Discussions and Research papers

GOVERNMENTS AS MARKET PLAYERS:

STATE INNOVATION IN THE GLOBAL

ECONOMY

Giselle Datz

Financial innovation emanating from the public sector is not a new phenomenon.The literature and practice of financial regulation is filled with instances in which the public sector understood and tried to contain financial excesses and attempted to maximize opportunities for economic growth via private investment. Hardly studied, however, have been cases of financial innovation that are not primarily related to regulation of private or public financial flows. This paper focuses on how govern- ments in emerging markets are acting increasingly as financial market players, enacting strategies that are not simply those of a risk-averse welfare maximizer (in a formal modeling description), but that of a high(er) yield seeking investor.

The public realm in which states operate is symbiotic. It encompasses two dual- ities: one between public and private activity and authority, and the other between demand and supply for financial innovation. In continuing with its transformative process, the state in emerging markets is undergoing a process of further hybridiza- tion, applying private methodologies to serve public goals (however politically insulated) and engaging as both a supplier and consumer of financial innovation in more aggressive ways. This hybridization shapes a new relationship between states and financial risk. However, the extent to which sovereigns can act as private players is limited by the understanding that they are inescapably tied to strategic public "interests that will take precedence over profit maximization."'

The ability to grasp the broadened investment room to move emerging market governments, as well as the new constraints they face, ultimately requires an under- standing of the state as a heterogeneous category. In other words, the heterogeneity that exists within financial markets in terms of strategies used and instruments available, can be found within the state with its diverse time horizons, functions and strategies.2 Therefore, understanding the role of states demands unpacking various layers of public and private mechanisms that manipulates them, which together determine their clout in the global economy.

Journal of International Affairs, Fall/Winter 2008, Vol. 62, No. 1. F A L L / W INTER 2008 | 35 © The Trustees of Columbia University in the City of New York

Giselle Datz

T H E PUBLIC AS A SYMBIOTIC ENTITY

The public realm encompasses a symbiotic relationship in financial innovation that is not simply concerned with regulating private activity, sponsoring privatiza- tions or leaving room for private authority to emerge. Instead, it is actually assuming "private-like behavior" through risk management activities regarding liability (debt) management and asset (reserves) diversiflcation.3 This is translated in the work of relatively new and autonomous debt-management offices and of sovereign wealth funds (SWFs). Within these can be detected a pervasive private strategy in actions ranging from the hiring of uniquely qualified financial professionals at market- competitive rates to the expansion of return-related operations.''

A second symbiosis is also at play. Governments that have always behaved as suppliers of financial assets—most notably sovereign bonds—by catering to the needs of institutional investors, are now playing a different role by providing demand for financial innovation and financial assets. Increasingly, states in emerg- ing markets are becoming net exporters of capital rather than importers. Emerging market governments, especially in the Persian Gulf and Asia-Pacific regions, are less content to leave large volumes of excess foreign reserves to be invested in risk-free assets with low return. More and more, there is a flight to risk through more auda- cious investments made by sovereign wealth funds—relatively autonomous and, thus far, secretive institutions.

Indeed, since the late 1990s, the globalization literature has been keen on parceling out the role of the state. Studies that claimed that the state was withering away gave way to more focused analyses of states as negotiators trying to intersect national law with foreign actors, especially through competitive deregulation or reregulation linked to the preferences or imperatives of foreign capital.5 A key para- doxical relationship between states and global capital was identified. Although the scope of states' autonomy to control monetary and fiscal policies was constrained by economic globalization, in order to realize the material gain from this process, as James Mittelman suggested, the state increasingly facilitated its development acting as its agent. 6 This facilitation operated not only at the level of political infrastruc- ture, but particularly at the level of legal infrastructure. For Leo Panitch, states authored a regime that defined and guaranteed the global and domestic rights of capital through international treaties with constitutional effect.'' Hence, the role of states was not only one of internalizing, but especially of mediating adherence to international capitalist competition.

Eric Helleiner's analysis of the Bretton Woods system provided a historical understanding of how states were indeed proactive in the development of financial globalization, initially restricted by the pervasiveness of the embedded liberalism compromise, e.g. economic liberalization accompanied by domestic welfare policies.8

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Governments as Market Players

