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just under half the total amount dispersed in 2007. Since January 2007 US$60.7 billion of a total of US$72.9 billion has been invested in the financial sector. Despite media coverage on China and the Gulf, it has been the city-state of Singapore that has been the most aggressive, with portfolio enhancements of US$41.7bn.9 It is, perhaps, indicative of the scale of the crisis that Barney Frank, the Democratic Chairman of the US House of Representatives Financial Services Committee, plaintively admitted: ‘we need the money…we’d be worse off without it’.10 A similar view pertains in Brussels. The European Commissioner for Internal Markets has wryly noted the ‘irony that the entities that were being demonised [by vested interests in Europe]…have in recent months been the saviours rather than the demons’. 11

At the same time, the reliance on Sovereign Wealth Funds raises much wider geo-political issues. Contestation centres on the perceived transparency and accountability deficit associated with their governance, particularly those from China and Russia. It is far from clear, however, whether the risks identified – financial contagion, the exercise of soft power, the need to protect legitimate national interests and governance deficiencies – represent pressing dangers or thinly veiled protectionism. Moreover, the clumsy shoehorning of explicit political desiderata into economic policy within recipient countries cuts against the open investment policy that informs the stated aims of financial globalisation.12 This, in turn, poses profound legitimacy and authority risks for international organisations, including the IMF and the OECD, which are attempting to broker a compromise between competing trade and political imperatives.

Tentative agreement has been reached on a draft set of Generally Accepted Principles and Practices for Sovereign Wealth Funds – the Santiago Principles. There remain, however, significant problems on how these can be implemented and enforced. Consequently, the remainder of the paper is structured as follows. First, it identifies how and why Sovereign Wealth Funds have been able to exploit deficiencies in the governance of major institutional actors within investment banking and their regulation. Second, it identifies the potential risks associated with the injection of liquidity from sources not governed by western market mores. Third, it evaluates the efficacy of current regulatory approaches, with particular reference to foreign investment review processes. The paper concludes with an assessment of the cogency of this framework and the impact of the debate on capital flows and financial globalisation more generally. 13


J Burton, ‘Wealth Funds Exploit Credit Squeeze’, Financial Times (London), 24 March 2008, 18.

10 D Enrich, R Sidel and S Craig, ‘World Rides to Wall Street Rescue’, Wall Street Journal (New York), 16 January 2008, A1.

11 C McCreevy, ‘The Credit Crisis and its Aftermath’ (Speech Delivered at Society of Business Economists, London, 6 February 2008).


OECD, Sovereign Wealth Funds and Recipient Country Policies (Paris, 4 April 2008).

13 It is indicative of the sensitivities involved that the principles themselves were not published when announced in September 2008. See comments made by Hamad Al Suwaidi and David Murray, Co- Chair of International Working Group Drafting Group and Under Secretary of the Abu Dhabi Department of Finance on release of Santiago Principles <http://www.iwg-swf.org/tr.htm> 2 September 2008 (According to Mr Al Suwaidi: ‘There was a very frank exchange… A lot of the discussion focused on the need to preserve the economic and financial interests of the sovereign wealth funds so as not to put them at a disadvantage when compared to the other types of investors such as hedge funds, insurance companies, and other institutional investors’).


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