[Senate Hearing 110-765]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 110-765




                               BEFORE THE

                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                             JUNE 11, 2008


       Printed for the use of the Committee on Foreign Relations

                   Available via the World Wide Web: 

48-061 PDF                  WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, 
Washington, DC 20402-0001

                COMMITTEE ON FOREIGN RELATIONS          

           JOSEPH R. BIDEN, Jr., Delaware, Chairman          
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       NORM COLEMAN, Minnesota
BARBARA BOXER, California            BOB CORKER, Tennessee
BILL NELSON, Florida                 GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois               LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey          JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
              Antony J. Blinken, Staff Director          
       Kenneth A. Myers, Jr., Republican Staff Director          


                            C O N T E N T S


Barrasso, Hon. John, U.S. Senator From Wyoming...................    42

Bhagwati, Jagdish, Professor, Law and Economics, Columbia 
  University, and Senior Fellow in International Economics, 
  Council on Foreign Relations, New York, NY.....................     5

      Prepared statement.........................................     8

Biden, Hon. Joseph R., Jr., U.S. Senator From Delaware...........     1

Cardin, Hon. Benjamin L., U.S. Senator From Maryland.............    39

Corker, Hon. Bob, U.S. Senator From Tennessee....................    32

Dodd, Hon. Christopher, U.S. Senator From Connecticut............    42

Drezner, Daniel W., Professor of International Politics, Fletcher 
  School of Law and Diplomacy, Tufts University, Boston, MA......    12

      Prepared statement.........................................    15

Isakson, Hon. Johnny, U.S. Senator From Georgia..................    37

Lugar, Hon. Richard G., U.S. Senator From Indiana................     4

Marchick, David, Managing Director and Global Head of Regulatory 
  Affairs, The Carlyle Group, Washington, DC.....................    18

      Prepared statement.........................................    20

Menendez, Hon. Robert, U.S. Senator From New Jersey..............    34

Webb, Hon. Jim, U.S. Senator From Virginia.......................    30

              Additional Material Submitted for the Record

Prepared Statement of Douglas Rediker, Co-Director Global 
  Strategic Finance Initiative, the New America Foundation, 
  Washington, DC.................................................    49

Responses of David Marchick to Questions Submitted by Senator 
  Biden..........................................................    57

Responses of David Marchick to Questions Submitted by Senator 
  Lugar..........................................................    53


                        SOVEREIGN WEALTH FUNDS:
                         IN AN ERA OF NEW MONEY


                        WEDNESDAY, JUNE 11, 2008

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                     Washington, DC
    The committee met, pursuant to notice, at 9:35 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Joseph R. 
Biden, Jr. (chairman of the committee) presiding.
    Present: Senators Biden, Dodd, Nelson, Menendez, Cardin, 
Webb, Lugar, Corker, Isakson, and Barrasso.

                   U.S. SENATOR FROM DELAWARE

    The Chairman. The hearing will come to order, please. I 
apologize to the witnesses and my colleague for starting a few 
minutes late here.
    We have a very distinguished panel this morning. I should 
start by saying that in the beginning of the year Senator 
Lugar's staff and mine sat down to talk about what hearings we 
thought were important ones to conduct. Back then the chairman 
said we should be holding hearings on--and I'm sorry it took so 
long, Mr. Chairman--on sovereign wealth funds. So I thank him 
for his leadership here and I look forward to hearing from each 
of you.
    Most Americans know all too well from their trips to the 
gas pump that record oil prices are now overtaking the housing 
crisis at the top of their economic worries, anyway. On top of 
the weakness in consumer and financial markets, now we have the 
threat of inflation rooted in energy prices, adding to the pain 
and complicating the task of restoring growth and stability to 
our economy.
    There is another effect of those high oil prices and our 
continuing dependence on imported oil. That is the historical 
shift which we saw back in the 1970s, but in earnest now, is 
the historical shift of wealth from our country to the oil 
producers, from Russia to the Persian Gulf.
    At today's prices, the United States is sending $800 
million a week to OPEC--every single--excuse me--every single 
day of the week, $800 million. In exchange for full tankers of 
their oil, we're sending them boatloads of money. Their bulging 
treasuries have now become powerful investment tools, so-called 
sovereign wealth funds, a phrase I think most Americans never 
heard of. Although they've been around since the mid-1950s, 
only recently they have caught our imagination, attention, 
wonderment, and concern.
    In addition to those oil-based funds, other nations such as 
China with export-based economies are accumulating their own 
large piles of money, which they are now using to buy assets 
around the world.
    Today the Committee on Foreign Relations will look at 
sovereign wealth funds and examine their foreign policy 
implications. I want to thank again the ranking member, Senator 
Lugar, for urging us to focus on this.
    Sovereign wealth funds are not new, as I've mentioned. In 
fact, the first sovereign wealth fund was established in Kuwait 
in 1953. Yet only recently have they found themselves in the 
public eye. This is partly due to the fact that they are big 
and getting bigger. Today analysts estimate that these funds 
are worth somewhere between $1.9 and $2.9 trillion, and some 
predict that by 2012 they could control $12 trillion worth of 
    What should we make of all of this? Should we be concerned 
that the Governments of Russia and China control billions of 
dollars in assets and directly invest in U.S. institutions and 
companies? What threat does this exposure hold for us, if any? 
What financial imbalances does it create?
    The IMF has called for an international effort to increase 
the funds' transparency. Where is the money coming from? Who 
controls it? Where is it going?
    Some senior officials of this administration also seem to 
consider sovereign wealth funds as a serious risk. The Director 
of National Intelligence Michael McConnell said in testimony in 
February, ``Concerns about the financial capabilities of 
Russia, China, and OPEC countries and the potential use of 
their market access to exert financial leverage to achieve 
political ends represents a major national security issue.''
    From the financial perspective, however, these funds could 
be an important source of capital in our global economy. Wealth 
funds can bring benefits to our economy. They have helped keep 
our banks afloat in the midst of the subprime mortgage crisis 
and ensuing credit crunch. They could offer a fresh infusion of 
capital to fuel employment and stimulate U.S. industry.
    When Citicorp needed capital to stabilize its balance sheet 
after the subprime mortgage crisis, the Abu Dhabi Investment 
Authority injected $7.6 billion, or a 4.9-percent stake, in the 
bank and bailed it out. In fact, on his recent trip to the gulf 
Secretary of the Treasury Hank Paulson struck a very different 
tone than McConnell on sovereign wealth funds. He said, 
``America will keep our markets open at home to investment from 
private firms and sovereign wealth funds. We reject measures 
that would isolate us from the world economy.''
    Threat or opportunity, that's the question everybody's 
asking. Sovereign wealth funds have more than one dimension. 
They defy in my view simple definitions and simplistic 
    We've called this hearing so we can get a better 
understanding of these funds: What are the threats, 
opportunities, and challenges along the way. As we move 
forward, I believe there are three issues that we should bear 
in mind, at least from my perspective. First, we need a 
strategy to identify and deal with sovereign wealth funds which 
use their assets to achieve political objectives. We have 
already seen indications that Russia may be using its fund to 
promote strategic objectives, such as its recent interest in 
acquiring a large stake in Airbus's parent corporation. 
Similarly, Singapore's Fund has been linked to political 
turbulence in Thailand and Indonesia.
    What should be our response? Greater transparency alone, at 
least in my opinion, will not resolve this issue. But punitive 
defensive regulation could be self-defeating, depriving us of 
potential benefits out of the fear of potential harm.
    Second, I think it seems to me we have to strike an 
appropriate balance between protecting against threats and 
remaining open to economic opportunities. While we cannot 
overlook the national security implications of sovereign wealth 
funds, neither can we overlook their potential for providing 
needed investment and resources.
    Finally, as we develop a policy toward sovereign wealth 
funds we should be careful not to confuse the symptoms with the 
cause. What I mean by this is these funds exist and are growing 
because we have no national energy policy in my view and no 
coherent trade policy. Short-sighted restrictions on 
international investment won't eliminate these underlying 
problems. We need to be smarter, more strategic, and more long 
term in our thinking, as we need to get our own house in order 
to reduce our economic vulnerability.
    Our panel today is in a good position to offer advice on 
these funds. Let me emphasize again that I hope listeners don't 
confuse our interest in discerning how these funds function and 
whether they're good, bad, or indifferent with the underlying 
reason why these funds exist. This committee under the 
leadership of Chairman Lugar in previous years, and I've tried 
to follow suit with his help, has been trying to focus on those 
underlying causes, because the truth of the matter is until we 
deal with them we've got a real problem that goes well beyond 
the existence of these funds.
    We have one of the best known and most respected voices 
from Columbia University, Professor Bhagwati. He's a noted 
economist and well-known financial commentator. He's 
particularly well placed to discuss sovereign wealth funds in 
the context of globalization.
    Dr. Drezner comes to us from the Fletcher School at Tufts 
University and he's going to provide what I would characterize 
as a political science perspective, which I always like to 
have, to sovereign wealth funds. I'm surrounded by a lot of 
economists, but political science guys like me I keep looking 
    Finally, David Marchick, currently at the Carlyle Group and 
former official with the Clinton administration, is going to 
offer us a U.S. business perspective, although he spent 
considerable time in government as well, perspective on 
sovereign wealth funds.
    I look forward to hearing each of their testimony and will 
end by again thanking the three of you for making yourself 
available. I know this is a pain in the neck and you have to 
alter your schedules to do it. But it's important to us and we 
truly appreciate it.
    Chairman Lugar.

                   U.S. SENATOR FROM INDIANA

    Senator Lugar. Well, thank you very much, Mr. Chairman. I 
thank you for holding this hearing and I welcome, with you, our 
distinguished panel.
    The rapid expansion in the number and the size of sovereign 
wealth funds is one of the most consequential international 
economic developments in recent years. The United States 
Treasury Department estimates that the number of sovereign 
wealth funds doubled between 2000 and 2005. As oil prices 
remain well above $100 a barrel, the incomes of oil exporting 
nations are soaring, as you pointed out.
    By some estimates, these national investment reserves now 
hold close to $3 trillion. Russia has about $130 billion in its 
stabilization fund. Venezuela has an estimated $18 billion. 
News reports indicate that the Saudi Government is developing 
plans for the largest sovereign wealth fund in the world, which 
would exceed $900 billion. According to Treasury Under 
Secretary David McCormack, sovereign wealth fund assets are, 
``larger than the total assets under management by either hedge 
funds or private equity funds and are set to grow at a much 
faster pace.''
    The expansion of sovereign wealth funds is not an 
inherently negative development. They have infused helpful 
liquidity into international financial markets and in some 
cases promoted beneficial local development. Yet sovereign 
wealth funds are not ordinary investors. Their ties to foreign 
governments create the potential they will be used to apply 
political pressure, manipulate markets, gain access to 
sensitive technologies, or undermine economic rivals.
    Some observers have argued that the primary goal of 
sovereign wealth managers will almost always be to produce a 
good return on invested assets. Consequently they are unlikely 
to engage in political or economic manipulation. Yet, producing 
a good return on investment is often stated as the primary goal 
of state-owned energy companies, but we have witnessed in 
recent years numerous instances of nations using or threatening 
to use their energy assets for political purposes.
    In this context we must examine whether United States 
agencies have the resources and the expertise necessary to 
effectively respond to the policy complexities inherent in 
sovereign wealth funds. We also need to study how the United 
States, working with like-minded nations and international 
institutions, can promote transparency in sovereign wealth 
funds to reduce concerns about political and economic 
    The high level of transparency demonstrated by the 
sovereign wealth funds of some countries, such as Norway, has 
shown that transparency can be internally beneficial. The 
Norwegian fund's transparency helps maintain public support for 
its investment strategy.
    In addition, our government must find the right balance 
between promoting investment in the United States and 
safeguarding security interests through regulation. The United 
States rising government debt and continued dependence on 
foreign oil have intensified our reliance on foreign 
investment. We certainly do not want to discourage healthy 
investments in the United States. As we have seen, some 
sovereign wealth fund investments helped provide potential 
stability to a number of United States banks.
    The Treasury Department has undertaken efforts designed to 
balance our need for foreign investments with prudent 
safeguards. Domestically it has been working to improve 
accountability within the Committee on Foreign Investment in 
the United States for review of foreign government-controlled 
transactions and it is creating a working group on sovereign 
wealth funds.
    Globally, the Treasury Department is supporting the 
International Monetary Fund and the World Bank in their 
development of voluntary best practices for sovereign wealth 
funds. It has also proposed that the Organization for Economic 
Cooperation and Development identify best practices for 
countries that receive foreign government-controlled 
    In addition, the Securities and Exchange Commission 
requires that sovereign wealth funds disclose holdings of 5 
percent or more in a public company and the Federal Reserve 
imposes a number of regulations on sovereign wealth fund 
investments in United States banks.
    I look forward to this opportunity to discuss the foreign 
policy consequences of sovereign wealth funds, to examine with 
members here whether additional public policy responses are 
necessary. I thank the chairman again for the hearing and look 
forward to hearing the witnesses.
    The Chairman. Thank you, Mr. Chairman.
    A more detailed background about your careers will be 
placed in the record. I didn't want to take the time to do it 
now. Professor Bhagwati, it's an honor to have you here and why 
don't you begin, and then we'll work down the line, Dr. 
Drezner. The floor is yours, sir.


    Dr. BHAGWATI. Chairman Biden, Ranking Member Senator Lugar, 
and members of the committee, it's a pleasure and a privilege 
to be before this distinguished committee. As both of you 
pointed out, these are not, sovereign wealth funds, are not a 
new phenomenon, but they are new in the sense of the very rapid 
acceleration with which they've arrived and the speed at which 
things happen can of course create anxiety.
    We have underlying reasons why we have got these SWFs, 
which Senator Biden referred to, and I think I want to turn to 
that a little bit toward the end, because you're dealing with a 
surface phenomenon, but we still have to regulate the surface 
phenomenon and react to the anxiety which is created by these.
    Now, in the United States in particular, though you find 
some bit of this anxiety also in the European countries, but in 
the U.S. the political anxiety really comes from a variety of 
reasons other than the sudden acceleration of these phenomena 
which are so new in our public consciousness. One of course is 
it represents a dramatic reversal of the role which we have 
played, because we are so used to investing abroad ourselves 
and being the top dog, the Rotweiler on the block, and suddenly 
we find ourselves in a state of what looks like dependence on 
foreign funds, particularly controlled by governments. So 
that's a double whammy, which I think naturally creates some 
    When we teach in the classroom, we always say trade creates 
some political problems. Investment creates even more in terms 
of being able to sell it to the people and to allay anxiety. 
And immigration, particularly illegal, we know is a most acute 
problem. So I think we have to confront that particular fact.
    The second reason why we have these--these anxieties--of 
course, is these are not transparent, as Senator Lugar in 
particular was pointing out. The nontransparency comes because 
several of the funds actually belong to countries which 
themselves are not democracies in the sense in which we are 
used to it, because good practices tend to spread. When you 
have good governance, democratic governance, you're 
accountable, like the hearing here and so on. But where you 
have authoritarian or sheikdoms and so on, there you don't have 
the transparency. It just runs right through the system.
    Of course, it offers certain advantages, which I'll mention 
later, in terms of how to handle the SWF anxiety. But basically 
there's a good relationship, which I have a chart which I 
borrowed from one of my CFR friends, Brad Setzer, which shows 
the level of transparency as measured by an agency and the 
governance in terms of authoritarianism. It's amazing how good 
that fit is. So it's entirely understandable that you would 
have that.
    But that, plus the fact that you are dealing with the UAE, 
China, Russia, which has sort of fallen out of favor, I think 
probably excessively so, all of these make you feel these are 
not countries which are really allies or sympathetic to our 
aims, and that is yet another factor which makes us worry, 
because if it was coming from Norway we wouldn't really bat an 
    So I think all of this creates the worry that we're going 
to be dealing with governments and their funds which are 
actually--may be used for strategic noncommercial, political 
objectives. It's a perfectly reasonable worry in my opinion to 
think like that.
    Now, of course we need to have a little perspective, which 
I say in my testimony, which is we normally don't have 
government investments abroad. We, of course, have aid programs 
and so on and so forth, but mostly we are into private 
investment abroad. But that doesn't mean that we leave politics 
out of it, because we have other instruments by which all of 
you actually try and influence political and economic and 
social objectives. Think of Helms-Burton, think of the free 
trade agreements, which are all in deep trouble because we want 
to advance social agendas, rightly or wrongly, but that is our 
    So we have other sets of instruments, given the way we are 
set up in our system economically and politically, by which we 
actually advance the state agendas, while leaving direct 
private flows more or less alone. Now these other countries 
seem to be using--certainly through social welfare funds, 
sovereign wealth funds, we are actually--those countries are 
not using a multiplicity of instruments to advance their 
strategic objectives. So I think we need to have a little bit 
of perspective on this in the sense that politics and economics 
cannot be divorced altogether, and not in our system either.
    As Peter Mandelson wrote recently, one more perspective, 
which is that we've had them around for 50 years, not in the 
same degree, and there's very little evidence that actually, 
even from the Middle East and so on, people have actually used 
the SWFs in order to advance any real strategic political 
objectives. So the track record is something which is a little 
bit more comforting, if you want to say, look, does the past 
tell you anything about the future.
    But let me now come just very quickly to why I'm not 
terribly worried about these in particular, because I feel that 
they're going to be very practical in terms of the way they 
invest. I was at a meeting in Florence with Tony Blair being in 
the chair and Joe Ackerman and others, a small group, and a big 
Chinese guy, high up, was there. He said--you know, Ackerman 
and Tony Blair both asked: What are you going to do about the 
SWFs and all the political anxiety? He said: Oh, we're just 
thinking now very seriously about simply handing over our 
investment portfolio to Goldman Sachs. Which means it takes the 
politics, the worries right out, aside from pleasing our Wall 
Street firms actually, so killing two birds with one stone.
    The Chinese are a very practical lot and I suspect that 
model will probably work out with the UAE and others, because 
they don't want--they do want to invest abroad. We have to 
remember that, because they've got all these enormous funds, 
and they want to invest. When they see that we are worried 
about how it might be misused for strategic and political 
purposes, they'll try, regardless of cost and so on, try and do 
what is in fact necessary to make these palatable to us.
    At the same time, right now we need the funds. You just 
have to talk to the former Secretary of the Treasury, who is 
now running Citigroup. He clearly is happen to get some 
infusion of funds. There's competition for these funds.
    So we also I think are going to be not going off the some 
extreme measures and so on. So I think on both sides there is 
likely to be convergence toward a reasonable way of dealing 
with this particular anxiety. In my view, therefore, we don't 
need any codes. Of course, there's no harm in keeping all these 
economists and others occupied in the international agencies 
doing something useful. But I think essentially a code is 
necessary if you think the system really requires a whole lot 
of guidelines and so on and so forth. And I'm not a 
libertarian; actually I'm a Democrat. And I feel----
    The Chairman. It's obvious from how well you speak. I knew 
that right off the bat. [Laughter.]
    Dr. Bhagwati. So I would say you need intervention when it 
is useful, but I don't think it's really necessary and you 
might just gum up the works, and this might resolve itself.
    But we still have to do something at our end because, just 
remember the Dubai fiasco. I think we need to tell our 
committee in case it doesn't have it--all of you are lawyers 
and so you know about critical scrutiny, but you can have 
enhanced scrutiny for certain sectors. Now, of course the 
French would do it for Danon's Yogurt, which we are more 
sensible than that. But we could do it for seaports, airports, 
and a variety of sectors where we think handing over the equity 
to a foreign power which might be hostile, which might be 
unstable, and so on--but I think it should be done across the 
board, not to provoke--not to fix on one particular country and 
so on. But it should be sectorially done, and there you could 
have enhanced scrutiny and Congress being involved right at the 
beginning, so we minimize the possibility of a Dubai kind of 
    So that would be my recommendation that we really need to 
do. A final word on why this happened, and I think Senator 
Biden was absolutely right to say this is a surface phenomenon 
and we have to deal with it, with the political anxiety in the 
system, and you can't just take a purist attitude saying it'll 
solve itself and so on. I think the underlying problem is in 
fact the huge imbalances in the world economy right now and the 
food crisis has compounded it. But there's also a plus side too 
to the food crisis, foolish as it may seem, because countries 
like India, which has also accumulated large reserves, and we 
are more transparent in India, but the reserves are going to be 
used up to import the food.
    So it's something where you're going to get a 
redistribution of surpluses and deficits and so on. So there 
might be some bright side to it.
    But in the end I would say that unless you take some more 
fundamental measures like on oil, like you were suggesting, 
Senator Biden, that you really have to get at the dependence on 
oil, which means going very intensively into the substitutes, R 
and D financing, and so on, and even I think we've got to work 
hard at actually selling GM foods and so on, because in so many 
countries, because of the Europeans and the NGO concerns and so 
on--we talk of Frankenstein foods as soon as you get out of the 
United States, but on the one hand you've got Frankenstein 
looming large in the imagination, and if you indulge him, if 
you feed him, indulge him, then you've got the grim reaper 
facing you, and also the enormous amounts, amount of dependence 
on these.
    So I think we have to take a fresh look at the underlying 
problems. It spills over to the environment as well. But I 
think we need a holistic approach to how to handle the 
underlying problems which are giving rise to these enormous 
funds in places where we're not entirely happy, that they're 
not the areas where you want these surpluses to arise. But I 
think that needs to be looked at, so the hearing cannot just be 
detached from the basic issues which you are raising, Mr. 
    So that's mine.

