 110, 114f, 116–17, 169n11; Russia and, 105–8, 119, 168n1; Santiago Principles and, xvi, 115, 120; short-termism and, 112; sponsors and, 106, 117–19; stability and,

197

198

Index China (continued) 105–6, 110, 112, 118, 170n19; State Administration of Foreign Exchange and, 113, 145–46, 169n13; State Council and, 106, 113; tariffs and, 108, 168n4, 168n7; Tiananmen Square revolt and, 108; trade agreements and, 1, 108; transparency and, 108, 113, 119–20; trust and, 116; uncertainty and, 113, 116; U.S. trade relations and, 1, 105–20; volatility and, 105, 110; welfare and, 109; Western concern over, 30; World Trade Organization and, 168n6 China Development Bank, 113 China Investment Corporation (CIC), xvi– xvi, 4f, 127, 169n14, 170n18; Annual Report of, 114–15; domestic banking support and, 110–11; form/function and, 138, 142, 146, 152; funding of, 112–15; governance of, 112– 15; investments of, 105; justifying behavior of, 105; legitimacy and, 106–8, 115–20, 168n1, 169n15; Morgan Stanley and, 105; new realities of global finance and, 146; performance of, 115; political economy and, 106; as productivist sovereign wealth fund, 40–41, 106; resource endowments and, 106; Santiago Principles and, 115; shareholder value and, 105, 116, 129; State Council and, 106, 113; as strategic investor, 105–6, 115–18; U.S. investment banks and, 169n16 Chow, P. C., 109 Chwieroth, J. M., 125–26 Clarida, R. H., 172n9 Clark, Gordon L., xi–xvii; Australia and, 47, 55, 57–61, 63, 166n6; best practice and, 155, 157, 159, 161; China and, 113; concept of sovereign wealth funds and, 43; form/function and, 140–42, 148, 171n2; governance scoring system and, 58, 166n9; Gulf States and, 129–30, 135; investment management and, 70, 96–98, 130; Norway and, 67, 70, 80, 82–83, 167n2; rise of sovereign wealth funds and, 2, 5, 7–12, 22, 26; Singapore and, 88, 90, 96–98, 102–3 Clinton, Bill, 168n4 Cohen, Benjamim J., 5, 69–70 Cold War, 88, 106–8, 119, 170n1 Commercial Bank of China, 170n17 commodities: Australia and, 47–48, 51, 57, 64; China and, 110; commodity funds and, 3,

14, 19–22, 36; concept of sovereign wealth funds and, 36–38, 165n10; exports and, 19–20 (see also exports); prices and, xi–xii; rise of sovereign wealth funds and, 3, 14, 16, 19–22, 26–27; Singapore and, 86 communism, 1; Berlin Wall and, 107; China and, 106–8, 114–15, 119; Cold War and, 88, 106–8, 119, 170n1; Iron Curtain and, 107; legitimacy and, 107 competition: Australia and, xiv, 47, 52, 54–56, 60–63, 66, 167n12; best practice and, 157–62; China and, 107, 113, 115, 118; concept of sovereign wealth funds and, 34, 41–45; form/ function and, 140, 146, 150–51, 171n2, 172n3; Gulf States and, 127, 130, 132–33; jolts and, 2, 18–20, 23–27; legitimacy and, 1; Norway and, 83; rise of sovereign wealth funds and, 1, 20, 22–23, 27; Singapore and, 87 consumption, xi–xii, xv; Australia and, 48, 50; China and, 109; form/function and, 152; rise of sovereign wealth funds and, 1, 20, 39; Singapore and, 87–91, 96, 101–4 contagion, xvi, 91, 98 Cooper, R. N., 169n11 coping mechanisms, 2–3, 23, 27 Corden, W. M., 20 corruption, xi, 7, 77, 121, 138 Costello, Peter, 51, 55–56, 61, 66, 166n4 CPPib, 58–60, 62, 166n8 Creed, W.E.D., 25 crisis: Asian, 2, 18–19, 88, 91, 101, 118, 127; Australia and, 46, 48, 52–55, 63, 66, 166n9; autonomy and, 91–93; China and, 105, 109–10, 115–16, 118–19; concept of sovereign wealth funds and, 30, 35–36; contagion and, xvi, 91, 98; Dutch disease and, 20, 72, 122; equity and, 137; form/function and, 137–39, 142, 144–48, 151–52, 154, 171n2, 171n5, 171n6, 172n7, 172n8; global, 2, 11, 18–19, 22, 30, 48, 55, 66, 70, 84, 86–88, 96, 100, 102–3, 105, 109–10, 116–19, 129, 135, 137–39, 142, 144–46, 151, 154, 166n9, 171n5, 171n6, 172n8; Gulf States and, 127, 129, 135; International Monetary Fund (IMF) and, 92; jolts and, 2, 18–20, 23–27; legitimacy and, 5; Norway and, 70, 84; recession and, 55, 73, 170n19; reserves and, xi, xv, 18–19, 163n1; rise of sovereign wealth funds and, 18–22, 25–27; Russian, 3; Singapore and,

86–88, 91–103, 167n1; volatility and, 2 (see also volatility) currency issues, xi; Asian, 91t, 92; China and, 106, 109–12, 169n10, 170n17; crisis of, 19, 27; Dutch disease and, 20, 72, 122; exchange rates and, 14, 16, 18–19 (see also exchange rates); floating and, 112; form/function and, 137–38; International Monetary Fund (IMF) and, 19; Norway and, 73, 76; pegging and, 106, 109–12, 169n10; rise of sovereign wealth funds and, 19–20, 27; Singapore and, 91t, 92 Davis, E. P., 7, 11 DAX30, 143 Dean, J., 168n8, 170n19 debt: Australia and, 51, 53, 55; China and, 112, 118, 146–47, 169n11, 170n19, 170n20; concept of sovereign wealth funds and, 38; form/function and, 146–47, 150; Norway and, 72; reserves and, 16; rise of sovereign wealth funds and, 16–19; Singapore and, 87, 102; United States and, 17–18 decision-making, xv; Australia and, 50, 58, 60–61; best practice and, 157, 159–62; China and, 115–16, 120; concept of sovereign wealth funds and, 31, 38; form/function and, 138–44, 151, 153; Gulf States and, 128, 130–32, 135, 171n3; Norway and, 68–71, 78–79, 83–84; retaining authority of, 2; rise of sovereign wealth funds and, 2, 7, 11, 165n1; Singapore and, 88, 90; transparency and, xiii; weakness of will and, 166n2 Deidda, L., 169n12 Demick, B., 170n19 democracy, xv, 1; Australia and, 46, 49, 65; China and, 107–9, 168n1; concept of sovereign wealth funds and, 38–39, 42–44; good governance and, 163; Gulf States and, 122, 124, 134; Kuwait and, 39; Muslims and, 95; Norway and, 68–71, 83–84, 167n1; policy and, 3; rise of sovereign wealth funds and, 14, 17; Singapore and, 88, 95, 102 Democratic Party, 108 developing countries, xi, 18, 109 DiMaggio, P., 24 Dimson, E., 84, 172n11 discounting, xi–xii; Australia and, 49, 55, 64; China and, 105, 110, 170n20; concept of

