Friday, February 8, 2008

Why the need for greater transparency of sovereign wealth funds?

Looked over Edwin Truman's Sovereign Wealth Funds: The Need for Greater Transparency and Accountability. This and other writings on SWFs seem to call for greater transparency mostly because of a fear (rational or not) that the country will use what is equivalent to a financial nuclear weapon of mass destruction. The fear is that in order to achieve political ends, a country will use the power of its SWF to wreak economic havoc in the financial world.

Apart from that I can see no other real reason listed in any of the other writings. In general, I thought the article was a good introduction but would benefit from:
1. A source for Table 1.
2. A baseline reference for a reader to gain some insight on the size of these SWFs. For instance, the size of the largest hedge fund and/or CALPers.

1. I did not find that a compelling case was made for the need for greater transparency or accountability.
2. It is also hard to make the case that the citizens of the countries in question even know that their governments have a large SWF and would demand accountability.
3. Backlash by host countries against invesment by SWF would force them to become more transparent unless they take their money elsewhere. No need for rules or mandates - self interest on the part of SWFs would eventually lead to greater transparency (again, if they don't take their money elsewhere). Academic and policy efforts requiring greater transparency and accountability are misplaced.

I'm curious how seriously the possibility that increased disclosure could be destabilizing, for instance something along the lines of Hyun Song Shin and Haresh Sapra's Do Derivatives Disclosures Impede Sound Risk Management?

It seems like the mad government scenario could also be applied to a mad hedge fund manager which are unregulated as well. I may be watching too much James Bond or reading too much Tom Clancy.

Brad Setser has some discussion.

No comments: