I am pleased to let those interested know that I have posted a draft of my essay, "Sovereign Wealth Funds, Capacity Building, Development, and Governance."
The paper considers the way that SWFs may be transformed by and are transforming the framework of global finance and production relationships. SWFs have already started moving well beyond their idealized form, established within the parameters of the Santiago Principles. SWFs now advance the political and economic projects of states, they serve to strengthen governance, they are the focal point for the normalization of global human rights in economic activities projects, and they also serve to advance the development goals of states. The old issues of the commercial character of these mechanisms, and of their effects of the financial markets and ownership structures of rich home states remains important, but may no longer be the central element pushing the development of SWFs. Law and regulatory structures lag far behind the realities that are taking shape on the ground. The public-private divide, the constraining structures of national principles of taxation and sovereign immunity are now ripe for contestation and change. But on what basis?
The final version is expected to be published with the Wake Forest Law Review whose staff I look forward to working with. In the meantime, comments, engagement and the like deeply appreciated. The abstract and introduction follow.
Sovereign Wealth Funds, Capacity Building, Development, and Governance
Wake Forest Law Review, Vol. 34, 2017
32 Pages Posted:
Larry Catá Backer
Though operating in some form or another for over half a century, sovereign wealth funds (SWFs) did not become an object of general attention until the early part of the 21st century when a combination of the need of developed states for investment and the growing acceptability of state investment in private markets abroad made them both threatening and convenient. Assured by the framework of the Santiago Principles most states now view SWFs as a useful multi-purpose sovereign investment vehicle. Yet over the last decade or so, SWFs appear to have developed the potential to become an important instrument in good governance and development, especially for resource rich and capacity poor developing states. Following the lead of Chile, and with the patronage of IFIs, these SWFs have begun to serve objectives as and with development banks both within and beyond their home state. This paper considers the capacity of SWFs to serve ends beyond mere fund value maximization as envisioned in the Santiago Principles. It explores the value of SWFs as a means of enhancing governance capacity in weaker states, its utility in enhancing development objectives, the emerging landscape of joint ventures among SWFs for development and their intersections with emerging infrastructure and development banks, and their importance in enhancing the operationalization of emerging international business and human rights standards not only within their own organizations but through their investment activities. A brief assessment of these trends ends the paper. Lastly, it develops a set of transformative changes in approaches to SWF instrumentality that SWFs, especially the smaller SWFs and those in developing states, might deploy in structuring and operating their SWFs within a globalized economic order. These strategies are meant to avoid the circular characteristics of current discussions grounded on premises of finance instrument silos and state based systems that no longer accord with the realities of, and fail to take advantage of the possibilities now offered through, global finance and can be grouped into the three transforming categories suggested in Section III: regionalization strategies; financial objectives strategies; governance strategies.
Keywords: sovereign wealth funds, development, corporate social responsibility, world bank, international monetary fund, sovereign investment
JEL Classification: E02, F02, F63, H87, K33, M48, P45, R58
Section I. Introduction.
Once upon a time, and not so long ago, there existed the Empire that is (or was) Globalization, one in which monsters might be spawned, and thus spawned, such monsters might be set free to terrorize the inhabitants of the many kingdoms that together constituted this transnational order. With the rise of each monster, in turn, all seemed lost, or at least diminished. But for every beast whose ravings threaten the good order of the global system arises those great defenders who wield regulatory reform, like music in William Congreve’s play, The Mourning Bride (1697), with “Charms to sooth a savage B[r]east, To soften Rocks, or bend a knotted Oak.”
Enter the beast: though operating in some form or another for over half a century, sovereign wealth funds (SWFs) did not become an object of general attention until the early part of the 21st century when a combination of the need of developed states for investment and the growing acceptability of state investment in private markets abroad made them both threatening and desirable. This was the beast set loose on the kingdoms, especially those realms grown fat on the profits of global production but who now found themselves at the mercy of a monster whose potential appetite could reduce these cash starved realms to the sort of penury they could not contemplate—at least not contemplate if they meant to keep their kingdoms stable and their heads on their shoulders. SWF money could prop up failing markets in the West, but it could also be used to control Western apex corporations, and thus indirectly threaten the authority of Western states—that was the essence of the fear around 2008.
And how to sooth this beast? Through the crafting of a narrative that would provide both food to the beast and put the monster to work for the preservation of the realms which it might otherwise have threatened. That master narrative both framed a rationale understanding of the sovereign wealth fund, and embedded them within emerging global financial systems. A SWF was conceived in a form that served the needs of the host states into which investment was injected as well as the home state that sought to make money from these investments. With a focus on money the political threat of the SWF could be diffused. No longer a threat, the beast became an ox, and its masters now welcomed into the club of those who ate well—and they have, eaten well that is. And its story—of its apparent threat and the manner of the breaking of the beast—shearing its monstrosity for the stoic utility of the ox, became one fit for retelling as an important marker of the scope and triumph of the global financial master narrative the domesticated SWF’s role within it.
