Though sovereign wealth funds (SWFs) have been around since the 1950s, they became much more important instruments of global finance with the maturing of the current system of globalization. Their distinguishing feature was their use of state wealth to invest outside their home states. That characteristic, when exercised by large funds (Norway, Singapore, Malaysia) or by powerful states (Russia and China) raised substantial concerns about the use of private markets to leverage public power. The economic turmoil of 2008 and thereafter, along with the advancement of quasi public self regulatory soft law (the Santiago Principles) substantially ameliorated the sense fo threat. immediately before the Originally SWFs raised concern.
By the start of the second decade of the 21st Century, then, SWFs became again he province of specialists, except for some who continued to see the transformative potential of SWFs at the intersection of public and private finance and governance systems. At the same time, SWF objectives appeared to change as well--most recently focusing on the value of SWFs as an internal ordering device. But this change has substantial ramifications, not just for any theory of SWFs but also for their role in the emerging governance systems around the evolving global financial, governmental and legal systems.
Further to that engagement, I have just posted a new paper to the Social Science Research Network (SSRN) that considers an aspect of this issue: "International Financial Institutions (IFIs) and Sovereign Wealth Funds—SWFs as Instruments to Strengthen Governance and Enhance Fiscal Discipline in Developing States." The Abstract, Contents and Introduction follow. A later version will appear in a special issue of Volume 2014 International Review of Law (Qatar University).
International Financial Institutions (IFIs) and Sovereign Wealth Funds—SWFs as Instruments to Strengthen Governance and Enhance Fiscal Discipline in Developing States
Larry Catá Backer
Abstract: Especially since the start of the second decade of the 21st century once more has seen more focused interest in the use of SWFs by home states—less as a means of projecting sovereign financial power outwards and more as a means of internal financial management, and development. What makes this interesting from the perspective of SWF development, is the role of IFIs in SWF development. This essay takes a first look to the way in which IFIs have also begun to use SWFs in their interactions, with a emphasis on developing states. A review of some recent efforts to establish SWFs with a stabilization or development focus suggests the way in which these funds now may better serve the project of fiscal and governance internationalization, and the development of global policy coherence around the fiscal ideologies of IFIs, rather than as an instrument of national policy. Part II briefly sketches the IFI’s interest in and approach to SWFs as a part of their investment, capacity building and rule of law toolkits. Part III then reviews the manifestation of this approach in the development of SWFs in a number of developing states. The essay suggests the ways that stabilization and development SWFs may better serve financial globalization than the particular interest of states establishing them precisely by transposing global standards of fiscal and governance behavior into the internal workings of states. In this sense development and stabilization SWFs serve as an instrument of globalization from the top down (through IFI policy operationalization) perhaps as effectively as SWFs that seek to project national financial power through private market investments abroad. But it also creates the possibility of divergence in SWF character as the consequences of the use of SWFs as governance devices may produce substantial deviation from the traditional organizational parameters of SWFs as instruments of macroeconomic policy.
Sovereign wealth funds (SWFs) have emerged, especially from the start of the 21st century, as important players in global finance. They represent a marked departure from the traditional roles of states and permit political entities, public institutions, to engage in private market transactions beyond their national borders as private market participants. They underline an important element in the development of institutions and systems beyond the state. They also implicate a number of factors in the role of states as structures for the management of economic policy, and as a participant in those markets.
SWFs incarnate and replicate the collisions between two tectonic forces that are grinding their way to a new normative framework of governance and power. On the one side is the state system, grounded in principles of sovereignty and of the fundamental distinction between the state and everything else, founded on formal structures and the respect for territorial borders. On the other side is the emerging system of societally constituted functionally distinct governance organs, grounded in principles of free movement of capital and investment, founded on systems of functional structures in which territory boundaries reference the functional boundaries of self constituted groups.
Though SWFs attract less attention in the popular press than they did before the events of the Arab Spring and related events distracted the media and political elites, they remain an important and increasingly significant actor in the evolution of economic globalization and its consequences for the role of states and non-state enterprises in economic markets. And SWFs have become an integral part of interlocked and network economic relations that in the aggregate give globalization its form. Developed states continue to encourage inbound investment by SWFs, though constrained by their national interests, and sometimes fearful of the political effects of the exportation of financial power.
In recent years SWFs have evolved significantly as investors. SWFs are a not inconsiderable source of foreign direct investment and are investing in a broad spectrum of assets including farmland, airports, energy, finance, real estate, equity markets and have strengthened global economic links by entering into partnerships and joint ventures with private entities and other SWFs. It is no surprise, then, that SWFs have become objects of intense and systematic study. This academic and policy engagement is generally divided among those with an interest in governance structure, fund management, and investment objectives, strategy and implementation. Of particular importance to lawyers and policy analysts are those issues touching on an exploration of emerging governance issues of sovereign wealth funds (“SWFs”). Of particular interest to economists have been the effects of sovereign investing on extraterritorial markets.
