The Evolving Politics of Sovereign Wealth Funds

Abstract

Sovereign wealth funds (SWFs) can provide needed liquidity and stabilize equity markets. Countries that are open ta investment by SWFs are likely to benefit from their participation. Countries, such as France, that adopt protectionist policies, may see a dramatic fall-off in foreign direct investment, which is likely to be harmful to their economy at the worst possible time. The adoption by SWFs of the Santiago Principles, a voluntary set of principles without the force of law, is unlikely to forestall tougher regulation by recipient countries that conclude that increased regulation of such funds is in their best interest. In the United States, the Obama administration and a Democratic-controlled Congress are likely to subject financial institutions, including private equity and hedge funds, to increased regulation. In this environment, SWFs may be unable to escape tighter regulation. If SWFs do not actively engage policy makers, they could be left with stricter rules and fewer investment options. JEL Classification : F21, F30, G11