Saturday, January 06, 2018

Just Published: "Sovereign Wealth Funds, Capacity Building, Development and Governance," Wake Forest Law Review 52(4):735-780 (2017)

I am happy to announce the publication of "Sovereign Wealth Funds, Capacity Building, Development and Governance," which appears in the Wake Forest Law Review 52(4):735-780 (2017).  The article considers sovereigns wealth funds in a new environment in which what had been a relatively straightforward device has become enmeshed in complex webs of finance, regional politics, and global production.  It considers the ways that emerging forms of SWF forms could be used by African states to enhance their autonomy and development. 

The Abstract and Introduction follow.  The article can be accessed here and here.

"Sovereign Wealth Funds, Capacity Building, Development and Governance" 
Larry Catá Backer
Wake Forest Law Review 52(4):735-780 (2017)

Abstract: Though operating in some form or another for over half a century, sovereign wealth funds (SWFs) did not become an object of general attention until the early part of the 21st century when a combination of the need of developed states for investment and the growing acceptability of state investment in private markets abroad made them both threatening and convenient. Assured by the framework of the Santiago Principles most states now view SWFs as a useful multi-purpose sovereign investment vehicle. Yet over the last decade or so, SWFs appear to have developed the potential to become an important instrument in good governance and development, especially for resource rich and capacity poor developing states. Following the lead of Chile, and with the patronage of IFIs, these SWFs have begun to serve objectives as and with development banks both within and beyond their home state. This paper considers the capacity of SWFs to serve ends beyond mere fund value maximization as envisioned in the Santiago Principles. It explores the value of SWFs as a means of enhancing governance capacity in weaker states, its utility in enhancing development objectives, the emerging landscape of joint ventures among SWFs for development and their intersections with emerging infrastructure and development banks, and their importance in enhancing the operationalization of emerging international business and human rights standards not only within their own organizations but through their investment activities. A brief assessment of these trends ends the paper. It develops a set of transformative changes in approaches to SWF instrumentality that SWFs, especially the smaller SWFs and those in developing states, with a focus on Africa, might deploy in structuring and operating their SWFs within a globalized economic order. These strategies are meant to avoid the circular characteristics of current discussions grounded on premises of finance instrument silos and state based systems that no longer accord with the realities of, and fail to take advantage of the possibilities now offered through, global finance and can be grouped into the three transforming categories suggested in Section III: regionalization strategies; financial objectives strategies; governance strategies.The Article ends by suggesting  that it may be time to move from the constraining language of SWFs to the more realistic law of sovereign investing.


A peaceable kingdom:[1] once upon a time, and not so long ago, there existed the Empire that is (or was) Globalization, one made up of many kingdoms woven together into a single transnational order. While there was order, there was little peace and the Empire was constantly on the defense against monsters spawned from out of itself, and thus spawned, such monsters might be set free to terrorize the inhabitants of those many kingdoms that together constituted this transnational order. With the rise of each monster, all would seem lost, or at least diminished. But for every beast whose ravings threaten the good order of the global system, the great defenders of the transnational order could wield regulatory reform, like music in William Congreve’s play, The Mourning Bride, with “[c]harms to sooth a savage B[r]east, To soften Rocks, or bend a knotted Oak.”[2] But could all beasts be so domesticated by the sonorous melodies of reform that preserved the good order of the system itself?

Enter the beast: When the state is itself the beast that seeks both the protection of Globalization and its undoing, the protection of the good order of the transnational system becomes more complicated, against which the tonics may have little effect. Enter sovereign wealth funds (“SWFs”); though operating in some form or another for over half a century,[3] SWFs did not become an object of general attention until the early part of the twenty-first century when a combination of the need for developed states for investment and the growing acceptability of state investment in private markets abroad made them both threatening and desirable.[4] This was the beast set loose on the kingdoms, especially those realms grown fat on the profits of global production, but that now found themselves at the mercy of a monster whose potential appetite could reduce these cash starved realms to the sort of penury they could not contemplate—at least not contemplate if they meant to keep their kingdoms stable and their heads on their shoulders. SWF money could prop up failing markets in the West,[5] but it could also be used to control Western apex corporations,[6] and thus indirectly threaten the authority of Western states—that was the essence of the fear at the time of the Great Recession of 2008.[7]

