I have just posted a paper to the Social Science Research Network (SSRN) that considers an aspect of this issue: "Sovereign Wealth Funds in Five Continents and Three Narratives: Similarities and Differences."
The final version will appear in Research Handbook On Sovereign Wealth Funds And International Investment Law (Fabio Bassan, ed. Edward Elgar Publishing forthcoming ). The Abstract, Contents and Introduction follow.
"Sovereign Wealth Funds in Five Continents and Three Narratives: Similarities and Differences."
Larry Catá Backer
Abstract: Organized and targeted state interventions in private markets, especially with respect to investments beyond their own territories, have raised complex issues. These public activities effectuated through private markets abroad, particularly when undertaken in the form of sovereign wealth funds (SWFs,) raise issues with respect to the viability of the private market-based foundations of globalization. These issues become more acute as the separation between the economic and political interests of sovereign investors becomes less clear and as that blurred line of separation crosses over from the domestic to international arenas. The issues become more complex as SWFs become ever more varied in structure, objectives, operations and habits. The most successful response has produced a master narrative, a transcendent and universal truth, of SWFs, that situates this phenomenon legitimately within the logic the emerging anarchic and polycentric global ordering, and two alternative visions. Yet even within these narratives, the myth of the monolithic SWF has resulted in a tendency to exclude rather than study the variety and regionalization of SWFs as they are developing in fact. Is it possible to discern regional affinities among SWFs even within the emerging narratives within which SWFs are conceived? This chapter explores SWF regionalization grounded in three distinct narrative foundations for SWF regionalism—an economic purpose narrative, a legalist narrative, and a corporatist narrative. The first currently serves as the “master narrative” of SWFs and as the lens through which SWFs are understood and around which analysis (especially social science and political analysis) and theory tend to be structured. The other two are alternative narratives that sometimes layer and sometimes seek to displace the master economics narrative. Each produces its own approach to understanding SWF regionalism. My thesis is that geographic proximity alone does not explain the variation in SWF form, though political and cultural affinity may. Instead, the distinctive narratives within which SWFs are conceptualized produce forms of regionalization that provide a powerful tool for structuring analysis of differences among national SWF models. But each tends to ignore the heterogeneity of SWF form and operation (which aligns with the anarchy and polycentricity of globalization). More importantly each serves to reinforce power structures that are used instrumentally—in this case to suggest a grand theory of SWF legitimacy and the conditions under which it can be realized. In particular, the “regional” categories discernable through the distinctive lenses of the narratives produce clearly distinctive “regions” of SWFs, grounded on the logic of the narrative rather than on the geographic home of the SWF. Part II considers the logic of each of the narratives. Part III then considers regionalization under each of these narratives, with a focus on the connection between geographic and narrative regionalism.
Part II—The Economics Master Narrative and Its Alternatives
A. The Economic Actor Master Narrative and a Focus on RiskPart III— SWF Regionalization and Narrative: Three Distinct Taxonomies Within Geographic Affinity.
B. The Legal Actor Narrative and Its Focus on Form
C. The State Corporatist Narrative and its Functional Focus
A. Geographic RegionalismPart IV –Conclusion
B. Regionalism and the Master Economic Narrative
C. Regionalism and the Legalist Narrative.
D. Regionalism and the State Corporatist Narrative.
Sovereign wealth funds (SWFs) have operated in current forms since the 1950s. Since the 1980s, globalization has reduced the power of all but the largest states to control economic policy even within their own borders. As borders have become more porous, capital has flowed between states with fewer impediments and has become subject to multiple regulatory regimes. More importantly, markets have come to serve as a source of managing behaviour of economic enterprises, and both states and enterprises have sought to use markets as a means of generating revenue and of instrumentally managing market stakeholders. More importantly, organized interventions in private markets by the largest state players has also become a means by which they might also manage global markets, either as a means of macroeconomic management to promote their version of financial stability through markets (Orr 2013, 9), or through long term pro-cyclical behaviors in the markets (Papaioannou et al. 2013).