But SWFs are not merely of concern to host states, or to home states as a means of strategic sovereign investing, or as a method of levering power in international governance. Especially since the start of the second decade of the 21st century once more has seen more focused interest in the use of SWFs by home states—less as a means of projecting sovereign financial power outwards and more as a means of internal financial management, and development. They have also been seen as vehicles for regional development. Indeed, SWFs have been increasingly seen as important instruments of internal macroeconomic policy. They are both deeply embedded within and outside their home states.
International financial institutions (IFIs) have also begun to consider the value of SWFs in their own activities. The International Monetary Fund was a facilitator in the development of the institutional architecture that led to the development of the influential soft law standards of SWF behavioral principles, the Santiago Principles. Especially in the form of stabilization and savings funds, and development funds, and for fiscal disciplinary purposes, SWFs have been taken up with the IMF’s technical assistance and lending projects for some time. It now appears that IFIs may come to view SWFs as a useful part of the IFI’s lending and capacity building toolkits for developing states that meet certain criteria. At the same time, SWFs have come to view IFIs, like the World Bank, as a potential investment aggregator and conduit.
This essay takes a first look to the way in which IFIs have also begun to use SWFs in their interactions, with a emphasis on developing states. It focuses specifically on the effects of IFI leadership in shaping SWF organization and operation in developing states as it might relate, generally, to the broad governance themes of climate change, corporate governance of portfolio companies, environmental protection, ethical investing, global financial regulation, human rights, regulation of SWFs, renewable energy and sustainable development. Part II briefly sketches the IFI’s interest in and approach to SWFs as a part of their investment, capacity building and rule of law toolkits. Part III then reviews the manifestation of this approach in the development of SWFs in a number of developing states. The central insight of this analysis, and the thesis of this essay is this: a functional examination of SWFs established in developing states (whether or not resource rich) suggests that the expansion of the use of SWFs, driven in part by IFIs, may be creating a fundamental tension as the consequences of SWFs established as a governance device may begin to deviate in substantial respects from SWFs used as an instrument of macroeconomic policy.
 W. Richard and Mary Eshelman Faculty Scholar & Professor of Law, Professor of International Affairs, Pennsylvania State University. The author may be contacted at firstname.lastname@example.org. He is grateful to Professor Joel Slawatsky and the staff of the International Review of Law for their excellent work in putting together this important issue.
 See, e.g., Joel Slawotsky, Sovereign Wealth Funds as Emerging Financial Superpowers: How U.S. Regulators Should Respond, 40 Geo. J. Int'l L. 1239, 1239, 1246-48 (2009)
 See, Larry Catá Backer, The Structural Characteristics of Global Law for the 21st Century: Fracture, Fluidity, Permeability, and Polycentricity, 17(2) Tilburg Law Review177 (2012).
 Udaibir S. Das, Yinqiu Lu, Christian, Mulder, and Amadou Sy, Setting up a Sovereign Wealth Fund: Some Policy and Operational Considerations, IMF Working Paper WP/09/179 (August 2009) (“Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer financial assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.” Id., 5), available https://www.imf.org/external/pubs/ft/wp/2009/wp09179.pdf.
 Larry Catá, Review Essay: Taking a Step Toward a Law for Sovereign Wealth Funds (September 7, 2012). Consortium for Peace Ethics Working Paper No. 2012-9/1, available http://ssrn.com/abstract=2143452.
 See, e.g., Nigeria to start $1B sovereign wealth fund, Boston.com, August 31, 2012 available http://www.boston.com/news/world/africa/2012/08/28/nigeria-start-sovereign-wealth-fund/V2dmU1sdw6y92ywkiEAAON/story.html ("Nigerian authorities pushed for the creation of a sovereign wealth fund as a means to better save the billions of dollars the nation annually earns annual from oil revenues. Opaque budgeting and corruption sees much of the money siphoned away.").
 Cf. Joseph Stiglitz, Making Globalization Work (New York: W. W. Norton & Company; Reprint edition 2007)); Marwan M. Kraisdy, Hybridity or the Cultural Logic of Globalization (Philadelphia, Temple University Press, 2005).
 White House Encourages Sovereign-Wealth Fund to Take Stakes, Wall St. J. (Jan. 27, 2011), http://online.wsj.com/article/SB10001424052748704062604576105952027426.