And how to soothe this beast?: The approach embraced was centered on the crafting of a narrative that would both provide food to the beast and put the monster to work for the preservation of the realms which it might otherwise have threatened. That master narrative[8] both framed a rational understanding of the sovereign wealth fund, and embedded model or idealized SWFs within emerging global financial systems.[9] A SWF was conceived in a form that served the needs of the host states into which investment was injected, as well as the home state that sought to make money from these investments.[10] With a focus on money, the political threat of the SWF could be diffused.[11] No longer a threat, the beast became an ox, and its masters were now welcomed into the club of those who ate well—and they have, eaten well that is.[12] And its story—of its apparent threat and the manner of the breaking of the beast—shearing its monstrosity for the stoic utility of the ox, became one fit for retelling as an important marker of the scope and triumph of the global financial master narrative and the domesticated SWF’s role within it.[13]

Thus, the beast that was the rogue SWF served two purposes. The first purpose was its contribution to the productivity of capital and investment across global markets, enriching those societies in which it might graze—as long as it played by the rules. The second purpose was its contribution to the mechanics and language of narrative and its articulation of the mechanisms of the regulatory order (in soft and hard national and international rules) that served the domesticated beasts as yoke and plough. The kingdom that is Globalization also generates stories of triumph over threats to the good order of the global political-economic and social systems.[14] These are the stories elites like to tell themselves over what passes for the campfires of community bonding—academic conferences, meetings of eminent persons at national and international organizations.[15] These are also the stories that help mask the sausage making that is regulatory governance in this age[16]—an age that might itself be coming to an end[17]—of global regulatory networks that provide the basis of good order for transnational economic activity.[18]

The nature, features, and character of this master narrative that reframed discourse and activity were developed around two primary premises. The first created a strong case of classification that made the SWF, so defined, amenable to management that would reduce its potential threats to good order. This classification system distinguished between the beast—which might forage and feed upon the financial instruments of foreign states—and other financial instrument livestock stomping around global financial and operational markets.[19] SWFs were to be encased in a precise and narrow definition,[20] which excluded both State Owned Enterprises (“SOEs”)—whose taming and use would be dealt with through a different regulatory narrative—and other forms of investment vehicles that feel outside the definition.[21]

The second encompassed the even larger project of socialization muted for what the political community constituted the most dangerous aspects of SWFs. The principles that emerged as the bars of the cage that made the SWF palatable had a single object—to de-nature the public element of the mechanism and to produce the illusion—and perhaps sometimes the reality—that these instruments would operate on the same basis as their non-state analogues.[22] That provided some advantages to the host states—the power to regulate the activities of these instruments in their home territories like other private enterprises, and the right to develop systems that might allow them to void such investments as they deemed threatening.[23] These usually were meant to protect sensitive industries, but could also be used to protect national development schemes.[24] There were some odds and ends to be sure. The issue of sovereign immunity required some action. The issue of state subsidies and of the need for a wall between the political and investment arms of the state also had to be considered.[25]

What was then required was a simple and straightforward application of well-worn hard and soft law regimes to tame the SWF, or at least to create a more or less fungible investment vehicle that could be regulated and evaluated much like any other private investment fund.[26] All of this was nicely framed within the general principles developed at the height of that epoch, now sometimes called the Great Recession, when the lust of western states for investment inflows into their capital markets exceeded their fear of rapidly developing and cash flush states now seeking to project their financial power into the capital markets abroad.[27] This was undertaken by a collective allegiance to the principle that such states would forego the use of their financial power for political ends by projecting investment as an enhanced weapon of international relations.[28]

