October 09, 2008
Sustainable Development, Human Rights and Sovereign Wealth Funds
Posted by Christiana Ochoa

The string of posts here on Conglomerate regarding the current global financial crisis has been illuminating. While I am tempted to further this discussion with my contributions as a guest over the next couple weeks, I have decided instead to stick with my original plan, which is to discuss the recent innovative efforts of a number of academics, international organizations and NGOs on the intersection of economic activity and human rights, particularly in the context of autocratic states or conflict zones.

There has been a significant amount of attention to sovereign wealth funds and the possibility that they may disrupt global financial markets or that they may act as Trojan horses, entering a country in the form of investments in private enterprises and then ultimately being used to influence political decisions and foreign policy. Relatively little attention has been paid to the potential implications of sovereign wealth funds for the protection and promotion of human rights. This was among the topics discussed at a University of Chicago workshop last February organized by Professors Tom Ginsburg, Patrick Keenan and myself, and in which my fellow guest blogger, Anna Gelpern, participated, together with other academics and staffers for international and non-governmental organizations. It is also the subject of a forthcoming article by Patrick Keenan, due to be published in the coming months by the Virginia Journal of International Law.   

Patrick Keenan points to the potential of sovereign wealth funds to contribute to the project of long term economic stability and development, especially in capital-exporting countries that bear what he calls “social arrears,” which he defines as unmet, basic development needs. He observes that some states with substantial sovereign wealth resources are also home to some of the world’s poorest populations. In a draft paper (available here) Anna Gelpern reports on the efforts of a group of leading sovereign wealth funds and the IMF to draft a set of Generally Accepted Principles and Practices (GAPP, also called the Santiago Principles) for sovereign wealth funds. In that paper she lays out what she calls the “four-fold accountability challenge” posed by sovereign wealth funds. Among them are public internal accountability, including the sort Patrick Keenan addresses and also public external accountability, under which she observes that “acting as a market participant should not absolve the state of its basic public duties: for example, not to fund genocide.”

Whether and how the GAPP addresses these internal and external public accountability concerns may provide valuable insights into the new role international organizations will play in connecting international economic activity and human rights. The IMF and others have made significant contributions in forming these connections in recent years. This is among the many areas in which we should be watching the relative effect of the IMF as its power shifts from that of “the power of the purse” to the power of expertise. 

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Comments (1)

1. Posted by Taxrascal on October 11, 2008 @ 18:55 | Permalink

He observes that some states with substantial sovereign wealth resources are also home to some of the world’s poorest populations.

I think this has a lot to do with the Dutch Disease: countries with oil will have less free political systems (since the rulers don't want to give other people a shot at the oil revenue) and unequal incomes (the same). The problem with curing it is that it means hurting natural-resource revenues.

For example, there isn't much of a non-oil economy in Saudi Arabia. If the Saudis decided to get into the auto business, they'd have two problems: first, their currency is higher than it otherwise would be due to oil, so their cars would not sell well -- they'd end up with a low return on investment. In addition, exporting cars would strengthen their currency further, hurting their oil revenue! It makes more sense for them to lend outside the country (and perhaps import some luxury goods in the bargain) than to invest within the country.

It might be possible to encourage them to at least make pro-growth investments: equities and venture capital rather than government bonds, mortgages, and big stakes in investment banks (given the state of the markets lately, they wouldn't need much convincing!).

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