When Leviathan Comes to Market: Emerging Disciplines on State Intervention in Markets

I wrote this paper while in residence at Georgetown University Law Center, completing my LLM. The aftermath of the 2008 global financial crisis provided a rather striking backdrop. Governments that had long championed market forces were intervening on an extraordinary scale to stabilise banks, preserve industrial capacity and support sectors such as automobiles.

The immediate inspiration was the negotiation and adoption of the Santiago Principles for sovereign wealth funds. Reading those principles, I was struck by their resemblance to much older attempts under the GATT to discipline state trading enterprises. Different institutions and different forms of state participation were confronting a familiar question: what rules should apply when a government enters a market as a commercial actor?

When the state becomes a competitor

My starting point was that there was no universally correct dividing line between the state and the market. Governments and markets both had important roles to play. What interested me was the conduct of governments once they became owners, investors and competitors, alongside the private businesses whose activities they also regulated.

The paper examined three overlapping areas: the GATT and WTO rules on state trading enterprises; the Santiago Principles governing sovereign wealth funds; and the emerging work on state-owned enterprises and competitive neutrality, particularly at the OECD. These frameworks differed in their scope and legal force, but repeatedly returned to questions of transparency, commercial decision-making, accountability and fair conditions of competition.

Common principles, difficult enforcement

Finding common principles was easier than ensuring that governments would follow them. The history of state trading disciplines illustrated how limited rules could struggle against entrenched political interests. The Santiago Principles placed considerable weight on disclosure, sound governance and operational independence, but participation was voluntary and there was no formal mechanism to impose sanctions.

My conclusion was cautious. Governments were reluctant to accept firm constraints on enterprises and investment vehicles they used to pursue important domestic objectives. Even so, transparency could matter, as could the desire of sovereign investors to remain welcome in foreign markets. Competitive neutrality—the idea that competition should not be distorted simply by whether a business is publicly or privately owned—offered another way to approach the problem.

Looking back

I think the question has become more relevant since I wrote the paper. The hands-off rhetoric associated with the Washington Consensus always sat uneasily with the extent of state intervention that actually occurred. What changed after the financial crisis was how openly governments stepped in, and how difficult it became to sustain the idea that intervention was something only other countries practised.

The continuing debate over the state’s roles as owner, policymaker and regulator makes this worth revisiting. The OECD’s 2024 review of state-owned enterprises, for example, still treats the separation of those roles and fair competition as central governance challenges. For me, the enduring issue is what disciplines governments will accept when their own commercial and strategic interests are at stake.

Read the paper

When Leviathan Comes to Market: Emerging Multilateral Disciplines on State-Owned Enterprises and What Existing Rules on State Trading Enterprises and Sovereign Wealth Funds Can and Cannot Teach Us, Simon Lacey. Written on 1 November 2011. The original 31-page paper is reproduced below.

Download the full paper (PDF) · View the paper on SSRN

Listing photograph: the Bank of England, London, by James Wong / Pexels.

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