Is there a link between a SWF sponsoring government’s level of democratization and the internal governance of the SWF? Sven Behrendt of the Carnegie Endowment for International Peace thinks so; he shows the extent to which a SWF’s compliance with the Santiago Principles corresponds to the country’s democratization:
It’s a fascinating chart with some interesting implications. It is telling to see how far most countries are from being “GAPP compliant.” Only the New Zealand Superannuation Fund even comes close to full compliance. Most of the funds only manage 40-60% compliance, while the SWF from Iran has the dubious honor of 0% compliance. These observations clearly fit with Sven’s correlation of political freedom and SWF governance. Indeed, if the SWF takes its cues from the sponsoring government, and most do, these results shouldn’t be all that surprising.
However, in a paper for New Political Economy, I looked at a similar issue: how governance can help a SWF overcome the taint of a sponsoring government that scores low on the democratization table. In talking about the China Investment Corporation, I noted:
“…in the absence of ‘good governance’, the CIC is tainted by China’s broader principles (as perceived in the United States). However, with the application of good governance, the CIC would be evaluated on its own merits and could potentially be viewed as ‘legitimate’ and ‘trustworthy’.”
Unfortunately, while I still believe the above, Sven’s research seems to suggest that my point is moot. As such, Sven concludes that:
“Any meaningful progress on the compliance of SWFs in emerging economies, particularly in the Arab world, is likely to be closely associated with broader democratic reforms.”
Good luck with that…
Ashby,
nice reference of Sven’s great work. regarding the CIC, it seemed striking to me, how far away it was from the trend line, ie how much more compliant it was than the state of China’s governing system would imply. Of course with the CIC we still face the challenge that its a relatively new entrant. Just having an annual report takes you a long way.
Rachel, That’s a really good point. China is clearly an outlier on the above chart. Something to think more about…
In my view, it’s not an accident that CIC is such an outlier. Were NCSSF included in the sample, you’d have two Chinese outliers. Both organizations are intended to serve as best practice models for the very sizeable (500+) number of USD1bn+ unlisted or state-owned Chinese institutional investors which aren’t yet well known outside China. These include insurers, group finance companies, regional SASACs and others. Both CIC and NCSSF are expected to serve as models to this group for investment process, portfolio assembly, compliance and reporting. In fact, there appears to be some friendly rivalrly between NCSSF and CIC about whose annual report will be the most informative and whose RFI/RFP processes are more transparent.
China appears to be the only nation on the chart attempting to use its SWFs to meet an internal policy goal: improving the investment practices of organizations in which the public has a stake, however indirectly. I’m not sure how much domestic interest there is in moving China to the right on the x-axis. Undoubtedly, however, China would love to have a population of global institutional investors that is at least the size of those found at that end of the axis. By ensuring that CIC and NCSSF place so high on the y-axis, the State Council and others are encouraging others to improve their game.
500+ USD1bn+ unlisted or state-owned Chinese institutional investors? That is remarkable; I had no idea it was that many. Very interesting, Mike. Thanks for the comment.
Hi All, Thanks indeed for these comments! I am just about to put together a Carnegie Paper on this, which gives more background to it all. It was a lot of boxes to tick ….;-) Of course, there will always be the problem with data availability, accessabilty and applicability, which required a great deal of judgement. So let’s treat it all with caution. Anyhow. Btw. I ran this also by age, i.e. maturity of the fund, but did not see any correlation. Likewise the size of the fund does not provide any idea about “Santiago compliance”. World Bank governance indicators and Transparency International’s “transparency index” get closer. But, interestingly, the EIU’s democracy index comes out strongest, as stated. I only included those funds that signed up to the Santiago Principles. It would be quite interesting to compare these against those which did not, and see if there is any difference. Mike, you would probably argue there is none, because its domestically driven. Interesting, indeed!
I agree with the point CIC (and to a certain extent GIC, but the democratic nature of Singapore is not the point here) have been designed as best practice for their respective countries as well as being (in CIC’s case) keen to become accepted as an commercially orientated investor in the West.
But, a point to be made about Middle Eastern Funds. As international pressures towards greater transparency and the need for state-owned corporations, including SWFs, to be more open about their dealings has mounted, there have been some moves towards transparency, but this has neither been universal nor uniform.
One of the reasons is that businesses in the Arab world, particularly private and government-owned corporations, tend not to be forthcoming about their company details. There is a culture of keeping quiet about big news, including investments, layoffs and the cancellation of major property developments. This isn’t just a corporate phenomenon; it’s a cultural one. Many Arabs, particularly in the Gulf, are reluctant to discuss their business, their families, their society or their culture. That said, Dubai’s current troubles might start to change this.
In many ways, differing reactions towards increasing transparency amongst Middle Eastern SWFs is another example of the dangers of treating them as a homogenous group.
Very good point, Victoria. There are cultural elements here that have tended to trump ‘international best practice.’
I just returned from a workshop of political economists in Doha, where the phenomenon of the “artistic haze” in the Arab world was pointed out, confirming your argument, Victoria. Though the cultural attitude to wealth and money needs to be respected, it appears to me that responsibility for system stability (which arguably is also based on the concepts of good governance, accountability and transparency) should increase relative to growing systemic relevance. This, in turn, should have positive consequences for how Arab SWF are managed.