Intermediation In Lieu Of Protectionism?

Ashby Monk

Has anybody else noticed an uptick in the number of articles and press reports about looming SWF protectionism?

  • Jin Liqun – Chairman of the CIC’s Supervisory Board and Deputy Chairman of the International Forum of Sovereign Wealth Fund – said a few weeks ago that SWFs would soon be facing some new protectionist headwinds.
  • The Economist noted two weeks ago that SWF investments are often associated with political concerns, and there is still a ‘long way to go’ if SWFs want to avoid protectionism.

Why now? Well, I see three reasons:

  • First, there has been an increase in the number of direct investments by SWFs, which always raises domestic concerns.
  • Second, the global economy is in recovery, which affords policymakers the time to think (again) about SWFs and their role in the world. As Victoria Barbary noted in the Financial Times last week, “While the climate’s not great, it’s not an issue, but when the economy starts to pick up, there’ll be a lot more pressure on [SWFs] to align with the Santiago Principles.”
  • Finally, there have been quite a few academic papers highlighting some non-commercial behaviors of SWFs, such as this one.

So, I guess we’re back to talking about SWF protectionism and, in particular, what we can do to avoid it.

One policy concept that has had some traction over the past few years is the idea of having SWFs operate through intermediaries when investing in certain foreign jurisdictions. As the idea goes, SWF investment via credible intermediaries would force these government funds to abide by commercial objectives, since the intermediary wouldn’t be willing to pursue anything other than profits (since an intermediary’s reputation and long-term prospects are ultimately dependent on their financial track record).

Unfortunately, if you’re a fan of that approach, you might want to read this paper by André de Palma, Luc Leruth, and Adnan Mazerei of the Centre National De La Recherche Scientifique. The paper, entitled, “Regulating Sovereign Wealth Funds Operating Overseas through an External Fund Manager”, evaluates this very policy proposal. And the findings aren’t what you might think:

“Some observers have suggested that SWFs could partly allay the concerns about possible political motivations behind their activities by investing through fund managers located in the recipient countries. We examine the usefulness of this proposal by using agency theory…The results show that, under reasonable assumptions, the use of fund managers may not necessarily address these concerns.”

Accordingly, the authors conclude that intermediation will do little (if anything) to stave off protectionism in certain jurisdictions. I guess we’re back to the ever-expanding drawing board.

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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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