Thus, the beast that was the rogue SWF served two purposes. The first was its contribution to the productivity of capital and investment across global markets, enriching those societies in which it might graze—as long as it played by the rules. The second was its contribution to the mechanics and language of narrative, and its articulation of the mechanisms of the regulatory order (in soft and hard national and international rules) that served the beats as yoke and plough. The kingdom that is Globalization also generates stories of triumph over threats to the good order of the global political-economic and social system. These are the stories elites like to tell themselves over what passes for the campfires of community bonding—academic conferences, meetings of eminent persons at national and international organizations, and the sausage making that is regulatory governance in this age—an age that might itself be coming to an end—of global regulatory networks that provide the basis of good order for transnational economic activity.
What were the components of this master narrative that reframed discourse and activity? The first created a strong case of classification that made the SWF, so defined, amenable to management that would reduce its potential threats to good order. This classification system distinguished between the beast—which might forage and feed upon the financial instruments of foreign states and other financial instrument livestock stomping around global financial and operational markets. SWFs were to be encased in a precise and narrow definition. These excluded both State Owned Enterprises (SOEs) (whose taming and use would be dealt with through a different regulatory narrative) and other forms of investment vehicles that feel outside the definition.
The second encompassed the even larger project of socialization muted for what the political community constituted the most dangerous aspects of SWFs. The principles that emerged as the bars of the cage that made the SWF palatable had a single object—to de-nature the public element of the mechanism and to produce the illusion, and perhaps sometimes the reality, that these instruments would operate on the same basis as their non-state analogues. That provided some advantages to the host states—the power to regulate the activities of these instruments in their home territories like other private enterprises, and the right to develop systems that might allow them to void such investments as they deemed threatening. These usually were meant to protect sensitive industries, but could also be used to protect national development schemes. There were some odds and ends to be sure. The issue of sovereign immunity required some action. The issue of state subsidies and of the need for a wall between the political and investment arms of the state also had to be considered.
What was then required was a simple and straightforward application of well-worn hard and soft law regimes to tame the SWF, or at least to create a more or less fungible investment vehicle that could be regulated and evaluated much like any other private investment fund. All of this was nicely framed within the general principles developed at the height of that epoch, now sometimes called the Great Recession, when the lust of western states for investment inflows into their capital markets exceeded their fear of rapidly developing and cash flush states now seeking to project their financial power into the capital markets abroad. This was undertaken by a collective allegiance to the principle that such states would forego the use their financial power for political ends by projecting investment as an enhanced weapon of international relations.
The result was the compromised compromise that are the Santiago Principles. Its twenty four principles were affirmed by the International Working Group of SWFs (IWG) and welcomed by the IMF’s International Monetary Financial Committee in 2008. The IWG’s successor organization, the International Forum of Sovereign Wealth Funds (IFSWF), formed in 2009.
And to some extent, the Santiago Principles have proved useful. Among its more important uses has been as a global centering element around which rational discussion could be organized. It produced an ideology of sorts. The ideology was framed around a core set of principles:To help maintain a stable global financial system and free flow of capital and investment; To comply with all applicable regulatory and disclosure requirements in the countries in which SWFs invest; To ensure that SWFs invest on the basis of economic and financial risk and return-related considerations; and To ensure that SWFs have in place a transparent and sound governance structure that provides adequate operational controls, risk management, and accountability.That ideology has been furthered through the tireless work of its own quasi governance apparatus. From this Secretariat has emerged useful storytelling and examples of appropriate conduct.
Assured by the narrative-framework that is the Santiago Principles, most states now view SWFs as a useful limited-purpose sovereign investment vehicle. As Allie Bagnall and Edwin Truman suggested in 2011, the Santiago Principles represented an “admirable but flawed transparency.” The flaws, of course, provided states, civil society and academics much food for thought. And it might as well have been used as a set of metrics for gauging the performance of SWFs as a class.
Yet over the last decade or so, SWFs appear to have developed the potential to become an important instrument in good governance and development, especially for resource rich and capacity poor developing states. Following the lead of Chile, and with the patronage of International Financial Institutions (IFIs), these SWFs have begun to serve objectives as and with development banks both within and beyond their home state. They are also viewed not merely as a vehicle for training in fiscal discipline, but also as a means through which anti-corruption strategies can be realized. They appear also to be useful as the means through which state to state development ventures may be undertaken.
