Gesture and Sovereign Wealth Funds: A View From Sydney

Friedrich Nietzsche's old insight about gesture--about the human predilection for gesture over substance -- appears more apt than ever in the context of establishing a multilateral governance framework for sovereign wealth funds.   The importance of gesture is likely to be at the core of the International Forum of Sovereign Wealth Funds being held in Australia this week.

The International Forum of Sovereign Wealth Funds (IFSWF) will convene its second meeting in Sydney, Australia on May 6-8, 2010, hosted by the Future Fund of Australia.

The meeting of senior representatives of Sovereign Wealth Funds (SWFs) from more than 20 countries across the world, together with representatives from government agencies and multi-lateral organizations, will review and discuss recent developments in the global economy and challenges in the investment environment going forward.

The IFSWF will issue a short communiqué and hold a press conference at the conclusion of the Sydney meeting.

International Forum of Sovereign Wealth Funds to Meet in Sydney, Australia on May 6-8, 2010

Ashby Monk in his excellent blog site, Oxford SWF Project, recently brought this idea home in his perceptive analysis of the build up to the final communique from this group. 

As an ‘unnamed SWF source’ explains in the FT today:

“That was the issue that gave rise to the whole thing…We responded by adopting the Santiago Principles and now we want to see what the rest of the world is doing about [providing] open, non-discriminatory investment markets.”

What? Hold your horses just a second, unnamed FT source. You are confusing the adoption of the Santiago Principles at the level of the IWG and the Forum with the implementation of the Principles at the level of the SWFs. The two are quite different.

While I think we’d all agree that developing and “adopting” the Principles was a remarkable feat of diplomacy and negotiation at the international level, their long-term success will depend on SWFs’ compliance with them. In other words, I don’t think you can claim to have “adopted” the Santiago Principles just because the IWG agreed on a framework. The funds themselves have to use this framework.

Ashby Monk, Santiago Implementation Falls Short, Oxford SWF Project, May 6, 2010. Monk draws attention to the analysis in an important new work, Sven Behrendt, Sovereign Wealth Funds and the Santiago Principles:Where Do They Stand?, Carnegie Endowment for International Peace, Carnegie Middle East Center No. 22 (May 2010), which offers some important insight into the level of compliance with the Principles.  Monk concludes that

there remains quite a bit of work to be done to move from “adoption” at the level of the IWG / Forum to “compliance” at the level of the SWFs. In fact, Sven finds that there are literally zero (!) SWFs that are 100% “Santiago Compliant” – i.e. not a single SWF has managed to implement all the principles and practices that they themselves crafted and agreed to adopt. While some funds are quite close (such as the New Zealand Superannuation Fund), most fall under the 60% compliance range. Remarkably, some signatories (e.g. Iran) are literally 0% compliant.

Ashby Monk, Santiago Implementation Falls Short, Oxford SWF Project, supra.  

Yet the governance implications for home as well as host states are complex.  Part of the problem is one of linkage.  Bernhardt reminds us that one can consider the Santiago Principles "as an experiment in global governance arrangements could be designed in an increasingly fragmented economic and political global space."  Bernhardt, supra, at 16.   There is an assumption within this analysis that this experiment can succeed only if it is translated into the traditional language of law and, as law, incorporated into the domestic legal orders of legitimately constituted states--both home and host states.  But the context in which the Santiago Principles themselves were developed--under the umbrella of a supra national organization for the purpose of designing confidence building principles of a self regulatory nature--suggests perhaps that the arena within which regulatory efforts should be directed are not localized within states.  It also suggests that the traditional methods of governance--statute, and international convention, but be inadequate.  SWFs represent projections of public power in private markets.

The Santiago Principles were meant to reassure host states that these projections of public power in private markets were not threatening.  Yet their adoption,without more, amounts to  mere gesture.  Their implementation would involve something considerably more substantive--Ashby Monk's principal point.  Like SWF states, host states have also adopted graet principles for the preservation of open private markets.  Indeed, most have done that and more.  It becomes perversely ironic, in that context, to consider the SWF home state complaints about gesture.