The result was the compromised settlement that are the Santiago Principles.[29] These twenty-four principles were affirmed by the International Working Group of SWFs (“IWG”) and welcomed by the International Monetary Fund’s (“IMF”) International Monetary Financial Committee in 2008.[30] The IWG’s successor organization, the International Forum of Sovereign Wealth Funds (IFSWF), formed in 2009.[31]

To some extent, the Santiago Principles have proved useful.[32] Among the Santiago Principles’ more important uses has been as a global centering element around which rational discussion could be organized.[33] The Santiago Principles produced—or better, they reflected—an ideology of sorts, one which was framed around a core set of principles:

To help maintain a stable global financial system and free flow of capital and investment; To comply with all applicable regulatory and disclosure requirements in the countries in which SWFs invest; To ensure that SWFs invest on the basis of economic and financial risk and return-related considerations; and To ensure that SWFs have in place a transparent and sound governance structure that provides adequate operational controls, risk management, and accountability.[34]

That ideology has been furthered through the tireless work of its own quasi-governance apparatus.[35] The Secretariat that was created to support the project of the Santiago Principles has become an important source of useful storytelling and examples of appropriate conduct.[36]

Assured by the narrative framework that was encapsulated in the Santiago Principles, most states could view SWFs as useful limited-purpose sovereign investment vehicles.[37] As such the privileged sovereign investment fund (“SIF”) was meant to be constrained within the borders of the now precisely defined SWF. As Allie Bagnall and Edwin Truman suggested in 2011, the Santiago Principles represented an “admirable but flawed transparency.”[38] The flaws, of course, provided states, civil society, and academics much food for thought.[39] Transparency flaws might also prove useful as metrics for gauging the performance of SWFs as a class.[40]

Yet, over the last decade or so, SWFs appear to have developed the potential to become an important instrument in good governance and development, especially for resource-rich and capacity-poor developing states. Following the lead of Chile, and with the patronage of International Financial Institutions (“IFIs”), these SWFs have begun to serve objectives as and with development banks both within and beyond their home state.[41] They are also viewed not merely as a vehicle for training in fiscal discipline, but also as a means through which anti-corruption strategies can be realized.[42] They also appear to be useful as the means through which state-to-state development ventures may be undertaken.[43] Taken together, these movements appear to move SWFs back into its more general SIF form.

This Article considers the capacity of SWFs to serve ends beyond a strict economic role to maximize fund value, which describes the core ideology that is envisioned in Santiago Principle 19 envisions.[44] The Article then considers the continuing relevance of the Santiago Principles as a basis for ordering and supporting legitimacy structures for state SIFs. To that end it, examines the principal emerging alternative or supplemental ends for which SWFs are created (and the ideologies underlying them). These include the following: (1) the value of SWFs as a means of enhancing governance capacity in weaker states; (2) SWF utility in enhancing development objectives; (3) the emerging landscape of joint ventures among SWFs for investment, development, and enhancing economic political objectives abroad along with the intersection of these objectives with emerging roles of infrastructure and development banks; and (4) the importance of SWFs in enhancing the operationalization of emerging international business and human rights standards not only within their own organizations but through their investment activities. Section I considers the emerging realities on the ground. Particular attention will be paid to SWFs as means of projecting state policy through its investment decisions and as an active shareholder, SWFs as development funds, SWF joint venturing in projects with other SWFs, SWFs as owners or controlling shareholders of SOEs, and SWFs as a means for strengthening governance in weak governance zones. Section III then considers the compatibility of these changes within the normative framework of the Santiago Principles and some emerging regulatory issues—from transparency initiatives in hard law, to national extraterritoriality projects, to the emerging business and Human Rights frameworks in operations and financial transactions. A brief assessment of these trends ends the Article.


[1]. Edward Hicks, Peaceable Kingdom (oil on canvas) National Gallery of Art, Washington, D.C. (1834)
/art-object-page.59908.html (last visited Sept. 12, 2017).

