There was relatively little alarm in Washington last month when a government-owned corporation from Dubai bought almost 20 percent of Nasdaq, the New York-based stock exchange. That was a contrast to the hysteria in 2006 that doomed Dubai's purchase of a British firm that manages U.S. port operations. In part, the mild reaction reflected the fact that the deal was clearly sound economically - and that Dubai gets only 5 percent of the voting rights in Nasdaq. The prospect of foreign ownership of a stock exchange was intuitively less scary to some than the prospect of foreign ownership, even by a moderate, pro-U.S. Arab state, of "critical infrastructure." Nasdaq has submitted the deal for a national security check under the toughened terms of a foreign investment review law enacted in July.
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But what if it had been communist-run China, instead of Dubai, buying into a major financial exchange? Hugo Chavez's Venezuela? Or Vladimir Putin's Russia? Such questions are no longer purely hypothetical because of the rise of "sovereign wealth" funds: huge piles of investment capital being assembled in Beijing, Caracas, Moscow - and many other capitals around the globe. Morgan Stanley projects that sovereign wealth funds could grow from their current total of $2.5 trillion to $12 trillion by 2015. As it happens, China, which has an estimated $300 billion to invest, has already bought a 10 percent share in Blackstone, the private equity company.
There is nothing new about foreign investors "recycling" their earnings from trade or oil production through the machinery of international capitalism. We saw it with Arab oil exporters in the 1970s and Japanese real estate buyers in the 1980s. Norway's government has long used its proceeds from North Sea oil to purchase assets around the globe. Even the oil-rich state of Alaska has a sovereign wealth fund, of sorts: the Alaska Permanent Fund.
Still, sovereign wealth funds pose tough issues for advocates of free-flowing international capital, which is why they were a major topic at the recently concluded annual meetings sponsored by the International Monetary Fund and World Bank in Washington. The case for foreign investment in the United States, which we have made many times, assumes that companies and individuals have an interest in deploying their resources where they will be most productive economically - and that they should be free to pursue profit around the world. Sovereign wealth funds, however, offer governments a way to take over businesses for political as well as economic purposes. That's a benign prospect if the buyer is Norway, a member of NATO. It is more troubling, though, if the government behind the money is that of China, Russia or Venezuela - none of which actually believes 100 percent in capitalism, and none of which is necessarily friendly to the West.
The accumulation of so many dollars in foreign hands is the result of years in which the United States has imported more than it exports. In the long term, whatever problems sovereign wealth funds pose will diminish if the United States can continue to reduce its twin budget and trade deficits. No doubt the new funds will make their share of bad investments, especially if they invest according to political, not economic, criteria - and the markets will punish them for that.
The best policy is to have sovereign wealth behave as much as possible like corporate wealth. That is, the operations of the funds must be transparent and accountable. Norway's Government Pension Fund-Global publishes data and an annual report in which it is quite open about its noneconomic objectives, such as environmental protection and opposition to child labor, and how it tries to achieve them. The United States and other potential hosts of sovereign wealth have a right to insist on similar disclosure from other funds, to seek their cooperation in establishing rules for transparency - and to limit the activities of those who can't or won't play by them.