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Sovereign Wealth Funds and National Security: The Dog that Will Refuse to Bark

2009; Taylor & Francis; Volume: 14; Issue: 2 Linguagem: Inglês

10.1080/14650040902827765

1557-3028

Jonathan Kirshner,

International Arbitration and Investment Law

Abstract Concerns have been raised that Sovereign Wealth Funds (SWFs) might be used by governments to advance international political goals, raising red flags about their possible economic and national security consequences. These concerns are overstated. Warnings about national security threats related to foreign investment have been sounded repeatedly throughout history, but they have invariably been false alarms. Although there are novel attributes about SWFs in contemporary world politics, establishing their national security consequences is much more difficult than it might seem. And in those instances where theoretical connections between SWFs and “high politics” can be established, on closer inspection the SWFs appear to be intervening variables – manifestations of other pathologies – rather than the root cause of the postulated problem. The potential geopolitical problems caused by SWFs are the result of shifts in wealth in the international system, and not by the establishment or functioning of wealth funds. ACKNOWLEDGEMENTS I thank Eric Helleiner, Steve Nelson, and the participants in the Cornell Workshop on Sovereign Wealth Funds for comments on earlier versions of this paper. Notes 1. Sovereign Wealth Funds are not new, they date at least as far back as 1953, with the creation of the Kuwait Investment Authority. But as a force to be reckoned with in the international economy, the current rise of SWF is a novel phenomenon. 2. ‘Sovereign Wealth Funds: The World's Most Expensive Club’, Economist, 24 May 2007; Tony Tassell and Joanna Chung, ‘The $2,500bn question’, Financial Times, 25 May 2007; Steven R. Weisman, ‘Oil Producers See the World and Buy it Up’, New York Times, 28 Nov. 2007; Henny Sender and David Wighton, ‘Saudis Plan Huge Sovereign Fund Body’, Financial Times, 22 Dec. 2007; Jim Burton and Chris Davis, ‘IMF Urges Action on Sovereign Wealth’, Financial Times, 24 Jan. 2008; Andrew Kramer, ‘Russia Opens Door to Investing Oil Reserves in Western Stocks and Bonds’, International Herald Tribune, 31 Jan. 2008. 3. Lawrence Summers, ‘Funds that Shake the Capitalist Logic’, Financial Times, 29 July 2007; Edwin M. Truman, ‘Sovereign Wealth Funds: The Need for Greater Transparency and Accountability’, Institute for International Economics, Policy Brief PB07-6 (Aug. 2007). 4. On market signals, see for example Summers (note 3). Most of the concerns regarding SWFs by economists emphasise issues of transparency, governance, and accountability. See Edwin M. Truman, ‘The Rise of Sovereign Wealth Funds: Impacts on US Foreign Policy and Economic Interests’, Testimony before the Committee on Foreign Affairs, US House of Representatives, 21 May 2008; Gerard Lyons, ‘State Capitalism: The Rise of Sovereign Wealth Funds’, Standard Chartered Bank, Global Research, 15 Oct. 2007. Truman, it should be noted, shares the view of most economists that SWFs “do not pose a significant new threat to US security”. 5. On this issue, See Jacqueline Best, The Limits of Transparency: Ambiguity and the History of International Finance (Ithaca: Cornell University Press 2005); also Nicholas Veron, Matthieu Autret, and Alfred Galichon, Smoke and Mirrors, Inc.: Accounting for Capitalism, trans. by George Holoch (Ithaca: Cornell University Press 2006). 6. Bill Powell, ‘Why China Won't Come to the Rescue’, Time.com, 19 Sept. 2008; Eric Dash and Andrew Ross Sorkin, ‘Citigroup Sells Abu Dhabi Fund $7.5 Billion Stake’, New York Times, 27 Nov. 2007; Peter Thal Larsen and Chris Hughes, ‘Sovereign Wealth Funds: The New Kids on the Block’, Financial Times, 23 Jan. 2008. 7. Jean-Jacques Servan-Schriber, The American Challenge (New York: Athanaeum 1968) p. 17 (quote); For representative illustrations of the concerns of the 1970s and 1980s, see Fernando Henrique Cardoso and Enzo Faletto, Dependency and Development in Latin America (Berkeley: University of California Press 1979); Daniel Burstein, Yen: Japan's New Financial Empire and Its Threat to America (New York: Simon and Schuster 1988). For an earlier example, see Henri Hauser, Germany's Commercial Grip on the World: Her Business Methods Explained (London: Eveleigh Nash Company 1917). 8. For an attempt to walk through many of the issues associated with FDI, including national security concerns, see Edward Graham and Paul Krugman, Foreign Direct Investment in the United States, 3rd ed. (Washington DC: Institute for International Economics 1995), esp. ch. 5. 