Sovereign Wealth Funds: power versus principle

Linked with Fred Halliday – Ireland.

Published on Open Democracy, by Fred Halliday, March 5, 2008.

The rise of “sovereign wealth funds” signals the end of the neo-liberal model and challenges western states and financial institutions to develop a coherent and long-term response, says Fred Halliday.

Two excerpts: The world’s financial press has a new obsession to succeed the “sub-prime mortgage” craze of autumn 2007: “sovereign wealth funds”, those state-backed investment bodies whose accumulating assets (often fuelled by the high energy prices of the 2000s) are roaming the globe in search of businesses to invest in, partner – and perhaps devour.

The enormous capital assets of these funds, and their potential influence on western markets and business, make the focus (and to a degree the fear) understandable; but some at least of the reporting and discussion about these new behemoths in the western media has a bias towards misunderstanding.

The world’s sovereign wealth funds SWFs are believed already to command assets worth around $3 trillion ($3,000,000,000,000; this figure is higher than (for example) the GDP of the United Kingdom. But the SWF phenomenon represents a major change in the world’s financial and investment markets in a way that goes beyond even considerations of this epic (and often suddenly acquired) scale of riches. For its significance lies also in the intellectual and policy context of its emergence: namely, that after three decades of policy, propaganda, and hype about “freeing up markets”, “reducing the role of the state”, and “promoting the private sector”, the SWFs embody a massive and unstoppable shift of influence back to what are in effect state-owned entities. Take that, neo-liberalism! The cunning of history has done it again …

… The west’s illusion:

The notion of western-style controls regulating the policy and behaviour of, for example, Arab Gulf states is revealed too in the irrelevance of the idea of “insider trading” in the region. Such a concept has no purchase – all trading, contracts, and deals are based not on public accounts or commercial law (let alone on transparency) but on personal contacts. This was emphasised to me over three decades ago by the wise Iraqi economist, Mohammad Salman Hassan: “In the Arab world no contracts are institution to institution, state to state, or enterprise to enterprise. All are person to person. On this they rely.”

For some western banks and businesses starved of funds, and facing the credit-crunch sparked in autumn 2007 by the “sub-prime” mortgage crisis in the United States, all this may appear good news. Their balance- sheets have (as the financial journalists say) “lots of holes to be filled”. But these institutions – and western governments – which wish or are obliged to deal with SWFs have a clear choice here (see Ann Pettifor, “How debtonation dies“, 30 August 2007).

They can enter agreements with SWFs (and other economic-political bodies in authoritarian states) with their eyes open – aware of the arbitrary adminstrative practices, occult financial sources and political interests involved. Such an approach is possible, many have followed it over the years.

They can also choose to leave the sovereign wealth funds to invest elsewhere; and to wait for the time – on present showing a pretty long way away – when both the SWFs and the wider political-financial systems of these countries meet better western criteria.

This is the choice. What western banks and businesses – and governments – should not do is to fool their publics, and possibly even themselves, about the realities of business, politics and influence in authoritarian states. The indulgence (or worse) towards money-laundering and fake accounting in the west, as well as the venality of many of those involved at the highest levels of business and power, may give a clear signal as to which path is the more likely. But at some point a dysfunctional global financial system needs bold action based on principle with long-term purchase, not mere calculation of short-term benefit. The SWFs are not going away. It is time to relearn for the old phrase about speaking truth to power. (full long text).

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