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

Abstract

Sovereign wealth funds are investment vehicles by which governments invest some of a nation's wealth in international financial markets. Some the world's poorest countries, often with fragile democracies or despotic governments, have been able to amass staggering amounts of wealth in these nominally private funds. For most scholars, the principal worry about these funds is that they make possible investments in pursuit of political, not economic, goals, and thereby strategically harm other countries or the international financial markets. Thus much of the debate about regulating sovereign wealth funds has centered on the international impact of these funds. There has been virtually no consideration of the domestic effects of sovereign wealth funds on the investor countries themselves. Drawing on recent empirical scholarship on government wealth, I show that 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. Is there a way to prevent sovereign wealth funds from becoming just another form of concentrated wealth that rogue governments can use to solidify their hold on power? I develop 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. My theory would go a long way toward creating a coherent regulatory approach to sovereign wealth funds that recognizes their international and domestic obligations.