But organized and targeted state interventions in private markets, especially with respect to investments beyond their own territories, have raised complex issues. Particularly when undertaken in the form of SWFs, these public activities in private markets raise issues with respect to the viability of the private market-based foundations of globalization. These issues become more serious as the separation between the economic and political interests of sovereign investors becomes less clear and as that blurred line of separation crosses over from the domestic to international arenas. These issues became acute by the early 21st century, as these investment vehicles became significant players in global finance. As a consequence, since the first decade of the 21st century, the principle operators of SWFs, and the major market-managing host states have sought to develop private mechanisms for the management of these investment vehicles. The object of these transnational regulatory institutions was to generate best practices among the most significant stakeholders in the global finance activities of SWFs, to forestall national legislation that might undermine the structural premises of globalization, to avoid the difficulties of invoking the formal structures of international law making, and to harmonize management of SWF behaviours with the polycentrism at the heart of globalization. More important, perhaps, was the political objective in what might have appeared to be a more anarchic and polycentric global ordering—the development and control of a master narrative, of a transcendent and universal truth, of SWFs (Lyotard 1984, Introduction XXIV-XXV).
But master narrative can only take the analysis so far. It faces conceptual challenges as SWFs become ever more varied in structure, objectives, operations and habits. Indeed, for all the efforts to develop market-based disciplinary regimes for SWFs, these vehicles have become more rather than less diverse since the beginning of the 21st century, with no sign of end. In addition to “classically” organized SWFs, state owned enterprises (SOEs) may adapt the characteristics of SWFs. Other vehicles may also function like SWFs without formal designation. SWFs may serve as development bank substitutes or as the basis for organizing state to state multilateral investment strategies in targeted private markets. SWFs may serve as a competitor to private investment funds or they may serve to leverage state law-making power extraterritorially through market interventions (Backer 2009, 2013). Especially since 2008, states have added an increasingly varied assortment of sovereign investment vehicle that have been labelled SWFs, even as the early legalist definitions increasingly suggest they are something else (Santiago Principles, App. 1). These are following international best practices and benchmarks, but also may be following regional models. And even those SWFs that are heavily invested in transnational self-regulation exhibit strong preferences for the protection of individual operating characteristics and objectives. Some of these differences may be explained by differences in national objectives for SWFs; some are explained by the extent of integration between political and economic structures; some may be explained by differences in culture and the historical context of SWF development. Indeed, the relationship between the public and private character of SWFs, and their expression in both SWF internal governance and external objectives may help suggest the limits of regulatory efforts that distinguish SWFs from other aggregated investment funds (Backer 2010).
Thus, even within these narratives, the myth of the monolithic SWF has resulted in a tendency to exclude rather than study the variety and regionalization of SWFs as they are developing in fact. Is it possible to discern regional affinities among SWFs even within the emerging narratives within which SWFs are conceived? This chapter examines SWF characteristics in different areas and regions. The focus is not on the development of a comprehensive taxonomy, but rather to suggest fundamental conceptual points of convergence and dissonance that bind and distinguish these investment vehicles. But rather than to focus on territorially joined regions as the foundation of the analysis, the chapter posits regionalization grounded in the premises of the most important narratives through which stakeholders have sought to organize “correct” thinking about SWFs. The chapter posits three distinct narrative foundations for SWF regionalism—an economic purpose narrative, a legalist narrative, and a state corporatist narrative. The first currently serves as the “master narrative” of SWFs. By master narrative I mean structuring of expectations and premises about the way things work, and ought to work,, and that limit our ability to see possibilities beyond the conceptual framework of the master narrative itself (Lyotard 1979). It defines the realm of legitimate discourse and analysis about its object. In this sense a master narrative serves as a lens (ideology or conceptual basis) through which one can “make sense” of SWFs and around which analysis (especially social science and political analysis) and theory tend to be structured. The other two are alternative narratives that sometimes layer and sometimes seek to displace the master economics narrative.
Critical to the exercise will be an examination of the possibility that within a general framework of each of these SWF narrative framework, individual and regional variations are forming that may be quite important in understanding the behaviours and constraints within which SWFs operate. If that is the case, then the key to understanding regionalization, and the character of the logic of SWF organization and operation, lies in the conceptual narratives through which these entities are understood, and thus understood, structured. That exercise is, in turn, meant to suggest the direction and limits of generalized regulatory efforts. Furthermore, a study on this topic under a comparative law perspective has not been made yet, and it appears to be extremely useful for understanding differences – on structure, accountability, transparency, governance, but also on purposes – based on different legal traditions. A study on such regional models – if they really exist, what they consist of, and how can they be, compared with international benchmarks - is becoming urgent. Finally, and briefly, a comparative analysis on the way states use SWFs or SOEs would be highly valuable in order to better understand states’ investment practice.
