(September 24, 2012) – The $5 trillion held in sovereign wealth funds (SWFs) worldwide is more than just resource riches and future social services, according to the Massachusetts Institute of Technology’s Shannon Murphy.
More and more, it’s also political power.
Sovereign wealth funds “provide the ‘carrot’ of sizable, patient capital, and wield a ‘stick’ via their ability to serve as investors of last resort,” Murphy writes. “This has resulted in sovereign wealth funds becoming, in some ways, a proxy for power/influence at home and abroad. The ability of non-OECD [Organisation for Economic Co-operation and Development] states to leverage SWF resources to earn excess financial return and accrue global influence, facilitate domestic economic development or meet the long term needs of citizens is reorienting relationships.”
The paper, titled “Leviathan’s Double Bottom Line: Sovereign Wealth Funds as Tools of Strategic Statecraft” and published earlier this month, is Murphy’s thesis for MIT’s Sloan School of Management.
Using the China Investment Corporation (CIC) as a case study, she argues that nations tend to invest sovereign wealth in the resources their citizens need, not the assets with the most promising returns. The CIC has concentrated much of its $482.2 billion in Africa, Canada, and Russia, securing vast quantities of oil, natural gas, copper, and iron ore, among other real assets, from these the resource-rich regions. These investments are also diplomatic olive branches, Murphy contends. In May 2012, China and Russia signed a strategic trade deal—a deal that her research indicates was largely a product of the CIC’s investments in Russia, including $1 billion allocated to Russia’s own sovereign wealth fund.
These hybrid political-financial arrangements, Murphy writes, will increasingly be necessary just to keep up with global powers.
“Sovereign capital’s arrival as a global financial force may mean that countries who do not seek policy benefits alongside financial returns could find themselves left behind. The question is increasingly becoming why not pursue strategic goals along with financial ones?”
Read Shannon Murphy’s entire paper here.