Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets: Introduction

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is tp find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post includes an Introduction to this project, a Table of Contents, and a list of prior series.


Table of Contents

Introduction (this post)

Posted Paper: "Sovereign Wealth Funds in Five Continents and Three Narratives: Similarities and Differences."

Part 1: Israel SWF

Part 2: Ghana Petroleum Funds

Part 3: Chile Pension Reserve Fund and Economic and Social Stabilization Fund

Part 4: Mauritania National Fund for Hydrocarbon Reserves

 Part 5: Papua-New Guinea SWF

Part 6: Iran National Development Fund

Part 7: Vietnam State Capital Investment Corporation

Part 8: Indonesia Investment Agency

 Part 9: Australia Future Fund

 Part 10: Palestine Investment Fund

 Part 11: Italy Strategic Fund

 Part 12: Korea Investment Corporation

 Part 13: Kuwait Investment Authority

 Part 14 Abu Dhabi Investment Authority

 Part 15 Qatar Investment Authority

 Part 16 Brazil Sovereign Wealth Fund

 Part 17 Russian SWFs

 Part 18 Fundo Soberano de Angola (Angola SWF)

 Part 19 Venezuela SWFs (Stabilization (FEM) and Development (Fonden))

 Part 20 Norway SWFs (Pension Fund Global, Pension Fund Norway and Bond Fund)

 Part 21 Sovereign Wealth Fund of Gabon (Fonds Souverain de la Republique Gabonaise)

 Part 22 State Oil Fund of Azerbaijan Republic (SOFAR)

 Part 23 Mongolia Fiscal Stability Fund (MFSF)

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Introduction

This series builds on some ideas I have been working through for a number of years relating to the elaboration of increasingly interlinked structures of global market regulation by states, and the emergence of states as important participants in the global markets they are seeking to regulate. This convergence of the regulatory function of states (preserving market integrity and macroeconomic stability), and the market participant of states (projecting public power across borders as a commercial actor), has produced a framework for sovereign investing that contributes to the transformation of the law-state system of the 10th century into something quite distinct (Backer, Larry Catá, On the Tension between Public and Private Governance in the Emerging Transnational Legal Order: State Ideology and Corporation in Polycentric Asymmetric Global Orders (April 16, 2012) ).  The general framework of the analysis has been choice of law related, but not in the traditional sense. Traditionally, the activities of sovereigns, either as regulators or participants did not raise issues of either choice or conflict of laws. But all that is changing. Modern globalization has effectively introduced a global advance toward free movement of capital and to greater protection of private activity from regulation. At the same time, states have sought to act more energetically as private as well as public actors. In a global legal order in which the value of state sovereignty has diminished and the cross border element of transactions has increased, states can extend their authority as private actors to an extent difficult when they seek to regulate as sovereigns. States privatize their traditional activities or seek to regulate indirectly by acting in markets. (Backer, Larry Catá, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law. Tulane Law Review, Vol. 82, No. 1, 2008).

In the form of sovereign wealth funds (SWFs), states project economic power beyond their borders. But some states also use private market activities abroad to transform the way they can project their own legal regimes beyond their territories, and in the process, contribute to a fundamental re-orientation of the relationship between state, market, and law. The object is not merely to maximize the welfare of the funds ultimate investors, the people of Norway (through its state apparatus), but also to use the NSWF to advance public policy in the international sphere and within the domestic legal systems of other states. Private power is deployed toward the ends of public governance; public power is deployed in turn toward the ends of private governance across the global marketplace for corporate ownership; markets become sites for legislation. The NSWF is evidence of a new form of complex and cooperative regulation, one in which the state itself serves as a nexus point for the domestication of international norms and its internationalization through projections of governance power in private markets. (Backer, Larry Catá, Sovereign Investing and Markets-Based Transnational Rule of Law Building: The Norwegian Sovereign Wealth Fund in Global Markets. American University International Law Review 29(1):1-122 (December 2013).

The financial crisis that started in 2007 has brought into sharper focus a set of rising global financial actor - the sovereign investor. In the form of sovereign wealth funds (SWFs), sovereigns have become an important player in global financial markets and its stability. Over the last decade they have become more visible and more aggressive in the scope and form of their interventions in global finance. In the form of state owned enterprises, sovereigns have begun to operate indirectly through subordinate legal persons that operate like privately held multinational corporations. In that form, sovereigns are becoming a more significant presence in global markets as owners as well as investors. More importantly, sovereign owners have begun to coordinate their economic activities for economic and sovereign goals. Consequentially, crisis has produced a dynamic element in the evolution of the global economic system. (Backer, Larry Catá, Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience. Transnational Law & Contemporary Problems, Vol. 19, No. 1, 2009). But the difficulty has been the need to overcome the inherent sovereign character of state investment, central to the definition of SWFs.

