Foreign countries are awash in dollars because they sell so much more to the US than they buy. Increasingly, their governments use some of those dollars to establish and operate investment funds. The funds buy shares in companies around the world. Sometimes they buy companies directly. Called “sovereign investment funds,” the IMF estimates that they now possess over $1.5 trillion. New York’s Morgan Stanley Bank estimates that could grow to $17.5 trillion in 10 years.
Predictably, some US businesses and their political friends are complaining that foreign governments might — perish the thought — use their sovereign funds to directly control American enterprises and wield political influence. Lawrence Summers, former Treasury Secretary and Harvard President, feels that it is appropriate for sovereign funds to buy shares in mutual funds, but “if they make more direct investments, they become meaningful actors in the economy, and that raises many more questions.” Summers was quoted in a New York Times article (Aug 21, 2007, p. C1) whose title worried that foreign governments will use these funds to “meddle in US affairs.” And all this at a time when the US mix of private mortgage finance and government regulation (or its lack) are exporting financial crises and credit crunch around the globe.
To understand what’s going on here, follow the bouncing financial ball. First, we take one prominent example of a country building up a large supply of U$D. The UAE sells oil, pearls, metals, and other goods to the US and world. Oil sales are priced in U$D and this results in their accumulation of a large supply of dollars. The UAE imports little from America. Persistent balance of payment surplus running into tens of billions of dollars leaves them with vast hordes of U$D. The excess dollars accumulate at the UAE central bank (its counterpart to the US Federal Reserve) or in other UAE government bodies.
For a long time, the UAE lent much of that money to the US government (by buying Treasury securities). This helped Washington to spend more than it taxed American families and businesses. Such funding of the federal deficit was apparently “meddling” that did not trouble anyone. However, when interest rates on US Treasuries dropped and when the dollar (in which that interest was paid) declined, the UAE government decided not to keep so much wealth in US Treasuries. A growing portion was to be moved into the sovereign funds that buy stocks, bonds, and companies.
Countries whose sovereign funds exceed $100 billion today include the UAE, Singapore, Saudi Arabia, Norway, Kuwait, and Russia, while China will likely soon join this group (New York Times, Aug 21, 2007, p. C1). Many other countries have sovereign funds still below $100 billion. When such funds buy controlling interest in companies, it represents a kind of “nationalization of formerly private enterprises.” In this way, governments may wield direct economic power and thereby the political influence that Lawrence Summers fears. Yet, governments in most advanced industrial economies have long been influencing foreign and domestic firms active in their countries. By doing so, governments also influence enterprises in other countries. The sovereign funds are just another way that governments will exert economic influence in other countries. The question is, so what?
Power and wealth are interactive and interdependent. America maintains a US Treasury Office charged with examining and approving foreign purchases of assets and firms. The Committee on Foreign Investment in the US (CFIUS) checks all purchases to assure they don’t compromise national security or technological leadership. The US government exercises power over the value of the US dollar which directly influences the wealth of individuals, companies, and governments around the world. All governments own parts of or entire companies inside their countries; only the extent of government ownership varies. The US, EU, Japanese, Australian, Korean governments are now directly influencing troubled banks with eased credit and will likely do more to ease a growing financial crisis. Governments have been “meaningful actors” in their own and others’ economies for a long time. Sovereign funds are just another ownership structure in an old story.
At the same time, businesses wield political influence. They seek to lower their taxes, increase their subsidies, best competitors, open new markets, and so on, by lobbying, bribing, and otherwise “meddling” in politics. Business requires and rewards political meddling. And the goal of political meddling by business is to shape the economic meddling by the government. Such mutual meddling is governed by the mechanisms and pressures of national and international laws and markets. For a long time, it has made little difference whether the company was owned by private individuals or state officials, foreign or domestic.
For example, some years ago, the Renault automobile company purchased American Motors. In pursuing profitability for American Motors, Renault meddled in US politics in the same ways used by American Motors before Renault’s purchase. Renault was then partly owned by the French government, but that made very little difference. The workers performed their tasks as they always had. The board of directors selected by the French government did nothing basically different from what the board of directors elected by American Motors shareholders had done.
Of course, some particular US industries and companies may be adversely affected by sovereign funds’ investments in the US. That is, they will face more or strengthened competition of various kinds. They may then try to prevent sovereign funds from investing in the US or demand tight limits on their activities. Other US industries and companies will see advantages in sovereign funds’ arrival. The corporations who expect to benefit from sovereign funds’ activities in the US will fight against those who expect to suffer. Both sets of companies will meddle in US and foreign government activity to achieve their goals.
The two sides will fight for or against US laws regulating sovereign funds. To win, each side will have to meddle (i.e., mobilize political support). That means spending money to lobby legislators and to “shape public opinion.” The companies favoring the sovereign funds’ entry will flood the media with stories about the copious benefits that will flow. The companies opposed to sovereign funds will spread alarms about “foreign” meddling that “threatens our way of life.” They will find allies among Americans who displace their real problems onto fears of “foreigners” and/or “foreign governments.” Each side will buy its academic spokespersons to put a veneer of expertise on its public relations. Some may even try to place stories in The New York Times written by prominent experts to influence popular opinion.
We know the game plan because we have seen it all before. Years ago, opposing groups of companies squared off over NAFTA. The side with the most money to spend and the best public relations strategies won. Repeatedly over the decades, the struggle between the companies who want “free trade” and those who seek “protection” reworks the same game plan. Among the relatively few directly affected by such corporate struggles, some will gain and some will lose. For most Americans, the outcomes of these struggles make relatively little lasting difference. So it will be again in the looming struggle over sovereign funds. After all, they have been around quite a while. The UAE set up its sovereign fund in 1976; Singapore in 1974, Kuwait in 1960. They always aimed to make money within existing global capitalism, not to change it, and certainly not to threaten it. Those goals drive their activities inside the US as well.
The American people have real and pressing economic and political concerns; job and pay security, basic human services, and deepening inequality might start the list. These are far more urgent than choosing sides in a media-hyped corporate fight over sovereign funds.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006). This article first appeared in Global MacroScope (at <www.globalmacroscope.com/>).