The Political and Governance Risks of Sovereign Wealth

Abstract

Sovereign wealth funds are designed to solve crucial domestic policy problems. Poorly managed SWFs and SWFs that are managed as tools of economic nationalism or mercantilism will present problems for both the sponsor country and for host countries that receive SWF investment. This article discusses some of the major concerns presented by sovereign wealth, addressing both domestic and international risks. As described in the article, these risks fall along four dimensions: domestic political risks, domestic governance risks, international political risks, and international governance risks. The IFSWF’s Santiago Principles provide a basic framework to manage and mitigate each of these types of risk, although it has limitations as a form of soft law that relies on the SWFs’ own internal compliance efforts. Notwithstanding these concerns, SWFs have proven themselves to be generally benign investors, suggesting that present governance and host country regulatory structures have successfully mitigated risks to this point. The same is not true, however, of domestic risks presented by SWFs, which remain a serious concern for governments and, to a lesser extent, markets generally.