POLITICS ON SOVEREIGN WEALTH

*
*
*
*
* More
o BigCharts
o Virtual Stock Exchange
o WSJ Asia
o WSJ Europe
o WSJ Americas
o WSJ Chinese

SEARCH
SEARCH

*
*
*
*
*
*
*
*
*
*

Choose a topic to search news:

*
*
*
*
*
*
*
*
*
*

The Wall Street Journal Home Page
User Name: Password:
Remember Me Log In
Forgot your username or password? | Subscribe
WELCOME | Log Out
My Account Messages Preferences
As of Saturday, June 7, 2008 Set My Home Page | Customer Service

News

Today's Newspaper

My Online Journal

Multimedia & Online Extras

Markets Data & Tools

Classifieds

OTHER FREE CONTENT
FROM THE WALL STREET
JOURNAL
EDITORS' PICKS
China's Odyssey
Pint-Size Problem
Olympic Stage
The Roar of ... Phil
Film Review
The Flubbing Dutchmen
Indexing
Basketball
Reply to All
MORE EDITORS' PICKS
BLOGS
Most Popular Posts
1. Jargon Tracker: News About 'Dry Drowning'; Summer 'Staycations'
2. Political Wisdom: President Obama? Place Your Bets.
3. Jargon Tracker: Is 'C-diff' a Superbug?; Talk of '$5 Gas'
4. Clinton Says Words Establishment, but Not Everyone, Dying to Hear
SEE ALL BLOGS
MORE FREE CONTENT
>> Personal Journal
>> Personal Finance
>> Leisure
>> Markets Data Center
>> Video
>> Blogs
>> Forums
>> Interactives
>> Autos
>> CareerJournal
>> Real Estate
>> Small Business
>> OpinionJournal
>> MarketWatch
>> AllThingsDigital

[back to MSN Money]
MSN Money Homepage
MSN Money Investing
MORE FROM TODAY'S JOURNAL
$ Subscription may be required | Subscribe Now
PEOPLE WHO READ THIS...
Also read these stories:
Go to Page WHAT'S NEWS
• Recession Fears Reignited
• Kerkorian Could Dent Fords' Control
• 'Friends of Angelo' Get Good Loans
• G-8 Energy Chiefs Meet as Oil Soars
• India Squeezes Influential Bank
MORE
Go to Page WHAT'S POPULAR
1. Opinion: Recoil Election
2. Oil Surge Is a Fresh Hit to Economy
3. Clinton Concedes, Backs Obama
4. Recession Fears Reignited
5. Opinion: Principle Beats Pork in California
MORE
OPINION

The Politics of Sovereign Wealth
By PETER MANDELSON
June 7, 2008; Page A11

Brussels

Sovereign wealth fund managers are not the type to court publicity. They are even more wary of controversy. For the last six months they have had both.

In a political climate in Europe and the United States that is increasingly defensive about globalization, the funds have become the target of anxiety about foreign investment and, in particular, about the growing economic strength of Russia and China. With the size of the funds set to grow hugely, publicity for the funds is a given. The question is how to avoid the controversy and to maintain business as usual. The basis for a deal is now taking shape.

NOTE: RUSSIA AND CHINA HAS BEEN NAMED AS THE SLEEPING GIANTS OF THE WORLD.

In my meetings with them, sovereign fund managers have often bridled at being the subject of suspicion. They rightly point out that for more than five decades they have been quietly investing the proceeds of oil and gas wealth for future generations without raising the slightest concern. Some have standards of transparency that are exemplary.

Although it is often made, the comparison of sovereign wealth funds to state-run businesses, especially powerful state-controlled monopolies like Gazprom, is misleading. A state acting like a business – throwing the resources of government behind a company that competes with others – is a different proposition from a state looking to invest its surplus capital in the most commercially advantageous way.

But the funds risk getting the facts right and the politics wrong. The explosion of resources under sovereign wealth-fund management and a shift by some into stocks rather than the more traditional bonds have made them front-page players. Some recipient countries feel that they should know more about their investment objectives or of their precise relationship with their sponsor governments. The possibility that a state might seek to use its investments for political leverage is very slim, but because recipients are not quite sure of the rules of the game, they can't exclude it entirely.

NOTE: FUND MANAGERS DOESN'T ONLY PLAY BASED ON THEIR CAPACITY, THEY ALSO LEARN MORE STRATEGIES TO BE MORE COMPETITIVE.

The smart move from the funds would be to confound the suspicions. If sovereign wealth funds want to manage the politics of their dramatic rise, they should study the experience of the hedge-fund and private-equity industries in Britain. When growing public anxiety about their intentions and business models put them on the defensive, hedge funds and private equity moved quickly to reassure the public with voluntary codes of conduct. Sovereign wealth funds should do the same.

Norway, which already sets a high standard for transparency and governance in sovereign wealth investment, has said it would work with the International Monetary Fund on a voluntary, world-wide code of conduct. Singapore and Abu Dhabi have both signed up to some basic investment principles agreed with the U.S. that could become a steppingstone to a wider global agreement.

Work between the funds and the IMF on such a code has gotten off to a prickly start. Some funds are suspicious of the IMF's motives. But the IMF is not, and will never be allowed to become, some sort of second International Criminal Court. The funds should grit their teeth and agree to a basic code that would cut the ground from under their critics. Sovereign wealth funds have a good track record as benign investors. Fund managers know that any attempt to use their investments for political leverage could backfire badly on them. So a voluntary and limited code of conduct would only formalize what they already do. Any fund unwilling to sign up to a reasonable code would have trouble explaining why.

Still, the funds are absolutely right to insist that such responsibility for transparency and fair treatment goes both ways. Assurances from the funds on transparency and openness deserve equivalent guarantees from OECD members that they will treat fund investments fairly and without discrimination. The OECD this week adopted a declaration welcoming investments by sovereign wealth funds, and recommitting members to principles of openness and nondiscrimination. The funds should see this as a gesture of good faith, and OECD politicians should stand by it. It is the essential quid pro quo that could seal this code and allow governments to turn down the heat under this issue.

Europe and the U.S. have no interest in turning away sound investment or encouraging public skepticism about foreign investment. So long as its capital is invested for no other goal than a good commercial return, a sovereign wealth fund is not different from a pension fund, and its investments are likely to be much longer-term.

But it would be a mistake for the sovereign wealth funds to believe that this will stop some more populist politicians from calling for discrimination or greater controls if public anxiety seems to demand them. Rather than responding with resentment or indifference, the funds should step up and show that if people want reassurance, they can have it.

Mr. Mandelson is the European Union's trade commissioner.

See all of today's editorials and op-eds, plus video commentary, on Opinion Journal.

And add your comments to the Opinion Journal forum.
Click to format this article for printing Click to format this article for printing View a list of most popular articles on our site Find out about distributing multiple copies of this article Find out about distributing multiple copies of this article