WASHINGTON - The United States has for years promoted its own business
interests abroad through public funds and lobbying to open up the economies of
developing countries, but as foreign government-controlled sovereign wealth
funds (SWFs) increasingly acquire or invest in US assets, Washington is
scrambling to change the rules of the game.
SWFs are essentially pools of money governments invest for profit.
Petroleum-producing countries, buoyed by soaring oil prices, now account for
about two-thirds of the total wealth of global SWFs.
As these funds begin to acquire stakes in US companies, Washington has moved
swiftly to curb their clout, prompting some
analysts to point out that this could be perceived as a case of double
standards by the US and its friends in the international financial
institutions.
"The United States [itself] is in the business of sovereign wealth management,"
Edwin M Truman, a senior fellow at the Peterson Institute for International
Economics, told a Congressional hearing on SWFs last week. "Consequently, we
should be careful what we wish for."
After all, US state and federal governments own or control more than US$3
trillion in financial assets, or 20% of the $15 trillion invested by
governments worldwide. This is close to the estimated $3.3 trillion that SWFs
controlled in 2007.
The United States has long advocated the removal of trade and investment
barriers in other countries through extensive programs euphemistically labeled
as aid and run by the State Department's US Agency for International
Development and Washington's proxy agents in the World Bank and the
International Monetary Fund (IMF) and other international financial
institutions.
Many of those institutions are notorious among development activists for
enforcing economic "reforms" that erode local control over economic and even
political decisions.
Yet when the rich Middle East SWFs sought to acquire important US assets, such
as when the emirate of Abu Dhabi purchased a $7.5 billion stake in Citicorp
last year, Washington had its moment of revelation.
Investments by SWFs in private US companies, equity funds and real property,
among other assets, came under unprecedented scrutiny. A slew of congressional
hearings on how to protect US national security ensued.
House Foreign Affairs Committee chairman Howard L Berman told a hearing last
week that investments by the funds of Middle Eastern countries "have raised
questions about the power that these massive funds may have over US national
security interests".
Berman said those funds are controlled by governments that are "sometimes
unfriendly, sometimes untrustworthy".
Congress even heard Alan Tonelson, a researcher at the US Business and Industry
Council, liken the SWFs to the threat posed by al-Qaeda and suggest that sheiks
in the Persian Gulf oil kingdoms can never be reliable allies.
SWFs have long been vetted by the Committee on Foreign Investment in the United
States, the government entity that reviews the national security implications
of foreign acquisitions of US assets.
Worried by the fact that some SWFs had shifted money away from treasury bonds
to purchasing equity stakes in US companies, Congress early this year also set
up the Sovereign Wealth Funds Task Force, a bipartisan study group aimed at
probing growing SWF investments.
Last month, a high-level congressional delegation, led by US Representative
Luis V Gutierrez, who chairs the sub-committee on Domestic and International
Monetary Policy, made a trip across the ocean to the Middle East to convince
investors there that only their money is welcome, but nothing more.
Other members of Congress were to hold a hearing this week to further examine
the issue.
In February, Under Secretary for International Affairs David H McCormick told
Congress that SWFs were raising a red flag in the White House. "Attention to
sovereign wealth funds is inevitable given that their rise clearly has
implications for the international financial system," he said.
US Treasury Assistant Secretary Clay Lowery even suggested that SWFs have only
two options in the US - to choose voluntarily not to vote their shares in US
companies or to disclose how they vote. Even more aggressive calls have
surfaced to require SWFs to take a non-controlling stake in a company and be
forbidden from voting their shares altogether to ensure that the investment is
passive.
In March, two top US officials got on the case. After lecturing them on the
benefits of transparency when doing business in the United States, US Secretary
Treasury Henry M Paulson and Deputy Secretary Robert M Kimmitt wrestled some
concessions from two of the world's largest funds - one controlled by Singapore
and one by the United Arab Emirates. The two SWFs pledged to be more
transparent and not make investments with a hidden political agenda.
The US Treasury tapped more weapons in its arsenal and has since October
encouraged the IMF and the Organization for Economic Cooperation and
Development to develop best practices for sovereign wealth funds, a process
that is likely to award more oversight to the United States and rich nations
over the SWFs.
But all those "protectionist" measures may have also unintentionally
highlighted the double standards in the international financial system at the
hands of its patrons.
Corporations, backed and promoted by Washington and international financial
institutions, frequently acquire and control sensitive sectors in developing
nations such as telecommunications, transportation, energy, media and the
financial sector.
While Washington says SWFs could potentially distort markets, in fact most
foreign investors, including hedge funds and private investors, have the
potential to do much more damage to markets in developing countries, without
much of a rebuke from Washington, given the size of their portfolios.
And no matter how much the SWFs expand, they will forever remain a tiny sliver
of the $190 trillion portfolio of global financial assets that are mostly in
the hands of Western and US institutions, or the $62 trillion managed by
private institutional investors.
This is perhaps why the current debate in the US about the SWFs could be what
advocates of greater sovereignty by developing nations over their economies
have been awaiting for many years to make their point.
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