9. There is, admittedly a great power bias in this analysis. For small developing economies in the nineteenth and twentieth centuries who hosted foreign investment, the risk of incurring the wrath of great powers protecting the interests of their investors was an obvious link between foreign investment and national security. See Charles Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (Berkeley: University of California Press 1985). But I do not expect this to be an issue which will be of much practical concern for an analysis of the consequences of SWFs. 10. Lois Weiss, ‘Chrysler Building on the Block’, New York Post, 11 June 2008; ‘Dubai Buys Fifth of Circus Troupe Cirque du Soleil’, Associated Press, 6 Aug. 2008; Robert J. Cole, ‘Japanese Buy New York Cachet with Deal for Rockefeller Center’, New York Times, 31 Oct. 1989; Stephanie Strom, ‘Japanese Scrap $2 Billion Stake in Rockefeller’, New York Times, 12 Sep. 1995; See also “application to perform work on a landmarked property”, New York City Landmarks Preservation Commission, available at . 11. Jonathan Kirshner, Currency and Coercion: The Political Economy of International Monetary Power (Princeton: Princeton University Press 1995); see also Jonathan Kirshner, “Currency and Coercion in the Twenty-First Century”, in David M. Andrews (ed.), International Monetary Power (Ithaca: Cornell University Press 2006). 12. SWFs could hold large amounts of foreign currency reserves, and, under the direction of the government, use those reserves to engage in currency manipulation. But there is nothing new here; countries hold foreign currency, and sometimes they have used those reserves for currency manipulation. Plopping those reserves in a SWF does not alter the underlying state capacity to engage in currency manipulation (a more general point that I return to below), and thus SWF currency manipulation doesn't really register, I would argue, as a national security consequence of the emergence of SWFs. 13. For a more elaborate discussion of this concept, see Rawi Abdelal and Jonathan Kirshner, ‘Strategy, Economic Relations, and the Definition of National Interests’, Security Studies 9/1 (Autumn 1999). 14. Kenneth Rogoff calls this the “goldfinger scenario”, which he considers “an extreme risk unlikely to materialize”, given the costs that it would impose on the would-be destroyer of the system. ‘Foreign Holdings of U.S. Debt: Is Our Economy Vulnerable?’, Testimony Prepared for US House of Representatives, Committee on the Budget, 26 June 2007. (Auric Goldfinger, it should noted, would have actually benefited from the irradiation of all the gold at Fort Knox, having otherwise cornered the gold market, but the general point is sound, if perhaps better labelled “the Samson option”.) 15. Lyons (note 4). I am deeply sceptical of the merits of such a strategy, rooted in what I call “the cult of energy insecurity”, but it would not be the first time states caused problems in misguided efforts to advance their interests. See Jonathan Kirshner, ‘The Consequences of China's Economic Rise for Sino-U.S. Relations: Rivalry, Political Conflict, and (Not) War’, in Robert Ross and Zhu Feng (eds.), China's Ascent: Power, Security, and the Future of International Politics (Ithaca: Cornell University Press 2008). 16. Daniel Drezner, ‘Speculating About the Red Herring: Rational and Irrational Fears about Sovereign Wealth Funds’, mimeo, 29 Feb. 2008; Benjamin J. Cohen, ‘Sovereign Wealth Funds and National Security: The Great Tradeoff’, mimeo, 20 Aug. 2008; Brad Setser, ‘Sovereign Wealth and Sovereign Power: The Strategic Consequences of American Indebtedness’, Council on Foreign Relations, Special Report No. 37 (Sep. 2008). 17. Douglas Rediker and Heidi Crebo-Rediker, ‘Don't Pick on Sovereign Wealth’, The Wall Street Journal Online, 17 July 2008. 18. For a recent example of Frankenstein on the move, see Michael Schwartz, ‘Russia Loans Venezuela $1 Billion for Military’, New York Times, 27 Sep. 2008. 19. Maurice Obstfeld and Kenneth Rogoff, ‘The Unstable US Current Account Position Revisited’, NBER Working Paper, 10869, Oct. 2004 pp. 1, 5, 7, 18; Michael Mussa, ‘Sustaining Growth While Reducing External Imbalances’, in F. Bergsten (ed.), The United States and the World Economy (Washington: Institute for International Economics 2005) pp. 175–176, 186, 194–195, 201–203; William R. Cline, The United States as a Debtor Nation (Washington: Institute for International Economics 2005) pp. 3, 66, 85, 99, 154, 168–171, 275–277; Sebastian Edwards, ‘Is the U.S. Current Account Deficit Sustainable’, NBER Working Paper, 11541, Oct. 2005, pp. 2–3, 11–12, 26, 40–42; Lawrence H. Summers, ‘The Current Account Deficit and the Global Economy’, Per Jacobson Lecture, 3 Oct. 2004, pp. 3–4. Trade deficit figures arefrom the US Census Bureau, Foreign Trade Division, 8 June 2007. 20. Total Oil consumption, 2004: US 20.7 million b/d; China 6.5; Japan 5.4; Germany 2.6, Russia 2.6; India 2.3; Oil Imports 2004: US 12.1 million b/d; Japan 5.3, China 2.9, Germany 2.4, South Korea 2.2; source: US Energy Information Administration, ‘Top World Oil Tables’. Projections of future consumption are from US Energy Information Administration, International Energy Outlook 2005. The International Energy Agency makes similar forecasts, but combines US and Canada in its statistics (US/Canada demand increases from 20.2 mb/d in 2000 to 24.8 in 2020). China's demand increases from 4.9 to 9.4 over the same period – note that China's demand is projected to almost double, but the absolute increase is actually slightly higher for the US and Canada 4.6 vs 4.5. IEA, World Energy Outlook, 2002, p. 92.