A New Breed of Sovereign Wealth Fund?

By Brett Keller

The news moves fast during times of crisis. French President Sarkozy called for a more aggressive French sovereign wealth fund (SWF) to protect domestic institutions from foreign investment just a week ago. But in the midst of all this, it’s worth pausing a moment to think about how far SWFs have come. While some of the funds themselves have been around much longer, the term was invented just a few years ago and only more recently have the funds captured wider attention. SWFs have been fascinating in part because they are seen as new vehicles for the “uphill” investment of capital from developing countries into more established economies, or for “South to South” investment between low-income countries.

But now, led by French President Sarkozy, some are pushing for the development of SWFs to stabilize and protect institutions in developed economies, a role that could not be more different from what most SWFs do today. Advocates who favor investment from the SWFs of nations such as China and the Gulf states see it as a way to tie them into the global economy and create further, mutually beneficent links of interdependence. The Sarkozy Way goes against all of this by providing one more instrument to compartmentalize national economies and reduce international interdependence.

When suspicion about SWFs reached its highest point—maybe about a year ago—the unanimous calls were for nonpolitical investing, driven by fear of scary, “less democratic countries” taking over the business infrastructure of the West. Now some of the same leaders are calling for new funds with blatantly political and nationalistic raisons d’être.

French President Sarkozy’s recent calls for a sovereign wealth fund for France are not going unanswered. Leading the resistance is Germany’s Angela Merkel, who is being pressured by other governments to take a strong stance against the French president (See “EU leaders look to Merkel to stand up to Sarkozy”)

Reacting last week to Sarkozy’s sovereign wealth fund proposal, eurosceptic Czech President Vaclav Klaus — who succeeds Sarkozy as holder of the EU presidency in January — described the plan as “old socialism.”

Skepticism from non-eurozone countries (such as the Czech Republic) can be explained in part by fears that “such a format would supplant the power of the rotating EU presidency, which France holds until January 2009 when the Czech Republic…will take over.”

(Though some Europeans have been lukewarm to the idea, other voices have popped up to say that new, seemingly protectionist SWFs may be the way of the future. David Judson, editor in chief of the Turkish Daily News, notes that Turkey may find an enlarged role for OYAK, its military pension fund. See “March toward the sound of economic gunfire”.)

Ironically, SWFs, the very state-controlled entities that gave some hope that more nations would become inextricably invested in the world economy, are now being touted as the tool of choice for a new brand of economic isolationism.

1 Response to “A New Breed of Sovereign Wealth Fund?”

  1. 1 Michael Xiao November 9, 2008 at 10:09 pm

    Diversification reduce the risk, I don’t think isolationism can help France to stablize its economy.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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