Index sovereign wealth funds and, 41; form/function and, 144, 146, 149, 151–52; Gulf States and, 131; Morgan Stanley and, 105; Norway and, 72, 76; rise of sovereign wealth funds and, 1, 20, 22, 27–28; Singapore and, 86–87 Dixon, Adam D., xi–xvii, 10, 22, 25, 42–43, 129 domestic sovereignty, 31–44 Dooley, M., 111 Dore, R. P., 11, 129 Dutch disease, 20, 72, 122 Dvir, E., 170n2 efficient markets hypothesis (EMH), 144, 171n5 Eichengreen, B., 48 El-Erian, M. A., 172n9 elitists, xiv–xvii; Australia and, 49; China and, 106, 115; concept of sovereign wealth funds and, 38–39, 45; form/function and, 142, 172n8; Gulf States and, 124, 127–28, 132–33; Norway and, 167n1; rise of sovereign wealth funds and, 11, 26, 28; Singapore and, 89 epistemic proceduralism, 68, 83–84 equity: Australia and, 46–48, 55–57, 62–66; concept of sovereign wealth funds and, 40–41; crisis and, 137; form/function and, 137–38, 144–53, 172n11; Intergenerational Report and, 55–56, 63–64; Norway and, 68, 73, 76, 78, 82–83; PBGC Board and, 137; rise of sovereign wealth funds and, 21 Eriksen, T., 20, 72, 74 Estlund, D. M., 83 ethics: causality and, 80; companies with poor records of, 81t; Council of Ethics and, 75, 77, 81t; domestic sovereignty norms and, 43; epistemic proceduralism and, 68, 83–84; form/function and, 150–51; governance and, 78–82; Government Pension Fund-Global (GPF-G) and, xv, 67–85; human rights and, 43, 77, 79, 81t, 108; perfectionism and, 83; social justice and, 22, 69; transparency and, 71–72, 78 (see also transparency) Ethics Council, 75 European Commissioner for Economic and Monetary Affairs, 6 exchange rates: fixed, 109; floating, 112; pegged, 106, 109–12, 169n10; rise of sovereign wealth funds and, 18; stability and, 92; State Administration of Foreign Exchange

199

200

Index exchange rates (continued) and, 113, 145–46, 169n13; U.S.-China, 109–12; volatility and, 18 exemplars, 46, 155, 158–61 exports, xi; Australia and, 48, 51, 53, 65; China and, 106–12, 118–21, 147, 168n6, 168n7, 168n8; commodity funds and, 19–20; concept of sovereign wealth funds and, 39; form/function and, 147, 152; growth and, 18; Gulf States and, 121, 123, 125, 127; rise of sovereign wealth funds and, 18–21; Singapore and, 87, 95; United States and, 147 Fattouh, B., 169n12 Feldstein, M., 18, 93 Financial Times magazine, 145 floating, 112 Fonds Stratégique d’Investissement (FSI), 42, 165n10 foreign exchange: Australia and, 48, 51; China and, 106, 109–13; form/function and, 143, 152; Gulf States and, 121; rise of sovereign wealth funds and, 14, 16, 18–19, 35–36, 40, 164n3; Singapore and, 91–97, 103 form and function, xiii–xvi; adoption and, 128–29, 137, 142; Australia and, 58, 62, 138, 153; autonomy and, 137, 141, 144–45, 151, 153; banks and, 137–38, 143, 145, 147–48, 151–53, 171n2, 172n7, 172n8; beneficiaries and, 146; capitalism and, 154; China and, 113, 138, 142; competition and, 140, 146, 150–51, 171n2, 172n3; consumption and, 152; crisis and, 137–39, 142, 144–48, 151–52, 154, 171n2, 171n5, 171n6, 172n7, 172n8; currency issues and, 137–38; debt and, 146–47, 150; decisionmaking and, 138–44, 151, 153; efficient markets hypothesis (EMH) and, 144; equity and, 137–38, 144–53, 172n11; ethics and, 150–51; exports and, 147, 152; foreign exchange and, 143, 152; Future Fund (FF) and, 138; future generations and, 138, 149, 153; geography and, 138, 152; geopolitics and, 139, 145–46, 152; global market and, 137–39, 142– 46, 149–54, 171n5, 171n6, 172n8; governance and, 7–8, 137–42, 145; growth and, 137–39, 142, 147–54, 171n2, 171n6, 172n9; Gulf States and, 128–29, 134–35, 138; inflation and, 147–48, 154, 172n9; innovation and, 141–43,

148, 150, 171n2; institutions and, 5, 7–9, 90, 137–45, 148–54, 172n7, 172n10; insurance and, 142–43, 146, 149, 153; International Monetary Fund (IMF) and, 147; investment and, 137–54, 171n2, 171n4, 172n7, 172n9, 172n11; legitimacy and, 90, 96–98; liabilities and, 143, 149, 153–54; macroeconomic, 5, 15t, 20, 48, 72, 110, 112, 121–24, 138, 148–49, 153, 167n2; modern portfolio theory (MPT) and, 143–44; nation-states and, 137–40, 146, 149, 152–53, 172n10; new realities of global finance and, 146–49; Norway and, 138; pensions and, 137–38, 140, 142–43, 146, 152–53; performance and, 7, 9, 140–46, 151–54, 172n6; policy and, 146, 148, 153; politics and, 138–49, 152–53, 172n8, 172n10; portfolios and, 139, 142–46, 149–54; reserves and, 137– 38, 172n10; rise of sovereign wealth funds and, 5, 7–9, 137–54; risk and, 137–38, 142–51, 154, 172n11; Santiago Principles and, 138, 152; savings and, 147, 152–53; short-termism and, 144, 146–47, 149–52; Singapore and, 90, 97, 138; sponsors and, 137–46, 149–50; stability and, 138, 147–49, 153; symbolism and, 128–29; transparency and, 138; uncertainty and, 139, 143, 145, 171n3; volatility and, 144, 148, 150, 152, 154, 172n9, 172n10; welfare and, 138, 149, 153; wisdom of crowds and, 140–41 France, 4f, 15t, 42, 79, 165n9 Franke, A., 38 French, K., 137, 148, 172n11 FTSE100, 143 fund boards, 58–62 Future Fund (FF), xv, 15t, 21, 42, 68, 72, 153, 166n8; accepted political principle and, 47; best practice and, 47, 57–60, 65, 166n6, 166n9, 167n10; commodities and, 47–48, 51, 57, 64; conceptual motives of, 47–48; Costello and, 51, 55–56, 61, 66, 166n4; discounts and, 49, 55, 64; equity and, 46–48, 47, 55–57, 62–66; form/function and, 138; fund boards and, 58–62; Government of Singapore Investment Corporation (GIC) and, 95, 102–3; growth and, 48, 51–57, 60, 166n4; guardians and, 60–62, 65; Intergenerational Report and, 55–56, 63–64; Labor Party and, 56–57, 66; legitimacy and, 46, 50, 55, 61–65; as lender of last resort,

54; Liberal Party and, 51–52, 56, 166n4, 166n7; long-term investment and, 46–50, 53–65; macroeconomic management and, 51–55; mandate of, 47, 59, 61; market access and, 54–55; mission statement clarity and, 58–59; as moralist sovereign wealth fund, 46; National Party and, 57, 166n7; parliament and, 46–47, 55–56, 61–62, 65; pension plan governance and, 47, 51–66; performance of, 48, 59–63; practice and, 48–51; principles and, 47–51, 56–57, 59, 64–66; short-termism and, 47, 49–51, 54–55, 61–65; sponsors of, 46–47, 50, 58–59, 61–62, 65; Tanner and, 56–57; temptation and, 48–51 Future Fund Management Agency, 59 future generations: Australia and, 47, 50, 55–57, 62–64; concept of sovereign wealth funds and, 36; form/function and, 138, 149, 153; Gulf States and, 135; policy and, xii, 14, 15t, 21–22, 36, 47, 50, 55–57, 62–64, 74, 78, 135, 138, 149, 153; rise of sovereign wealth funds and, 14, 15t, 21–22; Singapore and, 74, 78 Garton, P., 169n10 gas: China and, 118; concept of sovereign wealth funds and, 37, 39; Gulf States and, 124, 126t, 127; Norway and, 68, 72–74; rise of sovereign wealth funds and, 15t; Singapore and, 95; taxes and, 48 Gawrich, A., 38 Gelpern, A., 8 Generally Accepted Principles and Practices (GAPP), 6, 97. See also Santiago Principles geography: capitalism and, 25; China and, 106, 109; concept of sovereign wealth funds and, 33, 39–40, 44; financial, 9–12, 25; form/function and, 138, 152; Gulf States and, 133–34; mapping global changes and, 11; rise of sovereign wealth funds and, 25, 29. See also globalization geopolitics: Australia and, xiv, 46, 51; China and, 106, 115–20; emerging map of, xii; form/function and, 139, 145–46, 152; Gulf States and, 127, 170n1; Norway and, 67, 69; rise of sovereign wealth funds and, 7, 13–14, 28; Singapore and, 91, 95–96, 102; sponsor interests and, xiii Germany, xii, 107, 111–12, 129, 147, 171n2