This essay considers the capacity of SWFs to serve ends beyond mere fund value maximization ideology envisioned in Santiago Principle 19. It explores the value of SWFs as a means of enhancing governance capacity in weaker states, its utility in enhancing development objectives, the emerging landscape of joint ventures among SWFs for development and their intersections with emerging infrastructure and development banks, and their importance in enhancing the operationalization of emerging international business and human rights standards not only within their own organizations but through their investment activities. Section II considers the emerging realities on the ground. Particular attention will be paid to SWFs as means of projecting state policy through its investment decisions and as an active shareholder, SWFs as development funds, SWF joint venturing in projects with other SWFs, SWFs as owners or controlling shareholders of SOEs, and SWFs as a means for strengthening governance in weak governance zones. Section III then considers the compatibility of these changes within the normative framework of the Santiago Principles and some emerging regulatory issues—from transparency initiatives in hard law, to national extraterritoriality projects, to the emerging business and Human Rights frameworks in operations and financial transactions. A brief assessment of these trends ends the paper.NOTES
 William Congreve, The Mourning Bride (1697), act I, sc. 1, in Masterpieces of the English Drama: William Congreve, 367, 375 (Felix E. Schelling, ed., American Book Co. 1912).
 On the history of SWFs, see Simon Johnson, The Rise of Sovereign Wealth Funds, Fin. & Dev., Sept. 2007, at 56-57, available at http://www.imf.org/external/pubs/ft/fandd/2007/09/pdf/straight.pdf; see also Joseph J. Norton, The "Santiago Principles" and the International Forum of Sovereign Wealth Funds: Evolving Components of the New Bretton Woods II Post-Global Financial Crisis Architecture and Another Example of Ad Hoc Global Administrative Networking and Related "Soft" Rulemaking?, 29 Rev. Banking & Fin. L. 465, 472-478 (2010).
 See, e.g., Larry Catá Backer, Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience, 19 Transnat'l L. & Contemp. Probs. 3 (2010).
 See, e.g., Eric Langland, Misplaced Fears Put to Rest: Financial Crisis Reveals the True Motives of Sovereign Wealth Funds, 18 Tul. J. Int'l & Comp. L. 263 (2009); see also Luca Schicho, Pride and Prejudice: How the Financial Crisis Made Us Reconsider SWFs, 2 Goettingen J. Int'l L. 63 (2010); Larry Catá Backer, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, 41 Geo. J. Int'l L. 425, 474-482 (2010).
 A master narrative is a theory of postmodernism that posits that a societies’ storytelling in a historical sense centers or focuses on that societies’ particular point of view. See, e.g., Jean-Francois Lyotard, The postmodern condition: A report on knowledge (Manchester, UK: Manchester University Press 1984), available at https://www.marxists.org/reference/subject/philosophy/works/fr/lyotard.htm.
 For a discussion of the SWF master narrative, see Larry Catá Backer, SWFs in Five Continents and Three Narratives: Similarities and Differences, in Research Handbook on Sovereign Wealth Funds and International Investment Law 57-98 (Fabio Bassan, ed., Cheltenham, Eng.: Edward Elgar 2015).
 Mathias Okwe, Sovereign Wealth Fund records N5.17b profit, The Guardian (Sept. 8, 2015), https://guardian.ng/news/sovereign-wealth-fund-records-n5-17b-profit/ (Nigerian SWF); see also Norway's sovereign wealth fund books $30 bln profit in third quarter, Reuters (Oct. 7, 2016), www.reuters.com/article/us-norway-swf-idUSKCN1270O2.
 See, e.g., Róbert Csoma, Appreciation of the Role of Sovereign Wealth Funds in the Global Economy, Public Finance Quarterly 270-287 (2015), available at https://asz.hu/storage/files/files/public-finance-quarterly-articles/2015/a_csomar_2015_2.pdf.
 Larry Catá Backer, Economic Globalization Ascendant: Four Perspectives on the Emerging Ideology of the State in the New Global Order, 17 La Raza L.J. 141 (2006), available at http://ssrn.com/abstract=917417.
 OECD, OECD Guidelines for Recipient Country Investment Policies Relating to National Security 4 (2008), available at http://www.oecd.org/daf/inv/investment-policy/41456730.pdf.
 See, e.g., Larry Catá Backer, The 45th Presidency and Multilateral Treaties--Fear, Loathing and a Repudiation of 20th Century Americanism, Law at the End of the Day (Feb. 2, 2017, 10:53 PM), http://lcbackerblog.blogspot.com/2017/02/the-45th-presidency-and-multilateral.html#more; see also
 See, e.g., Anne Marie Slaughter, A New World Order (Princeton University Press 2004); Thierry de Montbrial, For a New World Economic Order, Foreign Affairs (Oct. 1, 1975), available at https://www.foreignaffairs.com/articles/1975-10-01/new-world-economic-order; Anne Marie Slaughter, The Real New World Order, Foreign Affairs (Oct. 1997), available at https://www.foreignaffairs.com/articles/1997-09-01/real-new-world-order.
