by Jeremy Leong
Much of the sovereign wealth fund (“SWF”) debate has taken place in the international context and understandably so. That SWF investments take place across national borders continues to raise questions relating to their impact on the stability of the international financial system and whether or not such investments are commercially or strategically motivated.
Existing international regulatory frameworks relating to SWFs are at best weak and are expected to remain so. Attempts by the International Monetary Fund to formulate international regulations for SWFs have so far met with limited success as the resulting Santiago Principles are only “soft law” and are not binding upon states or SWFs although they may evidence nascent or evolving customary international law.
This paper argues that those pre-2008 concerns are no longer salient. Instead of focusing on the most effective way international and/or foreign regulations can discipline SWF investment activity, we need to take an inward analytical turn in the debate. This inward turn should regard domestic legal and structural factors within states with SWFs (“SWF States”) as the most effective constraints on SWF behavior.
This paper preliminarily raises three reasons for this:
First, the financial crisis lessened the demand for discipline over cross-border investments by SWFs. Host states, once opposed to SWF investment within their borders, are now more keen to attract such investment so as to increase levels of liquidity in their financial systems.
Second, there is doubt that the international regulatory framework related to SWFs can be effective in disciplining SWF behavior.
Third, anecdotal evidence from SWF behavior in the course of the continuing financial crisis suggests that SWFs, or at least the interest groups who influence SWF activity, may be more sensitive to domestic constraints rather than external pressure. Accordingly, it may be more useful for the debate to take an inward turn and look at the domestic legal and structural constraints on SWFs. As the global financial crisis continues, SWFs will remain under pressure to balance their desire to invest globally with the vigilance to stabilize their home economies.
This paper briefly sketches an analytical framework which may be used to discuss domestic regulatory constraints on SWFs investments. It will then conclude with a brief discussion on the implications of an inward turn on future research into SWF regulatory policy.