Index Gertler, M. S., 1, 10, 129 Glick, R., 19, 79 globalization: capital market integration rates and, 84; concept of sovereign wealth funds and, 31, 41, 44–45; crises and, 103; economic policy and, 127; geopolitics and, xii–xiv, 7, 13–14, 28, 46, 51, 67, 69, 91, 95–96, 102, 106, 115, 117, 119–20, 127, 139, 145–46, 152, 170n1; innovation and, 25–28; institutions and, 25–27; rise of sovereign wealth funds and, 1, 4, 9–11, 14, 19, 22–29, 29 global market, xi–xii, xvii; Australia and, 47–48, 54–55, 66; best practice and, 155–56; China and, xvi, 105, 109–10, 113, 115–20; concept of sovereign wealth funds and, 30, 33, 38, 39, 43; financial services industry and, xiii; form/function and, 137–39, 142– 46, 149–54, 171n5, 171n6, 172n8; Gulf States and, 121, 124, 129, 132–35; multinational firms and, 33, 37, 96, 165n4; new realities of, 146–49; Norway and, xv, 69–70, 73, 76, 82, 84, 167n2; rise of sovereign wealth funds and, xiv, 2–11, 14, 18–20, 22, 25–26, 28, 166n9; Singapore and, 86–88, 91–103 Goetzmann, W. N., 82 Goh Chok Tong, 100 Gokhale, J., 56 Goldstein, M., 110, 169n9 governance: Australia and, xiv–xv, 46–47, 51, 57–61, 65; autonomy and, xii, xvii, 1, 11, 21, 26–27, 32–33, 38, 87–89, 91–93, 96, 101–2, 106, 113, 116, 120, 128, 137, 141, 144–45, 151, 153; best practice and, 13, 57–60 (see also best practice); China and, 106, 112–15; Clark-Urwin scoring system of, 58, 166n9; corruption and, xi, 7, 77, 121, 138; decision-making and, xiii (see also decision-making); democracy and, 163 (see also democracy); elements of good, 58–60; ethics and, 78–82; form/function and, 7–8, 137–42, 145; fund boards and, 58–62; future generations and, xii, 14, 15t, 21–22, 36, 47, 50, 55–57, 62–64, 74, 78, 135, 138, 149, 153; geography of finance and, 10; Gulf States and, 124, 130–33; hegemony and, 139, 152 (see also hegemony); institutions and, xvii (see also institutions); legitimacy and, 6–7, 142, 144–45, 152; as measurable resource,

201

202

Index governance (continued) 156; military and, 32–33, 79, 81t, 107, 119, 127; Norway and, xv, 68–71, 74, 80, 83–84; Principles of Management and, 102; rise of sovereign wealth funds and, 13, 17, 28, 36–38, 42–43; Singapore and, xv, 88, 90, 92–93, 95, 98, 103; third-party standards of, 90; wisdom of crowds and, 140–41 Government of Singapore Investment Corporation (GIC), xv, 37, 138; Australian Future Fund (FF) and, 95, 102–3; autonomy and, 87–93, 96, 101–2; best practice and, 88, 96– 98, 102; conceptualizing, 95; constitutional integrity of, 98–101; Council of Presidential Advisers and, 100–1; form/function and, 102; Goh Chok Tong and, 100; good management of, 94–95; governmentality and, 96–98; as insurer of last resort, 93–94, 102, 104; International Working Group on SWFs and, 87, 98, 102, 164n3; Lee Hsien Loong and, 95; Lee Kuan Yew and, 94; legitimacy and, 86–91, 93, 95–103; as lender of last resort, 92, 104; Low Thia Khiang and, 100; Minister for Finance and, 99; pensions and, 87, 97–98, 103; performance of, 86–91, 94, 97–99; as postcolonialist ­sovereign wealth fund, 37, 95; precautionary strategy and, 93–96; Principles of Management and, 102; Santiago Principles and, 87, 98, 102, 167n3; Siew Kum Hong and, 100; size of, 94–95; as territorialist sovereign wealth fund, 95 Government Pension Fund-Global (GPF-G): accountability and, 74–78; Annual Report of, 167n2; causality and, 80; control of, 74– 78; Council of Ethics and, 75, 77, 81t; curse of resource wealth and, 72; epistemic proceduralism and, 68, 83–84; equity and, 68, 73, 76, 78–79, 82–83; establishment of, 72–74; ethics and, xv, 67–85; form/function and, 138; General Provisions of, 76; GPF-Norway and, 74; huge size of, 68, 78; Investment Mandate of, 76, 77; legitimacy and, 68–71, 77, 82–85, 153; Ministry of Finance and, 20, 69, 72, 74–79, 81t, 82–83; moralist sovereign wealth funds and, 43–44; naming of, 73–74; National Insurance Scheme (NIS) and, 74; Norges Bank

Investment Management (NBIM) and, 67, 74, 76–77, 79–80, 82–84, 115, 138, 167n2; objective of, 77; parliament and, 67–68, 72, 74, 83; performance of, xv, 67–71, 73, 80–85, 167n2; petroleum and, 72–74; public budget and, 68, 72–75; Strategy Council on Investment and, 75; structure of, 74–78 Greenwood, R., 18, 23–24, 26, 164n10 Griffith-Jones, S., 18 gross domestic product (GDP): Asian growth and, 91t, 93; Australia and, 53–54, 57; concept of sovereign wealth funds and, 43; Norway and, 73; rise of sovereign wealth funds and, 19; Singapore and, 94t, 95 Grossman, G. M., 48, 168n8 growth, xi–xii, xvi; Alaska Permanent Fund and, 78; Asian, 91t; Australia and, 48, 51–57, 60, 166n4; best practice and, 162; China and, 105–6, 109–12, 115–20, 168n7, 168n8, 169n12; concept of sovereign wealth funds and, 40, 42–43, 165n2; CPPib and, 58–60, 62, 166n8; exports and, 18; form/function and, 137–39, 142, 147–54, 171n2, 171n6, 172n9; gross domestic product (GDP) and, 19, 43, 53–54, 57, 73, 91t, 93–95; Gulf States and, 121, 124, 129, 170n1; intergenerational equity and, 55–57; macroeconomic management and, 51–55; Norway and, 73–74, 167n2; rise of sovereign wealth funds and, 8, 11, 15t, 18, 20–21, 164n8, 165n14; Singapore and, 87, 90–91, 94, 101 Gruber, J., 55 guardians, 60–62, 65, 100 Gulf States: accountability and, 129; adoption and, xvi, 122, 125–36; assets under management (AUM) and, 125, 126t; autonomy and, 128; banks and, 128; best practice and, 130–32; capitalism and, 129, 134; competition and, 127, 130, 132–33; crisis and, 127, 129, 135; decision-making and, 128, 130–32, 135, 171n3; democracy and, 122, 124, 134; exports and, 121, 123, 125, 127; foreign exchange and, 121; form/function and, 128–29, 138; future generations and, 135; gas and, 124, 126t, 127; global market and, 121, 124, 129, 132–35; governance and, 124, 130–33; growth and, 121, 124, 129, 170n1;

