an uncertain future.64 The next section deals with the possible effects of
“sovereign wealth funds” on the global monetary regime.
SOVEREIGN WEALTH FUNDS
Sovereign wealth funds (SWFs) are “government investment funds, funded by
foreign currency reserves but managed separately from official currency reserves.”65Whereas official reserves hold low-risk assets such as sovereign
bonds, SWFs may hold equities, corporate bonds, and other assets; thus, SWFs are more important for financial markets. The rapid growth of SWFs signifies a partial return to state capitalism after decades of privatization in the West. Although SWFs have existed at least since the 1950s, they have grown dramat- ically over the last 15 years. The main factors behind the growth of SWFs are financial globalization, imbalances in the global financial system, and the large surpluses some states have acquired due to high oil prices. The countries with the largest SWFs include one DC (Norway), and the emerging economies of the United Arab Emirates, Saudi Arabia, China, Kuwait, Russia, and Singapore.
The emerging economies have used their SWFs to buy stakes in Western companies and invest in areas that will reduce the effect of volatile commodity prices on their revenues and balance of payments. For example, China’s SWF purchased shares in the U.S. financial firms Morgan Stanley and the Black- stone Group in 2007, and Dubai’s SWF bought up shares of several Asian companies such as Sony. However, many SWFs lack transparency, and it is dif- ficult to get reliable data on the size of the funds and their goals and strategies. The SWF of a democratic society such as Norway is more transparent because it has an obligation to its citizens. However, most emerging economies are less democratic, and there is little pressure for transparency. With emerging economies growing faster than DCs and investing their surpluses in the West, concerns have increased about the power and investment strategies of SWFs. For example, China’s SWF has invested in major U.S. financial firms. Most countries do not have major objections to foreign private investment, but they are more sensitive to foreign state investment. The SWF issue, along with the shift of manufacturing and financial jobs away from the West, could produce rising trade tensions and protectionism. SWFs suffered major losses as a result of the 2008 global financial crisis, and countries with SWFs are more likely to invest more conservatively in the future. However, they will remain an impor- tant vehicle for foreign investment by emerging economies with surpluses.66
Even if SWFs prove to be less important than some analysts predicted, Asian and Middle Eastern reserve assets are likely to cause some major changes in the role of the U.S. dollar and in IMF decision making. In 2007, Russia’s president Putin called for a “new architecture of international economic relations” and supported a rival candidate for IMF managing director against the EU’s choice of Dominique Strauss-Kahn of France.67Although Strauss-Kahn was chosen for
a five-year term, the IMF adopted selection procedures in 2007 which indicated that “any Executive Director may submit a nomination regardless of nationality,
for the [managing director] position.”68Under pressure from the emerging
economies, the April 2009 G20 meeting to deal with the global financial crisis agreed to complete a new balance of power in the IMF by 2011, in which heads of IOs would be selected by merit and not by nationality. Thus, it is unlikely that the EU will continue to select the IMF managing director by tacit agreement.
Considering IPE Theory and Practice
In the 1940s, the Bretton Woods negotiators opted for a monetary regime based on interventionist or embedded liberalism, in which states pegged their exchange rates to gold and the U.S. dollar, the IMF provided short-term loans for balance- of-payments problems, and states controlled capital flows to maintain exchange-rate stability. However, growing U.S. balance-of-payments deficits, combined with pressures for a return to orthodox liberalism, contributed to a shift from pegged to floating exchange rates in 1973 and to a gradual freeing of capital controls. Liberal theorists point out that, with the globalization of capital flows, countries had to choose between independent monetary policies and a system of pegged exchange rates because of the “Unholy Trinity.” In a bid to preserve their independence in monetary policy, the major countries shifted from pegged to floating exchange rates. In the orthodox liberal view, the shift to floating currencies and the freeing of capital flows are positive developments enabling markets to function more freely, with little interference from the state. Historical materialists by contrast see the increased capital mobility as a negative development because the fear of capital outflows forces governments to adopt policies that adversely affect the poorest and weakest in society. If governments do not adopt capital-friendly policies, MNCs and international banks can shift their funds to more welcoming locations.Thus, governments often lower their tax rates on corporate income, even if this means sacrificing social programs.69Increased capital mobility also adversely affects the
working class, because countries with weak labor unions draw investment away from countries with stronger unions.70Realists argue that the globalization of
monetary and financial relations is greatly exaggerated, and they present evidence that there was more openness to capital flows before World War I.71To the extent
that global financial flows have increased, this has occurred with the permission and sometimes encouragement of the most powerful states, and these states continue to dictate the terms for such transactions. Whereas realists are correct that powerful states supported financial globalization, liberals correctly point out that this globalization “has had unintended consequences for those who promoted it.”72
Thus, it is difficult for states to regain control over the global market forces they unleashed. Attempts to restore national controls on capital flows or to restore a system of pegged exchange rates would be like putting the genie back in the bottle.