 In the United States, this interest review is undertaken by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee authorized to review “covered transactions” (transactions that could result in control of a U.S. business by a foreign person), in order to determine the effect of such transactions on the national security of the United States. This system of review is undertaken pursuant to Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (section 721) and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. Part 800. See, e.g., U.S. Treasury Department, Home, Resource Center, International, The Committee on Foreign Investment in the United States (CFIUS) available http://www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx. The political effects can be significant. See, e.g., Ziad Haider, China Inc. and the CFIUS National Security Review, The Diplomat, Dec. 5, 2013, available http://thediplomat.com/2013/12/china-inc-and-the-cfius-national-security-review/.
 See, e.g., Edwin Truman, Sovereign Wealth Funds: Threat or Salvation? (Peterson Institute for International Economics (Peterson Institute for International Economics, 2010).
 See, e.g., by Massimiliano Castelli , Fabio Scacciavillani, The New Economics of Sovereign Wealth Funds (Wiley, 2012).
 See, e.g., Fabio Bassan, The Law of Sovereign Wealth Funds ((Cheltenham, Eng.: Edward Elgar, 2011); Gordon L. Clark, Adam D. Dixon, Ashby H.B. Monk, Sovereign Wealth Funds: Legitimacy, Governance, and Global Power (Princeton University Press, 2013).
 See, e.g., Abdullah Al-Hassan, Michael G Papaioannou, Martin Skancke, and Cheng Chih Sung, Sovereign Wealth Funds: Aspects of Governance Structures and Investment Management, IMF Working Paper WP/13/231 (2013) available https://www.imf.org/external/pubs/ft/wp/2013/wp13231.pdf; Martin Skancke, Hearing on Foreign Government Investment in the US Economy and Financial Sector before the Committee on Financial Services US House of Representatives (March 5, 2008) Available http://www.gpo.gov/fdsys/pkg/CHRG-110hhrg41725/html/CHRG-110hhrg41725.htm.
 See, e.g., essays in The Political economy of Sovereign Wealth Funds (Xu Yi-chong and Gawdat Bahgat eds., Palgrave Macmillan, 2010). Cf., Eliot Kalter and Thomas F. Holt, Jr., Key International Issues for Sovereign Wealth Funds, The Fletcher School Sovereign Wealth Fund Initiative (Spring 2010), available http://fletcher.tufts.edu/CEME/~/media/Fletcher/Microsites/CEME/newpdfs/SWFI_Key_Issues.ashx; Gawdat Bahgat, Sovereign Wealth Funds, An Assessment, Global Policy 1(2):162-171 (May 2010) available http://onlinelibrary.wiley.com/doi/10.1111/j.1758-5899.2010.00008.x/pdf. For an application in the context of a subordinate governmental unit, see, Chamber of Commerce and Industry of Western Australia, Examining the Issues of Sovereign Wealth Funds (2012 Sovereign Wealth Fund Issues Paper) (suggesting that SWFs are on balance not of benefit to developed states or their subordinate units, id., pp. 10-12) available http://www.cciwa.com/docs/advocacy/sovereign-wealth-paper_final.pdf?sfvrsn=2.
 See, e g., Tao Sun and Heiko Hesse, Sovereign Wealth Funds and Financial Stability—An Event Study Analysis, IMF Working Paper WP/ 09/239 (Oct. 2009). Available http://www10.iadb.org/intal/intalcdi/PE/2009/04299.pdf.
 See, e.g., Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - A common European approach to Sovereign Wealth Funds, /* COM/2008/0115 final */ 27 Feb. 2008. Available http://eur-lex.europa.eu/legal-content/EN/ALL/;jsessionid=dq3pTLMJtQgJhfggjqYskf86r2WT9ppzGXhSwkJNHvVMQ7gkZp2v!-1639360510?uri=CELEX:52008DC0115.
 Cf. Larry Catá Backer, Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience, 19(1) Transnational Law & Contemporary Problems 3-144 (2010).
 Cf. Larry Catá Backer, Sovereign Investing and Markets-Based Transnational Rule of Law ￼Building: The Norwegian Sovereign Wealth Fund in Global Markets, 29(1) American University International Law Review 1-121 (2013).
 See, e.g., John Shields and Mauricio Villafuerte, Sovereign Wealth Funds and Economic Policy at Home, in Economics of Sovereign Wealth Funds: Issues for Policymakers (Udaibir Das, Adnan Mazarei , and Han van der Hoorn, eds., Intl Monetary Fund (2010)). See also, Håvard Halland, Alan Gelb, Silvana Tordo, Sovereign Wealth Funds Investing at Home: Opportunity Fraught with Risks, posted to Sovereign Wealth Funds Are Coming Home, Growth and Crisis Blog, World Bank, Jan. 15, 2014. Available http://blogs.worldbank.org/growth/sovereign-wealth-funds-are-coming-home.