As a consequence, while there is a certain value to regionalization models as a basis for SWF analysis, geographic regionalization may not be the most useful analytical framework through which to create SWF taxonomies. Yet, considered beyond the organizing principles of geography, it is perhaps possible to discern the emergence of regionalization on the basis of conceptual territories. Beyond the purported primacy of the organizing principles of an economics-based master narrative, it is possible to discern regionalization grounded in the premises of law, on the one hand, and politics on the other. What regionalization does suggest is that globalization may indicate a realignment of regions, away from characteristics based on territorial proximity to regionalization grounded in more abstract boundaries—stage of economic development, integration in global networks, or political structures. As a consequence, the traditional taxonomies of comparative law, grounded in distinctive legal traditions of regulating states, may become less relevant within the new boundaries being drawn by globalization.
My thesis is that geographic proximity alone does not explain the variation in SWF form, though political and cultural affinity may. Instead, the distinctive narratives within which SWFs are conceptualized produce forms of regionalization that provide a powerful tool for structuring analysis of differences among national SWF models. In particular, the “regional” categories discernible through the distinctive lenses of the economic objectives master narrative and the alternative legalist and state corporatist narratives, produce clearly distinctive “regions” of SWFs, grounded on the logic of the narrative rather than on the geographic home of the SWF. Of course, future research is necessary to develop a robust understanding of regionalization as a factor in SWF operation, and the extent to which regionalization may affect efforts to regulate SWFs. Yet it is possible, within these SWF narratives, to discern national patterns in ways that provide coherence between national economic cultures and the behaviours of their respective SWFs. Each produces its own approach to SWF regionalism. But each tends to ignore the heterogeneity of SWF form and operation (which aligns with the anarchy and polycentricity of globalization (Backer 2012)). More importantly each serves to reinforce power structures that are used instrumentally—in this case to suggest a grand theory of SWF legitimacy and the conditions under which it can be realized (Backer 2009).
Part II considers the three principal narratives within which the logic and premises of SWFs are constructed, and through which they are organized and disciplined. The principal focus will be on the master narrative. The master narrative focuses on SWF as a tool of national economic welfare, that is on the role of the state in intervening in private financial markets outside and within its home territory (al-Hassan et al. 2013). The discourse is framed through economic concepts of risk. That focus has significant effects on the way on which the organizational variations permitted are understood and constructed. The legalist narrative is the most traditionalist form of conceptualizing SWFs (Bassan 2010). It is grounded on the formal placement of SWFs within the premises of the law-state, as national legal entities and as subjects of international law (Backer 2012). Distinctions in the form of organization and its operations tend to serve as the discursive foundations for thinking about SWFs. The state corporatist narrative re-asserts an older dirigiste turn in economic management. Its focus is on function, one that collapses the 20th century divisions between public and private spheres and in which the state can as easily regulate through market participation and through the traditional levers of law making (Backer 2013). It also provides a narrative through which the state can now deploy private markets for public policy including the protection of its political interests at home and abroad.
Part III examines regional variations among SWFs within these narrative conceptual frameworks. It tests the idea that regional variations among SWFs are arising and that they might be explained better by narrative differences than by regional differences in legal systems, politics, or other factors. It then considers whether the characteristics of these representative SWFs might suggest categorization on the basis of something other than, or in addition to, regional differences, or that regional differences might serve as a proxy for distinctive groupings of characteristics. Each of these narratives suggest regionalization, but each of very different sorts. All three contribute in significant ways to the merger of public and private governance systems touching on social, cultural and economic rights (Backer 2008) Even the United States may be toying with the idea of a national fund (we have state funds) ostensibly as an economic stabilization mechanism (Aziz 2014). The notion of regulation through markets intervention as a private player pursuing public interest appears to be strengthening. But differences within regions may be as important in understanding SWFs as similarities.