SWFs thus proceed from definition to conundrum. If SWFs are grounded in the reality of their formal connection to states, and if states are deemed sovereign in their actions, then it might be reasonable to assume that such funds could not be treated like private investment funds. To bridge that gap, it was necessary to find a way to disconnect SWFs from the state and sovereign activity, and to model private activity in a way that made it possible to construct a set of behavior principles that might produce an equivalence between SWFs and private investment vehicles. The first was accomplished by creating a functional distinction between state and SWF, a distinction unnecessary for traditional sovereign investment. The second was grounded in the presumption that there is a way of distilling the essence of private investment behaviors sufficiently precisely to distinguish those behaviors from sovereign conduct. (Backer, Larry Catá, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment (May 4, 2009). Georgetown Journal of International Law, Vol. 41, No. 2, 2009).

There have been a number of excellent studies that have sought to provide an overarching structure for understanding SWFs from the perspective of law (Bassan, Fabio. 2011. The Law of Sovereign Wealth Funds ((Cheltenham, Eng.: Edward Elgar)) and macroeconomic policy (Castelli, Massimiliano and Fabio Sacciavillani. 2012. The New Economics of Sovereign Wealth Funds (Chichester, IK: John Wiley & Sons)). The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

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Themes from prior years:

2009--The Ruminations Series:

The Ruminations Series in 2009 sought to develop a set of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope was that, built up on each other, the series would provide a matrix of thoughts that together might lead the reader in new directions. Ruminations continue to be produced form time to time. 

2010--The Business and Human Rights Series:

For 2010, this site introduced a new series--Business and Human Rights. The series took as its starting point the issues and questions raised by John Ruggie, the United Nations Special Representative of the Secretary-General (SRSG) on business and human rights, in a global online forum. Each of the Essays considered one of the topics raised in the online consultation. My hope was to help generate discussion and to encourage further discussion of the issues within the framework of the consultation framework.

2011--Norwegian Sovereign Wealth Fund Jurisprudence Series:

For 2011, this site introduced a new series of integrated essays--Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model. The object of this series to to consider the work of the Ethics Council of the Norwegian Sovereign Wealth Fund. The thesis of this series is this: The Norwegian Sovereign Wealth Fund (NSWF ) investment program is grounded in the application of a set of Ethical Guidelines adopted by the Storting (the Norwegian Legislature) and enforced through an Ethics Council charged with determining whether a company should be excluded from investment by the NSWF. The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment. That jurisprudence may contribute significantly both to the development of transnational social norm standards and affect the way domestic corporate law is understood. 

2012--The Thought of Zhiwei Tong (童之伟) Series:

For 2012, this site introduced the thought of Zhiwei Tong (童之伟), one of the most innovative scholars of constitutional law in China.   Professor Tong has been developing his thought in part in a essay site that was started in 2010.  See, Larry Catá Backer, Introducing a New Essay Site on Chinese Law by Zhiwei Tong, Law at the End of the Day, Oct. 16, 2010.  Professor Tong is on the faculty of law at East China University of Political Science and Law.  He is the Chairman of the Constitution Branch of the Shanghai Law Society and the Vice Chairman of the Constitution Branch of the China Law Society. The  Zhiwei Tong (童之伟) Series focused on translating some of Professor Tong's work on issues of criminal law and justice in China, matters that touch on core constitutional issues.  Each of the posting will include an English translation from the original Chinese, the Chinese original and a link to the original essay site. 

2013--The U.S. National Contact Point--Corporate Social Responsibility Between Nationalism, Internationalism and Private Markets Based Globalization

The object of this study is to better understand the evolving relationship between states (and domestic law) and international standards (including those which relate to treaties or other norms rejected for transposition into the domestic legal order), its effects on the corporations and the construction of a regulatory space that is neither purely legal, nor purely public but collaboratively intermeshed.  See Larry Catá Backer,"Private Actors and Public Governance Beyond the State: The Multinational Corporation, the Financial Stability Board and the Global Governance Order,"  Indiana Journal of Global Legal Studies 18(2):751 (2011). The thesis of this study is this: the United States has managed to resolve the tension between the conventional corporate governance approaches of the OECD's Principles of Corporate Governance  and its internationalist and stakeholder approaches of the MNE Guidelines. That resolution is grounded in bifurcating the OECD's corporate governance project into a domestic and an foreign relations part.  The OECD project is undertaken as an instrument of domestic policy with respect to the Principles of Corporate Governance.  But the stakeholder model of the MNE Guidelines is restricted for use only as an instrument of foreign policy. This bifurcation has significant consequences both for the way in which the United States continues to resist the transposition of the standards of the MNE Guidelines into U.S. domestic law and the way in which the work of the NCP is severely narrowed to avoid even the appearance of lending the MNE Guidelines anything like the character of governance norms.  Good enough for less powerful and less developed states, it has little role to play within the United States.  More an instrument of foreign policy than of changes in customary business practice the United States works hard to ensure that the MNE Guidelines do not develop any character of law, and that it remains undeveloped except as a set of aspirational goals.