 See, e.g., Veljko Fotak, Xuechen Gao, & William Megginson, A Financial Force to be Reckoned With? An Overview of Sovereign Wealth Funds 4 (ECGI Working Paper Series in Finance, Working Paper N° 476/2016, Aug. 1, 2016), available at http://ecgi.global/working-paper/financial-force-be-reckoned-overview-sovereign-wealth-funds.
 See, Locknie Hsu, The Role of Future of Sovereign Wealth Funds: A Trade and Investment Perspective, 34 Wake Forest Law Review – (forthcoming 2017).
Int’l Working Group of Sovereign Wealth Funds [IWG], Generally Accepted Principles and Practices “Santiago Principles,” (Oct. 2008), available at http://www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf [hereinafter Santiago Principles].
 International Forum of Sovereign Wealth Funds [IFSWF], Kuwait Declaration, (Apr, 6, 2009), available at http://www.ifswf.org/santiago-principles-landing/kuwait-declaration (establishing the IFSWF).
 In analysis of the positive value of the Santiago Principles, see, e.g., IFSWF, Implementing the Santiago Principles: 12 Case Studies (Nov. 2016), available at www.ifswf.org/sites/default/files/IFSWF_CaseStudies_Nov2016_0.pdf.
 IWG, Santiago Principles, at 4.
 The IFSWF has its own small Secretariat through which it produces knowledge that elaborates the fundamental ideology of the Santiago Principles themselves. On the work of the Secretariat, see, e.g., IFSWF, Who We Are, http://www.ifswf.org/who-we-are (last visited April 19, 2017).
 See IWG, Santiago Principles, at 4.; see also IFSWF, Santiago Principles: 15 Case Studies, IFSWF’s 6th Annual Meeting (Nov. 2014), available at http://www.ifswf.org/sites/default/files/SantiagoP15CaseStudies1_0.pdf.
 See, e.g., Allie E. Bagnall & Edwin M. Truman, IFSWF Report on Compliance with the Santiago Principles: Admirable but Flawed Transparency, Peterson Institute for Int’l Economics (Aug. 2011), available at https://188.8.131.52/publications/pb/pb11-14.pdf.
 See, e.g., Jason Buhi, Negocio de China: Building upon the Santiago Principles to Form an Effective International Approach to Sovereign Wealth Fund Regulation, 39 Hong Kong L.J. 197 (2009), available at http://heinonline.org/HOL/LandingPage?handle=hein.journals/honkon39&div=14&id=&page=; Ashby Monk, Recasting the Sovereign Wealth Fund Debate: Trust, Legitimacy, and Governance, 14 New Political Economy 451 (2009), available at http://www.tandfonline.com/doi/abs/10.1080/13563460903287280?journalCode=cnpe20&; Research Handbook on Sovereign Wealth Funds and International Investment Law (Fabio Bassan ed., Edward Elgar Publishing 2015); Paul Rose, Sovereign Wealth Fund Investment in the Shadow of Regulation and Politics, 40 Geo. J. Int’l L. 1207 (2009), available at https://ssrn.com/abstract=1561986; Larry Catá Backer, Regulating financial markerts: what we might learn from sovereign wealth funds, in Reshaping Markets: Economic Governance, the Global Financial Crisis and Liberal Utopia (Bertram Lomfield et al., eds., Cambridge 2016); Edwin M. Truman, Sovereign Wealth Funds: Is Asia Different? (Peterson Institute for International Economics, Working Paper No. 11-12, Jul. 29, 2011)available at http://dx.doi.org/10.2139/ssrn.1898787; Joseph J. Norton, The ‘Santiago Principles’ for Sovereign Wealth Funds: A Case Study on International Financial Standard-Setting Processes, 13 J. Int’l Economic L. 645 (2010), available at https://doi.org/10.1093/jiel/jgq034; Sven Behrendt, Gulf Arab SWFs—Managing Wealth in Turbulent Times, Carnegie Endowment for Int’l Peace (2009), available at http://dafg.eu/fileadmin/dafg/Downloads/S_Behrendt_update_Q4_2008.pdf; Anna Gelpern, Sovereignty, Accountability, and the Wealth Fund Governance Conundrum, 1 Asian J. Int’l L. 289 (2011), available at https://doi.org/10.1017/S2044251310000391; Luca Schicho, Pride and Prejudice: How the Financial Crisis Made Us Reconsider SWFs, 2 Goettingen J. Int'l L. 63 (2010), available at http://heinonline.org/HOL/LandingPage?handle=hein.journals/gojil2&div=8&id=&page=.
 Bagnall & Truman, supra note 15.
 Santiago Principles GAPP 19 should be read in conjunction with GAPP 18 that states that investment policy ought to be based on sound portfolio management principles.