Policy needed for sovereign funds, Paulson says

The growth of sovereign-wealth funds and the backlash against these state-owned capital pools demands a cautious policy response from the International Monetary Fund, U.S. Treasury Secretary Henry Paulson said Saturday in a speech to the IMF-World Bank annual meetings.

The IMF should help the funds "demonstrate to critics that SWFs can be constructive, responsible participants in the international financial system," Paulson said.

Finance ministers from the Group of Seven leading industrial nations met Friday with representatives of several sovereign-wealth funds at a special working dinner.

In remarks Friday after the G7 meeting, Paulson said the United States is concerned that investment decisions made by sovereign funds should be "driven by commercial motives" rather than political or strategic ones. See full story.

Recipients of the investments have a reciprocal responsibility to maintain openness to investment, he said.

"The growing importance of SWFs merits cautious, well-considered public policy responses," Paulson said in his remarks to the International Monetary and Financial Committee.

The IMF, he said, is well-positioned to act in its multilateral capacity to help craft guidelines to bring more transparency to the funds and to help mitigate any systemic risk.

The funds have been growing in recent years, largely because of a surge in oil revenues. Countries such as Saudi Arabia, Kuwait, the United Arab Emirates and Russia collectively have trillions of dollars to invest. Singapore and China also have huge sovereign-wealth funds.

When the Dubai government tried to buy a British port operator that manages many U.S. ports, critics of the deal in Congress blocked it, citing national security concerns. More recently, however, the deal for Dubai to invest in the Nasdaq stock exchange has been met with more support.

Paulson also touched on other economic concerns in his remarks, essentially repeating comments he's made many times in the past few months.

The U.S. economy will take a hit from credit-market troubles but stay on solid ground going forward, he said. He expects "continued growth" in the U.S. economy but acknowledged challenges.

"Recent credit market events will impose some penalty on U.S. economic growth," Paulson said in prepared remarks. However, he added that U.S. financial institutions remain strong and that the economy's fundamentals are healthy.