hegemony and, 129; inflation and, 121; innovation and, 122, 125, 128, 130, 134–36; institutions and, xvi, 121–36, 171n6, 171n7; International Monetary Fund (IMF) and, 125–27; investment and, 125–27, 130–33, 170n4, 171n7; legitimacy and, 124, 134; modernity and, xvi, 122, 128, 133–35; Mubadala and, 44–45, 126t, 127, 164n2; natural resources and, 121–28, 134–35; oil and, 49, 121–27, 133, 170n2; OPEC cartel and, xi, 121, 170n1; pensions and, 129–30, 132–33; performance and, 122, 130–32, 135–36; petroleum and, 121, 126t; policy and, 125, 127, 129–30, 133; politics and, 123–27, 130–35, 170n1; portfolios and, 126t; promise of finance and, 132–34; rentier sovereign wealth funds and, 124; reserves and, 122, 125, 126t; resource dependence and, 122–25; risk and, 130–31, 171n3; Santiago Principles and, 128, 130; savings and, 121, 125; Sheik Abdullah and, 125; short-termism and, 133, 136; sponsors and, 121–22, 125, 130, 134–35; stability and, 121, 124–25, 126t; trust and, 131; trustees and, 132; volatility and, 123–24, 170n2; welfare and, 121, 125 Gylfason, T., 20 Haberly, Dan, 40, 106, 116 Hawley, J. P., 11, 129, 146 Hebb, T., 86, 167n2 hegemony, xi–xiii, xvii; China and, 105–7; form/function and, 139, 152; Gulf States and, 129; rise of sovereign wealth funds and, 4–5, 9–11, 28; Singapore and, 86, 88 Helleiner, E., 10 Helpman, E., 26, 48, 168n8 Hess, M., 10 Hinings, C. R., 18, 23 hoarding, xii, 18–19, 87, 92–94, 111 Hoevenaars, R., 98 Hollings, Ernest, 109 Hong Kong, 4f, 19, 91, 109, 117t House of al Sabah, 39 housing, 147 Howarth, Nick, 166n7 Hsin, P.-L., 130 Hu, Y.-W., 169n13 Huang, H.-C., 169n12

Index human capital, 20, 42, 72, 96, 130, 133, 159 human rights, 43, 77, 79, 81t, 108 Iglesias, A., 130 immigration, 55, 96 imports: China and, 109–12, 119; Singapore and, 95 India, 1, 49, 107, 168n6 Indonesia, 15t, 37, 91–92, 94–95, 117t inflation: Australia and, 52, 60; China and, 110, 112, 169n12; concept of sovereign wealth funds and, 38; form/function and, 147–48, 154, 172n9; Gulf States and, 121; rise of sovereign wealth funds and, 8, 19, 26; Singapore and, 94 innovation: advocacy and, 24–25; Australia and, 54, 58, 60, 63–64, 166n9; best practice and, 157, 161; China and, 106, 119, 169n12; concept of sovereign wealth funds and, 42; form/function and, 141–43, 148, 150, 171n2; globalization and, 25–28; Gulf States and, 122, 125, 128, 130, 134–36; institutions and, 23–28; jolts and, 2, 18–20, 23–27; logic of, 23–25; Norway and, 70; rise of sovereign wealth funds and, 1, 9, 14, 18, 23–28; Singapore and, 93; vesting and, 24–25; xiii–xiv, 172n7, 172n10 institutions, xii–xiii; adoption and, 125–32; adoption of, 125–28; advocacy and, 24–25; Australia and, 46–50, 53, 55, 58–66, 166n1, 166n6, 166n9, 167n10; best practice and, 58, 155–62; China and, 105, 107, 113–20, 169n11, 169n12, 169n16; coherence and, 58, 155, 158–60; concept of sovereign wealth funds and, 32–33, 36–38, 42–45, 165n4; form/function and, 5, 7–9, 90, 137–45, 148–54, 172n7, 172n10; globalization and, 25–28 (see also globalization); Gulf States and, xvi, 121–36, 171n6, 171n7; importance of form of, 97; innovation and, 23–28; jolts and, 2, 18–20, 23–27; legitimacy and, 46 (see also legitimacy); nongovernmental organizations (NGOs) and, 33, 37, 44, 79, 108, 125; Norway and, xv, 68–71, 74–84, 167n2; performance and, 156–61 (see also performance); rise of sovereign wealth funds and, xiv, xvii, 1–28, 163n5, 164n8, 164n9, 165n11, 165n12; Singapore and, 86–103, 167n1; vesting and, 24–25

203

204

Index insurance, xvii; Australia and, 55; China and, 118; form/function and, 142–43, 146, 149, 153; Norway and, 74; reserves and, xi (see also reserves); rise of sovereign wealth funds and, 3–4, 9, 18–19, 26; self, xii, 3–4, 18–19, 93–94, 102, 104, 118, 167n1; Singapore and, 86, 93–94, 102, 104, 167n1 interdependence sovereignty, 31–35, 40–41, 44 Intergenerational Report, 55–56, 63–64 international legal sovereignty, 31–32, 35, 37, 44 International Monetary Fund (IMF): Articles of Agreement of, 92; Asian crisis and, 101, 127; bailouts of, 92; China and, 109–13, 118; concept of sovereign wealth funds and, 36; currency crisis and, 19; form/function and, 147; Gulf States and, 125–27; Indonesia and, 92; Korea and, 92; as lender of last resort, 92; leverage of, 92–93; mandate of, 92–93; rise of sovereign wealth funds and, 6, 11, 18–19, 164n3; Santiago Principles and, 6; Singapore and, 87, 92–94, 96, 98, 167n1; sovereignty and, 93; Thailand and, 92 International Working Group of Sovereign Wealth Funds, 6; concept of sovereign wealth funds and, 39; rise of sovereign wealth funds and, 13, 16–17, 164n3; Santiago Principles and, 39, 87, 98, 102; Singapore and, 87, 98, 102, 167n3 investment: Australia and, xv, 46–51, 54, 56–66, 166n5, 166n9, 167n10; best practice and, 155–62; China and, xv–xvi, 105–20, 169n11, 169n14, 169n16; China Investment Corporation (CIC) and, 105; concept of sovereign wealth funds and, 35–43, 165n3; efficient markets hypothesis (EMH) and, 144; equity and, 46–48, 55–57, 62–66 (see also equity); form/function and, 137–54, 171n2, 171n4, 172n7, 172n9, 172n11; future generations and, xii, 14, 15t, 21–22, 36, 47, 50, 55–57, 62–64, 74, 78, 135, 138, 149, 153; Gulf States and, 125–27, 130–33, 170n4, 171n7; long-term value and, 46–50, 53–65, 68–69, 72–74, 77–84, 89–91, 95–98, 101–6, 117–18, 121–25, 134–36, 139, 142, 144–54, 156–59, 166n2, 166n8, 170n20; modern portfolio theory (MPT) and, 143–44 (see also portfolios); Norway and, xv, 67–85, 167n2; reserves and, 3 (see also reserves);

rise of sovereign wealth funds and, xii–xiv, 3–20, 22, 26, 28, 164n3, 164n6; risk and, 3, 48 (see also risk); shareholder value, 11, 80, 84, 105, 116, 129; shortfalls and, 53, 58; Singapore and, xv, 88, 93–103, 167n3; strategic value and, 105; Strategy Council on Investment and, 75 Ireland, 15t, 22, 87, 103, 118 Iron Curtain, 107 Jackson-Vanik amendment, 108 Japan, 32, 109–12, 129, 147 JC Flowers, 105 Jepperson, R. L., 23 Johnson, Simon, 11–12 jolts, 2, 18–20, 23–27 Karl, T. L., 123 Kellman, M., 109 King, R. G., 166n5, 169n12 Kiribati Revenue Equalisation Reserve Fund, 125 Kissinger, Henry, 107 Korea, 4f, 15t, 19, 91–92, 109 Kotlikoff, L. J., 56 Krasner, S. D., 31 Kudrin, Alexia, 13 Kuwait, 3, 4t, 15t, 39, 121, 125–27 Kuwait Investment Authority (KIA), 39, 127 Labor Party, 52, 56–57, 66, 70 Lam, P. E., 101 Landon, S., 170n3 La Porta, R., 63 Lardy, N., 110, 169n9 Lawrence, T. B., 23, 25 Lee, D., 170n19 Lee, J., 87 Lee Hsien Loong, 95 Lee Kuan Yew, 94, 167n2 legitimacy, xiii–xiv, xvii, 163n6; Australia and, 46, 50, 55, 61–65; autonomy and, 87–93, 96, 101–2; capitalism and, 88–89, 107; China and, 106–8, 115–20, 168n1, 169n15; cognitive, 164n10; communism and, 107; competitiveness and, 1; concept of sovereign wealth funds and, 31–33, 36–39, 42–44; defining, 7; form/function and, 90, 96–98;

