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FINANCE: U.S. Preaches What It Practices Not

Analysis by Emad Mekay

WASHINGTON, May 29 2008 (IPS) - The United States has for years promoted its own business interests abroad through public funds and lobbying to open up the economies of developing countries, but as foreign government-controlled sovereign wealth funds (SWFs) increasingly acquire or invest in U.S. assets, Washington is scrambling to change the rules of the game.

SWFs are essentially pools of money governments invest for profit. Petroleum-producing countries, buoyed by soaring oil prices, now account for about two-thirds of the total wealth of global SWFs.

But as these funds begin to acquire stakes in U.S. companies, Washington has moved swiftly to curb their clout – prompting some analysts to point out that this could be perceived as a case of double standards by the U.S. and its friends in the international financial institutions.

“The United States [itself] is in the business of sovereign wealth management,” Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics, told a Congressional hearing on SWFs last week. “Consequently, we should be careful what we wish for.”

After all, U.S. state and federal governments own or control more than 3.0 trillion dollars in financial assets, or 20 percent of the 15 trillion dollars invested by governments worldwide. This is close to the estimated 3.3 trillion dollars that SWFs controlled in 2007.

The United States has long advocated for the removal of trade and investment barriers in other countries through extensive programmes euphemistically labeled as aid and run by the State Department’s U.S. Agency for International Development (USAID) and Washington’s proxy agents in the World Bank and the International Monetary Fund and other international financial institutions.

Many of those institutions are notorious among development activists for enforcing economic “reforms” that erode local control over economic and even political decisions.

Yet when the rich Middle East SWFs sought to acquire important U.S. assets, such as when the Emirate of Abu Dhabi purchased a 7.5-billion-dollar stake in Citicorp last year, Washington had its moment of revelation.

Investments by the SWFs in private U.S. companies, equity funds, and real property, among other assets, came under unprecedented scrutiny. A slew of congressional hearings on how to protect U.S. national security ensued.

House Foreign Affairs Committee Chairman Howard L. Berman told a hearing last week that investments by the funds of Middle Eastern countries “have raised questions about the power that these massive funds may have over U.S. national security interests.”

Berman said that those funds are controlled by governments that are “sometimes unfriendly, sometimes untrustworthy”.

Congress even heard Alan Tonelson, a researcher at the U.S. Business and Industry Council, liken the SWFs to the threat posed by al Qaeda and suggest that sheiks in the Persian Gulf oil kingdoms can never be reliable allies.

SWFs have long been vetted by the Committee on Foreign Investment in the United States (CFIUS), the government entity that reviews the national security implications of foreign acquisitions of U.S. assets.

But worried by the fact that some SWFs had shifted money away from treasury bonds to purchasing equity stakes in U.S. companies, early this year, Congress also set up the Sovereign Wealth Funds Task Force, a bipartisan study group aimed at probing growing SWF investments.

Last week, a high-level congressional delegation, led by U.S. Representative Luis V. Gutierrez, who chairs the Subcommittee on Domestic and International Monetary Policy, made a trip across the ocean to the Middle East to convince investors there that only their money is welcome, but nothing more.

Other members of Congress will be hold a hearing next week to further examine the issue.

In February, Undersecretary for International Affairs David H. McCormick told Congress that SWFs were raising a red flag in the White House. “Attention to sovereign wealth funds is inevitable given that their rise clearly has implications for the international financial system,” he said.

U.S. Treasury Assistant Secretary Clay Lowery even suggested that SWFs have only two options in the U.S. – to choose voluntarily not to vote their shares in U.S. companies or to disclose how they vote.

Even more aggressive calls have surfaced to require SWFs to take a non-controlling stake in a company and be forbidden from voting their shares altogether to ensure that the investment is passive.

In March, two top U.S. officials got on the case. After lecturing them on the benefits of transparency when doing business in the United States, U.S. Secretary Treasury Henry M. Paulson and Deputy Secretary Robert M. Kimmitt wrestled some concessions from two of the world’s largest funds – one controlled by Singapore and one by the United Arab Emirates. The two SWFs pledged to be more transparent and not make investments with a hidden political agenda.

The U.S. Treasury tapped more weapons in its arsenal and has since October encouraged the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) to develop best practices for sovereign wealth funds, a process that is likely to award more oversight to the United States and rich nations over the SWFs.

But all those “protectionist” measures may have also unintentionally highlighted the double standards in the international financial system at the hands of its patrons.

Corporations, backed and promoted by Washington and international financial institutions, frequently acquire and control sensitive sectors in developing nations such as telecommunications, transportation, energy, media and the financial sector.

While Washington says SWFs could potentially distort markets, in fact most foreign investors, including hedge funds and private investors, have the potential to do much more damage to markets in developing countries, without much of a rebuke from Washington, given the size of their portfolios.

And no matter how much the SWFs expand, they will forever remain a tiny sliver of the 190-trillion-dollar portfolio of global financial assets that are mostly in the hands of Western and U.S. institutions, or the 62 trillion dollars managed by private institutional investors.

This is perhaps why the current debate in the U.S. about the SWFs could be what advocates of greater sovereignty by developing nations over their economies have been awaiting for many years to make their point.