City of London, Flickr/Torcello Trio
Over the past five years, Sovereign Wealth Funds (SWFs) have become a prominent phenomenon in contemporary global capitalism. SWFs are government owned investment vehicles that take state wealth from excess reserves or commodity windfalls and invest it for returns in financial markets. They now number over 60 worldwide, the majority of which have come into existence since the year 2000. This rapid increase in number has been matched by explosive growth in their total asset holdings, recently estimated at just over US$6 trillion. As a result, governments are now holders and investors of wealth in a way that for certain philosophers and economists has long been the preserve of utopian speculation.
One of those thinkers was economist James Meade. In his classic work Agathotopia, Meade advocates the creation of a community fund - a stockpile of accumulated budget surpluses invested on the competitive stock exchange to fund a social dividend. In the 1990s, Gerald Holtham advocated the creation of a tax-financed community fund in the UK, managed by commercial managers, to generate returns to cover the gap in public finances that results when the cost of healthcare and education grows faster than GDP (Holtham 1995, 1999). In the US, Robert Kuttner argued in the late 1990s that the federal government should invest a proportion of its (then) budget surplus in the equities market and place the returns in a fund for grants to all newborn babies (Kuttner 1999). In another article in this series, Stuart White poses the question of whether we should revisit Meade’s proposal for a Citizens’ Trust to finance a universal social dividend.
For the most part, such proposals remain unrealized. The community fund, as imagined by Meade, Holtham, or Kuttner, has not been intentionally created in any political community. However, the establishment of sovereign funds by governments across the world realizes at least the superficial essentials of the community fund vision. At base, SWFs are government-owned pools of financial assets that seek to augment the public finances of their state sponsors through investment. Moreover, the rationale for most sovereign funds is a laudable policy goal like helping offset projected shortfalls in the public finances (often pension liabilities or healthcare costs); management of economic and fiscal challenges like currency fluctuation or national income volatility; or saving for future generations. Fundamentally, these functions are all about improving living standards within sponsoring countries by augmenting the prosperity of the establishing state.
However, in another crucial sense, SWFs are far from what we might intuitively imagine a community fund to be - that is, a fund set up to collectively benefit domestic citizens and promote their common welfare. Indeed, most SWFs are established by governments and invested by independent asset managers without consultation with the beneficiary population concerning their preferences for national wealth creation. Moreover, they are often managed in a relatively non-transparent and unaccountable manner with investment returns distributed according to the state sponsor’s will, very rarely benefiting present-day citizens. We might wonder then whether sovereign funds can truly be considered ‘community’ funds if their establishment and management are not subject to any meaningful popular control or benefit.
It is appropriate then to ask in what ways the governance of SWFs might be reformed to move sovereign funds closer to an intuitive idea of a community fund. This analysis has immediate relevance for those polities which already have SWFs. But it is also relevant in thinking about what people might seek if they were to establish an SWF. There are signs of stirrings of interest in the UK. The Scottish government has canvassed the idea of creating an SWF for Scotland based on oil and gas revenues. And a group of Labour MPs recently suggested using Crown estate to set up a UK SWF. Before going too far down this road, however, it is wise to get a clear sense of what SWFs could be – what they ought to be – if we so wish it.
Here, I focus on three areas of SWF governance that may be democratized to ensure SWFs become funds directly controlled by and benefiting their citizen beneficiaries. Such reforms must target the management, investment and distribution of sovereign wealth.
When it comes to exerting control over the management of SWFs as institutions, no existing fund could be fairly characterised as under community control. No existing sovereign fund is subject to direct popular control mechanisms. No citizenry elects the management of their SWF, nor directly determines the investment policy and objectives of their fund through referenda or consultative mechanisms. Instead, these tasks are undertaken by governments or external investment professionals to whom the management of SWF assets is delegated. No citizen representatives sit on SWF Boards, nor does any citizenry enjoy the ability to directly monitor the fealty of their fund’s Management to the objectives of the SWF. With the exception of SWFs in Norway and New Zealand, most sovereign funds resist extensive public disclosure regarding their investment strategies, asset holdings and risk management approach. This renders citizens dependent on their government representatives, who typically enjoy fuller disclosure on SWF activities, to properly monitor the funds. Accordingly, even if a SWF’s sponsoring ‘state is accountable to the people…the [sovereign] Fund [itself] is accountable only to the state’ (Backer 2009), resulting in a democratic deficit when it comes to popular control over the management of sovereign funds.
