Sovereign Wealth Funds

The Issue

Management of official holdings of foreign assets, in particular in sovereign wealth funds, has become a major focus of national and international economic and financial policy. The principal reasons are their size, lack of transparency, potential to disrupt financial markets, and the risk that political objectives might influence their management. Their recent growth and expansion have exposed two tensions in international economic and financial relations. First, the growth of sovereign wealth funds reflects a dramatic redistribution of international wealth from traditional industrial countries like the United States to countries that historically have not been major players in international finance. Second, governments own or control a substantial share of the new international wealth. This redistribution of wealth from private to public hands implies a decision-making framework that is at variance with the traditional private-sector, market-oriented framework.

Given these tensions, the challenge facing the United States and the international financial community is how best to guide these cross-border investment activities of governments and at the same time maintain the open market-based regime in which private-sector actors are the major players. These activities have achieved a sufficient scale and scope that an internationally agreed standard should be established to make them more transparent, predictable, and accountable to their own citizens and governments, to the citizens and governments of host countries, and to participants in financial markets. The International Monetary Fund, with the assistance of the World Bank, is engaged in a dialogue to try to establish such a set of best practices. Rather than rush to establish unilaterally a set of national standards, the United States should see what develops from this multilateral process.

Essential Reading from the Institute

Policy Brief 08-3: A Blueprint for Sovereign Wealth Fund Best Practices [pdf]
by Edwin M. Truman, Peterson Institute for International Economics
April 2008

Working Paper 09-10: A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds [pdf]
by Christopher D. Carroll, Johns Hopkins University
and Olivier Jeanne, Peterson Institute for International Economics
October 2009

Testimony: Sovereign Wealth Funds: New Challenges from a Changing Landscape
by Edwin M. Truman, Peterson Institute for International Economics
Testimony before the Subcommittee on Domestic and International Monetary Policy, Trade and Technology, Financial Services Committee, US House of Representatives
September 10, 2008

Op-ed: Four Myths about Sovereign Wealth Funds
by Edwin M. Truman, Peterson Institute for International Economics
Op-ed in VoxEU.org
August 14, 2008

Testimony: The Rise of Sovereign Wealth Funds: Impacts on US Foreign Policy and Economic Interests [pdf]
by Edwin M. Truman, Peterson Institute for International Economics
Testimony before the Committee on Foreign Affairs, US House of Representatives, Washington, DC
May 21, 2008

Policy Brief 07-6: Sovereign Wealth Funds: The Need for Greater Transparency and Accountability [pdf]
by Edwin M. Truman, Peterson Institute for International Economics
August 2007

Speech: Do Sovereign Wealth Funds Pose a Risk to the United States?
by Edwin M. Truman, Peterson Institute for International Economics
Remarks at the American Enterprise Institute, Washington, DC
February 25, 2008

Testimony: Sovereign Wealth Fund Acquisitions and Other Foreign Government Investments in the United States: Assessing the Economic and National Security Implications
by Edwin M. Truman, Peterson Institute for International Economics
Testimony before the Committee on Banking, Housing, and Urban Affairs, United States Senate
November 14, 2007

Paper: A Scoreboard for Sovereign Wealth Funds [pdf]
by Edwin M. Truman, Peterson Institute for International Economics
Paper presented at the conference on China's Exchange Rate Policy
Peterson Institute
Washington, DC
October 19, 2007

Working Paper 08-2: Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization [pdf]
by Aaditya Mattoo, The World Bank
and Arvind Subramanian, Peterson Institute for International Economics
January 2008