    [The prepared statement of Dr. Bhagwati follows:]

    Prepared Statement of Dr. Jagdish Bhagwati, Professor, Law and 
Economics, Columbia University Senior Fellow, International Economics, 
               Council on Foreign Relations, New York, NY

    Permit me to start with a few salient observations about Sovereign 
Wealth Funds (SWFs) before I proceed to policy implications.
                         sovereign wealth funds
    Sovereign wealth funds are over 50 years old, not an entirely new 
    What is new is their rapid growth and the fact that they have 
spread almost worldwide, spanning many different countries. There are 
the so-called ``Super Seven'' SWFs, each with assets of over $100 
billion. They are in: Singapore (two), Abu Dhabi, Norway, Kuwait, 
Russia, and China.
    By most estimates, SWFs recently exceeded $2 trillion already. Some 
forecast, using current trends, that they could exceed today's U.S. GNP 
by the end of 2020. Still, the overall world stock of financial assets 
is estimated variously in the range of $165 trillion and up, so that 
the SWF assets, while ``large,'' are also ``small.''
    What exactly are they? They represent government-controlled funds. 
So, typically (but not exclusively) they reflect either (i) monetary 
authorities' foreign investments (traditionally, central banks invested 
their reserves in foreign treasuries, rather than in equity) or (ii) 
more typically (in areas such as the Middle East) the funds that 
government entities have earned through exports of oil and other 
commodities (and which are typically beginning to invest in equity in 
the U.S. and other rich countries).
                           anxiety over swfs
    A general anxiety over SWFs has arisen for several reasons. First, 
we confront the sheer speed at which these funds have increased. The 
``role reversal'' where we have others buy into our banks and 
businesses instead of being the top dogs ourselves, is a painful 
reality which makes many of our citizens uncomfortable. Second, many 
Western governments (including France and Germany) and their publics 
are worried about the ``nontransparency'' of these funds' investment 
strategies. With some, we know that they invest here; but we have 
little clue about their governance and decision criteria in any form or 
degree whatsoever. So, the fear has grown about their pursuing 
noncommercial criteria in investing their funds (sometimes referred to 
as ``strategic'' investing). In particular, the potential noncommercial 
aspect of the investment strategy by SWFs, has created a general 
anxiety that we are laying ourselves open to political exploitation by 
the governments that own these SWFs. Third, this fear is particularly 
likely to arise because the politics of these countries is not one that 
excludes potential rivalry and even political instability and/or 
hostility. Thus, in the United States, Chinese and Middle Eastern (SWF) 
investments have attracted particular opprobrium especially because 
these are areas where there is feared political instability (the Middle 
East) or even potential hostility (China and the Middle East). Even in 
regard to Russian SWFs, the continual Putin-bashing that has afflicted 
most of the media, and the hostile and jaundiced coverage of Gazprom, 
has added to the fear that somehow we are laying ourselves open to 
exploitation by a Russia that is undemocratic and moving away from us 
in democracy and from international policy convergence. Again, in 
regard to China, their equity investments lead to the fear, voiced 
daily by Lou Dobbs, that China is out to get our technology and to spy 
on us. He and his likes influence and feed uninformed public opinion on 
trade, immigration, and now China, with hardly any politician daring to 
take him on frontally: Only Senator Obama, to his credit, has denounced 
him in no uncertain terms while others have had their allies and 
spokesmen appear on his show without any sense of embarrassment or 
    Let me elaborate on some of these observations; and then turn to 
the question of how to deal politically with this general anxiety over 
    First, it is indeed true that many SWFs have limited or no 
transparency. The lack of transparency happens to have some correlation 
with whether the government controlling these funds is democratic or 
autocratic (i.e. ``nondemocratic'' in one way or another). In the chart 
below, my CFR colleague Brad Setser and his research associate, Arpana 
Pandey, have plotted the form of Government on the vertical axis and 
the Level of Transparency on the horizontal axis, showing how 
nontransparency and lack of democratic governance tend to go more or 
less together. This is not surprising. Democratic governments typically 
have to meet, in their governance and in their institutions, 
transparency standards that dictatorships and sheikhdoms do not have 
to. But because a fair number of such SWF countries are nondemocratic 
(e.g. UAE and China for sure), the nontransparency makes recipients of 
these funds afraid that noncommercial ``strategic,'' political and 
social factors would prevail in the making of their investments.

    But remember that even transparency does not ensure that the SWF 
will not be used to promote noncommercial, noneconomic objectives. 
Thus, the Norwegian SWF proudly refuses to invest in sectors and 
countries which do not satisfy Norway's own menu of social 
responsibility criteria. Is it alright for Norway then to be 
influencing other countries' social policies while it would not want 
other countries to influence (in however limited and paltry a fashion) 
Norwegian politics? In fact, before outlining my views on what the U.S. 
needs to handle the anxiety over SWFs, let me proceed to put the SWF 
question in the context of the U.S. itself using private investment, 
aid and trade, among other phenomena to advance U.S. political and 
social objectives.
             public policy on swfs: putting it into context
    In deciding on Public Policy to address the anxiety over SWFs 
especially concerning their possible use of ``noncommercial,'' 
``strategic'' objectives, it is necessary to put the matter into 
context. Our own policies on private investment outflows and on trade, 
for example, are not free from attempts at advancing our political and 
social, broadly ``noncommercial,'' agendas. At the same time, there is 
little evidence that SWFs have been used significantly for 
``strategic'' investments.
    Thus, we have used Preferential Trade Agreements (PTAs), such as 
Free Trade Agreements, to use our political and economic power to 
compel the smaller countries in one-on-one negotiations, to accept a 
variety of trade-unrelated, noncommercial objectives, ranging from 
environmental and Labor agendas to restrictions on the ability to use 
temporary controls during financial crises.\1\ Important developing 
countries such as Brazil and India, both democracies, reject such PTAs 
with us, and with Europe, unless they are free from such political and 
social demands that piggyback on trade negotiations and advance 
unilaterally defined ``noncommercial'' objectives reflecting domestic 
politics and domestic lobbying agendas. I could also cite the 
deliberate use of trade retaliation under section 301 of the 1988 
Omnibus Trade and Competitiveness Act to impose on others our own 
unilaterally defined views as to ``unreasonable'' practices which 
reflected our own political and social agendas: A practice that 
attracted worldwide opprobrium.
    \1\ These issues have been addressed fully in my book, ``Termites 
in the Trading System: How Preferential Agreements are Undermining Free 
Trade,'' Oxford University Press, July 2008.
    More importantly, the U.S. has often exercised pressure on private 
U.S. investors to conform, not to ``commercial'' criteria, but to 
national ``noncommercial,'' ``strategic'' priorities and objectives. 
Most tellingly, the 1996 Helms-Burton Act was aimed at extraterritorial 
demands on foreign firms to advance the objectives of the Cuban embargo 
(which was operative in any event on U.S. firms). The act caused an 
uproar internationally, with the EU and Mexico denouncing the act and 
enacting counterlegislation, while the EU threatened to take the matter 
to the WTO. It is naive to believe therefore that we allow only 
strictly commercial objectives to guide the volume and direction of our 
private investment outflows. It would, in fact, be astonishing if 
politics were kept out of commerce in this pristine fashion in a 
constituency-and-lobby-responsive democracy like ours.
    In fact, even private pension funds have been known to use 
political and other noncommercial agendas to seduce or intimidate 
foreign governments into compliance with these agendas, bypassing 
strictly ``commercial'' objectives. Thus my colleague at the Council on 
Foreign Relations, Ben Steil, has written in the Wall Street Journal 
(March 7, 2008) about such political investing by California's Public 
Employees' Retirement System, Calpers which has $259 billion in assets 
and ``would rank fifth among the world's SWFs,'' and by the California 
State Teachers' Retirement System (Calstrs) which has $169 billion, the 
two together making California ``the second largest SWF in the world, 
just behind the United Arab Emirates.'' Maybe foreign governments and 
impartial observers are not ``anti-American'' when they contrast our 
own behavior with U.S. anxiety over and demands on SWFs abroad.
    By contrast, as Peter Mandelson (the EU trade commissioner) has 
written recently in the Wall Street Journal (June 7-8, 2008) that ``In 
my meetings with them, sovereign fund managers have often bridled at 
being the subject of suspicion. They rightly point out that for more 
than five decades they have been quietly investing the proceeds of oil 
and gas wealth for future generations without raising the slightest 
concern. Some have standards of transparency that are exemplary.''
                   which way for u.s. policy on swfs
    But U.S. policymakers cannot ignore the anxiety in the body 
politic, no matter how unjustified it may be. This became obvious 
during the uproar during February-March 2006 over the proposed 
purchase, after approval by the Committee on Foreign Investment in the 
United States (CFIUS), by DPW, owned by the government of Dubai, of 6 
major U.S. seaports and takeover of management of 16 other lesser 
seaports. Dubai is an ally or a satellite, depending on your political 
viewpoint; but it is certainly not a hostile or unstable government. 
But the political uproar was quite enormous, accompanied by 
congressional hearings and widespread condemnation. My own view was 
that this fuss was entirely irrational. But, once the security issue 
had been raised, with sabotage feared from the Middle East, it made no 
sense to persist with it. Suppose that the sale had been approved 
despite the political tsunami. And then some sabotage had happened at 
one of the 6 ports (as is always possible). That would then have killed 
the possibility of a more enlightened policy in this regard.
    To handle the politics of the issue, therefore, it is necessary now 
to develop a short list of sensitive sectors where ``enhanced 
scrutiny'' is exercised over inflows of funds, whether private or SWF, 
leaving all other sectors with free entry. The French do it and more 
for their ``national champions'' (which include, believe it or not, 
Dannon which produces yogurt). But we can be more sensible. Bipartisan 
involvement of congressional leadership on particularly sensitive 
investments (like seaport and airports) would also preempt later 
political surprises and embarrassments with political fallout in terms 
of our image abroad as champions of an open world regime on trade and 
investment. Indeed, we must recognize, and not compromise on, our 
openness which has been so rewarding to us (including to our workers as 
much empirical work shows that the pressure on our worker's wages 
cannot be attributed to trade and indeed some studies, such as mine, 
provide evidence that trade openness may actually have moderated the 
fall in real wages resulting from acute and repeated labor-saving 
technical change).
    Do we also need an international, voluntary Code of Conduct on 
SWFs? This is the current thinking.
    Mandelson states that the IMF is interested in masterminding such a 
code but that SWFs are suspicious of the IMF. We merely need to recall 
that, unlike the WTO which had an open and fiercely contested election 
where the Brazilian candidate was a close front-runner who lost to 
Pascal Lamy, the choice of the IMF Managing Director was basically 
regarded as a European prerogative. The newly emerging countries were 
denied the place, with the Europeans saying: Next time, not now. It was 
reminiscent of the famous remark of St. Augustine in his bacchanalian 
youth: ``Dear God, grant me chastity but not yet.''
    The OECD also wants to embark on formulating such a code. But its 
credentials are also weak: Except for Mexico and South Korea, it is a 
club of the rich countries who represent the countries receiving SWF 
funds, not the countries that own them. Unfortunately for the OECD, its 
attempt at formulating a code on multinationals revealed the flaw of 
such unbalanced representation. Its attempted code on multinationals 
failed because it contained mainly the rights of multinationals, and 
virtually nothing on their obligations (e.g. Corporate Social 
Responsibility) or on the rights of the receiving countries. The code 
should have been a tripod with all three legs; instead it had only one 
leg and the stool collapsed as critiques multiplied.
    But, leaving aside the question of who oversees the formulation of 
a code, do we really need one? My view is that the problems currently 
about the SWFs will iron themselves out as both the SWF-investing 
countries and the investment-receiving countries have incentives to 
arrive at a workable solution without a bureaucratic code having to be 
formulated, with all the attendant compromises that leave behind much 
    First, the SWF owners have little incentive to get themselves shut 
out of desired investment outlets. So, they will surely hire Wall 
Street firms like Goldman Sachs to do their investing, for example: I 
heard a Chinese high official say precisely this when the SWF matter 
was raised at a small meeting I recently attended in Florence. [I might 
add that rewarding Goldman Sachs with a juicy contract would counter in 
the U.S. eyes the fear that the Chinese SWFs are going to be used for 
noncommercial purposes; it would also have the added advantage of 
pleasing Treasury Secretary Paulson.]
    As for the U.S. and other rich countries, the enhanced influx of 
SWFs is, at least as of now, a matter of high priority. Where would 
Citigroup be without SWF infusion? Indeed, the competition for SWF 
funds is likely to be sufficiently intense for the U.S. and others to 
not create too many obstacles, and to put in place just a few 
procedures (such as the one recommended above for ``enhanced 
scrutiny'') to shield their political flank, in the way of the SWF 
    Hence, the need for a code seems to be negligible; it is really a 
red herring.

    The Chairman. Thank you very much, doctor. I read your 
statement and we probably all have. I'm going to, with your 
permission, have it placed in the record as if read because I 
think it's worth having in the public domain here, if you don't 
    Doctor, the floor is yours.

                     UNIVERSITY, BOSTON, MA

    Dr. Drezner. Mr. Chairman, Ranking Member Lugar, thank you 
very much for allowing me to participate in this. Thank you 
also in particular, Senator Biden, for the kind words you had 
for political scientists. My profession is normally not praised 
so highly in this chamber.
    The Chairman. I think very highly of it.
    Dr. Drezner. You're a wise man.
    In the interest of time and keeping everyone awake, I'm not 
going to go into the background of sovereign wealth funds, 
which has been ably done by my distinguished colleague to my 
left, as well as by both the opening statements.
    I would just give three take-away points from my testimony. 
The first is that, to use a health analogy, sovereign wealth 
funds are a symptom of much more serious health causes, crises 
the United States. Sovereign wealth funds are fueled primarily 
by extremely high energy demand in the United States, which is 
giving rise to petrodollars in oil exporting and energy 
exporting economies.
    It is also being driven by a large current account deficit, 
of which oil is obviously one part. There are a combination of 
factors driving this. Obviously one is the intervention in 
exchange rate markets by certain Pacific Rim economies that 
that will go unmentioned, and the other is a dramatically low 
U.S. savings rate, which is the fundamental way you're going to 
have to fix this problem.
    In defense of these capital-rich economies, the reason 
you're seeing them develop sovereign wealth funds is that, 
frankly, they're sick of holding large amounts of dollar-
denominated reserves. After you have a trillion of them it does 
make kind of sense to see if you can diversify your portfolio a 
little bit and try to earn higher rates of return. So it should 
be stressed that part of what they're doing is hardly 
malevolent in intention.
    If you're really concerned about sovereign wealth funds, 
you need to address those fundamental problems. It should be 
pointed out that market forces to some extent are contributing 
in this direction. You're already seeing a devaluation of the 
dollar vis-a-vis the renminbi since early 2007 and the best way 
to create energy conservation is having oil prices at the rate 
they are now. It's painful, but it's also probably necessary.
    The second point I would say is that as symptoms go 
sovereign wealth funds are relatively benign in their effects. 
In OECD economies, particularly the United States, the historic 
pattern of investments by sovereign wealth funds has been 
relatively passive and relatively long term in their intent. A 
study that was released this week by the Monitor Group showed 
that less than 5 percent of sovereign wealth fund investments 
in OECD economies have been intended--have been targeted for 
controlling interests in so-called strategic sectors; that on 
the whole sovereign wealth funds have been intended to pursue 
noncontrolling stakes or stakes that would not trigger the 
CFIUS process; and furthermore, that they were holding for the 
long term.
    That's not terribly surprising. The comparative advantage 
of sovereign wealth funds in financial markets is that they can 
hold long positions. They presumably do not face the same 
pressure to maximize their short-term rate of return that 
private sector investment funds do. This is a good thing, I 
would add, because in the year to date I believe sovereign 
wealth fund investment in the United States has earned a 
negative 10-percent real rate of return. So it's probably a 
good thing, and the data suggest that the overwhelming majority 
of sovereign wealth funds, not all of them to be sure, but the 
overwhelming majority are interested in maximizing profit and 
not acting for geopolitical reasons, again for the reasons I 
was talking about before: They want to diversify their 
portfolios, they want to maximize the rate of return on their 
investment. So it's not terribly surprising that they're going 
to be interested in profits much more so than geopolitics.
    Historically, the effect of having overseas investors 
controlling or having large investments in the U.S. economy has 
not in the end amounted to much in terms of the way of foreign 
policy influence. The reason is in times of crisis the assets 
are still physically in the United States. During World War II 
and other eras of crisis, foreign direct investment in the 
United States did not impair the functioning of the U.S. 
economy. So, although it is an interesting specter to discuss, 
in the end in times of crisis the assets are here and that's 
not going to change any time soon.
    Furthermore, I would add that prior waves of foreign direct 
investment by private actors, admittedly not public, there's 
been never any sort of suggestion that there's been any 
malevolent intent from those investments.
    Furthermore, in this sense, once again due to the wisdom of 
the U.S. Congress, you already have an infrastructure in place 
to deal with concerns that sovereign wealth funds might bring 
up with regard to investments in strategic sectors and the fact 
that they are government-controlled entities, namely the FINS 
Act that you passed last year and the guidelines the Treasury 
Department is going to be issuing.
    That combined with the regulatory procedures in place at 
the SEC and the Federal Reserve suggest that for once there is 
a problem that you actually have all of the institutions in 
place. I don't necessarily think you need to have further 
reform in the United States to deal with this kind of problem.
    Now, all that calming logic said, let me offer one warning, 
which is in terms of foreign policy I think the one significant 
crimp that sovereign wealth funds pose to the United States is 
that they will retard significantly U.S. efforts at peaceful 
democracy promotion abroad. There are three reasons for this.
    The obvious one is that most sovereign wealth funds are 
from nondemocratic countries and sovereign wealth funds 
presumably give these governments greater resources with which 
to maintain power, to buy off disaffected interests in their 
own country. It allows them to maintain state stability in 
their own country, not terribly surprising.
    The less obvious reason is that the United States might not 
have incentive to want these countries to democratize. Here 
we're talking about the combination of anti-Americanism and 
nationalism in the countries that have the largest sovereign 
wealth funds, namely the Pacific Rim and the Middle East. This 
sort of combination will create if you have democratic 
governments, newly created democratic governments, they're not 
necessarily going to be big fans of the United States, and they 
might very well decide to take costly actions in order to 
punish the United States for what they see as past historical 
    While this would hurt their own economies, I would stress, 
it is a tendency of newly democratic governments to do things 
that might hurt themselves for costly political reasons.
    Furthermore, it should be stressed that it is sovereign 
assets from democratic countries that are most likely to attach 
political conditions. All we need to look to here is our own 
country, where you see restrictions placed on, let's say, the 
California pension system in terms of investing in Sudan, or 
the Divest Terror campaign in terms of trying to place 
restrictions on investing in Iran.
    One final point, which is that in the long term--and I 
don't think this is a huge possibility, but I do think you have 
to consider it--sovereign wealth funds are part of a component 
of a sort of state-led development approach, in which you're 
talking about sovereign wealth funds, state-owned enterprises, 
national oil companies, government regulations of the Internet, 
other extensive government regulations, that appear to be 
succeeding in the short term at generating relatively large 
amounts of economic development.
    The rest of the world is looking to see what is the best 
recipe for economic growth, and for decades we have told them 
the past is liberal free market democracy. If it turns out that 
sovereign wealth funds are a component of this alternative form 
of development, then suddenly our own sort of model is going to 
look less attractive and that's going to cause an erosion of 
American soft power. Fewer countries are going to want what we 
    Now, I should stress that I don't know in the long term if 
this model is viable. But if it is that is certainly a source 
of concern.
    Thank you very much.