Incrementally, however, the tenants of neoliberalisn:\ as both a political project and

a set of ambitious economic reforms, promoted the abolition—even if not univer-

sally—of capital controls in favor of freer international financial flows.^

Governments recognize the importance of international coordination in monetary

policy. Furthermore, central bank independence remains an important tool for signaling

credibility to markets. However, transforming key administrative functions within states

and financial innovations lay beyond both pillars.lo States endured internal changes as

a consequence of their renewed engagement with global capital. Saslda Sassen suggests

that the "internal structuration of states" is in fact an element of analyses of the state

and globalization that has been neglected." In her view, state participation in imple-

menting its global economic agenda entailed the ascendance of what became strategic

agencies within the government apparatus that were most directly connected to this

agenda, namely central banl«, treasuries and regulatory agencies. 12

This discussion leads to an analysis of what Sassen calls the "restructuring of the

private-public divide," where "forms of authority once exclusive to the public

domain are now shifting to or being constituted in the private sphere of markets

with the corresponding normative recording."'3 More specifically, Sassen refers to

cases of expansion of the private sphere, particularly through privatization and

marketization processes launched in the 1980s. In other words, she sees economic

actors seeking to privatize public regulatory functions in a way that increases their

authority over matters once exclusive to the public domain, such as commercial arbi-

tration, property rights and the regulation of trade and capital markets.

This analysis of the privatization of forms of authority, however insightful, still

does not fully account for a parallel process marking a different trend. Privatization

often means that public functions and authority cease to be exercised solely by a

public entity and become a private venture undertaken by private agents who

usually follow efficiency-maximization criteria and remain far from any mandate to

provide public goods. In this sense, what is privatized is no longer publicly managed.

Nevertheless, these processes do not fit this kind of transformation: Sovereign debt

and asset management are not functions that have become privatized. The private

in this discussion has to do with how, not who. These functions are still a responsi-

bility of the state, yet are conducted almost as private-investment operations insofar

as they: (a) count on highly specialized professionals with private experience or

outsource some services to the private sector in serving a public purpose; (b) involve,

in the case of asset management by SWFs, a mix of "opaque operations and invest-

ments" such as acquisition equity (making sovereign states shareholders in private

businesses abroad); and (c) utilize models of risk management through hedging akin

to that of private financial players. Together such functions entail competitive strate-

gies among different sovereign debt and asset managers for the most lucrative deals,

FALLAVINTER 2008 I 37

Giselle Datz

taldng the understanding of a "competitive state" to yet another level of specializa- tion and interaction. 14 In all of these areas, we see a rearticulation ofthe relationship between states and financial risk. At stake is a more welcoming engagement with the motto, "no risk, no reward."

Sassen aptly suggests that understanding the global economy may entail the blurring, rather than the neat segmentation, of "longstanding dualities in state schol-

arship, notably those concerning the distinctive QlStinCtlOn spheres of influence of respectively the national and

l i c ^^ global, of state and non-state actors, and of the orirl -rkfixT-o+o i o private and the public."'^ In this sense, my argument «mu. p r i v a t e IS ., o , , . . . j ^ , merges with Sassen s notion that globalization is QcLerinineQ Oy producing within states a form of authority that is a

tlie kinds of hybrid, "neither fully private nor fully public, neither

constraints that ^"'̂ ^ national nor fully global."'^ I argue that the . , t" . 1 distinction between public and private is then not

states as rinancial determined by passive versus active investment and

y p e t and players risk management, but by the ldnds of constraints that

subject to. states as financial market players are subjected to. More than a hybrid, the state is a heterogeneous cate-

gory that entails a symbiotic relationship between private and public strategies, obstacles and methodologies.

For Geoffrey Underhill, a neat separation of state and market is not realistic as there is a latent interdependence between the two, one which is evidently not new, but rather endogenous to governance and the process of economic competition.!'' Such interdependence is not welcoming of a market and government conceptual dichotomy (seeing markets as exchange and governance as coercion), but rather more conducive to the idea of a "state-market condominium." Under this condo- minium, public regulation and supervision of market forces is more than the result of an antagonistic relationship between the public and the private. Instead, "it is systematic evidence of the ways in which market interests and state policy processes are integrated."is In this view, the transformation of markets goes hand-in-hand with the transformation of the state. Yet more than a reciprocal relationship, a symbiotic interaction between public and private in the heart of the state is apparent. The case of SWFs that purchase stakes in important Western firms has led to a series of reac- tions by official sectors in developed countries. The complexity of the situation is well illustrated by U.S. Securities and Exchange Commission Chairman Christopher Cox, to whom the increasing involvement of governments as both owners of compa- nies and investors in securities can be seen to challenge the classical (liberal) understanding of states as proposed by Adam Smith and Milton Friedman, who

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Governments as Market Flayers

emphasize minimal intervention at a fundamental level.'^

Underlining this unfolding policy confusion is the reality of "embedded neolib-

eralism," which is, as Philip Cerny suggests, a system of production and

private-public interaction—not simply via state, but also via civil society networks—

multifaceted and impressively fungible.20 That is, the current phase of capitalism,

based on a combination of tenants from neoclassical economic theory targeting

global economic integration, has become increasingly "what actors make of it."