Future Fund (FF) and, 46, 50, 55, 61–65; global crisis of, 5; governance and, 6–7, 142, 144–45, 152; Gulf States and, 124, 134; jolts and, 24–25; Norway and, xv, 68–71, 77, 82–85, 153; realist conception of, 89; rise of sovereign wealth funds and, 23–27, 164n10; Santiago Principles and, xv, 6, 120, 152; Singapore and, xv, 86–91, 93, 95–103; trust and, 6, 163n5 Leibfritz, W., 55–56 lender of last resort, 54, 92, 104 Lerner, J., 48 Levine, R., 166n5, 169n12 liabilities: Australia and, 51, 53, 55–65; best practice and, 158; concept of sovereign wealth funds and, 43; form/function and, 143, 149, 153–54; Norway and, 74, 76; pensions and, 26, 43, 51, 53, 55, 65, 103; rise of sovereign wealth funds and, 9, 15t, 16, 26, 164n5; Singapore and, 91, 98, 103 Liang, Q., 169n12 liberalization, 33, 51, 148, 169n10 Liberal Party, 51–52, 56, 166n4, 166n7 liquidity, 35, 53, 60, 85, 115, 146, 154 Li Yong, 169n14 long-term investment: Australia and, 46–50, 53–65, 166n2, 166n8; best practice and, 156–59; China and, 105–6, 117–18, 170n20; form/function and, 139, 142, 144–54; Gulf States and, 121–25, 134–36; Norway and, 68–69, 72–74, 77–84; Singapore and, 89–91, 95–98, 101–4 Lovely, M. E., 168n8 Low Thia Khiang, 100 MacKenzie, D., 143 Macquarie Bank, 167n12 Malaysia, 4f, 91, 95 Marion, N., 87 markets: Black-Scholes model and, 143; bubbles and, 49, 51, 73, 94, 121, 124, 148; competition and, 1 (see also competition); contagion and, xvi, 91, 98; Dutch disease and, 20, 72, 122; efficient markets hypothesis (EMH) and, 144, 171n5; exports and, 18 (see also exports); foreign exchange and, 106, 109–13 (see also foreign exchange); form/function and 137–39, 142–46, 149–54,

Index 171n5, 171n6, 172n8; globalization and, 1 (see also globalization); gross domestic product (GDP) and, 19, 43, 53–54, 57, 73, 91t, 93–95; hegemony and, 139, 152 (see also hegemony); imports and, 95, 109–12, 119; inflation and, 8 (see also inflation); jolts and, 2, 18–20, 23–27; liberalization and, 33, 51, 148, 169n10; mercantilism and, xii, 40, 87, 111, 146–47; modern portfolio theory (MPT) and, 143–44; Most Favored Nation (MFN) status and, 108, 120, 168n2; multinational firms and, 33, 37, 96, 165n4; neoclassical theory, 144–45, 149–53, 171n4; new realities of global finance and, 146–49; normalization of, 106, 108–12, 118, 120, 168n3; privatization and, 51, 54; production networks and, 33–42; promise of finance and, 132–34; protectionism and, 6, 13, 40– 42, 110, 167n3; recession and, 55, 73, 170n19; reserves and, 18–19; risk and, 3 (see also risk); shortfalls and, 53, 58; stability and, 3–5, 14, 15t, 18–23, 26 (see also stability); tariffs and, 108, 168n4, 168n7; uncertainty and, 48 (see also uncertainty) Markowitz, Harry, 143 Massey, J. E., 7 MassPRIM, 59 McCain, John, 109 mercantilism, xii, 40, 87, 111, 146–47 Merton, R. C., 113, 137, 141–42, 144, 166n4, 171n6 military, 32–33, 79, 81t, 107, 119, 127 Mishkin, F. S., 167n1 Mitchell, O. S., 130 modernity, xvi, 122, 128, 133–35 modern portfolio theory (MPT), 143–44 Monk, Ashby H. B., xi–xvii; Government of Singapore Investment Corporation (GIC) and, 86; rise of sovereign wealth funds and, 1, 7, 10–11, 14, 22 moralist sovereign wealth funds, 31, 42–44, 46, 68 mortgages, 105, 147 Most Favored National (MFN) status, 108, 120, 168n2 Mubadala, 44–45, 126t, 127, 164n2 multinational firms, 33, 37, 96, 165n4 Mumtalakat, 15t, 126t, 127

205

206

Index Muslims, 95 Mussa, M., 93 Myanmar, 79 Nathan, S. R., 100 National Development Reform Commission (NDRC), 113 National Insurance Scheme (NIS), 74 National Party, 57, 166n7 National Wealth Fund, 13 nation-states, xii–xvii; autonomy and, 87; bubbles and, 49; China and, 107, 113, 118, 127; competition and, 1 (see also competition); democracy and, 124; form/function and, 137–40, 146, 149, 152–53, 172n10; funcationalism and, 90; integration policy and, 1; legitimacy and, xv, 90 (see also legitimacy); mercantalism and, 87; policy networks and, 127; rise of sovereign wealth funds and, 1–2, 8, 10, 14, 18, 22, 25, 28–30, 36, 44–45; Singapore and, 86–93, 101–3; sovereignty and, 4 (see also sovereignty); sponsors and, 125; strategic assets and, 86 natural resources, 15t, 20, 38, 165n7; Australia and, 117; Canada and, 117; China and, 118; dependence on, 122–25; Gulf States and, 121–28, 134–35; Norway and, 118, 123–25; resource curse and, 124; Singapore and, 95 Neary, P. J., 20 neighborhood effect, 127 neoclassical model, 144–45, 149–53, 171n4 newly industrialized economies (NIEs), 109 New Zealand, 9, 15t, 22, 166n8 Ng, S., 170n19 Nixon, Richard M., 107 nongovernmental organizations (NGOs), 33, 37, 44, 79, 108, 125 Norges Bank Investment Management (NBIM), 67, 74, 76–84, 115, 138, 153, 167n2 normalization: China and, 106, 108–9, 111f, 118, 120, 168n3; Permanent Normalized Trade Relations (PNTR) and, 108–9, 112, 168n4 Normalized Trade Relations (NTR) status, 108 North, D. C., 130 North Sea, 48, 68, 124 Norway: accountability and, 68–69, 71, 74–78, 82–84; banks and, 67, 73–84, 115, 138, 153,

167n2; beneficiaries and, 67; best practice and, 67, 70, 78, 80; competition and, 83; control and, 74–78; Council of Ethics and, 75, 77, 81t; crisis and, 70, 84; currency issues and, 73, 76; debt and, 72; decision-making and, 68–71, 78–79, 83–84; democracy and, 68–71, 83–84, 167n1; epistemic proceduralism and, 68, 83–84; equity and, 68, 73, 76, 78, 82–83; ethics and, 67–85; form/function and, 138; gas and, 68, 72–74; global market and, xv, 69–70, 73, 76, 82, 84; governance and, xv, 68–71, 74, 80, 83–84; Government Pension Fund-Global (­­GPF-G) and, xv, 43–44, 67–85, 167n2; gross domestic product (GDP) and, 73; growth and, 73–74, 167n2; innovation and, 70; institutions and, xv, 68–71, 74–84, 167n2; insurance and, 74; investment and, xv, 67–85, 167n2; legitimacy and, xv, 68–71, 77, 82–85, 153; liabilities and, 74, 76; Ministry of Finance and, 20, 69, 72, 74–79, 81t, 82–83; National Insurance Scheme (NIS) and, 74; natural resources and, 123–25; Norges Bank Investment Management (NBIM) and, 67, 74, 76–84, 115, 138, 153, 167n2; oil and, 68, 72–74; parliament and, 67–68, 72, 74, 83; pension trustees and, 67–70; petroleum and, 43–44, 72–74; policy and, 68–69, 72–75, 77, 82; politics and, 167n1; portfolios and, 68, 73, 76–79, 82–83; reserves and, 68, 73–74; risk and, 67–68, 70, 76–77, 81t, 82; Santiago Principles and, 78; savings and, 74; short-termism and, 68, 72, 84, 167n1; sponsors and, 67, 69, 80; stability and, 70, 72, 167n1; Strategy Council on Investment and, 75; structure and, 74–78; transparency and, 71–72, 78, 79, 84; trust and, 71; uncertainty and, 70, 74; volatility and, 70, 72, 84; welfare and, 68–69, 72, 74, 80 Norwegian Central Bank, 67, 73, 76–77 Norwegian Ministry of Finance, 20 Nozick, R., 50 Obstfeld, M., 169n11 Ocampo, J. A., 18 Ocasio, W., 23 oil: China and, 118; commodity funds and, 19–21; concept of sovereign wealth funds