    [The prepared statement of Dr. Drezner follows:]

Prepared Statement of Dr. Daniel W. Drezner, Professor of International 
   Politics, Fletcher School of Law and Diplomacy, Tufts University, 
                               Boston, MA

    Sovereign Wealth Funds (SWFs) are government-controlled pools of 
assets designed to engage primarily in foreign portfolio investment. 
They are distinct from other sovereign assets--central bank reserves, 
state-owned enterprises and banks, and government pension funds--
because of the emphasis on cross-border equity purchases. Their size, 
rate of growth, and national origins have raised concerns about whether 
and how SWF investments impact America's economy and foreign policy. 
This testimony focuses primarily on the latter.
    In most respects, the growth of sovereign wealth funds has marginal 
effects on the contours of U.S. foreign policy. SWFs are, rather, a 
symptom of other national ailments--persistent macroeconomic imbalances 
and a failure to diversify America's energy supply. As symptoms go, 
sovereign wealth funds are relatively benign in their foreign policy 
effects. Indeed, SWF investment patterns have been less aggressive than 
the similar wave of Japanese foreign direct investment during the 
eighties. If anything, these investments demonstrate the ever-
increasing interdependence of the Pacific rim and Middle East with the 
American economy. There is, however, one foreign policy wrinkle from 
the rise of sovereign wealth funds. Their growth will significantly 
impair America's democracy promotion efforts.
    Sovereign wealth funds are not a recent invention--Kuwait created 
the first modern one in 1953. Nor are they un-American: The State 
governments of Alaska and Texas both have sovereign funds designed to 
manage the revenues that have arisen from their energy booms.
    What is new is the size of recently created funds, their 
anticipated rate of growth, and their countries of origin. Over the 
past 3 years, these funds have been growing at a 24-percent rate. In 
2007 these funds invested $48.5 billion globally; in the first 3 months 
of this year, they registered more than $24 billion in overseas 
investments. SWFs have been involved in high-profile equity purchases 
of high-profile financial institutions, lincluding Blackstone, Credit 
Suisse, UBS, Merrill Lynch, Morgan Stanley, Visa, and Citibank. The 
combined heft of sovereign wealth funds is currently estimated to be 
between $3 trillion and $3.5 trillion. To put this in the proper 
perspective, this is between 1 and 2 percent of global asset markets. 
Private sector analysts project that by 2015 their total valuation 
could range in size from $9 trillion to $16 trillion. In 2007, Russia 
and China created new sovereign wealth funds. Saudi Arabia created one 
this year, and press reports indicate that Japan and India might create 
their own funds in the near future.
    Two kinds of governments are pumping the most money into sovereign 
wealth funds: Energy exporters and Pacific rim economies. For the oil 
exporters, the incentive to create a sovereign wealth fund is twofold. 
First, these economies want to create assets that ensure a long-term 
stream of revenue to cushion themselves against the roller coaster of 
commodity booms and busts. As many economists have observed, these 
countries are simply converting assets extracted from the earth into a 
more liquid form. Second, by focusing on foreign direct investment, 
these governments are attempting to forestall the Dutch disease of 
rapidly appreciating currencies. Overseas investment via sovereign 
wealth funds can accomplish both tasks simultaneously.
    Export engines like China are also using sovereign wealth funds to 
keep their currencies from appreciating too quickly. As of 2007, China 
had accumulated more than $1.8 trillion in foreign assets in order to 
prevent the yuan from rising--and therefore keeping Chinese exports 
competitive in the United States. More than 80 percent of these assets 
exist in the form of foreign exchange reserves--safe investments with 
very low rates of return. As these reserves have accumulated, the 
Chinese Government has been willing to diversify its holdings into 
higher risk investments--hence the creation of the China Investment 
Corporation last year.
            the pattern of sovereign wealth fund investments
    To date, the effects of SWF investment in the United States have 
been benign. The general consensus among financial analysts is that 
sovereign wealth funds have taken a long-term, passive approach to 
their American investments. The bulk of recent SWF investments has been 
for either nonvoting shares or stakes too small to trigger the CFIUS 
process--somewhat defusing concerns about foreign state control of the 
U.S. financial sector. A majority of sovereign funds have explicit 
policies preventing them from acquiring controlling interests, and most 
of the rest have implicit policies following the same course of action. 
Compared to the wave of private Japanese foreign direct investment 
during the 1980s, sovereign investments have been considerably less 
controlling. They have consciously avoided the purchase of ``trophy 
assets'' such as Pebble Beach or Rockefeller Center. The more mature 
sovereign wealth funds outsource the management of many of their assets 
to outside managers.
    Indeed, the high-profile purchases of equity stakes have permitted 
firms like Citibank to recapitalize in the wake of the subprime 
mortgage crisis. The specter of China's SWF presence has also been 
exaggerated. While the China Investment Corporation (CIC) has $200 
billion to invest, the bulk of its assets have been invested 
domestically. As of March of this year, CIC's overseas investment total 
less than $20 billion, though this is expected to grow. CIC's most 
notable foreign investment--Blackstone--was made by a subsidiary prior 
to its takeover.
    The comparative advantage of sovereign wealth funds is that they 
can hold large positions for long stretches of time, weathering short-
term panics and downturns (this is a good thing for them--between 
February 2007 and February 2008, high-profile SWF investments earned a 
real rate of return of negative 10 percent). If these funds are 
attempting to maximize profits, they would therefore function in a 
countercyclical manner akin to hedge funds. This kind of investment 
pattern does not pose a threat to American interests.
                 overall effects on u.s. foreign policy
    One foreign policy concern is that SWFs are sprouting up primarily 
in countries not commonly thought of as reliable U.S. allies. Could 
they use their stakes to exercise political influence over American 
firms? Testifying before the United States-China Economic and Security 
Review Commission in February, Alan Tonelson articulated this concern: 
``If, for example, the Chinese Government held significant stakes in a 
large number of big American financial institutions, especially 
marketmakers, and if our Nation's current period of financial weakness 
persists, how willing would Washington be to stand up to Beijing in a 
Taiwan Straits crisis?'' That same month, Senator Hillary Clinton 
observed: ``You know, you cannot get tough with your banker. You cannot 
stand up if they have very different interests in the Middle East or in 
Asia than we do and they basically say, fine, you want us to dump 
dollars? Do you want us to pull our investments out?''
    This fear rests on some tenuous assumptions. First, it presumes 
that foreign governments will know how to strategically invest so as to 
maximize foreign policy leverage. This might give governments too much 
credit. As Kenneth Rogoff pointed out in congressional testimony last 
year: ``Governments have a long tradition of losing massive amounts of 
money in financial markets. This tradition is not likely to end anytime 
soon.'' Second, because of existing U.S. laws and guidelines, it is far 
from clear whether sovereign wealth funds could exercise malevolent 
control over firms even if they tried. The Foreign Investment and 
National Security Act of 2007 already requires heightened scrutiny when 
a foreign government-controlled entity acquires a controlling stake in 
a U.S. firm--and the Treasury Department's suggested guidelines suggest 
that CFIUS will investigate proposed acquisitions below the controlling 
level. Third, a cursory review of past waves of foreign direct 
investment reveals that in times of global crisis, what matters is the 
actual location of physical assets, not the identity of their owner.
    Many analysts predict that capital exporters will possess 
bargaining leverage on regulatory questions. However, the tatonnement 
process of bargaining currently taking place between home and host 
countries of sovereign wealth funds suggests that concerns about 
transparency will be addressed. Last year the International Monetary 
Fund (IMF) and the Organization for Economic Cooperation and 
Development (OECD), in response to a G-8 request, initiated reviews of 
best practices for sovereign wealth funds appropriate inward investment 
regimes for recipient countries. Both international organizations have 
made reasonable progress in their remits, and experts in both 
organizations seem unperturbed by their investment patterns to date.
    Individual sovereign funds are also adapting to the changed 
political environment. Two of the largest sovereign wealth funds--
Singapore's Government Investment Corporation (GIC) and the Abu Dhabi 
Investment Authority (ADIA)--agreed to principles of transparency with 
the U.S. Treasury Department in March of this year. The head of CIC 
pledged on ``60 Minutes'' that his fund would match Norway's sovereign 
wealth fund in transparency. Singaporean officials have made it clear 
earlier this year that it recognizes the need for greater transparency 
in its investment plan. GIC's deputy chairman explained, ``The greatest 
danger is if this is not addressed directly, then some form of 
financial protectionism will arise and barriers will be raised to 
hinder the flow of funds.''
    This last quote indicates why American foreign policy does not face 
significant constraints from SWF investment. The interdependence 
created by sovereign wealth funds cuts both ways. At present, the 
United States needs SWF investment to finance its large current account 
deficit. However, most other asset markets are neither big enough nor 
open enough to cater to large-scale sovereign wealth investments. Large 
market jurisdictions--the United States and European Union--should be 
able to dictate most of the rules and regulations regarding these 
funds. While the OECD economies--and prominent firms within these 
jurisdictions--might need SWF investment, it is equally true that 
capital exporters need America and Europe to keep their jurisdictions 
open to capital inflows. These two markets remain the only ones deep 
and liquid enough to absorb inflows in the trillions of dollars. 
Indeed, the very countries ginning up sovereign wealth funds at the 
moment are the most protectionist when it comes to foreign direct 
    Sovereign wealth funds are unlikely to disrupt the functioning of 
the American economy. They are symptom of other problems. U.S. 
consumption is keeping energy prices high. A low U.S. savings rate, 
combined with the foreign manipulation of exchange rates, has allowed 
some Pacific rim economies to inflate their current account surpluses. 
Those are the macroeconomic forces that are causing foreign governments 
to expand their sovereign wealth funds. Addressing those problems 
sooner, rather than later, will go a long way toward eliminating 
sovereign wealth funds as a political hot potato. Improving the savings 
rate of Americans, for example, would help to reduce the large current 
account deficit that is fueling the growth of sovereign wealth funds in 
the Pacific rim. Reducing energy demand would also reduce the growth of 
sovereign wealth funds among energy exporters--though such a reduction 
would be partially offset by rising demand around the globe. Recent 
trends suggest that market forces are moving in the preferred 
direction. In recent years the Chinese renminbi has appreciated by 20 
percent against the dollar. High prices will likely contribute to 
greater conservation efforts and reduced energy demand.
                     effects on democracy promotion
    The biggest effect of sovereign wealth funds on American foreign 
policy is their effect on democracy promotion efforts. These funds 
impact U.S. foreign policy in this area on several dimensions. SWFs aid 
and abet in the persistence of ``rentier states''--governments that do 
not need their citizens to raise revenue. Democratization is a much 
more difficult policy for the United States to pursue when the target 
government is sitting on trillions of dollars in assets to buy off 
discontented domestic groups. Authoritarian governments in the Middle 
East and East Asia will be more capable of riding out downturns that 
would otherwise have threatened their regimes.
    More generally, the growth of China's sovereign wealth fund belies 
the notion that as China grows richer it will become more democratic. 
Embedded within America's current national security strategy is the 
assumption that as China integrates itself into the global economy, it 
will face a growing demand from its own people to follow the path of 
East Asia's many modern democracies, adding political freedom to 
economic freedom. If the Chinese Government can blunt pressures toward 
democratization through its financial muscle, then the United States 
will need to recalculate its long-term approach toward Beijing.
    More perversely, the growth of sovereign wealth funds, combined 
with rising nationalism and anti-Americanism in capital exporting 
countries, would give the United States even less reason to want 
democratic transitions in these parts of the globe. Consider the effect 
of a populist or fundamentalist revolution taking over in Saudi Arabia 
or the gulf emirates. Rampant anti-Americanism among the Arab populace 
could encourage a new government to purposefully sell off SWF 
investments in the United States in order to induce a financial panic. 
While such moves would also be economically costly to these countries, 
such actions are not inconceivable in the early stages of a 
revolutionary government.
    Even if China or the Persian Gulf emirates were to democratize more 
gradually, one could easily envisage nationalist parliaments using 
their SWFs to constrain U.S. actions. Sovereign funds in democratic 
societies are more likely to inject political conditionality into their 
capital markets. In the United States, for example, interest groups 
have been eager to use America's financial muscle to alter the behavior 
of foreign actors in Sudan and Iran. There would be no reason to expect 
other democratic, capital-rich countries to behave differently.
    Looking at the long term, sovereign wealth funds are one component 
of an alternative development path, suggests a possible rival to 
liberal free-market democracy. In state-led development societies, 
governments could use sovereign wealth funds, state-owned enterprises 
and banks, national oil companies, extensive regulation, and other 
measures to accelerate economic development, buy off dissent and 
promote technology transfer. If this model proves sustainable over the 
long run--and this is a big if--it could emerge as a viable challenger 
to the liberal democratic path taken by the advanced industrialized 
states. More countries might think of sovereign wealth funds as a 
signal of being a ``successful'' country. One could then envision the 
proliferation of such funds--even in situations in which there is no 
economic rationale for its creation. This would have corrosive effects 
on America's soft power. It would be an open question whether the rest 
of the world would look at the democratic development model as one to 
emulate. Crudely put, far fewer countries would want what America 
    In conclusion, sovereign wealth funds have made headlines over the 
past year because of high-profile purchases of prominent firms. As long 
as global macroeconomic imbalances and demand for traditional 
hydrocarbon fuels continue to persist, SWFs are projected to grow at an 
accelerated rate over the next decade. Sovereign funds have, to date, 
played a constructive role in injecting liquidity into the global 
economy during the current period of uncertainty. There is little 
reason to believe that, on their own, sovereign wealth funds will 
exercise any significant constraint on most dimensions of U.S. foreign 
policy. Over the long term, the trouble with sovereign wealth funds is 
not that they will fail, but that they will succeed--in which case they 
pose a challenge to American national interests.

    The Chairman. Thank you very much, Professor.
    Sir, the floor is yours.


    Mr. Marchick. Thank you very much, Mr. Chairman, Senator 
Lugar. Thanks for the opportunity to participate. I will try to 
be brief for a couple reasons. One is that it is always the 
chairman's right to preempt and say what the witness was going 
to say and the chairman by definition always does it better.
    The Chairman. No; that's not true, but I'm flattered you 
think I did. Thank you.
    Mr. Marchick. So I think that you hit the nail on the head 
when you said let's focus on don't confuse the symptoms and the 
cause. All of this is driven by the huge and growing current 
account deficit that we are running, the combination of our 
trade deficit, our low savings rates, and our increasing 
dependence on oil combined with the high price of oil. Until we 
get those issues under control, which have huge public policy 
consequences and very difficult decisions, we're going to 
continue to see the changes that we're seeing today.
    Part of this has resulted in the growth of sovereign wealth 
funds, which you and others have said are growing quite 
rapidly, $3.2 trillion today, going up to maybe 12, 13 trillion 
in 5, 6 years.
    There is anxiety resultant from this because the 
investments are coming from nontraditional sources of 
investment in the United States. It's not just the U.K. or The 
Netherlands or Canada, which are traditional long-term 
investors, but it's now coming from China, the Middle East, 
    This reminds me somewhat of the situation 20, 21 years ago 
with Japan, where there was great concern on Capitol Hill. I 
think in July 1987 there was a press conference where Members 
of the House took sledge hammers to Japanese products. At that 
time there was great concern about whether Japan was going to 
buy up our assets, whether we were going to be eclipsed by the 
Japanese economy, and whether we were losing our leadership 
position in the world.
    Well, what happened after that was that Japan went through 
a prolonged period of economic slump and the United States went 
through a period of great economic dynamism, where we were 
actually encouraging the Japanese to get their economy growing 
again. So none of the fears that occurred in the late 1980s 
actually came to pass. But today we're seeing some of the 
similar anxieties.
    So the key issue for us I think as a nation is what do we 
do about this? It's been documented unequivocally by economists 
and others that foreign direct investment has a positive impact 
on the U.S. economy. It creates jobs, it creates high-paying 
jobs. There's a disproportionate investment in our 
manufacturing base, which is absolutely critical for our 
economy; that there's heavy investment in R & D; that overall 
it's a net benefit.
    Most sovereign wealth funds are passive investors, so there 
shouldn't be any problem with passive investment. Senator Webb 
has done some I think very good work on this issue in the CFIUS 
context. If a company has a third party management, whether 
it's Fidelity or Goldman Sachs or like our 401ks, there's no 
control, there's no issue.
    Then the issue is what if sovereign wealth funds take 
controlling stakes. In most sectors of the economy there 
should--there are no national security issues associated with 
investments, controlling investments in particular sectors--
real estate, retail, most services, insurance, et cetera.
    In a small subset of the economy, there are sensitive 
sectors where foreign investment does raise legitimate national 
security issues. Then the question is, Are our processes 
adequate and rigorous enough to address those threats? In my 
view they are and, thanks to the Congress, CFIUS has been 
strengthened and under the new law there is heightened scrutiny 
of any government-controlled investment.
    Let me just give you 2 minutes on our own experience at the 
Carlyle Group. We have been around for 21 years. We invest in 
all sectors of the economy. We have two investments from 
government-affiliated organizations. One is CALPERS, which owns 
5.5 percent of Carlyle, and the other is a company called 
Mubadala, which is based in the UAE, which owns 7.5 percent.
    Both those investments are structured exactly the same. 
They invest in us, we have total control over how we invest, in 
what companies we invest, how we manage those entities, and 
when we exit, when we sell the companies. They have no seats on 
our board, they have no right to control our decisions. So 
they're completely passive investments, just like when you and 
I invest in Fidelity or our thrift savings plans.
    They've been very positive investments and they've helped 
us expand our investment in the United States, which I think is 
a positive thing. What they're looking for is hopefully a good 
dividend, a good return, and hopefully we will do well with 
their money and meet their investment criteria. But they're 
completely passive and have no control over what we do or how 
we approach things.
    So I think that overall we should welcome sovereign wealth 
fund investment in the United States. Most of it is passive, so 
there shouldn't be any concerns. And for those few investments 
where they do trigger national security issues, as Senator Webb 
has focused on this issue, there should be a very active, 
rigorous review by Federal authorities to determine whether 
there are any national security issues, and if there are CFIUS 
should either mitigate those concerns or block the investment. 
Otherwise, we should welcome the investments.
    Thank you very much.

    [The prepared statement of Mr. Marchick. follows:]

Prepared Statement of David Marchick, Managing Director and Global Head 
        of Regulatory Affairs, The Carlyle Group, Washington, DC

    Chairman Biden, Ranking Member Lugar, members of the committee, 
thank you for the opportunity to testify, and for holding this hearing. 
I worked on foreign investment issues during my time in government and 
for the past 6 years before I joined The Carlyle Group, a global 
private equity firm. I am speaking as much from my previous experience 
as from my current perspective at Carlyle.
                   historical context for this debate
    Mr. Chairman, 21 years ago next month, seven Members of the House 
of Representatives held a press conference outside the Capitol where 
they smashed Japanese products with sledgehammers. At that time, there 
was great anxiety over the rise of Japan--over whether Japan was going 
to buy up our key assets, and whether Japan would eclipse the United 
States as the leading economy. None of those fears materialized. Japan 
subsequently went through a protracted economic slump where the United 
States was actually encouraging Japan to increase economic growth, and 
the United States entered one of the most dynamic periods in its 
economic history. Although Japanese investment stirred controversy in 
the 1980s, today, Japanese firms are part of the fabric of American 
society. In 2005, 613,000 Americans were working for U.S. affiliates of 
Japanese companies.
    Today, similar fears are being raised about another growing source 
of investment--from Sovereign Wealth Funds (SWFs).
    Just as with respect to Japan in the 1980s, a significant amount of 
today's anxiety exists because foreign investment is coming from new 
countries. For example, in 2006, the United Kingdom, Switzerland, the 
Netherlands, and Japan accounted for almost 60 percent of the 
cumulative stock (e.g. the cumulative amount of investment) of Foreign 
Direct Investment (FDI) in the United States but only accounted for 31 
percent of the inward flow (e.g. the amount invested in that year). 
Other countries, including developing countries, are becoming much 
larger outward investors. This represents a dramatic shift in the 
paradigm that we have seen for many years--China, Brazil, India, and 
Russia have traditionally been large recipients of FDI; today, they are 
starting to be significant sources of investment. From 2000-2006, 
outward FDI from China grew 6.9 times, from Russia 5.9 times, and from 
some Middle Eastern states more than 35 times.
    Also evident is the fact that investments from developing countries 
are more likely to be affiliated with government ownership than are 
cross-border investments from developed countries. Of the top 100 
multinational companies in the world, only 5 are government-owned. By 
contrast, of the top 100 developing-country multinational companies, 25 
are government-owned.
    Sovereign wealth funds are also becoming larger sources of cross-
border investments. Sovereign wealth funds have been around since 1953, 
when Kuwait, then controlled by the United Kingdom, established the 
Kuwait Investment Authority. SWFs invested either directly or through 
asset management firms in relative obscurity until the last couple of 
years, when the growing size and number of SWFs attracted the attention 
of the press and officials primarily in the United States and Europe.
    There have been two predominant factors driving this growth: Higher 
commodity prices, primarily in oil; and growing current account 
surpluses, particularly in Asia. Much of the growth has occurred in the 
developing world, including China, Russia, and the Middle East, and 
there have been more high-profile investments from government-
affiliated entities. The growth in SWFs has come at a time of overall 
growth in outward investment from developing nations.
    While the number and size of SWFs has grown in the past few years, 
SWF investments represent a small slice of the global investment 
market: In 2007, the value of SWF mergers and acquisitions (M&A) 
activity represented only 1.6 percent of total global M&A volume. The 
percentage may be larger in 2008, but overall will still represent a 
small component of global investment.
    Sovereign wealth funds have a lot of money--$3.2 trillion according 
to some estimates--but are tiny compared to the $52 trillion in global 
pension and mutual funds and even smaller when considered in the 
context of the more than $160 trillion in global financial assets. 
Further, while there have been a number of high profile investments, 
the vast majority of SWF investments are for passive, minority stakes. 
SWFs have, in fact, served as an important source of stability at a 
time of great uncertainty in financial markets.
                        swfs and foreign policy
    The regular flow of investment from SWFs does not, in my view, give 
rise to foreign policy concerns for the United States. The U.S. 
benefits from foreign direct investment--it creates jobs and fosters 
growth. SWFs have been investing in the United States for decades 
without any problems. To my knowledge, no sovereign wealth fund 
investment has compromised the United States' or any other country's 
national security.
    In fact, most SWF investment is completely passive and/or managed 
by third party investment managers. For these investments, it is hard 
to even create a hypothetical foreign policy or national security 
concern that could arise. Even where SWFs take controlling stakes in 
companies, most transactions do not raise any national security or 
foreign policy concerns. For example, there should not be any national 
security concerns associated with investment in most sectors of the 
economy, including the retail, real estate, or hospitality sectors, 
each of which have been the focus of SWFs. For those investments in 
more sensitive sectors, the United States has a robust, layered set of 
laws and regulations that protect important governmental interests 
associated with any investment, sovereign or otherwise. Last year, 
Congress passed the Foreign Investment and National Security Act, which 
strengthened the foreign investment review process in the United 
States. FINSA protects against threats to national security, and CFIUS 
has demonstrated its willingness to block or mitigate problematic 
investments. Other laws and regulations are in place to address other 
government interests, including antitrust, consumer welfare and safety 
and security. Even if there were cause for concern associated with 
sovereign wealth funds, our existing legal and regulatory structure 
should capture and fix--or block--any problematic investments. Bottom 
line: When foreign entities invest in the United States, the U.S. is 
sovereign, not them.
     By contrast, official or even informal actions to restrict SWF 
investment in the United States could cause foreign policy problems, or 
at a minimum, create unnecessary tensions with our allies and nonallied 
sources of investment. Legislative or regulatory steps to restrict SWF 
investments will not only cause harm to the U.S. economy, but also 
alienate countries which are critical allies on a variety of issues 
that are core to U.S. interests. Actions to curb SWF investment would 
not only impact China and Russia, it would also negatively impact 
Australia, one of our closet allies; Singapore, with whom we have a 
strategic defense alliance; and the UAE, which 
has troops in Afghanistan and is a critical ally against extremism in 
the Middle East. Even unofficial actions--including politicization of 
investments--can have a negative impact on the U.S. economy and U.S. 
national interests. Several significant sovereign wealth funds have 
recently stated that they will look to invest outside the United States 
or Europe because of the political environment. This unfortunate 
development harms our economy and potentially causes unnecessary 
tensions with other countries. Finally, if we start blocking 
investments in the United States, we can be certain that other 
countries will retaliate against U.S. investment abroad. Since the U.S. 
is the largest source of FDI in the world, we have more at stake than 
any other country in the world.
    Mr. Chairman, SWFs are growing fast because of high energy prices 
and our large current account deficit. American dollars are going 
overseas, and SWFs are one important way that foreign countries can 
recycle these dollars. I would much rather have SWFs invest in the 
United States than abroad--their investments creates jobs, economic 
activity, and opportunities for American firms and workers. Their 
investments further integrate these countries into the global economy, 
and align their interests with those of the United States. These 
investments also could help create economic security and a stronger 
middle class in the source countries, and as we know well, a vibrant 
middle class is an important source of stability.
    In my view, a more important foreign policy and national security 
concern is the United States' growing dependence on foreign countries 
to finance our current account deficit. At $738.6 billion in 2007, our 
current account deficit now accounts for about 70 percent of the 
world's total across all deficit countries. Beyond traditional surplus 
countries like Japan, fast-growth countries such as China, Russia, and 
Saudi Arabia have assumed a larger financing role. There is nothing 
unhealthy about foreign financing of deficits. However, the 
unprecedented size, trajectory, and sustained nature of our deficit, 
combined with growing structural imbalances, does raise concerns.
    We have little control over some of the factors leading to these 
structural imbalances. For example, some countries are clearly 
intervening at significant levels in order to lower the value of their 
currency. And the U.S. is uniquely positioned to continue to attract 
large amounts of investment to finance our deficit. But we can and 
should take steps to reduce the growth of our fiscal deficit, to 
encourage greater private savings rates in the United States, and to 
reduce demand for oil.
     carlyle's experience with government investment organizations
    I'd like to take a moment to explain The Carlyle Group's positive 
experience with two investments from government-affiliated entities. 
First, the California Public Employees Retirement System (CalPERS), the 
largest public pension fund in the world, acquired a 5.5-percent 
interest in Carlyle in 2000. Second, the Mubadala Development Company, 
a firm that invests funds on behalf of the government of Abu Dhabi, 
purchased a 7.5-percent stake of Carlyle in 2007. The terms of these 
investments are pretty simple: CalPERS and Mubadala acquired passive 
stakes in Carlyle. They exercise no control or influence over our 
investment decisions. Their investments have allowed us to create 
strong U.S. companies, grow jobs and spur innovation. CalPERS and 
Mubadala each receive a quarterly or annual financial report, and we 
will work hard to produce an attractive rate of return for both 
entities. Both CalPERS and Mubadala are sophisticated investors, and we 
are grateful for the confidence they have shown in us.
    In summary, SWFs are having a positive impact on the United States 
and international economies. They have proven to be a source of capital 
for the U.S. at a time of volatility in our financial markets. Indeed, 
if some of our largest financial institutions did not receive large 
infusions of capital from SWFs late last year and early this year, it 
could have led to economic disorder, which itself conveys a sense of 
weakness and vulnerability.
    To date, SWF investments have been typically passive, minority 
stakes. For active, controlling investments, the United States has a 
proven set of laws and regulations that protect our national interests 
associated with any foreign investment. Barring a particular problem 
with a particular transaction, our doors should be wide open to foreign 
investment. Formal or informal steps to close our economy or restrict 
investments would not only harm U.S. interests but also unnecessarily 
cause tensions with our allies and other countries with which we have 
important strategic objectives.