This lack of direct popular control over SWF management is especially pronounced when it comes to the investment of sovereign wealth. If SWFs are to truly operate as community funds, then arguably citizens must feel that their investment activities respect their collective values. This does not mean that citizens have to directly invest fund assets. But it does mean citizens should influence the ethical parameters of an SWF’s investment decisions.
Consider the experience of Norway’s SWF,
the Government Pension Fund – Global (GPFG). The GPFG is widely considered one
of the most transparent and accountable funds in the world. But while it
tops international rankings on these metrics, it has not been free from domestic controversy regarding the extent to which it reflects Norwegians’ preferences when investing its underlying assets. In the late 1990s, at the same time as Norway had played a leading role in the finalization of the Ottawa Treaty banning anti-personnel mines, Norway’s SWF was investing in a Singaporean company involved in the production of anti-personnel mines. Norwegian citizens began to question what values should be promoted through the investment of fund assets, especially whether such incoherence between its flagship state investment fund and other areas of national policy was acceptable.
In response, the Norwegian Government established an expert committee to clarify the fund’s approach to ethical investment and develop guidelines, resulting in the creation of a Council of Ethics responsible for evaluating compliance with those ethical guidelines. This makes Norway’s GPFG one of only two sovereign funds globally - along with New Zealand’s Superannuation Fund (NZSF) – to be subject to overarching ethical constraints in their investment mandate. While neither Norway or New Zealand allowed direct citizen input in the formulation of their ethical guidelines, both funds are exemplary insofar as they are subject to some sort of boundaries in profit-seeking that attempt to reflect the values of their sponsoring state.
Although sovereign funds primarily exist to generate investment returns, only one sovereign fund – the Alaska Permanent Fund (APF) – distributes a portion of its annual income directly to citizens. This is discussed by Karl Widerquist in another article in this series. Some other funds, like Singapore’s Temasek and GIC allow governments to undertake a discretionary transfer of a portion of SWF investment returns to the general budget for reinvestment in public programmes. Norway permits up to 4% of annual returns to be transferred from the GPFG to the general budget to cover deficits.
But with these exceptions, most funds simply allow investment returns to accrue back to the fund principal. Such a passive approach to the distribution of SWF earnings means that present day citizens do not necessarily experience any direct benefit from their sovereign funds, arguably limiting the extent to which these funds can be thought of as community funds by current generations.
The potential of community funds
Sovereign funds are the closest real-world approximation of a community fund since Meade first articulated this idea in the 1960s. Yet, the current design and operation of sovereign funds offers little basis for their characterisation as such. With some isolated exceptions, citizens are largely quarantined from exerting any direct influence over or enjoying any direct benefit from the management, investment and distribution of ‘their’ sovereign wealth.
Yet, as more states move towards establishing these funds with forecasts predicting the establishment of a further 20 SWFs in the next five years, there is real potential to reform these institutions so they not only better resemble the original community fund vision, but also help to more generally democratize the ownership and control of assets within domestic economies. As discussion of SWFs starts to emerge in various UK contexts, it is important to put these issues of democratic, community-led management, investment and distribution at the centre of the debate.
Backer, Larry C., ‘Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance through Private Global Investment’ Georgetown Journal of International Law (2009) 41(2): 101-192
Holtham, Gerald, ’A community fund could save social democracy’, The Independent, April 18, 1995.
‘Ownership and Social Democracy’, in Andrew Gamble and Tony Wright, eds., The New Social Democracy (Oxford, Blackwell, 1999), pp.53-68.
Kuttner, Robert, ‘Rampant Bull’, American Prospect 39, July-August 1998, pp.30-36.