and, 38–39; Gulf States and, 49, 121–27, 133, 170n2; North Sea and, 48, 68, 124; Norway and, 68, 72–74; OPEC cartel and, xi, 121, 170n1; rise of sovereign wealth funds and, 14, 15t, 19–21; Singapore and, 94–95; taxes and, 48 oligarchy, 32, 38 Oliver, C., 18, 23–26 Oman Investment Fund, 127 Organisation for Economic Co-operation and Development (OECD) countries, xi; Kathryn Gordon and, 6; Gulf States and, 125; Norway and, 75; rise of sovereign wealth funds and, 6, 22, 164n3 Organization of Petroleum Exporting Countries (OPEC), xi, 121, 170n1 Orwell, George, 89 Ostrom, E., 139 ownership, 16, 35, 39–40, 65, 77, 80, 82, 150 Palacios, R., 130 Park, D., 18, 48 paternalism, 89 Paulson, Henry, 13 Peck, J., 10 pegging, 106, 109–12, 169n10 pensions, xii–xiii, xvii; best practice and, 155–59; Canada Pension Plan and, 164n6; concept of sovereign wealth funds and, 36, 43–44; defined-benefit (DB), 9, 51, 55, 57, 60–61, 65, 143, 166n6; form/function and, 137–38, 140, 142–43, 146, 152–53; Future Fund (FF) and, 47, 51–66 (see also Future Fund (FF)); Government of Singapore Investment Corporation (GIC) and, 87, 97–98, 103; GPF-G and, xv (see also Government Pension Fund-Global (GPF-G)); Gulf States and, 129–30, 132–33; liabilities and, 26, 43, 51, 53, 55, 65, 103; pay-as-you-go (PAYG), 16; prefunded, 2, 22, 43, 125; reserve funds and, 3, 14, 15t, 21–22, 36, 43; rise of sovereign wealth funds and, 2–4, 8–9, 12–17, 21–22, 26; United Kingdom and, 70 performance: best practice and, 156–57, 159–61; China Investment Corporation (CIC) and, 115; form/function and, 7, 9, 140–46, 151–54, 172n6; Future Fund (FF) and, 48, 59–63; Government of Singapore

Index Investment Corporation (GIC) and, 86–91, 94, 97–99; Government Pension FundGlobal (GPF-G) and, xv, 67–71, 73, 80–85, 167n2; Gulf States and, 122, 130–32, 135–36; legitimacy and, 163n5 (see also legitimacy); rise of sovereign wealth funds and, 6–7, 9, 28; trust and, 7 Permanent Normalized Trade Relations (PNTR), 108–9, 112, 168n4 Persson, T., 49 petroleum: concept of sovereign wealth funds and, 37; Gulf States and, 121, 126t; Norway and, 43–44, 72–74; OPEC cartel and, xi, 121, 170n1; rise of sovereign wealth funds and, 15t, 21 Petroleum Fund of Timor-Leste, 15t, 21, 37–38 Philippines, 91 policy: arbitrage and, xi, 89, 154, 172n7; Australia and, 47–53, 56; best practice and, 88, 96–98, 102 (see also best practice) ; China and, 106–20, 168n8, 169n12, 169n15; coping mechanisms and, 2–3, 23, 27; democracy and, 3; efficient markets hypothesis (EMH) and, 144, 171n5; epistemic proceduralism and, 68, 83–84; equity and, 21, 40–41, 46–48, 55–57, 62, 64–68, 73, 76, 78, 82–83, 137–38, 144–53, 172n11; form/function and, 146, 148, 153; France and, 42; future generations and, xii, 14, 15t, 21–22, 36, 47, 50, 55–57, 62–64, 74, 78, 135, 138, 149, 153; global financial flows and, xi, 3–4, 127; Gulf States and, 125, 127, 129–30, 133; immigration and, 55, 96; International Monetary Fund (IMF) and, 92–93; Jackson-Vanik amendment and, 108; jolts and, 2, 18–20, 23–27; long-term, 46–50, 53–65, 68–69, 72–74, 77–84, 89–91, 95–98, 101–6, 117–18, 121–25, 134–36, 139, 142, 144–54, 156–59, 166n2, 166n8, 170n20; mercantilism and, xii, 40, 87, 111, 146–47; modernity and, xvi, 122, 128, 133–35; neoclassical theory, 144–45, 149–53, 171n4; new institutions and, 2; normalization, 106, 108–12, 118, 120, 168n3, 168n4; Norway and, 43, 68–69, 72–75, 77, 82; paternalism and, 89; pegging currencies and, 106, 109–12, 169n10; Permanent Normalized Trade Relations (PNTR) and, 108–9, 112, 168n4; protectionism and, 6, 13,

207

208

Index policy (continued) 40–42, 110, 167n3; rise of sovereign wealth funds and, 3–6, 9, 13, 17–22, 25–28, 165n11; Singapore and, 87–88, 93, 96, 98, 100–101, 167n1; stability and, 38; tariffs and, 108, 168n4, 168n7; transparency and, xiii (see also transparency); welfare and, 138, 149, 153 (see also welfare) political economy, xiv; China Investment Corporation (CIC) and, 106; concept of sovereign wealth funds and, 30–31, 40; rise of sovereign wealth funds and, 21 politics: adoption and, 130–32; Australia and, xiv, 46–51, 55–61, 64–66; authoritarianism and, 1, 14, 38, 49, 89, 107; autocracy and, 3, 17; autonomy and, xii, xvii, 1, 11, 21, 26–27, 32–33, 38, 87–89, 91–93, 96, 101–2, 106, 113, 116, 120, 128, 137, 141, 144–45, 151, 153; Berlin Wall and, 107; China and, 106–8, 112, 114–20, 168n2, 170n20; Clinton and, 168n4; Cold War and, 88, 106–8, 119, 170n1; communism and, 1, 88, 106–8, 114–15, 119; concept of sovereign wealth funds and, 30–45, 165n2; democracy and, xv, 1 (see also democracy); Democratic Party and, 108; form/function and, 138–49, 152–53, 172n8, 172n10; geopolitics and, xii–xiv, 7, 13–14, 28, 46, 51, 67, 69, 91, 95–96, 102, 106, 115, 117, 119–20, 127, 139, 145–46, 152, 170n1; Gulf States and, 123–27, 130–35, 170n1; hegemony and, 139, 152 (see also hegemony); Iron Curtain and, 107; Kissinger and, 107; Labor Party and, 56–57, 66, 70; Lee Kuan Yew and, 94, 167n2; legitimacy and, xv (see also legitimacy); Liberal Party and, 51–52, 56, 166n4, 166n7; military and, 32–33, 79, 81t, 107, 119, 127; National Party and, 57, 166n7; nation-states and, xii–xvii, 1–2, 8 (see also nation-states); Nixon and, 107; Norway and, 67–72, 76–79, 84–85, 167n1; oligarchy and, 32, 38; parliaments and, 46–47, 55–56, 61–62, 65, 67–68, 72, 74, 83, 95, 99; rise of sovereign wealth funds and, 1–2, 5–11, 13–14, 17, 20–29; Singapore and, 86–96, 99, 101–3; socialism and, 88; Tiananmen Square revolt and, 108; vetoes and, 108 portfolios: Australia and, 59–60, 63; best practice and, 160; China and, xvi, 105–6,