    The Chairman. Thank you very much. Thank all of you.
    Mr. Chairman, 7-minute rounds?
    Senator Lugar. Yes.
    The Chairman. We have good attendance and we'll do 7-minute 
    To state the obvious, there's a number of questions I'd 
like to ask, but I'm sure that my colleagues will ask them as 
well. I'd like to focus on something and maybe go to you, 
doctor, the political scientist in the group here. There's 
something that I'm a little more concerned about that's a more 
subtle influence. The subtle influence, quite frankly, that I 
focused on, and none of my colleagues nor any of you may think 
is worth the concern and I'd be anxious to hear if it's not and 
it would allay my concerns. But I think there is a subtle 
impact on our conduct of foreign policy when investments in the 
United States affect the powerful groups in which the 
investments are made, for them to determine and put impact on 
the Congress and the President ought curtail and/or enhance a 
certain foreign policy action.
    So that, let me overstate the case for a minute. One of the 
things that's become clear to all--I'll speak for myself--clear 
to me is that our overwhelming dependence on imported oil, 
coupled with our low savings rate and coupled with particularly 
the Chinese, at least in my view, policy of mimicking what 
Japan did and expanding it multifold in the first decade of the 
20th century regarding exports, has put us in a position where 
those nations whose conduct we wish to influence toward a more 
benign or, how can I say it, to be more responsible actors in 
the international community have no reason to have to listen to 
us. They're floating in a sea of oil.
    I mean, can you imagine Putin's circumstance in Russia in 
terms of the impact of any pressure relating to his de-
democratization of that country were he not floating in a sea 
of oil? If oil had gone down, as predicted by the 
administration, to $10 a barrel after we went into Iraq, where 
would Putin be at this moment? In a very different position, to 
take one example.
    Conversely, it has profound impact, as the Chairman has 
pointed out, on the willingness of our friends to act in my 
view responsibly, because they are held hostage by oil. I'll 
make a very subjective comment. I think the Chairman and I both 
agree that the expansion of NATO, including the preliminary 
steps for Ukraine, would have been a positive thing. Well, 
Russia used oil as they used their 40 divisions prior to the 
collapse of the Soviet Union to basically in my view say to the 
Germans: You've got a real problem; you go ahead and vote to 
expand NATO by bringing the preliminary steps for Ukraine, we 
may, figuratively speaking, cut off the spigot.
    So it has profound impacts on our foreign policy. I'm not 
picking on Russia, doctor. I am not one who views they should 
be kicked out of the G-8. I'm not--if you know, any of you know 
a little bit about me, I am not saber-rattling about it. But I 
think it's a statement of fact that there's real impact, that 
is subtle and not clear to the average American or European or 
    So, having said that, I think you add on top of that, if 
there is an overall by the year 2012 or 2015--if you have an 
$8, $10 trillion investment benefiting--benefiting the United 
States economic growth engine--but particularly benefiting 
those who control the growth, I think it becomes much harder 
and divides us up here when the President would come along and 
say: We're taking the following action against Saudi Arabia for 
reasons unrelated to sovereign wealth funds, or Russia or China 
or whatever.
    You see the pushback--let's argue that it's totally 
legitimate. You see the pushback that comes from American 
manufacturers. You see the pushback that comes from IT 
companies when we say to them, whoa, what the hell are you 
doing turning people over to Chinese authorities for violation 
of human rights--I mean, for violation of Chinese law? What are 
you doing? They say, whoa, hey, man, you guys shouldn't be 
legislating in this area; it will cost us a lot of money.
    You saw the impact when they sent us dogfood. If that 
dogfood had come from France, we'd have cut off that brand like 
bang. It'd be done, finished, gone, over. It would have been 
done within 2 days. But it was China and there's a whole hell 
of a lot of American investors who view, as the overused 
phrase, why invest in China, why Willy Sutton robs banks, 
robbed banks? That's where the money is. That's where the 
people are.
    So I'm sure, as an old friend of mine used to say, you 
understand my point. I'd like you to comment on it. What about 
the subtle impact on domestic American pressure from major 
patriotic--I'm not making any claims about patriotism, whether 
they are labor or business--on impacting upon the conduct of 
U.S. foreign policy when they, the beneficiaries of America 
investments, which I agree with you, Dr. Drezner, is most times 
fairly benign.
    I was going to ask--my very first question was about, 
remember Japan Incorporated was going to--that was my first 
question. You've mentioned it already. It didn't have much of 
an impact, but it went to our pride. It went to our sense of 
ourselves. But it also now seems to me to go to the conduct of 
foreign policy in terms of legitimate interest groups in the 
United States, able to, and appropriately, putting pressure on 
the United States Government in the conduct of foreign policy.
    It's a very broad question. Would you please respond, and I 
invite either of the other two to respond as well if you'd like 
to after Dr. Drezner does.
    Dr. Drezner. Thank you, Mr. Chairman. There's no question 
that the most effective kind of power you can exercise is the 
power that you never see, is the power that's sort of implicit 
in the other person's mind. So to some extent you're correct in 
terms of saying that if these interest groups, recognizing that 
they owe their livelihood in part to the ownership by sovereign 
wealth funds from overseas, would implicitly affect their 
behavior--in fact, I'm sure if you gave them a lie detector 
test and asked them, is it affecting your behavior, they'd pass 
it saying no. But it might have some sort of implicit awareness 
of the extent to which they're relying on foreign investment.
    So might that happen? It's certainly a possibility and if 
you look particularly at, let's say, the Senators from New York 
and what their attitudes are going to be after sovereign wealth 
funds investments into the U.S. financial sector, that might be 
an interesting political science exercise.
    Now, that said, I do think you're overstating the situation 
a little bit in a couple of ways. First, this kind of power 
cuts both ways. The more sovereign wealth funds investment 
there is in the United States, it doesn't just increase our 
dependence on foreign capital; it also increases the dependence 
of these other governments on our economy functioning 
relatively well.
    So in that sense I would argue this is an increase in 
interdependence, not an increase in asymmetric dependence.
    The Chairman. It may be an increase in economic 
interdependence, but that doesn't necessarily comport with the 
promotion of human rights. That doesn't necessarily comport 
with our view of where our strategic interests lie unrelated to 
our economic concerns. I mean, I would argue the President did 
not make the judgment to go into Iraq, notwithstanding what 
people think, based on oil. I would argue he made that judgment 
based upon what he thought the national security interest--I 
think he's wrong, but the national security interests of the 
United States were in the region.
    So I don't doubt for a moment the interdependence that it 
breeds. But what I do wonder about--and you've answered the 
question--is whether or not it has the effect of having 
economic policy in effect trump other legitimate, legitimate 
foreign policy and national security concerns in terms of our 
action. What is economically in our interest is not always 
necessarily strategically in our interest, I would argue, 
unless you are a political science professor who's gone over to 
the economists, and then what the hell, you're lost.
    Dr. Drezner. I have to confess, I also have a master's 
degree in economics.
    The Chairman. I knew you were suspect. [Laughter.]
    Dr. Drezner. I have consorted with other known economists, 
    I think in the long term the pursuit of wealth and the 
pursuit of power tend to go hand in hand. So it's not clear to 
me--while there might be some short-term conflicts, I think in 
the long term the sort of issues you're raising do not 
fundamentally impair U.S. foreign policy.
    As I said in my testimony, I agree that the promotion of 
sovereign wealth fund investment is going to retard the 
promotion of democracy and human rights abroad. That has to do 
with the origins, the countries of origin. But that said, these 
countries now have a greater stake in making sure that the U.S. 
retains its economic growth and the stability of the global 
system, and that's not for nothing.
    The Chairman. I'm not suggesting it is. I appreciate your 
    Do either one of you like to comment? I'm over my time, but 
if it's brief.
    Dr. Bhagwati. Yes, sir, very quickly, Mr. Chairman. With 
China it's really our investment there----
    The Chairman. I agree.
    Dr. Bhagwati [continuing]. In the provinces, rather than 
their investment with us----
    The Chairman. No; I absolutely agree with that.
    Dr. Bhagwati [continuing]. That's constraining us. And as 
far as Russia is concerned, it's just the luck of the draw that 
the oil price increases have actually made them so much better 
off. I mean, they've gone from being a superpower to what I 
call a super-beggar, when they were completely flat out. Now, 
thanks to oil, they've risen up again. I think it's just 
getting a little hard for us to accept that in the sense that 
they're now speaking their minds, following their interests as 
they see relevant, and so a divergence is opening up.
    But I think as far as sovereign wealth funds are concerned, 
I would be inclined to agree with my political science friend 
that it really doesn't amount to a hill of beans right now. But 
there's a subtle influence which you were talking about, like 
when they start buying up Citigroup and so on and so forth. 
These are not--Senator Obama is not here, but these are not 
exactly innocent, poor, ineffective lobbies. As far as their 
influencing what the firms will say and do in Washington, I 
think there may be--I mean, that's something we need to think 
    I don't know which way it would go, but certainly it's an 
important point which you're raising. I think at the moment I 
don't see any clear pathway which would be followed, but 
certainly when the going gets tough on some issue you can be 
sure that the financial firms which have been bought into a 
little bit are going to be more cautious compared to NGOs and 
others who want to push human rights, and so on and so forth. 
So I think you've got a good point there.
    The Chairman. I've not reached any judgment on it, but I do 
think we don't talk about it much and that's why I wanted to 
raise it, because it's just not in the line of questions my 
incredibly competent staff has prepared for me. I just wanted 
to because others will ask those questions as well.
    David, would you like to make any response?
    Mr. Marchick. Just very briefly, these are age-old issues. 
I dealt with them when I was in the administration, where 
business or agriculture wanted one thing and there were other 
interests. Good policymakers have to balance the various 
interests and make the judgment on what they think is the best 
interest of the United States overall.
    But I agree with my colleague that sovereign wealth funds' 
impact on that is probably negligible.
    The Chairman. Thank you.
    Mr. Chairman.
    Senator Lugar. Thank you very much, Mr. Chairman.
    One of the good things about discussing the sovereign 
wealth funds is it brings to the fore a host of other questions 
other committees and the whole Senate is dealing with. For 
example, Mr. Marchick, you mentioned that one problem that we 
have is that we're running a very large trade and current 
accounts deficits. We are also running a large fiscal deficit 
of $400 billion. There are plans in 10 years of how that might 
get down to zero or so, but these are not altogether credible, 
given what we're doing.
    So as a result we have a need for a lot of money. We've 
been borrowing through our Treasury bonds from all these 
countries quite apart from sovereign wealth funds for a long 
time. There are disagreements as to how many trillions of 
dollars other countries have, but it is a large sum.
    It would appear that our low savings rate, which some 
estimate at sort of a net zero after credit cards and 
everything else are factored out, is not going to change very 
rapidly, especially given the stresses on families and on 
mortgages. So these things are not inevitable, but these would 
appear to be trends that are intermediate in our own future and 
maybe even fairly long-term that dictate a lot of policies that 
we may have.
    Now, they may verge, as you point out, Dr. Drezner, into 
foreign policy in this sense, that the President in his second 
inaugural address stressed democracy, said it was demeaning to 
suggest any country was unprepared for democracy. Yet others 
are noting, not necessarily cynically, that our emphasis upon 
human rights and democracy, has been in decline, in some cases 
hardly spoken. This may have to do with strategic problems with 
regard to war and peace, but it also may be related to, as the 
chairman pointed out, oil and natural gas and other resources, 
and maybe even ultimately the sovereign wealth fund issue.
    This is more than a subtle change in terms of our own 
outlook or, as you pointed out, Dr. Drezner, the suggestion 
that some countries might adopt the so-called Chinese model, in 
which you have an authoritarian government, but a lot of market 
activity, investment, and prosperity. It's a very, very dynamic 
    So somebody looking at this might say that for some 
developing countries that this model may be the best way to go, 
given the per capita benefits.
    But that runs aground to some fundamental thoughts in our 
country about democracy, human rights, market economics, 
freedom of world trade altogether, although the Chinese don't 
necessarily restrict that. They want money coming in. We've 
certainly accepted their money going out. I just mention these 
not subtle changes.
    When I was in Azerbaijan last year, the gentleman running 
their sovereign wealth fund--it's a much smaller one right 
now--was stressing the transparency. I thought that was 
admirable, and they claim they're going to use the Norwegian 
    This country, like many countries, has a lot of money 
accumulating pretty fast. But the fact that they're going 
transparent is a benefit to their citizens. Now, this is hardly 
a democracy, but it's moving in that direction. In other words, 
if we were to encourage some models that's a pretty good one to 
take a look at and to at least congratulate people when they do 
the right thing. I think this is an example of that.
    On the other hand, what I wonder in Azerbaijan, as well as 
in any of the countries that have the sovereign wealth funds, 
is it likely that sovereign wealth fund holdings may go from $3 
trillion to $12 trillion or higher. Also, when do governments 
in order to either pacify their populations or because they do 
run into difficulties--it might be a world food shortage or 
something else--have to use the money?
    The demand, whether it's transparent or not, the suggestion 
in our press that somehow trillions of dollars are coming here 
to satisfy our lack of saving and our deficits, and back in the 
oil producing countries people are saying, why aren't the roads 
any good or how about the schools, or so forth. What is your 
prediction in terms even of the immediate trend, as well as the 
long, as to whether there really will be great sovereign wealth 
funds? Or is this a trend that is spurred by the particular 
energy evolution of the moment and that we are simply 
witnessing in that form?
    Do you have a thought, doctor?
    Dr. Bhagwati. If I may just to respond to that, I think 
it's a very important point. I think the other witness actually 
pointed out that we were so concerned about Japan at one time 
and Japan went into a tailspin. So I think it's a very good 
question because typically we, economists included, tend to 
extrapolate from whatever is going on. And there's no reason to 
think, as I was hinting at from the point of view of the Indian 
experience, to think that these funds are going to keep growing 
at the same rate, because, take China and India both. Both of 
them badly need infrastructure investments at home. They're 
talking about it. There's big discussion in India on using 
reserves for infrastructure. And China as well, as doubtless 
you know, Senator Lugar.
    As a result, a lot of those reserves are going to 
disappear. And now, with the food crisis the Indian ones are 
going to go fast because they won't be able to go and borrow 
from the Fund and the Bank when they have so many reserves 
already to be able to spend on that.
    So I think these things come and go. I think currently if 
we keep at our oil policy of trying to create substitutes and 
so on and hopefully the environmental policies reinforcing our 
security concerns, so if we finally mean business on this issue 
and really move into that, I think that will certainly depress 
the price of oil down the road, there's no question about it. 
Right now, of course, the weak dollar is in fact extending to 
the notion that all currencies are likely to be weak and 
therefore people are moving, hedge funds included, from 
currencies into commodities. This has happened before. So 
commodity prices are moving up.
    But that's a temporary phenomenon. It's not a long-run 
phenomenon if you're looking at the future. So I think the huge 
oil price increase I think certainly is, you might call it 
speculative, but it is just portfolio diversification by people 
who are holding assets. They think commodities are the place to 
    So I think it cannot be expected to continue. There are 
some long-run factors also why food prices might keep 
increasing, but that's where you have to take decisions on GM 
foods and a variety of things like that. But I don't see this 
particular distribution of surpluses and deficits continuing.
    We are also--we're going to enter into a new 
administration, whether it's Republican or Democratic, and the 
rather profligate policies on the budget, et cetera, will be 
put in line, because that can be brought in line a little more 
quicker than getting people not to--to increase savings in a 
dramatic fashion. So there are possibilities, and I would say 
I'm not concerned that much about the underlying trends unless 
people don't take fairly straightforward decisions which I 
think are obviously in need of being taken. And I don't see any 
fundamental problems about these decisions being taken right 
    So I think we should not get too carried away by the 
current situation.
    Senator Lugar. Dr. Drezner.
    Dr. Drezner. Senator, as a well-trained academic I can 
provide at least 30 answers to a single question. Let me try to 
do that here in terms of sort of contradicting what I said a 
little bit on terms of how sovereign wealth funds might 
actually help democracy promotion. There are a few 
countertrends, particularly if there's adroit uses of policy.
    As you suggested, one of the ways in which this can promote 
democracy in some countries is the transparency of sovereign 
wealth funds and whether this information gets to the citizens 
of those countries. You're correct that there is resentment in 
some countries where there is significant amounts of poverty 
and yet you read about trillions of dollars being invested in 
the richest country in the world. So there is no doubt that 
sovereign wealth funds have to tread carefully and governments 
have to tread carefully in terms of managing domestic 
    Another way in which they can potentially contribute to at 
least democratization or rule of law is that by operating in 
financial markets, reputation matters and the rule of law 
matters a great deal. So as a result the governments that run 
sovereign wealth funds have to learn to play by Western rules 
to some extent. I think you're starting to see that with the 
IMF process of trying to develop more transparent voluntary 
codes of conduct by sovereign wealth funds.
    I think the fact that you got a commitment from Singapore's 
Government Investment Corporation and the Abu Dhabi Investment 
Authority that transparency is important suggests that they are 
slowly recognizing the political problems they're going to have 
to face. So that in some ways could contribute to greater 
transparency in these nondemocratic countries.
    That said, there is one concern, which is if you actually 
have a crisis take place I think the last thing you would want 
from a U.S. perspective is for these governments, for these 
sovereign wealth funds, to precipitously withdraw significant 
amounts of money from the United States in order to fund crises 
at home.
    To repeat what my colleague said, dealing with the current 
situation we've got now is kind of like turning the battleship 
Missouri. It's going to take a little while and the last thing 
you want is for the turn to be too precipitous. So to some 
extent if you have a crisis in these countries and you have 
sort of a change in government, as I said, a more populist 
revolution, you don't want to do terribly rash actions.
    So just as you don't want rash actions by this 
distinguished chamber, I also think you don't want rash actions 
by the home country governments of these sovereign wealth 
    Senator Lugar. Mr. Marchick.
    Mr. Marchick. I'll be very brief because I know there are a 
lot of Senators here looking to engage.
    Two points. The first point that you raised is kind of the 
macro issue: Will this continue and what does it mean for the 
United States? In my view, running a--having a balanced, 
perfectly balanced budget is not essential--and running a 
deficit has traditionally not been problematic for the United 
States. Having a current account deficit has not been 
particularly problematic. But the trend lines are stark and 
accelerating. This year it'll improve a little, basically 
because the economy is slowing.
    But I think that in the next Congress, with the next 
President, with whomever it is, hopefully some of the actions 
that you can control, there will be action in terms of 
improving the deficit, improving savings rates, and getting a 
handle on the energy situation. And hopefully that will create 
a trend line more toward balance, even if it's never going to 
be perfectly balanced.
    Second is, Azerbaijan is a good example. It is a small 
country seeking to become more independent from Russia, that 
suddenly found itself with huge amounts of oil and natural gas, 
where if they took that money and invested it back in their 
economy there would be hyperinflation and the oil curse, which 
would basically wreck the entire economy and make all of the 
nonoil parts of the economy noncompetitive.
    So the United States and the IMF and Europe encouraged them 
to set up a sovereign wealth fund, to invest abroad. They 
invest through third party, mostly mutual fund type management, 
and they have one of the big accounting firms audit them to 
create transparency.
    So I think that it would be hard to criticize Azerbaijan 
for essentially doing exactly what the United States asked them 
to do for so many years, when all of a sudden there are 
concerns about sovereign wealth funds.
    Senator Lugar. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Before I yield to Senator Menendez, I'm going to submit a 
question on behalf of Senator Nelson, who had to go to another 
hearing regarding the CSX Railroad, a Jacksonville-based 
railroad that stretches 21,000 miles, 23 States, connects 13 
military bases and 70 ports, shipping more military equipment 
than any other railroad in the country. It's currently the 
target of a hostile takeover by an investment group called The 
Children's Investment Fund, which includes unknown sovereign 
wealth funds among its investors. CFIUS review of this 
potential takeover at the request of the Department of Defense 
is currently under way.
    The question he asked, not to be answered now, but I hate 
to ask you to do it in writing: Is the Committee on Foreign 
Investment in the United States within Treasury an effective 
means to safeguard the interests that he's concerned about? 
That's the question.

    [The information referred to above was not available at 
press time.]

    The Chairman. I yield to Senator Menendez.
    Senator Menendez. Mr. Chairman, Senator Webb has another 
pressing engagement and I'd be happy to yield.
    The Chairman. Senator Webb?

                  STATEMENT OF HON. JIM WEBB, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Webb. I appreciate both my colleagues over here 
yielding to me. I have 175 10-year-olds waiting on the Capitol 
steps to get a picture taken. It would be very difficult to 
explain to them if I was too much later.
    Gentlemen, we have a clear picture obviously of why there 
seems to be so much incentive toward moving toward these 
sovereign wealth funds. It's liquidity, partly because of bad 
investments here, and partly because of tremendous transfer of 
wealth outside of this country as a result of oil policies on 
the one hand and trade policies on the other.
    Just very quickly, Dr. Drezner, I would like to agree with 
your comment, which is something that has concerned me. That is 
what we're seeing here with this new form of government and 
economic cooperation inside these countries, many of which are 
not democracies that could down the road actually solidify the 
political systems that we have an interest in changing because 
they are able to benefit from a free market system. It's 
something of an irony, but that's what's going on here.
    Mr. Marchick, on your comment, and others, about the 
situation in Japan in 1987 and shortly thereafter, I think the 
distinctions that we need to make now when we're looking at 
sovereign wealth funds is, first of all, this was a compatible 
political system. The Japanese political system is compatible 
to our own. They're an ally. And the challenge at that time was 
an economic challenge and, most importantly, this was not 
government investment. Other than T-bills--and ironically, I 
wrote a novel, published in 1991, where one of the assumptions 
was that if there had been a confrontation, a serious political 
confrontation on a specific issue--the issue in the novel was 
if they had withdrawn the T-bills--how would that affect our 
economy at a time that would illuminate the political issues. 
So this has been around.
    But this situation here is to me quite a bit different. 
Foreign direct investment can be individual, it can be company, 
it can be investment in T-bills, it can be direct foreign 
government investment, which we are talking about here, into a 
free market economy. 
Then, much more troublesome, it can be direct foreign 
investment from nondemocratic regimes that could have strategic 
interests that are different than our own. That really is the 
question that we're facing.
    We can only deal at present in a limited way with the CFIUS 
process because it's an individual process. The difficulty that 
we're going to be facing here is the cumulative process--the 
process of cumulative investments with the potential for 
manipulation or withdrawal, implicit, the nondiscussed ways of 
influencing an economy and as a result a government.
    So let me just throw one question at you. Why is it that 
the United States Government does not directly invest in our 
own economy, and why are we so comfortable with other 
governments investing directly in our economy?
    Dr. Drezner. Thank you, Senator. To respond to your 
question, let me quote Ken Rogoff inform his congressional 
testimony last year: ``Governments have a long tradition of 
losing massive amounts of money in financial markets and this 
tradition is not likely to end any time soon.'' That likely 
answers your question, which is the belief is in this country 
that governments are not necessarily adept at picking winners 
and losers in terms of buying companies.
    I should point out again, the government invests massive 
sums in the United States economy. It just doesn't do so by 
buying equities. It invests in education, it invests in 
infrastructure, it invests in technology, and so on and so 
forth, and these are all appropriate investments.
    One of the problems with extrapolations of sort of current 
trends is the belief that foreign governments are somehow going 
to be incredibly adept at picking winners in terms of their 
investments in the United States. As I said before in my 
testimony, to date these investments have earned a negative 10-
percent real rate of return over the past year. So do not 
underestimate the ability of foreign governments to screw up in 
terms of choosing which their investments will be.
    Senator Webb. If I may, because I only have a minute and 40 
seconds left and I've got 175 kids waiting for me. I 
respectfully disagree. I don't think that the reason that the 
United States Government has declined to invest in the free 
market elements of our economy is because it won't make money. 
I believe it's because of the nature of our governmental 
system. I keep hearing about the fact that the Chinese lost 
money in their original investment. If there is a continued 
interest, and there will be, it's probably beneficial, 
fortunate in a way, because if they had made a huge amount of 
money right at the beginning we'd have a different view of 
    But the question we have to address is a systemic question. 
The United States Government doesn't invest in the stock market 
because it would be viewed as picking sides, picking winners 
and losers. That's a totally different thing than financing 
governmental programs.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Senator Corker.

                 STATEMENT OF HON. BOB CORKER, 
                  U.S. SENATOR FROM TENNESSEE

    Senator Corker. Thank you very much, Mr. Chairman. I think 
our witnesses have been outstanding and also have a sense of 
humor, which is greatly appreciated.
    I would say that, just to follow on to Senator Webb's line 
of questioning, though, that I would also add a minor detail. 
We have no money to invest, so that is also a pretty limiting 
factor that I think is pretty relevant.
    I think I like the perspective in the long-term views that 
you're sharing with us. I think it's fair to say that relative 
to other countries today at this moment in time, at this brief 
period of time in history that we're a part of today, that we 
are relative to them presiding over a weakening of our country 
as it relates to their relative strength.
    I think that's a fair assessment of where we are, and I 
think maybe the most important thing to take away from this 
hearing and other hearings of this type. I think that's a fact 
and I'd just like to ask the three contestants to yes or no 
that one.
    Dr. Bhagwati. Certainly other countries have grown the 
required surpluses and so on, which is an added element.
    But I would just like to say one more thing in relation to 
this whole question of whether sovereign wealth funds are going 
to give an added advantage to the authoritarian governments as 
against our model, which relies more on markets and human 
rights and so on. I think the way I read the evidence on India 
and China comparisons, which have been with us ever since 
President Kennedy's time and so on--the two countries have 
always been compared--many seers I've talked to said that they 
would invest in China now, but not 10 years from now relative 
to India, because democracy really is the surefire way to have 
sustained development. Actually, if you look at China, the 
sinologists themselves are deeply worried about the fact that 
they don't have a democratic government. This is why people 
take to the streets when you have takings. We have takings in a 
judicial fashion, but when the commissars take your land away. 
You don't have NGOs, no civil society really. You don't have an 
independent opposition party. You don't have an independent 
judiciary. You don't have an independent press, the four 
elements of a functioning democracy.
    So people take to the streets, and it's a highly unstable 
system actually in China. And if you look at the environmental 
damage and if you adjust the Chinese growth rates, as we 
should, for the damage they're doing to the environment, and 
there are well-established ways of doing it, people bring down 
their growth rate by about 3 percent actually. I've seen 
estimates to that effect.
    So they're not doing all that well. They might go down, 
again the same point as Senator Lugar was making.
    Senator Corker. That was a pretty long yes or no and I 
appreciate it.
    I would just--I would say that the other point I was 
getting ready to make, and I think you just made it for me, is 
that while they are investing in our country today, they are 
not investing in themselves. I think that there can be some 
long-term bigger issues that they will be dealing with down the 
road because they are not investing in infrastructure, they are 
not investing in education, they're not doing some of the basic 
things that need to happen.
    So I do think that the issue of oil--I just want to get to 
that. I am not one who believes that--I believe that our future 
here as it relates to energy is through technology and changes. 
I do think it's interesting that we continue to talk about oil 
in the Middle East and yet would not even consider using the 
reserves that we have here in our own country.
    At the end of the day I would also say, though, that even 
if we used our own reserves here, is it not fair to say that 
these countries are still going to be awash in cash because 
other countries are going to be buying from them? I'd like just 
a brief comment if I could from the witnesses on that. The fact 
is the imbalances are going to continue either way because of 
the high price of oil and their ownership of it; is that 
    Mr. Marchick. Yes, sir; it is. The fundamentals are in 
place, going back to Senator Lugar's statement. Oil prices are 
high. A number of countries are maintaining very high levels of 
current account surpluses, which means that they're earning 
more than they can consume. And the money has to go somewhere. 
The money can either be invested domestically, which some of it 
is, but not too much of it can be because then you get into 
inflationary situations.
    So some of it has to go overseas. It can either go overseas 
and buy T-bills, which a lot of foreign countries are doing 
right now--we're financing our deficit through basically 
foreign borrowing--or it can go into direct investment. In my 
view it's better to have direct investment because it's longer 
term, it's less liquid, and it's an investment in the United 
States. It's essentially a sign of confidence in the United 
    Senator Corker. Let me follow up with that quickly. I would 
just--it seems to me that in many ways we're more fragile as it 
relates to our relationships with other countries with them 
having tremendous investments in our debt than we are with them 
having investment in equities. A change of policy, a concern 
about the value of the dollar, sudden desires to be in other 
currencies could have, it seems to me, a more immediate 
destabilizing factor on our country than investment in equities 
spread throughout our country.
    I'd just like brief answers or thoughts as it relates to 
    Dr. Drezner. Just briefly, Senator. There's an old adage 
that if you owe the bank $1,000 that's your problem; if you owe 
the bank a billion dollars, that's the bank's problem. To some 
extent, you're seeing that with respect to the large amount of 
U.S. debt being held by central banks overseas, which is it's 
so large that they don't want the U.S. economy o collapse. 
You're correct, in theory they could do this sort of thing, but 
it would be just as disastrous for them as it would be for us. 
So I don't think that's a terribly realistic scenario, and I'll 
just leave the answer there.
    Senator Corker. I do hope--and I know my time is up. I do 
hope that these types of hearings that we're having--and I 
agree, doctor, that we should not become too alarmist, that we 
need to have perspective about where we are, and I know that 
many of these countries will even more so be investing through 
investment entities, if you will, and not taking as much direct 
ownership possibly because of some of these issues we're 
talking about.
    But the fact of the matter is that the policies that we are 
carrying out today in our country today, just at this moment in 
time--and this is a great country and we can redirect ourselves 
hopefully--and just the sort of the culture that we have in our 
country as it relates to consumption beyond the ability to pay, 
that today these types of meetings point out the fact that we 
need to drastically change the policies that we have in this 
country today to cause us to be stronger in the future. Is that 
a fair assessment?
    Dr. Bhagwati. Yes.
    Senator Corker. Thank you, Mr. Chairman.
    The Chairman. Senator Menendez?