What states have been making of it goes beyond setting up firewalls; it now involves

a closer understanding of risk and how some exposure to it may be worth the ride.

DEBT MANAGEMENT

Sovereign debt management has gone through important changes in both devel-

oped and developing countries. In the European Union (EU), political integration

was a product of an important process of economic harmonization, which entailed,

among other initiatives, balancing budgets along the lines of accountable and trans-

parent debt management. From this emphasis came the initiative to make debt

management a more autonomous function of entities located inside the Ministry of

Finance, yet behaved separately from it in a more specialized fashion. For example,

the Ministry of Finance defines the medium-term strategy for debt management

according to its risk preferences and the macroeconomic constraints of the country,

while the Debt Management Office (DMO) implements that strategy and adminis-

ters the issuance of domestic and foreign-currency debt.2 '

At the macroeconomic level, the logic for this separation of tasks is analogous to

investor-signaling arguments made by students of central bank independence.22

Sovereign debt management that is independent of monetary policy would signal to

financial markets and domestic constituencies that governments are indeed commit-

ted to the transparent and accountable management of debt policy. That could lower

the government's borrowing costs, indicating that the country is much less likely to

engage in risky strategies, such as irresponsible indebtedness, in order to suit

political goals.

At the microeconomic level, an autonomous debt agency functions much like

private fund administrators in the sense that it tries to attract professionals who are

knowledgeable in the intricacies of global financial markets. In an International

Monetary Fund (IMF) report. Marcel Cassard and David Folkerts-Landau explain

that a great advantage of an autonomous DMO is that it "can be given a clearly

defined objective, without being hampered by either the management of structure or

pay scale of the public sector. "23 A flexible pay structure is seen as an important mech-

anism to attract qualified staff. Translated into practice, performance criteria was

developed for debt managers, which made their daily work, accountability structures

FALLAVINTER 2008 I 39

Giselle Datz

set aside, a risk management operation of liabilities. If they were in charge of manag- ing assets, their work would not differentiate much from that of private mutual or pension fund managers. After all, the logic goes that "debt management could be significantly improved if it was entrusted to portfolio managers with knowledge and experience in modern risk management techniques, and if their performance was measured against a set of criteria defined by the Ministry of Finance."24

Indeed, the perceived necessity to attract these kinds of professionals was a reason for Ireland, Sweden and Denmark to develop separate debt management offices placed outside of the Ministry of Finance and staffed with financial experts with experience in portfolio risk management. It was then assumed that funding operations would be carried out more aptly because those in charge "followed private sector, market-oriented principles and that, since they did not have to comply with bureaucratic procedures, they would create an environment appropriate for quick decision making. "25 Philip Anderson stresses the fact that recruitment and retention of staff with appropriate skills is often a challenge in the public sector.26 Yet, creative solutions are increasingly being discovered, such as providing staff with training opportunities, contracting skilled and experienced staff on fixed-term assignments and allowing for placements of private sector personnel in the debt management unit or for the use of long-term advisors with specialist skills.27 Furthermore, bench- marks for debt management are set in accordance with the risk tolerance of each government, which is, in turn, a function of the size of the public debt, its currency composition and maturity.28 Sovereign debt managers, like private pension and hedge or mutual funds managers, are held accountable for their actions if they perform below benchmark targets set in terms of the foreign currency market.

Increased competitiveness is another goal of DMOs, further linking public poli- cies to private methodologies. For example, France's Debt Management Office—^Agence France Tresor—was created to reduce the cost of debt for the French taxpayer and "to help investors better identify French debt securities within the range of sovereign debt products available in European and world markets."29 Catering to investors' demands and preferences is an effective way to gain terrain among competi- tors. In this effort, sovereign debt management institutions are increasingly issuing inflation-indexed bonds as well as long-maturity bonds that appeal to investors inter- ested in cushioning growing inflationary pressures worldwide.^o

W^hat we see then are two important transformations having taken place. Not only was more autonomy given to DMOs and equivalent agencies, but also a private rationale for conducting business was inserted in the system via increased competi- tion among these agencies. The Financial Times reported in 2002 that, although "European finance ministers are not usually at the forefront of innovation in capital markets," the picture is definitely changing. The newspaper went on to report that,

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as "competition for funding from investors intensifies in the wake of the euro, newly- styled and aggressive debt management agencies are getting more creative and more opportunistic in meeting their governments' borrowing requirements." If, in the past, the supply of European sovereign bonds was relatively predictable, now supply for bonds is a major mover of financial markets. So much so that "some of the elements of the corporate bond market are beginning to influence the shape of the government market. "31