115–18, 120, 170n18; concept of sovereign wealth funds and, 39–40; form/function and, 139, 142–46, 149–54; Gulf States and, 126t; modern portfolio theory (MPT) and, 143; Norway and, 68, 73, 76–79, 82–83; rise of sovereign wealth funds and, 5, 9; Singapore and, 89 Portugal, 37 postcolonialist sovereign wealth funds, 31, 36–38, 95 privatization, 51, 54 production networks, 33–42 productivist sovereign wealth funds, 31, 39–41, 106 protectionism, 6, 13, 40–42, 110, 167n3 Putin, Vladimir, 13 Radelet, S., 92–93 Sachs, J., 91–92 Santiago Principles: best practice and, 98; China and, xvi, 115; form/function and, 138, 152; Generally Accepted Principles and Practices (GAPP) and, 6, 97; Gulf States and, 128, 130; International Monetary Fund (IMF) and, 6; International Working Group of SWFs and, 6, 39, 87, 98, 102; legitimacy and, xv, 6, 120, 152; Norway and, 78; Singapore and, xv, 87, 98, 102, 167n3; trust and, 6 Sants, H., 97 Saudi Arabian Public Investment Fund, 127 Savastano, M. A., 93 savings, xi; Australia and, 53; concept of sovereign wealth funds and, 42, 48; form/ function and, 147, 152–53; Gulf States and, 121, 125; Norway and, 74; rise of sovereign wealth funds and, 14, 15t, 18, 22, 164n3; Singapore and, 87, 94, 101, 103 Schaeffer, S. M., 82 Schoar, A., 48 Seo, M.-G., 25 shareholder value, 11, 80, 84, 105, 116, 129 shortfalls, 53, 58 short-termism, xi, 20, 26; Australia and, 47, 49–51, 54–55, 61–65; best practice and, 157; China and, 112; form/function and, 144, 146–47, 149–52; Gulf States and, 133, 136;

Norway and, 68, 72, 84, 167n1; Singapore and, 89, 91, 93, 95, 103–4 Sidaway, J. D., 36 Siew Kum Hong, 100 Singapore, 72; accountability and, 98–99; autonomy and, 87–89, 91–93, 96, 101–2; banks and, 86, 94, 102–3; best practice and, 88, 96–98, 102; capitalism and, 103; commodities and, 86; competition and, 87; Constitution of, 98–101; consumption and, 87–91, 96, 101–4; contagion and, 91, 98; Council of Presidential Advisers and, 100–101; crisis and, 86–88, 91–103, 167n1; currency issues and, 91t, 92; debt and, 87, 102; decisionmaking and, 88, 90; democracy and, 88, 95, 102; economic contraction in, 91–92; exports and, 87, 95; foreign exchange and, 91–97, 103; form/function and, 90, 97, 138; future generations and, 74, 78; gas and, 95; global market and, 86–88, 91–103; Goh Chok Tong and, 100; governance and, xv, 88, 90, 92–93, 95–98, 103; Government of Singapore Investment Corporation (GIC) and, xv, 37, 87–104, 138; gross domestic product (GDP) and, 94t, 95; growth and, 87, 90–91, 94, 101; hegemony and, 86, 88; human capital and, 96; immigration policy of, 96; imports and, 95; inflation and, 94; innovation and, 93; institutions and, 86–103, 167n1; insurance and, 86, 93–94, 102, 104, 167n1; International Monetary Fund (IMF) and, 87, 92–94, 96, 98, 101, 167n1; International Working Group and, 87, 98, 102, 167n3; investment and, xv, 88, 93–103, 167n3; Lee Hsien Loong and, 95; Lee Kuan Yew and, 94, 167n2; legitimacy and, xv, 86–91, 93, 95–103; liabilities and, 91, 98, 103; Low Thia Khiang and, 100; Minister for Finance and, 99; Muslims and, 95; nation-state politics and, 86–93, 101–3; natural resources and, 95; oil and, 94–95; policy and, 87–88, 93, 96, 98, 100–101, 167n1; politics and, 86–96, 99, 101–3; portfolios and, 89; precautionary strategy and, 93–96; Principles of Management and, 102; reserves and, 2–3, 87–89, 92–96, 99–101, 103; risk and, 97, 102; Santiago Principles and, xv, 87, 96–98, 102, 167n3; savings and,

Index 87, 94, 101, 103; short-termism and, 89, 91, 93, 95, 103–4; Siew Kum Hong and, 100; sponsors and, 86, 93, 102; stability and, 87, 89, 91–92, 96, 98, 102–3, 167n2; transparency and, 87, 98, 102; trust and, 167n3; uncertainty and, 93–96, 101, 104; volatility and, 87, 92; welfare and, 86–91, 100–104 Singapore Airlines, 97 Skancke, M., 72 Smith, C. E., 170n3 socialism, 88 social justice, 22, 69 solvency, 9, 21, 103, 143 South Africa, 168n6 sovereignty, xiv; conceptions of, 31–36; control capacity and, 33; domestic, 31–44, 32; hegemony and, 139, 152 (see also hegemony); interdependence, 31–35, 40–41, 44; international legal, 31–32, 35, 37, 44; International Monetary Fund (IMF) and, 93; nonterritorial exercise of, 33; production networks and, 33–42; protectionism and, 6, 13, 40–42, 110, 167n3; rise of sovereign wealth funds and, 4, 9, 11, 14, 18, 26–29; three conditions of contemporary, 32–34; Westphalian, 31–33, 35–37, 40, 44 sovereign wealth funds: Alberta Heritage Fund and, 15t, 65, 78; Australian Future Fund (FF) and, xv, 15t, 21, 42, 46–66, 68, 72, 95, 102–3, 138, 153, 166n8; beneficiaries and, xiii, 16–17, 49, 56, 60, 67, 146, 158, 164n6; best practice and, 155–62; China Investment Corporation (CIC) and, xvi–xvi, 4f, 40–41, 105–20, 138, 142, 146, 152, 169n14, 169n15, 169n16, 170n17, 170n18; classification of, 17–22; commodity funds and, 3, 14, 19–22, 36; currency issues and, 19–20, 27; difference of, 13; engagement and, 34–37; equity and, 21, 40–41, 46–48, 55–57, 62, 64– 68, 73, 76, 78, 82–83, 137–38, 144–53, 172n11; form/function and, 137–54 (see also form and function); future generations and, xii, 14, 15t, 21–22, 36, 47, 50, 55–57, 62–64, 74, 78, 135, 138, 149, 153; geographies and, 9–12; geopolitics and, xii–xiv, 7, 13–14, 28, 46, 51, 67, 69, 91, 95–96, 102, 106, 115, 117, 119–20, 127, 139, 145–46, 152, 170n1; ­Government of Singapore Investment Corporation (GIC)