                  U.S. SENATOR FROM NEW JERSEY

    Senator Menendez. Thank you, Mr. Chairman. I appreciate the 
    From what I understand of your testimony, you are all 
basically in agreement that we have not much to fear from 
sovereign wealth funds. Is that a fair statement? Yes.
    So let me ask you in a different context, Hugo Chavez. We 
think that countries will respond based upon their financial 
interests and so they won't be looking at other political 
dimensions. Yet here we have Hugo Chavez, maybe not through a 
sovereign wealth fund, but nonetheless using the national 
patrimony of Venezuela in a way that is not being promoted for 
the financial benefit of its citizens, but ultimately to 
promote his foreign policy. Citgo here in the United States 
puts out oil to communities that are underserved or have needs. 
He does that in promotion of his policy. He uses his oil 
throughout Latin America to promote his policies.
    There is a perfect example of what in that country is the 
sovereign wealth being used for a political purpose. So why is 
it that we cannot foresee the possibility of sovereign wealth 
being used in a way that doesn't look at strictly the financial 
rewards, but at rewards that may very well promote the foreign 
policy of another country?
    I look at Dr. Drezner's testimony and, while a 
hypothetical, in a post-September 11 world I think we have to 
think about what things that may seem hypothetical actually 
take place. You cite, for example, to consider the effect of a 
populist or fundamentalist revolution taking over in Saudi 
Arabia or the Gulf Emirates, and that a rampant anti-
Americanism among the Arab populace could encourage a new 
government to purposely sell off sovereign wealth funds in the 
United States in order to induce a financial panic.
    Now, that might not be inconceivable, as you say, in a 
revolutionary stage. I think that when we saw an airplane 
turned into a weapon of mass destruction or a simple envelope 
laced with anthrax into a deadly weapon, that using financial 
instruments in a way to undermine the national interests or 
security of the United States is not farfetched. That doesn't 
mean you stop all sovereign wealth funds or investments, but I 
think we have to do a better job of looking at how these 
investments take place.
    So my first set of questions is: Why do we not envision 
that and how can we just be so sure that only financial 
interests of sovereign wealth funds will be pursued? Second, in 
my other assignment as a member of the Banking Committee we had 
some of these hearings and I believe some of you have been 
testifying before the committee. It's interesting to see that 
they always seem to keep the threshold below the trigger 
threshold necessary for review of CFIUS, the Committee on 
Investments of Foreign Assets in the United States. It throws a 
little red flag up to me and says, well, why, if this is so 
good, why do you always keep below the threshold, number one?
    No. 2 is, I look at what Chairman Cox said in reference to 
sovereign wealth funds, the chair of the Securities and 
Exchange Commission, and he said when it comes to transparency 
the track record to date of most sovereign wealth funds does 
not inspire confidence. How is it that we work around the 
paradox that is supposed to uphold investor protection, yet it 
depends upon the disclosure of governments that are not subject 
to their own regulations?
    How is it, for example, if we believe that there are 
violations of U.S. securities law, we can do very little and we 
get no cooperation from the very governments that are under 
    So these are paradigms that I think are of concern and I'd 
like to hear your responses to some of that.
    Mr. Marchick. Let me take a crack at that. Senator, I think 
you raised some very good points, and I don't think there is, 
at least from my perspective, much, if any, daylight between 
what you're saying and what we're saying. The first thing to 
say is that these funds have been around for 50 years and to 
date I'm not aware of any that have compromised either U.S. or 
any other country's national security.
    Second is, Is it in the United States interest to have 
investment from these entities or not? Broadly speaking, I 
think the answer is yes. Most of their investment is passive. 
It's managed by third parties and they have no control.
    Then you take the other investments, where they have 
controlling stakes, whether it's a small investment where they 
have 11 percent, 15 percent, or even a 6-percent controlling 
stake if they have rights on the board, et cetera. Most of that 
investment shouldn't be problematic for us either in real 
estate, in retail, in sectors that don't have security 
    For the sectors where we have essential security interests 
or any other interests, then the U.S. Government should be very 
vigilant in protecting our interests, whether it's national 
security, competition, chemical security, chemical safety, 
across the board. The question is are our laws and regulations 
adequate to address whatever risks there are?
    Senator Menendez. What's your answer to that question?
    Mr. Marchick. My answer is that overall the answer is yes 
and that we have--we obviously have room to improve in some 
areas that are unrelated to whether an investor is a sovereign 
wealth fund or not. Obviously, some of the issues concerning 
toys and pet food and consumer safety are troubling to anybody 
in the United States, particularly people that have kids. But 
that's an issue that we need to deal with from an overall 
    Senator Menendez. With respect, that's a different issue. 
The reality is that it is not about investment in potentially 
critical assets of the United States by a foreign government 
who you can't get under the existing Securities and Exchange 
Commission law to respond to inquiries if there is an 
    Mr. Marchick. Let me answer it this way, then. For any 
issue where there is a delta in the risk between a domestic 
investor and a foreign investor and a delta in the risk between 
a foreign private investor and a foreign government investor, 
my view is that the CFIUS process and other regulatory 
processes are adequate to deal with those risks.
    Senator Menendez. Can I hear from the rest of the panel?
    Dr. Drezner. Senator, I think you started talking about 
Hugo Chavez. It's not clear to me that Hugo Chavez's throwing 
around money has actually achieved all that much, and if 
anything it's increased his unpopularity at home. I think 
that's a worthwhile parable to consider in terms of the more 
dangerous scenarios you're talking about.
    Senator Menendez. It may not be the result, but it's the 
intent that I am worried about. You can't just look at negative 
results and say, well, it didn't prove well for him. It doesn't 
mean that if someone else couldn't be using it more 
intelligently and provide a positive result.
    Dr. Drezner. Again, never underestimate the ability of 
governments to screw things up in terms of their intent. So I'm 
actually not sure that you're going to have a Machiavellian 
government successful at potentially accomplishing this.
    I agree, however, that certainly there's the 1-percent 
possibilities that you're talking about. You need to have 
constant vigilance, and I would again agree with Mr. Marchick, 
we have a regulatory process and we have the legal institutions 
in place to guard against those very kinds of concerns. As I 
said, the promotion of transparency among sovereign wealth 
funds by the IMF process I think would also add an extra level 
of assurance to deal with the kind of concerns that you've just 
    Senator Menendez. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    The Senator from Georgia.

                   U.S. SENATOR FROM GEORGIA

    Senator Isakson. Thank you, Mr. Chairman. Very helpful 
hearing and I appreciate the witnesses and their testimony 
    I'm not a lawyer, so I'm a real estate broker, and in the 
1980s I was in the real estate business when Japan Inc. became 
the popular fear in the United States of America. I'd point out 
that they crashed for three or four reasons. One is they bought 
at 100 percent. Second, they bought real estate; they weren't 
buying companies. Third, they had no transparency at home and 
the banks kept the assets at the purchase level when the U.S. 
economy went in the tank in 1990-1991 and the assets plummeted 
in value, and eventually they had to recognize that.
    The reason I make that point is this. Maybe the sovereign 
wealth funds looked at that experience with foreign investment 
in the United States and said: Hey, controlling interests might 
not always be good and the strength of the United States 
economy's going to make this investment a good or bad 
investment. So they're a passive investor, in smaller amounts, 
spreading their risk over a larger number of investments, and 
have a vested interest in the economy being good. Is that a 
fair judgment?
    Dr. Bhagwati. I think it is a fair judgment, and I think 
all experience even with private investment, as you were 
pointing out by the Japanese, they bought into the Empire State 
Building and they were taken by Hollywood basically, rather 
than the other way around. So I think in many cases even not 
having an experience of our system, they actually really were 
moving into areas where they didn't have any comparative 
advantage in terms of investment know-how. They really came a 
    I think it's the same thing. I think they're much more 
cautious as a result of that past experience. Like the Chinese 
put their foot wrong on the Blackstone Group. They virtually 
transferred a lot of money to our people. So they've learned 
from that as well. So I think they're going to be very 
cautious, and I don't think the Chavez model is a particularly 
relevant one. Chavez is just throwing money around, like we 
sometimes do with our foreign aid to achieve objectives.
    Senator Isakson. We haven't always achieved ours either.
    Dr. Bhagwati. It's a tricky business, but I think it's not 
particularly appropriate to link that one with the sovereign 
wealth funds thing.
    Senator Isakson. Given what we're debating on the floor of 
the Senate right now and the concurrent concern over gas 
prices, 20 years ago my son wrote a master's thesis in 
economics on the Dutch disease and its impact on Middle Eastern 
countries, their sole dependence on one source of wealth, a 
rich natural resource.
    We're talking about oil running out in 40 years or going on 
a decline. We've got a 40-year period of time to get off of 
petroleum and onto whatever the new new thing is. I notice five 
of the big seven sovereign wealth funds are obviously getting 
their money from oil and selling it to us. Are they in the 
process through these wealth funds of reinvesting the money 
we're paying them for the foreign oil so that when it does run 
out they've got an investment basis to continue to sustain 
their type of a society, but with a different singular source 
of wealth, that being those pools of investments versus the oil 
they had for so many years?
    Dr. Bhagwati. I think some of them are. I think countries 
like China are going to be investing in their own system 
increasingly, I feel. And countries like India are going to be 
using it up to meet the food crisis. So it's not a situation 
which is going to be extrapolated into the future.
    I think the oil, people deriving money from oil, certainly 
are making a calculated decision that the internal rates of 
return from internal investments, meaning social investments, 
infrastructure and so on, don't offer as much prospect as 
investing it in our system. I think this is why they are going 
to be much more pliable to accepting rules and being obliging 
in the way in which they do it.
    But I think that is clearly the decision they're making, I 
think, that they're better off coming here rather than putting 
more money into their own investments. So I think that also 
suggests that we need not be too alarmed in the sense they're 
simply interested in the rates of return, essentially. I think 
they're going to learn from past mistakes like the Japanese 
investments, some recent Chinese investments, and I think we 
expect to do--I think one thing we need to remember is that 
there's been debate, is the current deficit being driven by the 
fact that people want to invest money here or the other way 
    I think to some extent we're still a safe haven, we're 
still the smartest economy in the world. We go through problems 
like everybody does. But essentially, if you ask people, not to 
look at arbitrage operations between the euro and us and the 
yen, for example, but if we say, look, if you had a pot of gold 
where would you put it on a sustained basis, I think almost 
everybody would agree. Everyone I've ever talked to says this 
is the country they want to invest in.
    So I think fundamentally that's a decision even the oil 
guys are making, that this is where they want to be. I think it 
is going to be reasonably steady. They aren't going to fool 
around trying to use it for political purposes. So I'm 
reasonably optimistic on that front.
    Senator Isakson. Well, the reason I brought those two 
things up, I was in Iraq the day the Dubai Ports deal broke and 
they diverted us to Dubai to try and talk to the government 
over there and settle everybody down. I realized what a problem 
lack of knowledge is. I think, Mr. Chairman, your having this 
hearing and subsequent hearings we would do on understanding 
sovereign wealth funds will help us to get the information out 
on what they are.
    Second, if we can have a good system of transparency we can 
raise the level of confidence, but also reduce the risk of some 
of the fears that you see out there in these investments. After 
all, in the end these countries are governments in many cases 
different than ours, that are not necessarily democracies, but 
they're investing in a democracy. If we maintain its strength--
and we have some things we need to do--this can be good for us 
as a country and good for the ``world is flat'' era that we're 
going into, where we're so close and so interconnected.
    I just want to echo what Senator Corker said, that our 
savings rate, our spending habits, and our dependence on 
imported oil are three contributors to our current problem. 
Every time we can improve our situation vis a vis oil, create 
mechanisms where savings become something the American people 
do, we can go a long way towards being an even more attractive 
place for the world to invest its assets and want America to do 
    Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Senator Cardin.

                   U.S. SENATOR FROM MARYLAND

    Senator Cardin. Thank you very much, Mr. Chairman, and I 
very much appreciate you holding this hearing. I think it's 
extremely important and I think we all agree on the fundamental 
issues in this country that we need to deal with that have 
added to the growth of the sovereign wealth funds and the 
diversity of the sovereign wealth funds and the potential for 
impact on our own country.
    We need to deal with the realities of the balance of 
payments deficit in the United States. As our panel has 
indicated, a deficit is not always bad, but the uncontrollable 
deficits are bad, and the trend lines are problematic. We need 
to deal with our own operating budget deficit, our own savings 
deficits in this country. A lot of that are issues that we need 
to deal with internally.
    But when you take a look at whether we have a level playing 
field with our major trading partners and you look at some of 
the manipulation that's been done, for example China and the 
manipulation of currency, that impacts the surpluses that China 
has versus the United States, adds to their ability to grow 
their wealth funds, and can become an issue for our own 
    Clearly, the sovereign wealth funds that are operating as 
stabilization for the economy of a country that is focused on a 
particular natural resource, that makes sense. I don't think 
any of us disagree with having that type of a stabilization 
fund. However, when these funds grow at such a level or where a 
country can potentially use those funds for a strategic 
purpose, not having the same pressure that investors have on 
the managers of funds, then it can become an issue that we 
should be concerned about.
    I think about China and I think about the fact that they've 
made strategic decisions to invest in countries where they need 
natural resources, which clearly give them leverage over that 
other country's decision as to how they use their natural 
resources. I think of our own relationship with China and the 
fact that we have more limited options against China today than 
we had 10 years ago because of the ability of China to--their 
market impact in the United States.
    So let me just challenge our panel if I might. Let's assume 
we disagree with your overall conclusions that our current 
economic and regulatory system in the United States is strong 
enough to protect us against potential harm from sovereign 
wealth funds. Let us say that we want to act now while we can 
act, looking at the trend lines, concerned about the potential 
strategic impact that these sovereign wealth funds could have 
on U.S. interests.
    My question to you is, Can you tell us whether we can focus 
our legislative actions to the areas of potential harm to this 
country, those funds that are not transparent, those funds that 
are operating with strategic interests rather than pure 
economic interests? Is there a way that we could either 
strengthen our Committee on Foreign Investments in the United 
States Act or look at legislation or regulation that is 
targeted to the types of fund activities that we think could be 
abusive to U.S. interests?
    Is there a way that we can be surgical as we look at ways 
of better defining U.S. areas of concern as we go forward?
    Mr. Marchick. Senator Cardin, I think it's a very good 
question. My view is that the Congress just acted in a surgical 
way, thanks to the leadership of Senator Dodd and others, by 
passing a new amendment to Exon-Florio, which I believe passed 
unanimously last year, and which the administration is 
currently implementing with a series of regulations which I 
know Senator Dodd, Senator Webb, and others have weighed in on.
    That law basically addresses problems that became apparent 
during the Dubai Ports issue, which is, whether you agree or 
not that Dubai Ports' investment in the United States was a 
security risk--in my view it wasn't--the fundamental issue was 
that the Congress lacked confidence in the strength and the 
transparency of an administrative process. CFIUS didn't provide 
Congress with the reports they were supposed to provide. They 
didn't adequately brief Congress.
    So when you had difficult facts in this case, which made a 
political stew, the systems that were in place didn't stand up 
to the scrutiny. So that's what the legislation that Senator 
Dodd so ably got put into law I think addressed. It strengthens 
the communications with Congress. It requires heightened 
scrutiny for any government-linked investment, requiring the 
Deputy Secretary--
requiring much higher levels of engagement and basically 
signatures to the Congress that they personally have looked 
into the issue and do not find national security issues. Before 
it could be done at a much lower level. So you're going to have 
much more exacting scrutiny.
    It created a much broader and more appropriate criteria for 
examining investments in a post-9/11 world.
    Senator Cardin. I would just point out, I strongly 
supported that effort and it dealt with the port issues, which 
were pretty transparent as to its potential impact on the 
United States. But when we're dealing with perhaps natural 
resources or dealing with areas that are not as directly 
related, it may be more difficult under the current regulatory 
and statutory arrangement.
    My issue is is there ways to strengthen those types of 
    Mr. Marchick. Again, we should always look to find things 
that we can do to improve our national security. It's a 
constant effort. But the law that was put in place dramatically 
expands the scope of inquiry to critical infrastructure. The 
previous law focused on defense assets and a traditional, very 
narrow definition of security. The new law that Senator Dodd 
led broadly defines much broader subsectors of the economy and 
requires exacting scrutiny of those investments.
    So the Congress should be vigilant in oversight and I'm 
sure that this committee, I think which has jurisdiction, and 
Senator Dodd, which has jurisdiction, there will be hearings to 
make sure that CFIUS is doing its job. But my view is the 
legislative framework is in place for it to be effectively 
implemented, and then the question is are they effectively 
implementing it. And that's something that Congress should 
pursue through oversight.
    Dr. Drezner. Just a quick add-on, Senator. First, I believe 
the legislation that was passed also has a provision 
specifically for government-controlled entities if they 
purchase U.S. assets, to address the question about sovereign 
wealth funds to some extent. You've already got it in the 
    It should be pointed out that, since Treasury has yet to 
finalize, I believe, the implementing regulations, my tendency 
is to apply a Hippocratic oath to new policy innovations, which 
is, first do no harm. Let's see what the existing process does, 
I think, before adding onto it.
    Senator Cardin. I'm just going to make a very brief 
comment. There was significant concern about moving forward 
with that legislation last year. It was clearly in my view the 
right thing to do and I congratulate Senator Dodd on his 
leadership. My concern is that, while we have the opportunity 
to act now and use that model to deal with the realities of 
what some of these sovereign wealth funds may be getting into, 
it may be the time is right to take a look at that model to 
expand its potential areas of interest as to what sovereign 
wealth funds may be getting into that could affect the security 
of our country that's not currently covered by the act. That 
was just my point that we should be doing.
    Thank you, Mr. Chairman.
    The Chairman. Mr. Marchick, my staff tells me you may have 
a plane you have to catch, and if you do----
    Mr. Marchick. Yes, sir. I've already missed one. I 
    The Chairman. No, no, no. There's no need to apologize. We 
apologize to you.
    Mr. Marchick. Thank you very much. I'm very sorry I have to 
run if you don't mind. Senator Dodd has already heard from me 
many times. He's probably sick of hearing from me.
    The Chairman. Well, thank you very much for being here, and 
Chairman Dodd is never tired of hearing.


