When Sovereign Wealth Funds Invest for Political Reasons

The US is the world’s sole superpower: it has global influence both politically and militarily which no other country can even dream of. What’s more, it does not hesitate to use that influence in its own best interests.

The one thing the US doesn’t have, of course, is a large amount of money in the bank. In fact, as the world’s largest debtor, it borrows billions of dollars from the rest of the world every day. So my eyebrows rose a little when I saw that former US Treasury secretary Larry Summers was warning of what might happen if other countries started throwing their wallets around in the service of political ends.

What is the primus of capitalism? It is that people invest and own companies in order to maximize their value. If you think about national ownership of a stake in a business or a whole company, or even a direct investment made by a public pension fund in the United States, the same issue arises: There can be motives other than highest rate of return.

These other motives distort the whole notion of capitalism that value maximization is the chief objective…

The sovereign wealth funds themselves should get together and put an end to all this worry and discussion by agreeing to a number of principles to which they will abide – for example that under no circumstances are they going to speculate in currencies, they are always going to be long term investors and they are never going to use sovereign wealth funds to pursue any national political objective.

Summers, here, is essentially asking that countries with a lot of money unilaterally declare that they will never use that money with an eye to any political end. He would never ask something similar of countries with large military or diplomatic resources – but instead he waffles about "the primus of capitalism" as a way of asking foreign countries to tie one hand behind their backs in the way they play the 21st Century Great Game.

The fact is that capitalism doesn’t care about motives. If individual players in the capitalist system care about things other than the highest rate of return and value maximization, that’s fine. Sometimes, such investments create arbitrage opportunities for nimble hedge funds; at other times, they simply result in unnecessary losses. And capitalism has long been able to cope with different shareholder classes, where some shareholders have more power than others.

What’s more, it’s worth remembering that back in the mid-90s Summers himself used US capital to help support Mexico – and Mexico’s bondholders – for explicitly political ends. Why is it OK for the US to use its money in that instance to pursue a national political objective, but it’s not OK for any other country to use its money in global stock markets for a similar reason?

Summers might not like the fact that rival countries have a new and powerful weapon in their arsenals. But that’s no reason for them to unilaterally disarm.

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1 Response to When Sovereign Wealth Funds Invest for Political Reasons

  1. Quite informative. It removes quite a few myths about sovereign funds while simultaneously raising legitmate concerns. I would like many more such articles.

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