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Maximizing Autonomy in the Shadow of Great Powers: The Political Economy of Sovereign Wealth Funds

60 Pages Posted: 17 Mar 2011 Last revised: 11 Apr 2012

Kyle J. Hatton

Skadden, Arps, Slate, Meagher & Flom LLP - New York Office; Columbia University - Law School; Skadden, Arps, Slate, Meagher & Flom LLP - Banking

Katharina Pistor

Columbia University School of Law

Date Written: March 15, 2011

Abstract

Sovereign wealth funds (“SWFs”) have received a great deal of attention since they appeared as critical investors during the global financial crisis. Reactions have ranged from fears of state intervention and mercantilism to hopes that SWFs will emerge as model long-term investors that will take on risky investments in green technology and infrastructure that few private investors are willing to touch. In this paper we argue that both of these reactions overlook the fact that SWFs are deeply embedded in the political economy of their respective sovereign sponsors. This pa-per focuses on four political entities that sponsor some of the largest SWFs worldwide: Kuwait, Abu Dhabi, Singapore and China. Each of them has been governed for decades by elites whose grip on power has been tied to the economic fortune of their respective economies and their ability to pacify, or at least balance against, foreign powers. We argue that for these four political entities, both the motives for establishing SWFs and the strategies they employ can best be explained by an “autonomy-maximization” theory.

In a world where uncertainty — both economic and political — looms larger as a concern in the wake of the global financial crisis and political upheavals, such as the revolutions in Tunisia, Libya and Egypt, elites use an increasingly diverse array of tools to protect their autonomy within the global system and hedge against unexpected turmoil. SWFs serve ruling elites by concentrating substantial resources, which can be used to pay off domestic adversaries, to insure the economy against major downturns and thereby mitigate public discontent, to signal cooperation to major foreign powers and to increase legitimacy in the global arena by presenting governance structures familiar to the West. We employ a comparative case study analysis to highlight the critical importance of these political economy dynamics in the establishment of SWFs, their governance structures and their behavior in both normal times and during times of crisis.

Suggested Citation

Hatton, Kyle J. and Pistor, Katharina, Maximizing Autonomy in the Shadow of Great Powers: The Political Economy of Sovereign Wealth Funds (March 15, 2011). Columbia Journal of Transnational Law, Vol. 50, No. 1, 2012; Columbia Law and Economics Working Paper No. 395. Available at SSRN: https://ssrn.com/abstract=1787565 or http://dx.doi.org/10.2139/ssrn.1787565

Kyle J. Hatton

Skadden, Arps, Slate, Meagher & Flom LLP - New York Office ( email )

Four Times Square
New York, NY 10036
United States

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Skadden, Arps, Slate, Meagher & Flom LLP - Banking ( email )

United States

Katharina Pistor (Contact Author)

Columbia University School of Law ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-0068 (Phone)
212-854-7946 (Fax)

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