Autonomy Preservation Funds

Ashby Monk

If you’re going to read one paper on sovereign funds this month, I recommend you make it this one: “Maximizing Autonomy in the Shadow of Great Powers: The Political Economy of Sovereign Wealth Funds” by Kyle Hatton and Katharina Pistor of Columbia University’s School of Law.

I say this not because these authors cite my work – though, let’s be honest, that probably helped their case – but because I think they have done a remarkable job of provoking thought and advancing discussion on the all important question: ‘Why do governments set up sovereign funds?’ Given the remarkable popularity of SWFs (from Africa to America), their paper is a welcome addition. Moreover, the authors offer extremely rich and detailed case studies on SWFs in Kuwait, Abu Dhabi, Singapore and China, so even if you don’t buy into their conclusions, you’ll still want to download their paper to read the cases. Here are some of the key bits from the paper:

Based on detailed comparative analysis of the leading SWFs in the world and their role within the systems that sponsor them, we argue that SWFs are autonomy-maximizing institutions.”

“…the internal governance structures of the SWFs themselves ensure that SWF management is directly accountable to the ruling elite in each sponsor country. Consequently, it is unsurprising that SWFs can be, and are, wielded to advance the interests of those elites. First and foremost among these interests is the maintenance of their privileged position.”

“The task of maximizing autonomy is, however, complex. The privileged position of ruling elites in non-democratic countries is dependent on domestic stability, security of the state against foreign rivals, and the maintenance of substantial autonomy relative to superpowers to which they might otherwise be vulnerable. Without domestic stability, elite status is fragile and will last only until the next coup or mass uprising; a foreign invasion would topple existing elites or at least subsume them into a hierarchy with foreigners at the top. Finally, as autonomy relative to superpowers decreases, the ability to direct state action toward benefiting the elite is restricted and domestic legitimacy may be threatened.”

In all these situations, the authors think sovereign funds are playing an important role in ensuring the autonomy of these ruling elites (in non-democratic countries). It may be slightly disconcerting to accept this conclusion — i.e, that SWFs are there to keep the ruling elites…well…ruling and elite — but the authors make a pretty solid case. Furthermore, while there are some clear differences, their argument isn’t all that dissimilar from an argument I myself recently made:

“SWFs exist to preserve local autonomy and state sovereignty by harnessing the power of finance…a SWF is ‘theorized’ by the sponsor as a buffer against the risks to autonomy and sovereignty in a global economy.”

The obvious difference between Hatton & Pistor’s paper and my paper is their focus on the ultimate SWF stakeholder. My analysis is grounded at the level of the state or government, while their analysis is built on the ruling elites (i.e., individuals). Also, my analysis looks at all SWF sponsors in the world, while theirs focuses on non-democratic sponsors.

The good news is that the two papers aren’t contradictory. My paper focuses on how SWFs facilitate autonomy, while the other paper focuses on who benefits from this autonomy once it is established. As their paper illustrates, in a monarchy, the ultimate beneficiary is going to be the monarch; in a dictatorship, the ultimate beneficiary is going to be the dictator. Granted, there may be secondary benefits from smoothing commodity revenues in stabilization fund and saving for future generations for the common man, but if the government and the ruling elites are one and the same, then these ruling elites will be the primary wielders of the sovereign wealth.

But wouldn’t that be true whether or not there was a SWF? In other words, the ruling elites in non-democratic countries will reap the benefits of their country’s natural wealth regardless of whether this wealth is explicitly sequestered in a sovereign fund. So, perhaps a SWF offers a unique opportunity in non-democratic societies to establish rigorous governance rules that prevent mismanagement by these elites? Anyway, I have a lot to think about…

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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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