Sovereign Wealth Funds: The Need for Greater Transparency and Accountability

Policy Brief
07-6
August 2007

Edwin M. TrumanManagement 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. Moreover, such large cross-border holdings in official hands are at sharp variance with today's market-based global economy and financial system. These investment activities of governments have become sufficiently significant that an internationally agreed standard should be established to guide these activities. The standard should apply to the gamut of international investments of governments, including traditional foreign exchange reserves, stabilization funds, nonrenewable resource funds, sovereign wealth funds, and government-owned or controlled entities such as pension funds. The standard should ensure that international investments of governments are based on clearly stated policy objectives and investment strategies. It should set out the role of the government and the managers of the investment mechanism/entity and ensure that the operations of the investment mechanisms are as transparent as possible. Depending on the type of mechanism, its size, and the scope of its activities, behavioral guidelines with respect to its management should be established. Such a standard would contribute not only to financial stability in the countries directly involved but also to international financial stability by increasing the transparency, accountability, and predictability of the operations of governments in managing their international investments and discharging their obligations to current and future generations.