Friday, January 25, 2008

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How about some reciprocal gratitude?

A follow-upon my last post on sovereign wealth funds (SWFs).

I quoted the head of the Norway's fund saying, ""It seems you don't like us, but you need our money." It strikes me that one could flip that around. Not for norway, but for most of the countries now sprouting SWFs, the line should read: ""It seems you don't like us, but you need to invest your money with us."

Countries are developing sovereign wealth funds for a number of reasons:

1) They're accruing massive current account surpluses because of commodity booms or misaligned currencies

2) They can't reinvest most of these surpluses domestically, because of concerns about sterilization, inflation, the Dutch disease, etc.

3) Holding these assets simply as reserves is not terribly profitable.

4) Therefore, they need to find a place to invest. Places with capital markets large and deep enough to absorb the gargantuan levels of investment without distortion. In other words, the United States and the European Union.

There is no question that, right now, western financial markets could use the money. However, it's also worth pointing out that there are not a lot of non-OECD markets receptive to large-scale SWF investments. Indeed, the very countries ginning up sovereign wealth funds at the moment are the most protectionist when it comes to foreign direct investment. A Russian SWF is not going to find a receptive audience in China -- and vice versa.

Am I missing anything?

posted by Dan on 01.25.08 at 08:47 AM


Only that this is a temporary situation, and that while SWFs use the same money as private investors do they may choose to move funds to their own countries or to their countries allies and clients more readily for political reasons.

I think this is significant enough to justify something other than a "don't worry, be happy" view of the world's capital markets.

posted by: Zathras on 01.25.08 at 08:47 AM [permalink]

What might be instructive is an analysis on how politicians in the past have treated similar funds. The US example is the uses and abuses of state pension fund systems. There is always pressure to invest these funds in domestic boondoggles or dying industries. (At one time, the Alabama pension fund controlled US Air, for no good reason anyone could really figure out)

State pension funds also are pushed by politicians to interfere in corporate governance. (CALPERS likes to do this) And finally, there have been some fascinating scandals with respect to these things. (The one that comes to mind is the scandal in Ohio regarding pension fund investments in rare coins, thhat disappeared when some of the rare coins turned up missing.)

posted by: Appalled Moderate on 01.25.08 at 08:47 AM [permalink]

I think you hit the highlights. About the only thing you didn't mention was the lack of transparency and accountability in in non-OECD markets, rendering investments there extremely risky. As well, adequate legal protection for foreign investors, including sovereign wealth funds, is often lacking.

posted by: RW Rogers on 01.25.08 at 08:47 AM [permalink]

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