States, markets, and sovereign wealth funds.

Author:Helleiner, Eric
 
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The rapid growth of sovereign wealth funds in the last few years has suddenly become an important topic in international policymaking circles. While these funds have a longer history, they have recently been growing very quickly. Of the forty plus funds in existence, twelve have been created since 2005 and a number of other countries are considering following suit (Kimmitt 2008). As they increase in size, such state-led funds are emerging as significant financial players in global financial markets. Their value is estimated to be somewhere around $2.5 trillion (up from around $500 billion in 1990), greater than the entire hedge fund industry. According to Stephen Jen (2007), the value of these funds could rise to roughly $12 trillion by 2015, and will surpass the total value of official reserves by 2011. These funds are also becoming more aggressive, shifting their investments from government securities into less liquid, higher risk assets.

The growth of SWFs should interest not just policymakers. In this article, we suggest that this phenomenon also has important theoretical implications for debates concerning the political economy of global finance. The growth of SWFs is widely portrayed in the popular media as signalling a return of the state within the global financial arena (e.g. Truman 2008a, Garten 2008, Wolf 2007). We do not disagree with this point, but we wish to highlight how the reassertion of state authority in global finance is taking place in a manner that scholars of international political economy (IPE) did not anticipate in the financial globalization debates that dominated the field during the 1990s. As we review in the first section of the article, those debates focused primarily on the extent to which global financial markets acted as an external constraint on state policy autonomy. In the second and third sections of this paper, we detail how the growth of SWFs has increasingly placed states in the position of being investors themselves within the global financial markets. In the fourth section, we argue that this phenomenon highlights some problematic features of the "states vs market" dichotomy that drove earlier debates. In this way, the rise of SWFs helps to move theoretical debates concerning the political economy of global finance forward in new directions that we highlight in the conclusion.

The Earlier Debate

The globalization of financial markets generated heated debates in the field of IPE during the 1990s. In a useful review of these debates, Benjamin Cohen (1996: 295) noted that "traditionally, in political economy studies of global finance, the central problematique has been the uneasy dialectic between states and markets ... scholars typically focus on the challenge posed by mobile capital to the autonomy of national governments." On the one side of this debate were those who saw heightened capital mobility undermining the policy autonomy of nation-states in increasingly severe ways.

From this perspective, capital mobility was becoming a structure of the international system which "systematically constrains state behaviour by rewarding some actions and punishing others" (Andrews 1994: 197). Capital mobility was said to be enforcing an "embedded financial orthodoxy" (Cerny 1994) by providing wealth asset-holders with a powerful 'exit" option to exercise against governments that strayed from their preferences of low inflation, low taxation, restrictive government spending and more generally conservative politics. These new constraints--what Thomas Friedman (2000) called the "Golden Straightjacket"--were said to help explain why governments across the world shifted towards these kinds of policies since the 1970s.

On the other side of the debate were those who argued that the enduring power of states was understated by these arguments. One line of critique suggested that the constraints imposed by global financial markets were exaggerated. If countries were willing to allow their exchange rates to fluctuate, they could retain a high degree of monetary policy autonomy. Many governments, it was argued, had also demonstrated that there was considerable room to manoeuvre with respect to tax policy, government spending and left-of-centre politics since financial markets were concerned primarily only with overall national inflation rates and aggregate levels of fiscal deficits (e.g. Mosely 2003, Garrett 1998). A second line of critique suggested that the structural view underestimated the extent to which global financial markets ultimately rested on a political foundation provided by states. From this perspective, the globalization of finance had been a product not just of technological and market pressures but also of deliberate state decisions to liberalize capital controls from the 1960s onwards, decisions that could be reversed in the future. Rather than acting as a new structure of world politics, capital mobility thus rested on fragile political foundations (e.g. Helleiner 1994, 1999). As Pauly (1995: 373) put it, "Capital mobility constrains states, but not in an absolute sense". Therefore, analysts should be "cautious when interpreting the current dimensions of international capital flows as constituting an exogenous structure that irrevocably binds societies or their states ... a collective movement away from capital decontrol may be undesirable, but it remains entirely possible" (1995: 385).

This debate was a fascinating one, but it was also problematic. The problem was not that one argument clearly proved more accurate than the other; it was that the debate was too narrow. Although participants disagreed about many things, they shared a common assumption. State authority was seen by both sides to be significant only through its capacity to either regulate capital mobility or respond to the imperatives of global financial markets. One side believed these capacities were rapidly diminishing, while the other did not. This restrictive conceptualization of state authority reinforced the traditional state-versus-market dichotomy in IPE. The emergence of SWFs has highlighted how limiting this dichotomy is.

The Rise of Sovereign Wealth Funds

Sovereign wealth funds are notoriously difficult to define precisely, but the term is usually used to describe state-owned or state-controlled pools of capital that are actively invested, at least partially, outside the country. These investment vehicles have grown in recent years, particularly in parts of the world where the size of official reserves is increasing rapidly. Between 2001-07, official foreign exchange reserves across the world almost tripled from $2.1 trillion to $6.2 trillion, and the bulk of the increase was in two distinct groups of developing countries (Griffith-Jones and Ocampo 2008: 3).

The first was in countries exporting commodities, especially oil. With the current commodity boom, revenue from these exports rose sharply and in many developing countries this revenue largely accrued to the government. In this context, sovereign wealth funds have been seen as a tool to invest surplus funds abroad with the purpose of stabilizing fiscal revenue over time, promoting intergenerational saving, and/or avoiding "Dutch disease" by offsetting foreign exchange inflows (e.g. Kimmitt 2008).

The link between oil exporting, in particular, and sovereign wealth funds is longstanding. The very first SWF, the Kuwait Investment Authority, was established in 1953 by an oil exporter. In the wake of the 1973-74 oil price rise, the Abu Dhabi Investment Authority (ADIA)--now the world's largest SWF--was also created (as were two funds established by the Alaskan and Albertan governments in 1976). Norway also established its prominent SWF--the "Government Pension Fund, Global" (GPFG)--in 1990, to handle its sudden accumulation of oil wealth at the time. And many of the newly created SWFs since 2000 have also been in oil-exporting countries such as Algeria, Iran, Kazakstan, Libya, Qatar, Russia, and Venezuela. According to Aizenman and Glick (2007), approximately two-thirds of all assets held by SWFs today are held by oil and gas exporters, with the largest such holders being Abu Dhabi (somewhere between $500 and 875 billion), Kuwait ($213 billion), Norway ($375 billion) and Russia ($128 billion) (Truman 2008a: 2).

If the current commodity boom is behind the rapid expansion of SWFs today, is the latter trend merely temporary? Not necessarily. According to McKinsey Global Institute, petrodollar assets would continue to experience significant growth even if oil prices were to fall to $30 per barrel. If the price of...

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