Sovereign Wealth Funds and Social Arrears: Should Debts to Citizens be Treated Differently than Debts to Other Creditors

[Patrick Keenan is Associate Professor at the University of Illinois College of Law]

I’m grateful to the folks from VJIL and here at Opinio Juris for the chance to share a few thoughts about my article.

My aim in this article is to try to broaden the way that scholars and policymakers think about sovereign wealth funds. The standard fear about SWFs is that they open the door for states to use market tools as strategic tools. What is left out of the debate is a separate concern: that governments in control of state resources will not pay enough attention to politics. My concern is that SWFs could become just another pool of concentrated wealth that non-democratic regimes or leaders could use to solidify their political power.

Although this article is one of a series that I have written in the past couple of years that looks at the connections between human rights, business and finance, and globalization, my interest in this specific topic was sparked by a single data point that I saw somewhere (though I no longer remember where). In 2006, Nigeria received about $11 billion in official development assistance. That same year, the government of Nigeria controlled a sovereign wealth fund work more than $17 billion. It struck me as odd that a state would simultaneously accept massive amounts of development assistance and export capital. In my paper I show that Nigeria’s situation is far from unique. To be clear—this data point got me thinking about states as stewards of wealth. I do not claim that it proves conclusively anything.

Now for the paper—the standard concern about SWFs is perhaps best illustrated by an example or two. Most of us likely remember the Dubai Ports World imbroglio, when DP World, a state-owned company from the United Arab Emirates, attempted to purchase a company that would have given DP World control of the management of six ports in the United States. Many in Congress and elsewhere worried that the deal would have undermined US security by permitting the UAE to advance its strategic interests rather than just seeking profits. There was a similar outcry when China’s national oil company—CNOOC—attempted to purchase Unocal. In both instances, the argument was that the transaction would amount to giving control of the purchased company to a foreign government. Implicit in this argument is an assumption that the foreign government would put politics over profits. This argument retains some appeal despite the fact that so far, all the evidence suggests that when states operate in the markets, they do so in the pursuit of profits.

But what happens when states give too little weight to domestic political considerations? From the perspective of people in the state controlling the fund, an SWF is purely an instrument of public policy. Money invested in an SWF is money not spent or schools or roads or hospitals. When an SWF is used to transfer wealth from one generation to another, it can be a perfectly rational approach. Consider Kiribati, whose government controls as SWF worth about $400 million. Fifty years ago, Kiribati’s economy was almost entirely dependent on the revenue from one resource (guano, if you must know). Now the resource is gone but the wealth remains, thanks to sound investments.

Unfortunately, the evidence suggests that many states haven’t done as well as Kiribati. In many developing countries, concentrated wealth in the hands of the government is associated with greater repression, weaker institutions, and a lower quality of life for ordinary citizens. My article develops a theory of social arrears to define what a state owes its citizens, and to determine whether a sovereign wealth fund is being used to fulfill this obligation. I argue that a government’s unmet obligations to its citizens should be treated like unpaid debts to other creditors, which constrain the government’s investment options until those creditors are satisfied.