Since 2001, the World Bank and the IMF have been advocating for the estab- lishment of quasi-independent agencies to manage the public debt of emerging market countries, emphasize the benefits of lower cost for public credit, create trans- parency and accountability, especially regarding the development of accurate and comprehensive debt data, implement of cost effective cash management policies that "minimize government liquidity and repayment risks"; and provide consistency in the development of governments' securities market.32 The crucial difference between emerging market economies and Organisation for Economic Go-operation and Development (OECD) economies is not the level of indebtedness, which has been positively altered by high levels of reserve accumulation in the developing countries, but how governments' balance sheets are exposed to external shocks, given their low level of investment diversification and amount of debt issued in foreign currency.33

The Nigerian Debt Management Office, for example, was established in 2000 in order to consolidate the management of public debt in a semi-autonomous agency. Its goals were to reduce debt stock and cost, link debt management to effective fiscal and monetary policies and to project and promote the "good image of Nigeria as a disciplined and organized nation, capable of managing its assets and liabilities."34 The Nigerian DMO has been able to deliver on its mandate to reduce the debt stock and, perhaps more importantly, lead the way in the much needed development of Africa's debt markets. A crucial achievement of Nigeria's DMO has been the country's exit from the Paris and London clubs through effective negotiations and debt buybacks.35

Autonomous DMOs operating in developing countries are still relatively rare, even if the notion of increased strategic debt management has been prevalent since the 1990s. Where no major institutional change was carried out, evident moves have been made in most countries in terms of methodological assessments and updates in risk management practices. In countries where the central bank is responsible for domestic debt, it has been hard to transform this responsibility to a different agency, as in the cases of Costa Rica, Nicaragua and Sri Lanka. Pakistan has set up a coor- dination office and Gosta Rica a coordination committee. These are layers of "complex arrangements" politically and financially when it comes to debt manage- ment in a context of volatile financial flows.36 In addition, developing countries have

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Giselle Datz

focused on creating domestic public debt markets. For example, in Brazil these debt markets have been a component of the country's debt management strategy^?

With varying degrees of depth, more private-like approaches to public debt management are changing in important ways the channels through which govern- ments do business with public and private financial players, both as demand for high yield and supply of new investment tools.

SOVEREIGN WEALTH FUNDS

After decades of severe indebtedness, many developing countries are now able to accumulate foreign reserves, make early repayments of their debts to the IMF and buy back foreign-currency debts. This has to do with learning curves from the 1997 Asian crisis, which made it evident that reserve accumulation was an imper- ative to buffer sudden instability. As Ben Thirkell-White puts it, "the build up of reserves in the post-crisis Asia suggests that the need for finance is not so desper- ate that countries are prostrate in the face of market pressure."38 Indeed, the tide has turned. Developing countries are consolidating their positions as capital exporters.39 That is a critical change in the configuration of capital flows. The salience is no longer that of the private sector, nor is it that of the public sector in developed countries exporting money to developing countries. Rather, a structural shift is underway, marking a "dramatic redistribution of international wealth" according to which large flows of publicly-owned funds are moving from countries that "historically have not been major players in international finance" to those who used to play this role. Therefore, governments, not private players, are in control of "the new international wealth."40

A large volume of this wealth is held by sovereign wealth funds (SWFs), govern- ment investment vehicles funded by foreign reserve exchange assets that are managed separately from the official reserves of the central bank and reserve-related functions of the finance ministry.^i According to recent estimates, there are fifty-four SWFs (pension and non-pension funds) in operation today. They are linked to thirty-seven different countries and hold approximately US$5.3 trillion in assets.42 Sources of funding and hence strategies of investment and time horizons differ among SWFs. Some are funded through central bank reserves (as in the case of the giant funds from China and Singapore). Others are funded through export revenues of state-owned resources (Abu Dhabi, Kuwait), taxation from exports (Russia), fiscal surpluses (Korea, New Zealand) or privatization receipts (Malaysia, Australia).

According to the IMF, there are five types of SWFs based on policy objectives. There are stabilization funds set up by countries rich in natural resources to cushion volatility in commodity prices, savings funds that "transfer non-renewable assets into a diversified portfolio of international financial assets to provide for future

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generations," funds that operate as reserve investment corporations pursuing poli- cies with higher returns, development funds that allege priority to socioeconomic projects and sovereign funds that are, in effect, pension funds.''^

Having existed for over three decades, SWFs are not new; what is new is the number of funds and their sheer current and predicted sizes. In 2007, sovereign funds invested US$92 billion in equity transactions, compared to US$3 billion in 2000. Moreover, the trend seems to be accelerating as these funds' investments during the first quarter of 2008 alone reached US$58 billion, which exceeds their combined total for the years 2000 to 2005.44

Such growth is linked to the accumulation of sovereign reserves in emerging markets through trade surpluses "unequalled as a percentage of the global economy since the beginning of the 20th century," which have made official reserves held by some governments become "astronomically high." The key here is that SWFs do not simply represent saving for a rainy day, but strategic investing for the long term.45 They mark a departure from the trend to invest foreign reserves in liquid assets such as short-term U.S. Treasury bills and government securities issued by other devel- oped countries to investment in high-return equities. After all, as Nouriel Roubini puts it, "Why hold U.S. T-bills with a meager 5 percent return, German Bunds with a 4 percent return, or Japanese government bonds with a 0.5 percent return when you can acquire foreign firms, invest in real assets, stock markets, or higher-yielding corporate bonds? "46 Indeed, there is pressure on governments with surpluses to earn better returns through different and riskier investment avenues.

One of the key financial developments of the turbulent period of late 2007 and early 2008 was the way in which emerging market governments, through their SWFs, acted as stabilizers of key commercial and investment banks plagued by ever- increasing losses from the sub prime crisis. For example, the Chinese Investment Corporation (CIC) invested US$5 billion in Morgan Stanley, acquiring a 9.9 percent share in the company. This happened despite CIC's losses in a previous US$3 billion deal with Blackstone whose initial public offering price dropped over 50 percent after the deal was concluded. The Government of Singapore Investment Corporation (GIC) and an undisclosed investor from the Middle East invested US$12 billion in the Swiss UBS. Abu Dhabi Investment Authority injected US$7.5 billion into Citigroup late in 2007.

Sovereign wealth funds are not only investors in large Western financial institu- tions, but also clients. Investment banks have been keen on creating the infrastructure to attract sovereign investment. For example, HSBC Investments has hired a new "global head of sovereign and supranational," and Morgan Stanley Investment Management has announced the appointment of a "managing director and head of central banks and sovereign wealth funds." According to the person who

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assumed this latter position, his role is to "help improve the firm's coverage of these increasingly important clients." In his own words: "It's about engaging with the clients to understand their needs and then providing tailored investment solutions." Another asset manager in charge of dealing with sovereign funds states that "one of the reasons why sovereign funds are important...is because it's new business, it's new money."'"' That entails managing funds on behalf of SWFs, many of which outsource mandates when in-house expertise is lacking, as in the case of Abu Dhabi Investment Authority whose assets—between 70 and 80 percent—are managed outside the country. Norway's Government Pension Fund has about 28 precent of its assets managed by fewer than fifty third-party bond and equity asset managers. As expected, competition for the business of SWFs is stiff. Wall Street firms are increas- ing their focus on sovereign funds by selling services that range from advice on merger and acquisitions to structured services.48

The liaison between Wall Street and some emerging market governments should not recall the time Citibank—despite being "too big to fall"—lent money to Latin American countries only to witness the default of these loans en masse in the 1980s. This is a different kind of relationship. It is a private investment firm serving the sovereign client, helping it generate higher yield for public monies, and, expectedly, collecting handsome fees in return. Not only is the public-private symbiosis within the state a case in point, but the renewed ways in which Wall Street deals with and in some ways relies on sovereign wealth from emerging markets adds more depth to what Richard Gnoddle calls the "new ecosystem of global capital."49

Sovereign wealth funds retreated from Wall Street as the U.S. financial crisis worsened in the early fall of 2008. Yet, retreating does not mean that these sover- eign investors are behaving less like market players. On the contrary, as all investors are now engaging in a "flight to quality," or to liquidity, destined to the U.S. bond market, SWFs are still behaving akin to most market players as well as foreign central banks. These funds are said to be taking their time to see how the U.S. government's bailout plan shapes up and whether it helps to ease the sense of chaos in the Western banking system. However, risks as well as new opportunities for profit lie ahead.5O SWFs are poised to take advantage of the latter. In addition, it is likely that Gulf economies in particular may seek to invest more locally. As long as oil prices remain high, their fundamentals remain strong, in sharp contrast to those of most Western economies.^'

INESCAPABLY PUBLIC: HYBRIDITY AND CONSTRAINTS

The literature on globalization—suggesting that emerging markets were severely constrained by ñnancial market expectations—^was apt in its detection of public

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responses to financial preferences and their impact on policy autonomy. More

recently, the ways in which states in developed countries found room to move became

clearer, even at the level of international institutions and the commitments therein.^2

Less attention has been paid to the effort of identifying room for policy maneuvers in

emerging markets, even at times of economic distress.^^ Increasingly it is important

to consider that the types of constraints imposed on emerging market governments

will not merely be imposed by international financial investors, but by new rules at

the public level that limit governments' actions as market players. Those can be

endogenous and intrinsic to public mandates to foster domestic economies and

consistent with macroeconomic goals. They can also be related to accountability

abroad regarding sovereign investment in private markets and key institutions.