To insulate themselves from global monetary instabilities, some countries are seeking regional alternatives, and the most important of these is the eurozone. Ideational as well as material factors have played a role in the EMU, because a neoliberal policy consensus among EC leaders in the late 1970s induced them to
Questions 161
QUESTIONS
1. What options does a country have in dealing with a balance-of-payments deficit, and what are the preferred options of the three main theoretical perspectives? 2. When did the United States first have a balance-of-payments deficit, and when did
it first have a balance-of-trade deficit? Why was the Bretton Woods monetary regime unsustainable in the long term, and what role did the “Triffin Dilemma” play in the breakdown of the regime?
3. How much influence have DCs and LDCs had in the IMF decision-making structure? Do you think this is likely to change in the future?
4. What have the IMF’s functions been in the global monetary regime? How did the shift from pegged to floating exchange rates affect the role of the IMF vis-à-vis the G7? How has the role of the G20 changed in relation to the G7/G8, and what is the reason for this change?
5. What are the characteristics of the current global monetary regime, and in what ways has it contributed to instability? What is the “Unholy Trinity,” and does it limit the changes that IMF members could make in the current monetary regime?
give up autonomous monetary policies to achieve exchange-rate stability. As this chapter discusses, the euro has emerged as an important alternative reserve currency to the U.S. dollar. A currency’s effectiveness as a medium of exchange, a unit of account, and a store of value depends on ideational as well as material factors, because individuals must be confident that the currency can be used in financial transactions without significantly losing its value. Growing U.S. current account deficits and foreign debt have decreased confidence in the U.S. dollar, but the EMU’s difficulty in forging sufficient political and economic unity among the member countries has also detracted from confidence in the euro. With financial globalization, the future of the dollar depends not only on the United States and its traditional European allies, but also on the actions of emerging economies with large U.S. dollar reserves such as China, Russia, and a number of OPEC countries.
This chapter has shown that the United States as the key currency country has been able to adopt policies not open to other states—such as “benign neglect” of its growing current account deficits and foreign debt. However, financial globalization is posing more limits on the policy choices of all countries today, including the United States. For example, in 2005 and 2006, the U.S. Congress sidetracked two efforts by emerging economies to use their SWFs to gain control of U.S. assets: a bid by a Chinese state oil company for Unocal, the twelfth largest U.S. oil company; and a bid by Dubai to purchase a controlling stock interest in a number of U.S. ports. Congress took these actions because of concerns about the national security implications. However, the U.S. deficit and debt problems, and the credit problems posed by the 2008 financial crisis show that the United States may be less able to choose from whom, and on what terms, it receives external finance. Both the global monetary regime and the U.S. dollar as the key international currency face an uncertain future.
6. Why was the EMU formed, and how successful has it been?
7. Is the euro likely to pose a challenge to the U.S. dollar as the key currency? What are SDRs, and could they pose a challenge to the U.S. dollar? What role do you think the Japanese yen and Chinese yuan will have in the future?
8. Do you think the U.S. deficit and debt problems pose an economic and geopolitical threat to the country? Is external financing through sovereign wealth funds and other sources a good solution for U.S. debt problems?