[2]. William Congreve, The Mourning Bride act I, sc. 1, 9 (Glasgow: 1751) (1697).

[3]. See Simon Johnson, The Rise of Sovereign Wealth Funds, Fin. & Dev., Sept. 2007, at 56, (explaining the history of SWFs); see also Joseph J. Norton, The “Santiago Principles” and the International Forum of Sovereign Wealth Funds: Evolving Components of the New Bretton Woods II Post-Global Financial Crisis Architecture and Another Example of Ad Hoc Global Administrative Networking and Related “Soft” Rulemaking?, 29 Rev. Banking & Fin. L. 465, 472–78 (2010).

[4]. See Larry Catá Backer, Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience, 19 Transnat’l L. & Contemp. Probs. 3, 24 (2010).

[5]. Eric Langland, Misplaced Fears Put to Rest: Financial Crisis Reveals the True Motives of Sovereign Wealth Funds, 18 Tul. J. Int’l & Comp. L. 263, 264 (2009).

[6]. Id.

[7]. See id.; see also Larry Catá Backer, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, 41 Geo. J. Int’l L. 425, 474–82 (2010); Luca Schicho, Pride and Prejudice: How the Financial Crisis Made Us Reconsider SWFs, 2 Goettingen J. Int’l L. 63, 69 (2010); Robert Rich, The Great Recession, Federal Reserve History, (last visited Sept. 26, 2017).

[8]. Jean-Francois Lyotard, The Postmodern Condition 3 (Manchester Univ. Press 1984) (1979), (explaining a master narrative is a theory of postmodernism that posits a societies storytelling in a historical sense, which centers or focuses on that societies’ particular point of view).

[9]. For a discussion of the SWF master narrative, see Larry Catá Backer, SWFs in Five Continents and Three Narratives: Similarities and Differences, in Research Handbook on Sovereign Wealth Funds and International Investment Law 57, 57–98 (Fabio Bassan ed., 2015).

[10]. Róbert Csoma, Appreciation of the Role of Sovereign Wealth Funds in the Global Economy, Pub. Fin. Q. no. 2, 2015, at 270, 275,

[11]. Id. at 285.

[12]. Mathias Okwe, Sovereign Wealth Fund Records N5.17b Profit, The Guardian (Sept. 8, 2015), (discussing SWFs located in Nigeria); see also Norway’s Sovereign Wealth Fund Books $30 Bln Profit in Third Quarter, Reuters (Oct. 7, 2016),

[13]. See Csoma, supra note 10, at 270–87.

[14]. Larry Catá Backer, Economic Globalization Ascendant: Four Perspectives on the Emerging Ideology of the State in the New Global Order, 17 La Raza L.J. 141, 145 (2006).

[15]. Cf. Neil Gross and Crystal Fleming, Academic Conferences and the Making of Philosophical Knowledge, in Social Knowledge in the Making 151 (Charles Camic et al., eds., U. Chicago Press 2011).

[16]. Org. for Econ. Co-operation & Dev. Inv. Div., Sovereign Wealth Funds and Recipient Countries—Working Together to Maintain and Expand Freedom of Investment (2008),

[17]. See Larry Catá Backer, The 45th Presidency and Multilateral Treaties—Fear, Loathing and a Repudiation of 20th Century Americanism, L. End Day (Feb. 2, 2017, 10:53 PM),

[18]. See, e.g., Anne Marie Slaughter, A New World Order (2004); Thierry de Montbrial, For a New World Economic Order, Foreign Aff. (Oct. 1, 1975),; Anne Marie Slaughter, The Real New World Order, Foreign Aff. (Oct. 1997),

[19]. Veljko Fotak, Xuechen Gao & William Megginson, A Financial Force to Be Reckoned With? An Overview of Sovereign Wealth Funds 4 (Eur. Corp. Governance Inst., Working Paper No. 476/2016, 2016),

[20]. Id. at 8.

[21]. See id. at 8.

[22]. See id. at 9.