Indeed, public initiatives that use private methodologies for liability manage-

ment or new and rislder channels for asset investments will still be circumscribed by

the notion, or fear, that states are not always profit maximizers, and thus "their

private activity is [always] public in character. "̂ 4 xhis public character entails legal

restrictions and incipient but potentially restrictive "codes of conduct" for govern-

ments as foreign investors. How restrictive those will ultimately be is still history in

the making, yet countries that try to curb the penetration of foreign public invest-

ment in their domestic economies will pay the price of potentially losing a financial

tie to limited pockets of wealth in the currently ailing global economy.

CONCLUSION

In the last two decades, governments have undergone important transforma-

tions in the constant challenge to compete, adapt and innovate in a realm of global

economic and financial integration. Focusing on the element of innovation, particu-

lar autonomy is being given to debt and asset management agencies within the state,

which increasingly operate as private actors. They engage in hedging risks, but they

also seek returns. This is not privatization of state activity or delegation of author-

ity from the public to the private sector. It is something more symbiotic happening

within the public realm, linking governments' roles as both supply and demand for

financial assets and innovation. There is a reconfiguration of public financial goals,

which is strategic, sophisticated and proactive, rather than purely regulatory.

One important implication has to do with financial complexity and state behav-

ior. States are less and less capable of fully regulating financial transactions due to

the fact that, as Alan Greenspan notes in his recent autobiography, "Markets have

become too huge, complex, and fast moving to be subject to 20th century supervi-

sion and regulation." He adds that it is no wonder that "this globalized financial

behemoth stretches beyond the full comprehension of even the most sophisticated

of market participants."55 Nonetheless, this is not a monolithic phenomenon.

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Giselle Datz

Despite this general sense of bewilderment, the state in emerging markets is far from retreating. Rather, it is evolving, and in some areas of its involvement with financial players, it is taking the role akin to that of an investor or risk manager—at times equally secretive and opportunistic despite inescapable constraints that attach governments' financial moves to broader public interest goals.

Another implication involves the contours of a new relationship with risk between the public and private sectors. If risk indeed drives the demand for regulation, and hence underlies the regulatory (defensive) role of the state, so too does it propel the active (offensive) role of governments as financial players, using private sector princi- ples to manage sovereign assets and liabilities. Governments are following methodologies tailored to corporations, creating benchmarks for risk taking while keeping an eye on opportunities to generate returns that make them intensively competitive, definitively adaptable and increasingly innovative. As Julie Froud, Adam Leaver and ICarel Williams posit, what sustains the remaldng of capitalism today is the "proliferation of new actors, contradictory agendas and multiple logics" brought about by financial dynamics.56 The state is hardly a new actor, but its role is constantly recon- figured according to its intrinsic heterogeneity of tasks, tools and responsibilities. '^

NOTES

*I am grateful to Leslie Armijo, Phil Cerny, Anna Gelpern and Iain Hardie for their comments.

• Ashby Monk, Scott Moore and Xunyi Xu, "A Review of Chinese Language Literature on Sovereign Wealth Funds" (Oxford International Review Working Paper SWFOOl, 1 July 2008), 3.

2 Javier Santiso, Ttte Political Economy of Emerging Markets: Actors, Institutions, and Financial Crises in Latin America (New York: Palgrave, 2003); Iain Hardie, "Trading the Risk: Financialisation, Loyalty and Emerging Market Government Policy" (paper presented at the annual meeting of the International Studies Association, San Francisco, 26-29 March 2008).

3 Saskia Sassen, Losing Control (New York: Columbia University Press, 1996).

^ According to the International Monetary Fund-World Bank Debt Management Guidelines, sovereign debt management can be defined as "the process of establishing and executing a strategy for managing the government's debt in order to raise the required amount of funding, achieve its risk and cost objec- tives and to meet any other sovereign debt management goals the government may have set, such as developing and maintaining an efficient market for government securities." "Guidelines for Public Debt Management," International Monetary Fund and World Bank (2001).

