Economist cover story: ‘Invasion of the Sovereign Wealth Funds’
Posted by AJ on January 18, 2008
The Economist’s cover story this week is a feature on Sovereign Wealth Funds.
The story gives a good overview of many of the basics such as size of SWFs, how they came about, how they’ve evolved, where they’re headed, and the issues facing SWF investing. It also includes a relatively balanced discussion on the motives of SWFs, which isn’t surprising as The Economist is probably the most fair and balanced mainstream publication around.
One point that The Economist makes, that has been completely absent from the mainstream debate thus far, is that the fear of politicizing foreign investments cuts both ways. The SWFs must be cognizant of possible retaliatory actions, such as asset freezes and/or asset confiscations, that can be taken against their investments for things such as political disagreements or court rulings that hold SWFs responsible for the actions of their host country’s citizens. The Economist cites the example of Britain forcing the Kuwait Investment Authority to divest from part of its’ stake in BP in the 1980s because Margaret Thatcher, in the midst of privatizing national assets, ‘was in no mood to see so much of a national treasure owned by a foreign government’.
Politicians scrutinizing the recent flurry of SWF investments should take care to remember that these infusions are in effect rescue capital that their government’s would likely be on the hook for had SWFs been deterred from investing, and that their own future geopolitical motives should be held to the same standard they want to hold SWFs to.
The article concludes, correctly in my opinion, by saying the chief threat that SWFs pose is that of financial protectionism and that it’s in the best interests of all parties to get along:
The hope is that both host countries and sovereign-wealth funds see that their interest lies in building confidence. The hosts stand to benefit from the funds’ capital. Meanwhile the funds are ruled by the politics of the places where they invest. You are only sovereign at home; abroad, someone else wields the power.