    Senator Dodd. As you are walking out the door, an issue I 
was going to raise with you was the new regulations 
implementing FINSA, which remove any doubt, I think, that if a 
foreign entity holds less than 10 percent of voting interest it 
may still exercise control and thus prompt a CFIUS review. I 
think the word ``control'' obviously is the operative word; but 
moving clearly in the right direction on all of that.
    So I know that you're packing up. We'll send a letter.
    Mr. Marchick. My view is that--and you and Senator Webb 
have done a lot of work on this. My view is that the 
regulations tighten the focus on transactions that are less 
than 10 percent. So you could have a 1-percent interest but 
control the board of directors and you're right in the CFIUS.
    Senator Dodd. I appreciate that immensely, because that is 
the kind of flexibility. And while he's had to leave 
apparently, to Senator Cardin, my sense is too as well that I 
don't think you need to necessarily expand the areas covered. I 
would suggest that under existing law, unless you tell me 
otherwise, that if you start talking about some of these other 
investment areas, for someone to suggest that a natural 
resource were going to be acquired in some way here, I still 
believe CFIUS applies. I don't think because the area that he's 
raised is not mentioned specifically it would deny the kind of 
operation to examine that to determine any national security 
    Senator Cardin. I think one of the positive elements, many 
positive elements, of the law you wrote is that it gives CFIUS 
incredible flexibility. So in 3 years, if there's a new 
national security threat that we don't know about today, CFIUS 
covers it. Cyber security is covered now; 4 years ago, 5 years 
ago, that wasn't a concern.
    Senator Dodd. And if it's not, I presume you'd be back up 
or someone would be back up here, from this administration or 
the next administration, suggesting that we need to have an 
additional authority granted if there's some question about it.
    Anyway, I know you've got to run. I apologize.
    The Chairman. Thank you.
    I thank the Senator from Wyoming for his indulgence. The 
floor is yours, sir, and then we'll go to Chairman Dodd.

                   U.S. SENATOR FROM WYOMING

    Senator Barrasso. Thank you very much, Mr. Chairman.
    If I may as you leave, Mr. Marchick, there'll be a couple 
questions. I may want to just submit them to you in writing, 
because I am interested in your thoughts on some of these 
things. Thank you very much.
    Mr. Chairman, we heard a little earlier that Goldman Sachs 
had concluded that, while concern about politically motivated 
acquisitions in the West might be justified, so far there's no 
evidence of this becoming an issue with the sovereign wealth 
funds and in their view there wasn't a serious prospect of it 
becoming one. But I agree with Senator Menendez that you don't 
worry about someone's intention; you worry about the 
possibilities and the potential to create problems.
    I am concerned, Mr. Chairman, that there is the potential 
or the possibility to create problems. I look at this in terms 
of nations where they may have an interest in high oil prices 
and they at the same time have a sovereign wealth fund and the 
possibility of using them--through speculation or 
manipulation--to bid up the price of oil on the futures market; 
using the sovereign wealth fund to then bid up the prices as 
they then sell their product, the oil, to the United States or 
to the rest of the world.
    I don't know if that's something that you'd given any 
consideration to, but I'd be most interested in your comments 
on that potential, which would drive the cost of oil even 
further up than we're dealing with now.
    Dr. Bhagwati. But that possibility, Senator, would be 
independent of whether there were any sovereign wealth funds. 
They could be doing it right from Riyadh or anywhere in the 
Middle East and so on. So I think the possibility of this kind 
of deliberate speculation, as it were, to try and raise the 
returns to you, if it works it doesn't require them to be 
present here in any particular form. So I think it's just not 
related really to the sovereign wealth fund issue, but it's a 
possibility certainly. If you've large amounts of funds, like 
when George Soros was accused by Malaysia of speculating 
against the Malaysian currency prior to the East Asian 
financial crisis, he was supposed to be such a big player that 
when he started speculating against the currency they thought 
he was undermining the currency. Maybe he should speculate on 
something else.
    So I think it's exactly the same point. If you're a major 
player you can have--you can actually manipulate prices and 
have other lemmings follow you, and then you really have a high 
rakeoff. So I think it's certainly possible. Whether it's 
likely in this particular case, is that really happening now, 
I'm not sure.
    Senator Barrasso. I don't know if you want to comment, Dr. 
Drezner. I was going to ask you about just the transparency in 
a global market, to know if it is happening, even separated 
from the sovereign wealth funds?
    Dr. Drezner. Just to add, if you're talking about 
hypotheticals, there are so much better ways of jacking up the 
price of oil. All Mahmoud Ahmedinejad needs to do is issue some 
sort of fiery denunciation of the United States and Israel and 
oil prices go up by $10 a barrel. That's much more effective 
and much more direct than the sort of indirect route which 
you're talking about.
    It also should be pointed out that, while some actors want 
oil prices to simply go up and up and up, the major oil 
producers, particularly Saudi Arabia, there is a downside to 
oil prices being prohibitively high, which is obviously it puts 
political heat on them, and also it can cause a global economic 
downturn, which eventually diminishes demand for their 
    Senator Barrasso. Could I move a little bit to the issue 
then of U.S. foreign aid. I look at the fact that the United 
States, a major funder of activities around the world, some to 
countries perhaps that have sovereign wealth funds. How do we 
balance that, where we are as a nation investing, giving money 
to foreign countries and they have sovereign wealth funds, and 
should that money not be used instead for them to invest in 
their own country.
    You talked about hyperinflation, if too much money went 
into their own countries. But I have a concern about the United 
States and the taxpayers of America sending money overseas 
while they're just continuing to do well and investing with 
sovereign wealth funds.
    Dr. Bhagwati. I think it's the general state of development 
which you may be interested in, because sovereign wealth funds 
may be there, but you may want to give foreign aid just with a 
view to promoting health care and all sorts of things. Now, 
whether in fact those sovereign wealth funds themselves should 
be used for that, it depends on the magnitude of these funds. 
You might as well say, look, private investment funds should 
not flow out from there. So you're then taking a position on 
where people should be investing their money. I think if we 
start getting into that kind of comparison I don't think it 
really is very helpful, because then you'll wind up doing 
micromanagement, as it were, of how a country's resources are 
going to be used.
    So I think sometimes you just have to take their portfolio 
of choices and what they decide as given, and if there are 
countries you want to assist with development, then I think you 
should just throw it out of the window and really focus on 
whether the moneys you're going to provide are going to do 
things like affect malnutrition and a variety of other things, 
promote liberty, et cetera.
    So my choice would be to say, look, unless it's a gigantic 
SWF with gigantic reserves--I think this is the sort of issue 
which would come up with China. There, would you really want to 
put moneys into assisting with development? I doubt it, I doubt 
    Dr. Drezner. Just to add, I don't think there's a terribly 
strong correlation between where our foreign aid is going and 
the size of sovereign wealth funds in those countries. So I 
don't know how large a concern it is. Certainly I understand 
why you would be concerned about the overlap.
    It also depends on the reasons for the aid, of course. For 
example, given the earthquake in Chungdu, I don't think you 
would assume that the United States would not want to 
participate in humanitarian efforts because they have a large 
sovereign wealth fund. Obviously, this serves our own 
interests, not to mention ethical concerns.
    Also, a lot of the reasons for the U.S. aid overseas is to 
promote democracy, to promote human rights, and it's not 
terribly shocking that some of these governments might be 
reluctant to invest their own money in such efforts. But I 
don't think that should therefore prevent us from at least 
trying to nudge these countries in the direction we want to see 
them going.
    The Chairman. Thank you very much.
    Chairman Dodd?
    Senator Dodd. Well, thank you very much, Mr. Chairman.
    Let me thank our witnesses and our colleagues as well. I 
know you've been here a long time this morning and I apologize 
for not getting over here at the outset of the hearing.
    Let me thank Senator Biden and Senator Lugar for holding 
this hearing. It's very appropriate that the Foreign Relations 
Committee examine this issue as well and, as you've heard and 
obviously because of your awareness of the issue, you're 
conscious very much of the fact that the Banking Committee as 
well has obviously jurisdiction over a good aspect or part of 
this. But the foreign policy implications are significant and 
so it's very appropriate that this committee be listening to 
witnesses as well.
    Over the last 18 months, actually we've had markups of 
bills and hearings along this area. We held the first 
congressional hearing last November on sovereign wealth, 
affirming Congress's legislative approach to addressing 
national security concerns. Based on these hearings, the 
Banking Committee has undertaken several oversight initiatives, 
including a forthcoming Government Accountability Office 
report--and we conducted an April hearing evaluating the 
regulatory authorities over these funds and closely monitoring 
efforts to establish a set of best practices for sovereign 
wealth funds by the United States and international bodies, 
including the Treasury Department, Securities and Exchange 
Commission, the International Monetary Fund, and the 
Organization for Economic Cooperation and Development.
    Today, as you probably heard already--and I'm repeating 
myself to those who were talking about this. I'm sure the 
chairman may have noted this. The IMF estimates that 20 
sovereign wealth funds, largely financed by petrodollars and 
excess foreign exchange reserves, manage somewhere between $2 
and $3 trillion globally, and they're anticipating those assets 
to climb to around $12 trillion by 2012. I don't know if you 
agree with those numbers or not, but those are the numbers 
we've been given.
    So with that kind of financial muscle and the extensions of 
foreign governments, their operations in U.S. markets have 
raised questions, obviously, of political intentions, 
transparency, and the security of critical U.S. industries.
    At the same time, in recent months sovereign wealth has 
provided a much-needed source of capital. Without them we'd be 
in a very different situation in this country. So it's one of 
those issues here. Be careful because without sovereign wealth 
funds we would have some serious problems in the country. So as 
we look at these issues, maintaining that balance.
    Fortunately, I believe the United States can continue to 
enjoy an open investment climate while protecting economic and 
national security, and I appreciate the generous comments the 
chairman tells me you made about CFIUS, the legislation we 
crafted, and the very balanced way to deal with those issues. 
But CFIUS is only one tool and we're examining obviously the 
roles of other agencies in light of this influx of investment, 
from the Federal Reserve and the SEC to agencies governing 
specific industries like defense, energy, and 
    Many questions remain. I mentioned one here already and 
that is the control issue and to what extent Treasury can 
respond. I appreciate very much Mr. Marchick's response about 
the flexibility of the legislation, so we need not necessarily 
jump in. And obviously we want to examine through oversight how 
this is all proceeding in the coming weeks and months and 
    How can we ensure sovereign governments cooperate with the 
United States in enforcing our laws, including insider trading 
protections? Chairman Cox I think had a pretty good quote in 
this area. He said: ``The same government from whom we sought 
enforcement assistance was also the controlling person behind 
the entity under investigation. It creates some inherent 
potential conflicts.'' So we need to examine that and how we 
can make certain that sovereigns operate in the United States 
market strictly according to their commercial rather than 
foreign policy interests is obviously an overriding issue.
    Perhaps most important to this hearing on foreign policy, 
is how can we address concerns over reciprocity. So if I may, 
let me ask you about the reciprocity issue if I could, and ask 
both of you professors, Dr. Bhagwati and Dr. Drezner. The 
reciprocity questions are: How might promoting reciprocity 
support such mutual economic interests? What sorts of forums 
exist to advance such an agenda, and would demanding such 
reciprocity damage foreign relations with any of these other 
countries as well?
    Dr. Bhagwati, do you want to start?
    Dr. Bhagwati. If by reciprocity you mean what they expect 
of us when we deal with sovereign wealth funds in their 
    Senator Dodd. Uh-hmm.
    Dr. Bhagwati. We should also follow the same transparency--
I mean, we are kind of state of the art anyway, and we also 
don't use sovereign wealth funds particularly. So I think in a 
way it's a moot issue, if that's what you mean. It would be 
    Senator Dodd. There's also other questions, access to 
markets, how investments are treated, how private investments 
are treated. So I'm not looking for sovereign wealth fund 
versus sovereign wealth fund, but giving access to that 
    Dr. Bhagwati. OK. That gets back into the problem you 
always have with devising a code on investments in general, 
foreign investments, which would consist of private and the 
governmental ones, the sovereign wealth funds. We haven't 
really made much progress. The OECD tried it, as you know, and 
the NGOs objected in a big way, the developing countries 
    I think if you're going to do that you would have to make 
it stand on sort of three legs, as it were. It'll have to be a 
tripod where you have the rights of the funds, of the people 
who are doing the investments, and the rights of the people 
receiving these funds, then the obligations of whichever entity 
in terms of corporate social responsibility and so on. The OECD 
code, being at the OECD, which is a rich countries club as you 
know, was entirely on the rights of the corporations. But I 
think we could expand the whole thing, now that we're taking up 
the matter again at the OECD and the IMF, into looking at in a 
very comprehensive way to include things like CSR, corporate 
social responsibility, and what should be the rights of the 
countries which are receiving these funds.
    It shouldn't be just a matter of--I think having the 
sovereign wealth funds would automatically bring in the focus 
on the obligations to be transparent and so on and so forth. 
But I think it could be expanded in that direction if by 
reciprocity you mean a more comprehensive thing which really 
looks into all these different dimensions. I think it's time to 
look at the entire investment flows in the modern context, in a 
much richer way than we have traditionally done in relation to 
an investment code.
    Senator Dodd. Any comments, doctor?
    Dr. Drezner. Senator, Mr. Chairman, first let me preface my 
remarks. Having grown up in the State of Connecticut, it's an 
honor to be speaking with you, and I can assure you that you've 
made my mother very happy by the fact that I'm able to----
    The Chairman. Let's not get carried away here. [Laughter.]
    Senator Dodd. Where are you living now?
    Dr. Drezner. I live in the State of Massachusetts.
    Senator Dodd. Well, come on back. All is forgiven. We'll 
take you back. [Laughter.]
    Dr. Drezner. They have to hire me there.
    The Chairman. Hire him at Yale.
    Dr. Drezner. Yes; exactly.
    I don't disagree--I would say I agree fully with Dr. 
Bhagwati. I would point out that one of the reasons why 
sovereign wealth funds probably have less leverage than we 
think they do vis-a-vis the United States is precisely because 
most of the developing world has the kind of investment 
protectionism that you're talking about and therefore there's 
not a lot of opportunity for them to invest in those places. 
Not surprisingly, I think something like 60 percent of 
sovereign wealth fund investment is in OECD countries.
    Interestingly enough, this might be in essence where a 
sovereign wealth fund from one country might actually be acting 
in our interests by trying to pry open other developing country 
markets as well. So this might be a situation where the sort of 
natural trend line works in our favor, and I'm not sure 
stressing reciprocity is necessarily going to be a necessary 
part of U.S. policy.
    Senator Dodd. Let me ask you on a related matter of the 
enforcement issues, the question of the importance of 
diplomatic arrangements with foreign governments and with 
sovereign wealth funds to ensure cooperation with American 
authorities, the SEC and others, in the course of criminal or 
civil legal proceedings. Can you give us some sense of where 
you think that is and to what extent we can be demanding more 
of that? Do you have any sense of that?
    Dr. Drezner. I'm going to have to plead ignorance.
    Senator Dodd. I was going to ask Mr. Marchick more. It's an 
area I presume he'd probably have a bit more----
    Dr. Drezner. It's not my area of competence, I'm afraid.
    Senator Dodd. We will submit the question to him.
    As I pointed out, if you end up with the some governments 
from whom we're seeking enforcement is also the very entity 
making the investment, you've got sort of an inherent problem 
here. That very government willing to be supportive of 
enforcement areas if in fact they're the provider of the 
sovereign wealth----
    Dr. Drezner. There is one thing I can say on this. I think 
there might be a tendency on the part of the United States to 
overestimate the sort of unitary nature of authoritarian 
governments, the belief that if there exists a sovereign wealth 
fund and it's controlled by an authoritarian government then 
surely the government is strategically micromanaging the 
sovereign wealth fund. The fact is that you have bureaucratic 
politics in those countries just as you do in the United 
States. So even though we might think that there's going to be 
a direct line of access from the government to the fund, if you 
take a look at sort of closer analysis, for example CIC, it 
seems pretty clear that there is actually a fair amount of 
bureaucratic squabbling going on there about how appropriately 
to manage the CIC.
    This isn't to say that these issues aren't--I agree with 
Commissioner Cox that these are an issue of concern, but 
they're not necessarily--it would be dangerous to overstate 
them, I guess.
    Senator Dodd. He poses a good intellectual question.
    Dr. Drezner. Right.
    Senator Dodd. And I'm waiting to get some specific examples 
of where maybe this has happened, where you're finding lack of 
cooperation which would warrant maybe considering something 
    I thank you both and thank Mr. Marchick. Of course, in 
these debates I always find it somewhat interesting. Some of 
the strongest supporters, of course, of investments by 
sovereign wealth funds are the private sector in the country, 
and I just find it somewhat of a contradiction when you suggest 
the investment of governments, their own government. Yet when 
it comes to this government making investments we find some of 
the same constituencies rather antagonistic to the idea. So 
it's somewhat amusing to me that the very people who are the 
strongest supporters of governments investing here are some of 
the strongest opponents of our own government making some 
investments in certain areas. But that's my own sort of inside 
private smile I have from time to time on these issues.
    But I thank you immensely, both of you, and I'm sorry again 
I wasn't here to hear all of your comments in response to 
questions that others raised. But this is a very important area 
and a growing one. As I point out, if the numbers are correct 
it's even going to get larger, and it offers some tremendous 
    We're going to have hearings tomorrow, Joe, on the 
infrastructure bill that Chuck Hagel and I have authored trying 
to create an infrastructure bank idea, that attracting private 
wealth into these--because we're not going to do what we need 
to be doing. We've got a $1.6 trillion shortfall just in 
maintenance of existing physical infrastructure in the 
country--waste water treatment, water systems, roads, bridges, 
and the like. This is not going to be done out of the 
appropriation process. You're going to have to attract private 
wealth to come in and do it.
    So sovereign wealth funds become an incredible source of 
potential liquidity for us dealing in this area. For those who 
are worried about this, I always say you can't pick up a 
transit system or bridge and take it back to the country who's 
helped you build it. So there's some wonderful attractions of 
having private wealth come into this area, which we need 
desperately for economic growth in this century. So they're 
very important related issues and an area we want to continue 
to support, and I thank you.
    The Chairman. Maybe they can pick up I-95 as it goes 
through Delaware and Connecticut, which are parking lots.
    Senator Dodd. We'd be willing to give that up.
    The Chairman. We'd be willing to give them those two.
    Gentlemen--Mr. Chairman, do you have any further questions?
    Senator Lugar. No, thank you.
    The Chairman. Thank you for your time and your input. With 
your permission, we don't want to make a lot of extra--a little 
extra work for you. I have half a dozen questions that I'd like 
to submit in writing. There's no time frame on them. With your 
permission, we'll leave the record open for a day to see if 
some of our colleagues who had other business might have some 
questions. But you've covered the waterfront very well. We 
appreciate it a great deal.
    The only part of this whole exercise that Senator Lugar and 
I found difficult was the consistent praise for Chairman Dodd 
and the Banking Committee.
    Senator Dodd. I'm glad I showed up. [Laughter.]
    The Chairman. That's right.
    But seriously, thank you very, very much. It was very 
helpful, and we are adjourned.

