The Rise of Sovereign Wealth Funds: Impacts on US Foreign Policy and Economic Interests

by Edwin M. Truman, Peterson Institute for International Economics

May 21, 2008

Sovereign wealth funds (SWFs) pose the greatest risks to the citizens of the countries whose governments have accumulated the large stocks of international assets, but authorities in the United States and other countries where those assets are invested also have legitimate concerns about how these funds will be managed. The major concern is that the governments that own or control these funds may mismanage the wealth, pursue political or economic power objectives when making SWF investments, or come into conflict with governments of countries in which they are investing.

Truman concludes that though the potential impacts are disquieting, SWFs do not pose a significant new threat to US foreign policy, national security, and economic interests. The United States has adequate mechanisms to manage such threats, which at this point are between minimal and nonexistent. Before turning to any additional, bilateral remedies, US authorities should exhaust all multilateral approaches to make the world safe for SWFs—through the establishment of an internationally agreed voluntary set of best practices and open financial environments. Financial protectionism is the wrong answer to the challenges of financial globalization and the associated potential for global financial turbulence.

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