209

210

Index sovereign wealth funds (continued) and, xv, 37, 87–104, 138; Gulf States and, 121–36; legitimacy and, xiii (see also legitimacy); liabilities and, 9, 15t, 16, 26, 43, 51, 53, 55–65, 74, 76, 91, 98, 103, 143, 149, 153– 54, 158, 164n5; logic of, 34–36; as market makers, 142–45; MassPRIM and, 59; moralist, 31, 42–44, 46, 68; nation-states and, 1–2, 8, 10, 14, 18, 22, 25, 28–30, 36, 44–45; neighborhood effect and, 127; new realities of global finance and, 146–49; Norwegian Government Pension Fund-Global (GPF-G) and, xv, 43–44, 67–85, 167n2; ownership and, 16, 35, 39–40, 65, 77, 80, 82, 150; pensions and, 3, 14, 15t, 21–22, 36, 43 (see also pensions); performance and, 6; postcolonial, 31, 36, 36–38, 95; Principles of Management and, 102; productivist, 31, 39–41, 106; relative isolation of, 138; rentier, 31, 38–39, 44–45, 124, 165n7; reserves and, 19 (see also reserves); resistance and, 34–36; rethinking concept of, 30–45; rise of, 1–29; Rozanov and, 13; Santiago Principles and, xv; sponsors and, xvi–xvii (see also sponsors); stability and, 3–5, 14, 15t, 18–23, 26, 38, 42, 149 (see also stability); stated purpose of, xiii; as strategic investors, 149–52; as symbol, 128–29; term definitions for, 16–17, 164n3; territorialist, 31, 41–42, 45, 95; time inconsistency problems and, 165n11; trust and, 6; typology of, 36–44 sponsors: Australia and, xiv, 46–47, 50, 58–59, 61–62, 65; China and, 106, 117–19; concept of sovereign wealth funds and, 31, 34, 36, 43–45, 165n7; form/function and, 137–46, 149–50; geopolitics and, xiii (see also geopolitics); Gulf States and, 121–22, 125, 130, 134–35; nation-states and, xvi (see also nation-states); Norway and, 67, 69, 80; rise of sovereign wealth funds and, 3, 8–9, 14, 16–17, 20, 27, 164n6, 165n14; Singapore and, 86, 93, 102 stability, xi, xv; Australia and, 48, 51, 63; China and, 105–6, 110, 112, 118, 170n19; concept of sovereign wealth funds and, 38, 42; exchange rates and, 92; form/function and, 138, 147–49, 153; global imbalances and, xii; Gulf States and, 121, 124–25, 126t; insur-

ance and, 3 (see also insurance); macro­ economic, 5, 15t, 20, 48, 72, 110, 112, 121–24, 138, 148–49, 153, 167n2; Norway and, 70, 72; rise of sovereign wealth funds and, 3–5, 14, 15t, 18–23, 26; Singapore and, 87, 89, 91–92, 96, 98, 102–3, 167n2 stakeholder value, 105, 116 Standard & Poors, 143 State Administration of Foreign Exchange (SAFE), 113, 145–46, 169n13 statutory boards and government companies (SBGCs), 99 Steenkamp, T., 98 Steil, B., 7, 11 Stephens, Ursula, 62 Strategy Council on Investment, 75 Subramanian, A., 26 Suchman, M. C., 24, 163n6 Suddaby, R., 18, 23–25 Summers, L. H., 18–19, 112 Summers, R. S., 128 Sunstein, C. R., 69–70 Supperannuation Fund, 166n8 Suwaidi, Hamad al, 6 Tabellini, G., 49 Taiwan, 91, 109 Tan, K., 101 Tanner, Lindsay, 56–57 tariffs, 108, 168n4, 168n7 technocrats, 2, 20, 26 Teece, D., 130 telecommunications, 54, 166n7 Telstra, 54, 166n7 Temasek Holdings, 95 Teng, J.-Z., 169n12 territorialist sovereign wealth funds, 31, 41–42, 45, 95 Tett, Gillian, 145 Thailand, 91–92, 94 Theodore, N., 10 Thornton, P. H., 23 Tiananmen Square revolt, 108 time horizon focus, 157, 159 Timor-Leste, 15t, 21, 37–38 Tolbert, P. S., 24 Total, 79 Towers Watson, 57, 142, 166n9

trade agreements, 1, 31, 33, 108 trade surpluses, 109–10 transparency: accountability and, 7; Australia and, 47, 56, 166n8; best practice and, 161; China and, 108, 113, 119–20; decision-­ making and, xiii; form/function and, 138; Norway and, 71–72, 78–79, 84; rise of ­sovereign wealth funds and, 7, 13, 17; Singapore and, 87, 98, 102 Truman, E. M., 58, 78, 84, 89, 95, 97–98, 112, 166n8 trust: Australia and, 50; best practice and, 159; China and, 116; Gulf States and, 131; legitimacy and, 6, 163n5; Norway and, 71; performance and, 6–7; rise of sovereign wealth funds and, 17; Santiago Principles and, 6; Singapore and, 167n3 trust boards, 158–59 trustees: Australia and, 47, 60–66; best practice and, 161; guardians and, 60–62, 65, 100; Gulf States and, 132; Norway and, 67–70 uncertainty, xiv; Australia and, 48, 58, 60; best practice and, 156–57; China and, 113, 116; concept of sovereign wealth funds and, 45; form/function and, 139, 143, 145, 171n3; Norway and, 70, 74; precautionary strategy and, 93–96; rise of sovereign wealth funds and, 2, 21, 26–27, 165n1; Singapore and, 93–96, 101, 104 United Arab Emirates (UAE), 126t, 127, 170n4 United Kingdom: capitalism and, 129; failed banking system of, 86; insurers of last resort and, 102; Labor Party and, 52; pensions and, 70; reserve hoarding and, 87; short-term interests and, 103 United Nations, 75 United States: Alaska Permanent Fund and, 78; capitalism and, 129; Chinese trade relations and, 1, 105–20; Clinton and, 168n4; Cold War and, 88, 106–8, 119, 170n1; debt and, 17–18; Democratic Party and, 108; exports and, 147; failed banking system of, 86; insurers of last resort and, 102; JacksonVanik amendment and, 108; Kissinger and, 107; military and, 33; Most Favored Nation (MFN) status and, 108, 120, 168n2; Nixon and, 107; Permanent Normalized Trade

Index Relations (PNTR) and, 108–9, 112, 168n4; recipe for prosperity of, 170n20; reserve hoarding and, 87; September 11 attacks and, 113; short-term interests and, 103; Soviet Union and, 106–8, 119; tariffs and, 108, 168n4, 168n7 Urwin, R.: Australia and, 57–58, 60, 166n6; China and, 113; decision-making lessons and, 70; form/function and, 141–42; governance scoring system and, 58, 166n9; investment management and, 70, 96–98, 130, 155; Singapore and, 96–98, 102 U.S. Federal Reserve, 3 US Pension Benefit Guarantee Corporation (PBGC), 137 vesting, 24 volatility, xiv; Australia and, 53–54; China and, 105, 110; concept of sovereign wealth funds and, 30; exchange rates and, 18; form/function and, 144, 148, 150, 152, 154, 172n9, 172n10; Gulf States and, 123–24, 170n2; Norway and, 70, 72, 84; rise of sovereign wealth funds and, 2, 8, 18, 20–22, 26; Singapore and, 87, 92 Wallis Inquiry, 166n4 Wang, B., 169n9 Wang, J., 48 Webber, M. J., 109 Weiss, E. B., 64 Weiss, L., 23, 26–27 welfare, xvii; Australia and, 46, 55, 62; beneficiaries and, xiii (see also beneficiaries); best practice and, 158; China and, 109; concept of sovereign wealth funds and, 43–44; form/function and, 138, 149, 153; Gulf States and, 121, 125; Norway and, 68–69, 72, 74, 80; pensions and, 3, 14, 15t, 21–22, 36, 43 (see also pensions); rise of sovereign wealth funds and, 15t, 21–22, 27, 164n8; Singapore and, 86–91, 100–104; social, xv, 15t, 22, 72, 88, 90, 100, 164n8; stability and, xv Westphalian sovereignty, 31–33, 35–37, 40, 44 Williams, A. T., 11, 129, 146, 167n2 Williamson, O. E., 130 wisdom of crowds, 140–41 Wise, D. A., 55

211

212

Index Wójcik, D., 10, 171n2 Wolfe, M. W., 1, 50 Woo-Cumings, M., 123 World Bank, 55 World Trade Organization (WTO), 41–42, 108, 112, 168n4, 168n6

Xie, T., 168n2 Zeitz, G. J., 7 Zimmerman, M. A., 7 Zingg, A., 130 Zucker, L. G., 24