Aug 6, 2007 3:13 pm


It has certainly been the case in the past. Does that mean that it must always remain the case? 9/11 preceded action on Islamist terror. Hamas had to be elected for democracies to support excluding"political" fronts of terrorist organizations from participating in elections. New Orleans had to flood before the levies were repaired. The bridge in Minneapolis had to collapse before structural stresses were taken seriously and I can but wonder what economic or national security disaster will have to strike before we confront the dangers of Sovereign Wealth Funds?

Does my weak economic understanding cause me to exaggerate? I do not think so especially now that Lawrence Summers, the brilliant former Harvard president and treasury secretary, is voicing similar concerns about Funds that shake capitalist logic. He writes:

To date most of the official commentary on the issue of SWFs has been framed in terms of traditional arguments about cross-border capital flows. US and UK officials have raised ­concerns that focus only on the desirability of reciprocity and transparency and on how to treat sectors that trigger national security questions. Others, particularly in ­continental Europe, have been less positive and have emphasized nationalist considerations about the benefits of local ownership and control.

What has received less attention are the particular risks associated with ownership by government-controlled entities, particularly where the ownership stake is taken through direct investments. The logic of the capitalist system depends on shareholders causing companies to act so as to maximize the value of their shares. It is far from obvious that this will over time be the only motivation of governments as shareholders. They may want to see their national companies compete effectively, or to extract technology or to achieve influence.

If that is not bad enough, consider the national security angles:

Apart from the question of what foreign stakes would mean for companies, there is the additional question of what they might mean for host governments. What about the day when a country joins some “coalition of the willing” and asks the US president to support a tax break for a company in which it has invested? Or when a decision has to be made about whether to bail out a company, much of whose debt is held by an ally’s central bank? . . .

To the extent that SWFs pursue different approaches from other large pools of capital, the reasons have to be examined. The most plausible reasons – the pursuit of objectives other than maximizing risk-adjusted returns and the ability to use government status to increase returns – are also most suspect from the viewpoint of the global system. . . .

Governments are very different from other economic actors. Their investments should be governed by rules designed with that reality very clearly in mind.

Unfortunately, Summers call for a serious debate was publish in the FT, the paper most focused on the subject. I am glad to note that Gabriel Schoenfeld of Commentary picked it up and I am grateful to Ed Lasky of the American Thinker (the outlet in which I expressed similar concerns) for bringing it to my attention.

Maybe, just maybe, we will get lucky and some reporter will ask a presidential candidate a question about the subject. And, maybe, just maybe, it will force our powers that wish to be to focus on it before economic or political disaster strikes and we are forced to respond with a hasty ad hoc costly remedy.

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