    [Whereupon, at 11:47 a.m., the hearing was adjourned.]

              Additional Material Submitted for the Record

  Prepared Statement of Douglas Rediker, Co-Director Global Strategic 
     Finance Initiative, the New America Foundation, Washington, DC

    Over the past several months, few issues in international finance 
have generated as much discussion and comment as have Sovereign Wealth 
Funds (``SWF''s). This committee deserves enormous credit for 
recognizing the potentially significant foreign policy consequences of 
the rapid accumulation by foreign governments of enormous, growing 
pools of capital. These large concentrations of government-controlled 
wealth raise complex issues that transcend traditional boundaries 
between foreign policy, financial markets, international economics, and 
national security.
    It is my belief, however, that too much focus on SWFs may, in fact, 
divert attention from the more fundamental foreign policy issue that 
these funds have come to represent--that of the rise of ``state 
capitalism'' and the broader use of finance as a tool of foreign 
policy. These, I believe, are increasingly important 21st century 
    SWFs are simply a particular type of global financial market 
investor.\1\ They should not automatically trigger foreign policy 
concerns. Too much focus on SWFs as potential tools of political 
influence fails to take into account that the world's more than 50 SWFs 
are very different in terms of the origin of funds, size, structure, 
investment philosophy, and motivation. Other than the commonality of 
government ownership, they are really not a definable class of either 
political or financial actors. But it is specifically foreign 
government ownership and the possibility that these increasingly 
wealthy foreign governments may use finance as a tool to advance their 
national interests abroad that makes them of interest as a matter of 
foreign policy.
    \1\ There are also definitional questions as to what constitutes a 
SWF. For example, some analysts include in SWF calculations part or all 
of the $327 billion held by the Saudi Arabia Monetary Authority 
(``SAMA''), while others exclude these funds, classifying them as 
central bank reserves instead. Similarly, the China Investment 
Corporation (``CIC'') is that country's acknowledged SWF. But, China's 
State Administration for Foreign Exchange (``SAFE''), which manages 
China's central bank reserves and is not generally considered an SWF, 
has recently made significant investments in international equities.
    In many cases, SWFs are neither the major repositories of 
government controlled wealth, nor the financial tool through which a 
country might seek to exert financial influence for political gain. 
While SWFs are believed to control approximately $3 trillion of assets, 
foreign government-owned central bank assets are estimated to exceed $7 
trillion. State-owned-enterprises (``SOE''s) represent an additional 
distinct investment vehicle. There is greater likelihood that, if a 
country sought to use financial tools to advance foreign policy goals, 
it would do so either through the use (or threat of use) of central 
bank reserves to impact currency markets or via an SOE. For example, it 
is generally taken for granted that central bank interventions in 
currency markets have at least some element of political rather than 
pure financial motives. Likewise, foreign policy considerations are 
very much involved in potential investments by SOEs. For example, past 
rumors of interest in acquisitions by Russia's Gazprom have caused 
great consternation in many European countries for fear of the 
political motivation and impact of such an investment. Such issues are 
less likely to be raised by means of an investment by an SWF.
    We should be cautious about finding common denominators among the 
motives and actions among widely differing governments based on the 
particular financial structure through which they hold and invest their 
wealth. This is why the U.S. and international community have struggled 
to put in place criteria by which to judge SWFs, as well as appropriate 
rules and responses to govern their actions. There is little in common 
between the risks posed by SWFs of strong democratic allies like Canada 
and Norway and those whose political systems and motivations are more 
worrying, like those of China and Russia.
    I believe the criteria by which many suggest we judge the risks 
posed by SWFs has resulted in an overemphasis on transparency and 
disclosure, while ignoring the more subjective, but more valuable, 
assessment of the political risk that a particular government owner 
poses. This is dangerous. While increased transparency and disclosure 
should be encouraged, such an overemphasis on transparency of SWFs 
alone may, in fact, lead to unnecessary conflict with allies, which, 
for a multitude of reasons may fail to meet the requisite level of 
transparency. Likewise, we may take false comfort from those SWFs that 
comply with transparency rules, but whose government owners' use of a 
broad array of other financial tools to advance foreign policy 
interests and which should warrant closer attention.\2\
    \2\ For example, the Abu Dhabi Investment Authority (``ADIA''), the 
largest SWF with assets estimated to approach $875 billion, has been a 
responsible investor in the U.S. and global markets for over three 
decades. In financial circles, ADIA is considered a high quality 
investor and has never been accused of acting in a manner inconsistent 
with international political or financial norms. Yet, ADIA consistently 
receives failing grades as an SWF because it does not publicly disclose 
information about its holdings, investments, or governance structures. 
In fact, ADIA, which, along with Singapore, recently agreed to improve 
its disclosure practices, if judged against its financial peer group of 
large international hedge funds and private equity funds, rather than 
against its political ones, is in line with the industry norm. By 
contrast, Russia's National Wealth Fund, established in February of 
this year, has announced that it intends to disclose its financial 
holdings in a transparent manner, leading to high marks on the various 
SWF transparency indices. However, Russia, through various non-SWF 
entities, has demonstrated a willingness to use its recently acquired 
financial heft to advance its national interests abroad.
    It is important to note that a comprehensive review of relevant 
legislation and regulation already in place in this country should 
provide this committee with comfort that we are already well protected 
from market-based threats that SWFs may pose to our national or 
economic security. Last year's revised CFIUS/FINSA legislation, as well 
as existing protections afforded by the SEC, Federal Reserve, Antitrust 
authorities and other relevant legislation and regulation, provide a 
high degree of protection from improper takeover approaches or unwanted 
material investments from SWFs.
    But we must acknowledge that over the past several years, many of 
the world's emerging nations have accumulated capital at an 
unprecedented pace.\3\ At the same time, we have witnessed the rise of 
competing centers of global finance not only in Europe but also in Asia 
and the Middle East. While the U.S. remains the world's sole military 
superpower, we can no longer claim the same level of financial 
dominance. While the U.S. is, of course, still a financial powerhouse, 
we are no longer the only game in town. This shift has significant 
foreign policy and political consequences. We should expect that 
certain other countries may seek to further their national interests by 
using the financial tools that they increasingly have at their 
disposal. In their minds, finance and foreign policy are increasingly 
    \3\ Over the first half of 2007, central banks in the world's 
emerging economies accumulated over $600 billion of new reserves--an 
amount that is double the total reserve position of the IMF--whose 
mission used to include preventing the collapse of many of these same 
    \4\ In fact, traditional foreign policy phrases like ``nuclear 
option,'' ``balance of power,'' ``mutually assured destruction,'' and 
other similar terms are now embraced by many financial, as well as 
military, strategists.
    Independent of their commitment to SWF best practices, countries 
like China, Russia, and Venezuela can be expected to selectively use 
finance as an instrument of power and influence. They have already 
begun to do so. For example, last year U.S. financial markets reacted 
to veiled threats that China might resort to the ``nuclear option'' of 
dumping U.S. dollars. At the same time, Russia called for a new 
``balance of power'' by seeking the support of emerging market 
countries for their proposals to a new global financial architecture 
and Venezuela tried to win some ``hearts and minds'' by refinancing 
other nations' IMF debt through its participation in capital market 
transactions. None of these initiatives involved SWFs, and yet they are 
clear examples of the attempted use of increasing financial might to 
exert strategic influence over foreign affairs.
    From Britain's use of financial tools to expand its empire in the 
18th and 19th centuries to the U.S. threat in 1956 to wreck havoc on 
Britain's currency if it did not end its occupation of the Suez, 
history is replete with examples of the use of finance and financial 
markets as tools of foreign policy. It is, I believe, important to 
recognize and address as a top priority the foreign policy consequences 
raised by the increasing wealth of other nations. But I do not believe 
that we achieve any meaningful economic, foreign policy, or national 
security benefits by targeting SWFs with additional burdens. As 
significant providers of capital to our markets, SWFs have thus far 
been a positive influence on the U.S. and global economies.

  Responses of David Marchick to Questions Submitted by Senator Biden

    Question. How would you assess the level of regulatory protection 
in the U.S. versus other regions, such as the EU. Are our regulations 
comparatively stronger? Can they be improved? Are they sufficient?

    Answer. While I am not an expert on the regulatory regimes in every 
country within the EU, I believe that the laws and regulations in the 
United States give the executive branch adequate and authority to 
protect U.S. national security and/or other important government 
interests. FINSA protects against threats to national security, and 
CFIUS has demonstrated its willingness to block or mitigate problematic 
investments. DOD has its own set of regulations to protect the defense 
supply chain and classified information. Hart-Scott-Rodino triggers 
antitrust reviews for any significant acquisition. And in any sensitive 
sector, there are a host of laws and regulators that provide additional 
protection. In the chemicals industry, for example, there are five 
federal regulators focused on safety, security, transportation and 
other issues; several state-level regulators; and more than a dozen 
Federal statutes that impose various, wide-ranging controls on chemical 
investments and operations. The Fed, Treasury, OCC, and OTS scrutinize 
investments in the banking sector. Similar laws and regulatory 
oversight exist in the telecommunications, energy, pharmaceutical, and 
transportation sectors, among others. Even if there were cause for 
concern associated with sovereign wealth funds, our existing legal and 
regulatory structure should capture and fix--or block--any problematic 
investments. Bottom line: When a foreign entity invests in the United 
States, the U.S. is sovereign, not them.
    Several countries in Europe and around the world have recently 
amended their laws to strengthen scrutiny of foreign investments. 
France, for example, recently issued regulations that require 
additional reviews for investments in a number of sectors of the French 
economy. Hungary passed a new law that raises obstacles toward foreign 
acquisitions of companies that affect ``the security of public 
supply.'' Germany is considering new legislation to increase scrutiny 
of investments by sovereign wealth funds.
    In general, I believe that countries have both a right and 
obligation to protect national security, including with respect to 
foreign investments. At the same time, national security should not be 
a guise for protecting domestic companies or national champions from 
economic competition.

    Question. Robert Zoellick, President of the World Bank, has called 
on sovereign wealth funds to take an active role in investing in the 
development of sub-Saharan Africa. What do you see as their role in the 
economic development of these countries? Can they have a positive 
effect? What are the downsides?

    Answer. Foreign investment is absolutely key to the economic 
development in Africa, and Africa has traditionally been a location of 
under investment with the exception of investments in national 
resources and extractive industries. Sovereign wealth funds are an 
important and growing pool of capital, and hopefully SWFs can increase 
their investment in Africa.
    At the same time, the United States, European governments and 
various international institutions, including the IMF, have been 
putting pressure on SWFs to invest only for commercial reasons, as 
opposed to political reasons. I therefore note the irony that the IMF's 
sister institution, the World Bank, is calling for increased investment 
in Africa by SWFs for development purposes, as opposed to commercial 

    Question. Dr. Edward Truman of the Peterson Institute has devised a 
``scorecard'' for sovereign wealth funds that ranks the funds according 
to a set of best practices criteria. Does this scorecard represent a 
useful analytic tool to rate sovereign wealth funds? Does it measure 
the right factors? Or is there little correlation between national 
security risk and a fund's scorecard rating?

    Answer. I support the transparency initiatives being pursued by the 
Treasury Department and the International Monetary Fund, and hopefully 
additional transparency can ease some of the concerns that exist about 
SWFs. At the same time, transparency is not a proxy for the existence 
or absence of national security risks. One can imagine an investment in 
the United States by a completely transparent SWF that triggers 
national security concerns. One could also imagine an investment by a 
completely nontransparent SWF that does not implicate national security 
    Instead of transparency, one needs to look at the country making 
the investment, the asset being acquired, and the sensitivity of the 
asset to determine the national security risk associated with an 

    Question. Recently the Kuwait Investment Authority asked companies 
seeking money from it to ``clear our name with politicians before you 
talk to us.'' Lehman Brothers is also said to be looking to raise 
capital from sovereign wealth fund sources. From your perspective as a 
senior executive in The Carlyle Group, are you concerned that the 
current political environment in the U.S. is dissuading outside 
investors from putting money in U.S. assets? Do we need to consider 
sending a different political signal?

    Answer. Yes; I know from my experience as an attorney before 
joining The Carlyle Group and from discussions I have had with foreign 
investors that the political environment in the United States is 
dissuading certain investors from investing here. Certain foreign 
investors worry that their investments will trigger political backlash 
in the United States, either putting their investment or their 
reputation at risk. Other foreign investors worry that about the CFIUS 
process, either with respect to the timing required to clear CFIUS or 
with respect to the conditions imposed by CFIUS. Some investors have 
publicly announced that they will look outside the United States and 
Europe to invest because of the political environment. Lower investment 
volumes by definition lessens economic activity in the United States, 
potentially costing jobs and economic opportunities for Americans.
    In my view, both the President (and the new President in 2009) and 
the Congress need to make clear that the United States remains open to 
foreign investment. In addition, both the executive branch and the 
Congress (in its oversight role) should work to ensure that regulatory 
processes are predictable and nondiscriminatory. The hearing that 
Senator Biden held, and the opening statements by Senators Biden and 
Lugar, set exactly the right tone, in my view.

    Question. To what extent is past behavior of certain sovereign 
wealth funds a better indicator of national security risk than 
transparency? For example, the Abu Dhabi Investment Authority generally 
has a solid investment reputation in the United States, but it is also 
one of the least transparent funds. Should this matter when it comes to 
national security?

    Answer. See above.

    Question. Many commentators have expressed specific concern toward 
Russia's Sovereign Wealth Fund--the Russian National Wealth Fund. It 
has already raised concern with its disclosure that it owns a 5-percent 
stake in the European Aeronautic Defense and Space Co. (which owns 
Airbus) and is considering increasing its stake to 25 percent. This has 
prompted Germany to consider new laws restricting sovereign wealth 
funds. Should we be concerned about Russia's SWF in particular? Is the 
German response the appropriate one? Should we consider other policy 
responses when it comes to Russia's SWF?

    Answer. I believe that the FINSA creates an effective, adequate, 
and balanced mechanism to ensure that foreign investments do not risk 
U.S. national security. The new law and regulations require heightened 
scrutiny of acquisitions by government-owned companies, including SWFs, 
and require additional reporting to Congress to ensure that Congress 
can effectively execute its important oversight role.
    The draft German law creates a number of uncertainties for foreign 
investors, including uncertainty with respect to whether the government 
will act to block or mitigate a transaction for up to 3 months after 
the transaction has been completed.

  Responses of David Marchick to Questions Submitted by Senator Lugar

    Question. You noted in your testimony that a more important foreign 
policy concern is the ``United States growing dependence on foreign 
countries to finance our current account deficit.'' Could you please 
outline in more detail how our government's fiscal deficit connects to 
the need for foreign financing?

    Answer. By definition, if the United States spends more than it 
saves (both in terms of public and private savings), it needs to 
finance that spending. As a result, the United States requires 
investment from abroad through a variety of means, including foreign 
direct investment.

    Question. What does the growth of sovereign wealth funds mean for 
the United States? If sovereign wealth funds reduced their investments 
in the United States, what would be the impact on our economy?

    Answer. The growth of SWFs has a number of implications for the 
United States. First, it points to an unhealthy current account 
imbalance, combined with high energy prices, which has led to a 
dramatic rise in the accumulation of official reserves in a number of 
countries around the world. Second, just like any other investor, SWFs 
have many choices with respect to deployment of their capital. So long 
as a SWF investment does not create a national security risk to the 
United States, we should welcome SWF investments. If the United States 
created an unwelcome environment for SWFs, it would ultimately harm US 
economic and strategic interests. Just like any other investment, SWF 
investments can help create economic activity, jobs and opportunity for 
American firms and workers.

    Question. What policy proposals would you recommend, if any, to 
improve sovereign wealth fund transparency?

    Answer. I believe that the proposals outlined by the IMF, with 
support from the Treasury department, are generally pointed in the 
right direction. Transparency will help reduce concerns and fears about 
SWFs; at the same time, even a perfectly transparent SWF might seek to 
buy U.S. assets the sale of which would present national security 

    Question. The President of the World Bank, Robert Zoellick, has 
suggested that sovereign wealth funds actively invest in the 
development of sub-Saharan Africa. What do you see as the role of 
sovereign wealth funds in the economic development of poor countries?

    Answer. SWFs can and should play an important role in investment in 
sub-Saharan Africa but the United States and International Financial 
Institutions should not press SWFs to make non-commercial investments 
in the region. The U.S. and other countries can and should play an 
important development role in sub-Saharan Africa. However, it would be 
counter-productive and confusing if the U.S. and International 
Financial Institutions call on SWFs to make investment only for 
commercial reasons, on the one hand, but then call for development-
related investments on the other.

    Question. Should we treat sovereign wealth fund investments 
differently than other types of foreign holdings of U.S. assets? Do 
U.S. national security concerns differ for sovereign wealth funds 
versus other types of foreign investment and foreign purchase of U.S. 

    Answer. The recently passed CFIUS reform bill requires heightened 
scrutiny of foreign acquisitions of U.S. companies by government-
controlled entities, including Sovereign Wealth Funds. In my view, the 
legislation strikes the right balance between encouraging foreign 
investment and protecting national security. To date, most SWF 
investment have been small, passive stakes which have not implicated 
any U.S. national security interests.

    Question. Despite concerns about sovereign wealth funds, it is also 
possible that they can support U.S. foreign policy and development 
goals. Some oil and gas rich countries with surging export revenues 
struggle with weak domestic economies. For example, Angola, which 
reportedly received $44 billion in oil revenues last year, has the10th 
largest amount of arable land in the world but has been unable to 
revive its agriculture sector and imports half of its food. How can the 
U.S. encourage governments to form well-managed funds? Are our foreign 
assistance tools equipped to provide this sort of technical expertise?

    Answer. The United States has--correctly in my view--for many years 
encouraged small, resource-rich developing countries to take steps to 
avoid the so called ``Dutch disease,'' which has undermined the 
economies of many oil-rich countries. One of the big challenges that 
resource rich countries face is that the dramatic increase in fiscal 
revenues at times of high energy prices increases inflation, creates 
upward pressure on their currency and make non-energy sector exports 
uncompetitive. One way to reduce risks of Dutch disease or the ``oil 
curse'' is to set aside revenues and invest them abroad. In doing so, 
countries can maintain discipline on spending and reduce upward 
pressure on their domestic currency. Both the Treasury Department and 
the IMF have done good work in providing technical assistance to 
developing countries on these issues but perhaps more could be done at 
this time given the extraordinary growth in revenues in a large number 
of resource-rich countries.