International Financial Institutions (IFIs) and Sovereign Wealth Funds — SWFs, Internal Improvement and the Socialization of Developing States

Abstract

Especially since the start of the second decade of the twenty-first century, once more we have seen more focused interest in the use of SWFs by home states — less as a means of projecting sovereign financial power outwards and more as a means of internal financial management, and development. What makes this interesting from the perspective of SWF development is the role of international financial institutions (IFIs) in SWF development. This article takes a first look at the way in which IFIs have also begun to use SWFs in their interactions, with a emphasis on developing states. A review of some recent efforts to establish SWFs with a stabilization or development focus suggests the way in which these funds now may better serve the project of fiscal and governance internationalization, and the development of global policy coherence around the fiscal ideologies of IFIs, rather than as an instrument of national policy. Part II briefly sketches the IFI’s interest in and approach to SWFs as a part of their investment, capacity building and rule of law toolkits. Part III then reviews the manifestation of this approach in the development of SWFs in a number of developing states. The article suggests ways in which stabilization and development SWFs may better serve financial globalization than the particular interest of states establishing them precisely by transposing global standards of fiscal and governance behavior into the internal workings of states. In this sense, development and stabilization SWFs serve as an instrument of globalization from the top down (through IFI policy operationalization) perhaps as effectively as SWFs that seek to project national financial power through private market investments abroad. But it also creates the possibility of divergence in SWF character as the consequences of the use of SWFs as governance devices may produce substantial deviation from the traditional organizational parameters of SWFs as instruments of macroeconomic policy.

Note: Later version to be published as “International financial institutions (IFIs) and sovereign wealth funds (SWFs) as instruments to combat corruption and enhance fiscal discipline in developing states,” 2014 International Review of Law (Qatar) (forthcoming).

Keywords: sovereign wealth funds, development fund, stabilization funds, rule of law, socialization, IMF, World Bank, corruption

JEL Classification: E63, F02, G23, K33, O11, O23, Z10