5 Saskia Sassen, "Embedding the Global in the National: Implications for the Role of the State," in States and Sovereignty in the Global Economy, ed. David A. Smith, Dorothy J. Solinger and Steven C. Topik (London: Routledge, 1999); Philip Cerny, "The Asian Grisis and the Gompetition State" (manuscript. University of Manchester, 2003); Steven Vogel, Freer Markets, More Rules (Ithaca: Gornell University Press, 1996); Michael Moran, "Understanding the Regulatory State," British Journal of Political Science 32, no. 2 (2002), 391-413.

6 James Mittelman, The Globalization Syndrome: Transformation and Legitimacy (Princeton: Princeton University Press, 2000).

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Governments as Market Players

^ Leo Panitch, "Rethinking the Role of the State," in Globalization: Critical Reflections, ed. James

Mittelman (Boulder: Lynne Rienner, 1997).

^ Eric Helleiner, States and the Reemergence of Global Finance (Ithaca: Cornell University Press, 1994);

John Ruggie, "Globalization and the Embedded Liberalism Compromise: The End of an Era?" (MPIFG

Lecture Series on Economic Globalization and National Democracy, Cologne, 1996).

9 Philip Cerny, "Embedding Neoliberalism: The Evolution of a Hegemonic Paradigm," ¡oumal of

International Trade and Diplomacy (forthcoming. Spring 2008); David Harvey, A Brief History of

Neoliberalism (New York: Oxford University Press, 2005).

'0 Sylvia Maxfield, Gatekeepers of Growth: The International Political Economy of Central Banking in

Developing Countries (Princeton: Princeton University Press, 1997); According to W. Scott Frame and

Lawrence White financial innovations are characterized by new products (e.g. adjustable-rate mortgages,

exchange-traded indexed funds); new services (e.g. online securities trading, internet banking); new

production processes (e.g. a new type of electronic exchange for trading securities, internet-only banks).

In their review of the economic and financial literature on financial innovation the authors point out that

empirical studies on financial innovation are surprisingly few. More revealingly, in listing sources and

actors involved in innovation, the authors never mention the role states play in it. W Scott Frame and

Lawrence White, "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?" Journal of

Economic Literature 42 (March 2004), 118.

' ' Saskia Sassen. Territory, Authority, Rights: From Medieval to Global Assemblages (Princeton:

Princeton University Press, 2006a).

'2 In Territory, Authority, Rights, Sassen extends this argument to include an expansion of executive

powers in the United States (continued and deepened by the current Bush administration) in a realm of

heightened security concerns, withering civil privacy and increased secrecy.

13 Sassen (2006a), 184.

''^ Philip Cerny, "Paradoxes of the Competition State: The Dynamics of Political Globalization,"

Government and Opposition 32, no. 1 (1997), 251-274.

'^ Saskia Sassen, "When National Territory is Home to the Global: Old Borders and Novel Borderings,"

in Debates in New Political Economy, ed. Anthony Payne (London: Routledge, 2006b), 109.

16 Sassen (2006b), 109-110.

•^ Geoffrey Underhill, "States, Markets, and Governance for Emerging Market Economies: Private

Interests, the Public Good, and the Legitimacy of the Development Process," International Affairs 79, no.

4 (2003), 755-781; Geoffrey Underhill, "Markets, Institutions, and Transaction Costs: The Endogeneity

of Governance," (working paper no. WEF0025, World Economy and Finance Research Programme of the

UK Economic and Social Research Council, 2007).

18 Underhill (2007), 681.

19 Christopher Cox, "The Rise of Sovereign Business," (speech by the U.S. Securities and Exchange

Commission chairman, Washington, DC, 5 December 2007).

20 Cerny (2008), 10 (page number as in the original manuscript).

21 While central banks are usually in charge of operations regarding foreign reserve management.

Ministries of Finance have the authority over liabilities (debt) management.

22 Central bank independence did not necessarily entail debt management independence because debt

management was still being used in some countries to achieve monetary goals; see the case of Sweden

from World War 11 until the mid-1980s; Elizabeth Currie, Jean-Jacques Dethier and Eriko Togo,

FALLAVINTER 2008 I 47

Giselle Datz

"Institutional Arrangements for Public Debt Management," (World Bank Policy Research Working Paper No. 3021,2003).

23 Marcel Cassard and David Folkerts-Landau, "Risk Management of Sovereign Assets and Liabilities," (IMF Working Paper No. 97/166, 1997), 14-15.

24 Ibid., 11.

25 Currie, Dethier and Togo (2003), 16.

26 Philip Anderson, "The Changing Role ofthe Public Debt Manager," (Washington, DC: World Bank, 2005).

27 The expanded roles of public debt managers would justify such fiexibility Those can include: conduct- ing transaction in derivatives markets (such as swaps and futures), modeling cost and risk of the debt portfolio, advancing information technology systems and handling all financial instruments, managing operational risks (Anderson 2005).