 See, e.g., Alan Gelb, Silvana Tordo, and Håvard Halland, Sovereign Wealth Funds and Domestic Investment in Resource-Rich Countries: Love Me, or Love Me Not? The World Bank, Economic Premise, No. 133, Jan. 2014 available http://siteresources.worldbank.org/EXTPREMNET/Resources/EP133.pdf.
 See, e.g., Asim Ali and Shatha Al-Aswad, SWFs and Egypt: A Fresh Look at Infrastructure Funding and Investments, The Fletcher School, Tufts University The Sovereign Wealth Fund Initiative (March 2012).
 See, Abdullah Al-Hassan, Michael G Papaioannou, Martin Skancke, and Cheng Chih Sung, Sovereign Wealth Funds: Aspects of Governance Structures and Investment Management, IMF Working Paper WP/13/231 (2013) available https://www.imf.org/external/pubs/ft/wp/2013/wp13231.pdf; (discusses, among other things, SWF roles in macroeconomic management and the need for close coordination with other macroeconomic and financial policies as well as their role in global financial stability)
 Cf. Michel Aglietta, Sovereign Wealth Funds in the Mutation of Global Finance, CSAF International Conference, Sovereign Wealth Fiunds and Institutional Investors, Abu Dhabi 2013. Available http://economix.fr/pdf/seminaires/crise/ABUDHABI_MA_2013.pdf.
 That institutional architecture, the International Working Group of Sovereign Wealth Funds, “met at IMF Headquarters in Washington, D.C. The meeting facilitated a useful exchange of views among the SWFs, recipient countries, and representatives from the Organization for Economic Cooperation and Development (OECD) and the European Commission. . . . The IWG is comprised of representatives from 25 IMF member countries, and is co-chaired by a senior representative of the Abu Dhabi Investment Authority (ADIA) and the Director of the IMF's Monetary and Capital Markets Department who were selected by the participating SWFs.” International Working Group of Sovereign Wealth Funds is Established to Facilitate Work on Voluntary Principles, Press Release No. 08/01 (May 1, 2008) available http://www.iwg-swf.org/pr/swfpr0801.htm.
 In 2008, the OECD Secretary General explained the nature of the facilitation and the involvement of IPO and IFIs: “A year ago, the G7 called on the IMF and the OECD to explore how sovereign wealth fund investments fit into the global economy. Following that call, in April of this year, the OECD Investment Committee sent the message that recipient countries welcome investment from SWFs, and that they will treat such investments the same as any other foreign investment. Today, the Sovereign Wealth Funds and the IMF have delivered a set of Agreed Principles and Practices about their own transparency and governance.” IMF Ministerial-level Roundtable on the “Santiago Principles” for Sovereign Wealth Funds, remarks by OECD Secretary-General, OECD, 11 Oct. 2008, available http://www.oecd.org/daf/inv/investment-policy/imfministerial-levelroundtableonthesantiagoprinciplesforsovereignwealthfundsremarksbyoecdsecretary-general.htm.
 International Working Group of Sovereign Wealth Funds, Generally Accepted Principles and Practices (GAPP)—Santiago Principles (2008), available http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf.
 “Stabilization funds aim to reduce the impact of volatile revenue on the government and the economy. Savings funds seek to create a store of wealth for future generations.” Jeffrey Davis, Rolando Ossowski, James Daniel, and Steven Barnett, Stabilization and Savings Funds for Nonrenewable Resources Experience and Fiscal Policy Implications, IMF Occasional Paper No. 205 (April 13, 2001), available http://www.imf.org/external/pubs/nft/op/205/.
 For a brief definition, see, e.g., Sovereign Wealth Fund Institute, Strategic Development Sovereign Wealth Fund (SDSWF), available http://www.swfinstitute.org/statistics-research/strategic-development-sovereign-wealth-fund/ (identifying a domestic stabilizer scenario, an industry job creator scenario, a country-corporate alliance scenario, and a resource transfer scenario).
 “The general justification for such funds is that some share of government revenues derived from the exploitation of a nonrenewable resource should be put aside for when these revenues decline, because the price of the resource has fallen, or the resource has been depleted or both.” Id.
 The approach was described in IMF Intensifies Work on Sovereign Wealth Funds, IMF Survey Magazine Online, March 4, 2008. Available http://www.imf.org/external/pubs/ft/survey/so/2008/pol03408a.htm.
 See Howard Schneider, World Bank gets help from sovereign wealth funds to invest in developing nations, Washington Post, April 18, 2010, available http://www.washingtonpost.com/wp-dyn/content/article/2010/04/17/AR2010041702921.html.