“Illiberal” states control more than 15 percent of world GDP, and their sovereign wealth funds represent a security risk to the world’s democracies, a new report concludes. European states should think twice before turning to such funds for relief in the current financial crisis, the Brussels-based think tank Bruegel argues.
“The current crisis may increase both Europe’s need for such investment and its sensitivity to the non-economic implications,” the report suggests. It notes the growing share of inward investment on the part of SWFs from “countries with diverse political regimes with which Europeans may not always see eye-to-eye.” The EU should adopt a European version of the United States’ committee on foreign investments, it concludes.
Such funds are not only a threat to Europe. “Nations with authoritarian regimes now play, as a result of their large foreign currency reserves and sovereign wealth funds, a key role in shaping the economic future of the United States,” a recent analysis notes, including such regimes as the People’s Republic of China, Saudi Arabia, Russia, Singapore and the United Arab Emirates.
China has reportedly bought $300 million of Costa Rican government bonds in exchange for which it is pushing the Central American democracy to sever diplomatic ties with Taiwan. Even if China had no intention of using its sovereign wealth fund for directly political purposes, the investments could allow Beijing to project its soft power globally, according to a Congressional Research Service report
Although most funds are managed by professional investors focused on maximizing returns, at a macroeconomic level, notes political economist Dan Drezner, “it is reasonable to fret about the growing clout of state-based investors, not least because most of this money will be held by a small group of (authoritarian) countries:
As a long-term development model, sovereign wealth funds are viewed as one component of a possible rival to liberal free-market democracy. State-led development societies – in which governments use SWFs to buy off dissent and promote development and technology transfer – could emerge as a viable challenger to the accepted political economy of the advanced industrialized states. This would have corrosive effects on the West’s soft power. It would be an open question whether the rest of the world would look at the Western development model as one to emulate. Crudely put, far fewer countries would want what the United States and European Union wants.
Drezner believes such fears are overblown, but concedes that sovereign funds threaten massively “crimp” efforts at democracy promotion.
Authoritarian governments’ growing financial power is a strategic as well as an economic concern, according to a report from the Council on Foreign Relations. “Not only do we live in a new ‘age of authoritarianism’,” notes the report’s author Brad Setser, “but we live in a world where autocratic governments increasingly finance democratic governments.”
“Autocratic governments generally don’t finance other autocracies,” he observes. China, Russia and the Gulf states are developing large financial claims on the United States and Europe. “One thing is clear: the world’s biggest financial powers are no longer the world’s large democracies,” Setser concludes.
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