28 Cassard and Landau (1997).

29 Agence France Tresor, "The Best ofthe Euro," (Paris: Agence France Tresor, 2007).

30 In February 2005, France recorded a "groundbreaking" sale of 50-year maturity bonds in response to a notable demand by institutional investors, including pension and insurance funds, which need longer- maturity assets to match their liabilities in a context of ageing populations {Financial Times, 23 February 2005). These institutional investors accounted for one quarter of the transaction. Notably, hedge funds were also interested in the deal. With this operation, France became the first G-7 country to issue such a long-maturity bond (way beyond the maximum 30-year bonds in existence) in modern times; Inflation- linked bonds are not strangers of emerging market countries in Latin America and Europe (which made up 73% of the $46 billion in these bonds). Yet, recently it has been reported that more countries in the Asia-Pacific region are likely to also issue these so-called linkers in order to signal commitment with price stability. The absence of a substantial number of linkers issued in the region has to do with the lack of a large pension fund sector, yet sovereign wealth funds are making for potentially sizable new demand {International Herald Tribune, 1 August 2008).

3 ' Financial Times, 1 March 2002.

32 "Strengthening Debt Management Practices: Lessons from Country Experiences and Issues Going Forward," (Washington, DC: International Monetary Fund and World Bank, 2007), 5.

33 Currie, Dethier and Togo (2003).

34 "About DMO," Debt Management Office of Nigeria, 20 September 2008, http://www.dmo.gov.ng/ aboutdmo/about.php.

35 In 2003, Nigeria took advantage of a downtime in debt markets to repurchase US$601million of its par bonds and US$288 million of its oil warrants at considerably discounted prices in a public auction coordinated by Citigroup. This was done in preparation before the Paris Club in 2005, when Nigeria struck a deal that eliminated US$30 billion of debt, combining forgiveness (US$18 billion was written off) with two repayments of US$12 billion combined {Financial Times, 1 July 2005).

36 IMF and World Bank (2007).

37 IMF and World Bank (2007); "Building a Debt Managing Department: The Brazilian Experience," (Brasilia: Tesouro Nacional, 2006).

38 Ben Thirkell-White, "The International Financial Architecture and the Limits of Neoliberal Hegemony," New Political Economy 12, no. 1 (2007), 36.

39 Stephany Griffith-Jones, cited in Financial Times, 9 February 2007.

48 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Flayers

'*0 Edwin Truman, "A Blueprint for Sovereign Wealth Fund Best Practices," (policy brief no. PB08-3,

Peterson Institute for International Economics, 2008), 3.

' ' ' Clay Lowery "Remarks by Acting Under Secretary of International Affairs, Clay Lowery on Sovereign

Wealth Funds and the International Financial System," (speech. United States Treasury, Washington,

DC, 2007).

42 Truman (2008).

43 Often these are assets still understood as "reserves"; IMF and World Bank (2007), 46.

44 Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy (Cambridge,

MA: Monitor Group, 2008).

45 ING Investment Management, "Rich SWF Seek Long Mutually Fulfilling Relationship(s)," ING

Investment Weekly (May 28, 2007).

46 Nouriel Roubini, "The New Bogeyman of Financial Capitalism," Project Syndicate, http;//www.project-

syndicate.or^commentary/roubini 1 (2007).

47 Euromoney, December 2007.

48 Financial Times, 27 June 2008.

49 Richard Gnoddle, "New Actors Play a Vital Role in the Global Economy," Financial Times, 12

November 2007.

50 Roula Khalaf, "Gulf Wealth Funds Poised to Pounce on US Assets," Financial Times, 27 September

2008.

51 Simeon Kerr, "Local Liquidity Loss Shatters Gulfs Faith," Financial Times, 26 September 2008.

52 Layna Mosley, Global Capital and National Governments (New York: Cambridge University Press, .

2003); Linda Weiss, "Global Governance, National Strategies: How Industrialized States Make Room to

Move under the WTO," Review of International Political Economy 12, no. 5 (2005), 723-749.

53 Giselle Datz, "What Life After Default? Time Horizons and the Outcome of the Argentine Sovereign

Debt Restructuring," Review of International Political Economy (forthcoming).

54 Larry Cata Becker, "The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares,

Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law," Tulane Law Review 82,

no. 1 (2008).

55 Alan Greenspan, The Age of Turbulence (London: Penguin Books, 2007), 489.

56 Julie Froud, Adam Leaver, and Karel Williams, "New Actors in a Financialized World," New Political

Economy 12, no. 3 (2007), 339-347.

FALLAVINTER 2008 I 49