By Ashby Monk
The Oxford SWF Project is a source of open discussion and engagement on the topic of SWFs. As such, we welcome and indeed seek out all views and opinions on the subject. Today, we offer the twelfth installment of our segment: “Q&A with a SWF expert, stakeholder or policymaker” (see the Q&A archive). We are pleased to welcome Kathryn Gordon of the OECD, and the OECD observer to the International Working Group on SWFs. While Mrs. Gordon’s views are her own, her perspective helps to further debate and facilitate understanding.
Ashby Monk: Thanks for joining us today, Kathryn. Your work at the OECD deals with preventing investment protectionism. (See the OECD Observer report on its SWF work.) In your view, has the OECD project and the IMF’s project with SWFs (for which you were an observer) muted the national level trend towards SWF investment protectionism?
Kathryn Gordon: The OECD and a group of SWFs have developed two sets of guidance – the OECD’s is for recipient country policies toward SWFs and the SWFs’ is for their own governance and transparency practices (the Santiago Principles). These two sets of guidance are flip sides of the coin in the trust-building process. But trust-building is an ongoing process and now both groups will want to redouble their efforts to make good on their commitments. The OECD countries would be both pleased and honored to continue collaborating with SWFs on this task.
You ask about the direction of the trend on protectionism – there is no one single direction, rather a mix of eddies and cross currents. Right now, policy makers are genuinely afraid that a protectionist backlash will spook markets even more. Furthermore, I am sure that most OECD countries would welcome with open arms SWF investments, especially in finance. However, as real economy impacts start to bite, protectionist impulses become much harder to resist.
Governments should resist these impulses. In periods of crisis, protectionism is the easy way out. It gives policy makers and their constituencies the false comfort of thinking that they are dealing proactively with issues. What’s really needed now are: 1) palliative measures to assuage, where possible, the genuine suffering caused by this upheaval; and 2) international collaboration to re-build our financial and economic institutions on more solid foundations. Lashing out at foreign investors, including SWFs, doesn’t help us on either of these two fronts.
Ashby Monk: What, in your view, is it about SWFs that lead some nations to consider protectionist policies? Are there any specific SWFs that are of concern to OECD members?
Kathryn Gordon: For the record, it is worth noting that the vast majority of measures taken by OECD countries to block foreign investments have been directed against investors from other OECD countries. For the most part, SWFs have deliberately avoided high-profile investments that might attract unwanted political attention. It is true that their recent forays into the financial sector attracted a great deal of attention, but these were actively sought out by recipient countries and are widely agreed to have had a stabilising effect on OECD markets, even though they turned out to be (at least for now) bad investments for the SWFs and their home societies.
To answer your question, I would note that OECD societies are like any other – they are afraid of what they don’t know and don’t understand. Furthermore, many OECD countries are used to dominating international markets and receiving significant investments from new non-OECD investors (from SWFs or others) takes a little getting used.
These fears and suspicions are not backed up by the historical record – there have been no known problems associated with a SWF investment in the OECD area. And, SWFs can do much to allay fears by explaining their missions, investment strategies and risk management practices. This is what the Santiago Principles encourage them to do.
Ashby Monk: It was recently reported that China’s State Administration of Foreign Exchange used its assets to extract political concessions from Costa Rica. As I understand it, this is a case where a SWF has used its financial capital for political ends, which is the primary concern of Western policymakers. What’s your view? Given your job is to try to minimize protectionist policies, is this investment an impediment to ensuring unfettered markets?
Kathryn Gordon: I have no specific knowledge concerning the truth of these allegations, but, in general, it is true that mixing geo-political objectives with financial objectives creates a bad name for government-controlled investments. Governments, and not just China’s, have a long history of mixing business and politics in foreign investment. If governments are involved in business transactions at all, one can assume that political objectives will creep in at some point.
This is not necessarily a problem. Political objectives lie in a continuum between acceptable and unacceptable goals. On the acceptable side, most people would agree that governments have a legitimate role in helping their citizens to save for retirement and that public pension funds are a legitimate tool for pursing this objective. Who would wish to prevent public pension funds from availing themselves of the diversification possibilities offered by foreign investment? Governments also pursue other policy goals through international investment. For example, an Abu Dhabi SWF recently invested in a Japanese health care facility with a view to securing treatment capabilities for health problems (such as diabetes) that are commonly found in Middle Eastern populations. This investment helps Abu Dhabi achieve a political objective in the area of public health. Again, this political objective – protecting public health – has broad acceptance in all societies.
The challenge for government controlled investors, including SWFs, is to: 1) be transparent about their policy purpose; 2) adopt governance arrangements that minimise the scope for inappropriate political interference while also allowing for necessary political accountability. The SWFs’ new principles contain guidance to help them do this. OECD countries would welcome an opportunity to explore with SWFs and others the question of the “grey zone” between acceptable and unacceptable political objectives – what policy objectives are in this zone and how do we manage possible conflicting policy interests between home and recipient countries?
Ashby Monk: Thanks, Kathryn, for taking time out of your busy schedule to answer my questions. Your insights are enlightening.
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