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…