[23]. See id.

[24]. See id. at 7.

[25]. See id. at 9.

[26]. See Larry Catá Backer, “The Future of Sovereign Wealth Funds”: Notes From the Symposium Sponsored by the Wake Forest Law Review, Law at the End of the Day (Mar. 24, 2017, 10:06 AM),

[27]. Id.

[28]. Id.

[29]. Int’l Working Grp. of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices: “Santiago Principles” (Oct. 2008) [hereinafter Santiago Principles].

[30]. Id. at 1–2, 7–9.

[31]. See Kuwait Declaration, Int’l F. of Sovereign Wealth Funds (Apr. 6, 2009), (establishing the IFSWF).

[32]. See Int’l Forum of Sovereign Wealth Funds, Implementing the Santiago Principles: 12 Case Studies 15, 19, 23, 37, 49 (Nov. 2016), (analyzing the positive values of the Santiago Principles).

[33]. Id. at 5, 23.

[34]. Santiago Principles, supra note 29, at 4.

[35]. See Who We Are, Int’l F. Sovereign Wealth Funds, (last visited Sept. 12, 2017) (explaining the IFSWF has its own small secretariat through which it produces knowledge that elaborates the fundamental ideology of the Santiago Principles themselves).

[36]. See Santiago Principles, supra note 29, at 4; see also Int’l Forum of Sovereign Wealth Funds, Santiago Principles: 15 Case Studies 66 (Nov. 2014),

[37]. Allie E. Bagnall & Edwin M. Truman, IFSWF Report on Compliance with the Santiago Principles: Admirable But Flawed Transparency, Peterson Inst. for Int’l Econ. (Aug. 2011),

[38]. See id.

[39]. See Sven Behrendt, Carnegie Endowment for Int’l Peace, Policy Outlook: Gulf Arab SWFs—Managing Wealth in Turbulent Times 2–4 (2009),; Research Handbook on Sovereign Wealth Funds and International Investment Law (Fabio Bassan ed., 2015); Larry Catá Backer, Regulating Financial Markets: What We Might Learn From Sovereign Wealth Funds, in Reshaping Markets: Economic Governance, the Global Financial Crisis and Liberal Utopia (Bertram Lomfield et al. eds., 2016); Jason Buhi, Negocio de China: Building Upon the Santiago Principles to Form an Effective International Approach to Sovereign Wealth Fund Regulation, 39 H.K. L.J. 197, 202–03 (2009); Anna Gelpern, Sovereignty, Accountability, and the Wealth Fund Governance Conundrum, 1 Asian J. Int’l L. 289, pin? (2011); Ashby Monk, Recasting the Sovereign Wealth Fund Debate: Trust, Legitimacy, and Governance, 14 New Pol. Econ. 451, 452 (2009); Joseph J. Norton, The ‘Santiago Principles’ for Sovereign Wealth Funds: A Case Study on International Financial Standard-Setting Processes, 13 J. Int’l Econ. L. 645, 649–50 (2010); Paul Rose, Sovereign Wealth Fund Investment in the Shadow of Regulation and Politics, 40 Geo. J. Int’l L. 1207, 1208 (2009); Schicho, supra note 7, at 69–70; Edwin M. Truman, Sovereign Wealth Funds: Is Asia Different? (Peterson Inst. for Int’l Econ., Working Paper No. 11-12, 2011),

[40]. Bagnall & Truman, supra note 37.

[41]. See Implementing the Santiago Principles: 12 Case Studies, supra note 32, at 19.

[42]. Thomas Holt, Jr., To Be or Not To Be: Sovereign Wealth Funds Face Increasingly Complex Legal Challenges, Fletcher Network for Sovereign Wealth & Global Cap., (last visited Sept. 12, 2017).

[43]. See Santiago Principles, supra note 29, at 4.

[44]. Santiago Principles GAPP 19 should be read in conjunction with GAPP 18 that states that investment policy ought to be based on sound portfolio management principles.

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