Here below is additional proof that Patanaik's point that global imbalances
will not be refressed by exchange rate tinkering but the crisis will come when
foreigners seek national assets in the US
Funds that shake capitalist logic
By Lawrence Summers
Financial Times
July 29 2007 17:49
For some time now, the large flow of capital from the developing to the
industrialised world has been the principal irony of the international
financial system. In 2007 this flow will total well over half a trillion
dollars, a figure that will be comfortably exceeded by the build-up in reserves
and sovereign wealth funds (SWFs) in developing countries.
Indeed, Morgan Stanley has estimated on reasonable assumptions that there is
now close to $2,500bn (￡1,200bn, €1,800bn) in SWFs and that this figure will
increase to $5,000bn by 2010 and $12,000bn by 2015.
Inevitably, and appropriately, countries possessed of publicly held foreign
assets far in excess of anything needed to respond to financial contingencies
feel pressure to deploy them strategically or at least to earn higher returns
than those available in US Treasury bills or their foreign equivalents. Even
without this pressure, SWFs are now growing at a faster pace than the global
rate of new issuance of traditional reserve assets.
There is plenty of room for debate over how large these funds should become.
(Does China really need a saving rate in excess of 50 per cent that all but
forces hundreds of billions of dollars in reserve growth?) But on any plausible
path over the next few years, a crucial question for the global financial
system and indeed for the global economy is how these funds will be invested.
The question is profound and goes to the nature of global capitalism. A signal
event of the past quarter-century has been the sharp decline in the extent of
direct state ownership of business as the private sector has taken ownership of
what were once government-owned companies. Yet governments are now accumulating
various kinds of stakes in what were once purely private companies through
their cross-border investment activities.
In the last month we have seen government-controlled Chinese entities take the
largest external stake (albeit non-voting) in Blackstone, a big private equity
group that, indirectly through its holdings, is one of the largest employers in
the US. The government of Qatar is seeking to gain control of J.?Sainsbury, one
of Britain’s largest supermarket chains. Gazprom, a Russian conglomerate in
effect controlled by the Kremlin, has strategic interests in the energy sectors
of a number of countries and even a stake in Airbus. Entities controlled by the
governments of China and Singapore are offering to take a substantial stake in
Barclays, giving it more heft in its effort to pull off the world’s largest
banking merger, with ABN Amro.
To date most of the official commentary on the issue of SWFs has been framed in
terms of traditional arguments about cross-border capital flows. US and UK
officials have raised -concerns that focus only on the desirability of
reciprocity and transparency and on how to treat sectors that trigger national
security questions. Others, particularly in -continental Europe, have been less
positive and have emphasised nationalist considerations about the benefits of
local ownership and control.
What has received less attention are the particular risks associated with
ownership by government-controlled entities, particularly where the ownership
stake is taken through direct investments. The logic of the capitalist system
depends on shareholders causing companies to act so as to maximise the value of
their shares. It is far from obvious that this will over time be the only
motivation of governments as shareholders. They may want to see their national
companies compete effectively, or to extract technology or to achieve
influence.
We have seen the degree of concern over News Corp’s attempt to buy The Wall
Street Journal. How differently should one feel about a direct investment stake
of a foreign government in a media or publishing company?
Apart from the question of what foreign stakes would mean for companies, there
is the additional question of what they might mean for host governments. What
about the day when a country joins some “coalition of the willing” and asks the
US president to support a tax break for a company in which it has invested? Or
when a decision has to be made about whether to bail out a company, much of
whose debt is held by an ally’s central bank?
All of these risks would be greatly mitigated if SWFs invested through
intermediary asset managers, as is the case with most institutional pools of
capital such as endowments and pension funds. The experience of many endowments
and pension funds suggests that this approach is in most cases likely to
produce the best risk-adjusted returns.
To the extent that SWFs pursue different approaches from other large pools of
capital, the reasons have to be examined. The most plausible reasons – the
pursuit of objectives other than maximising risk-adjusted returns and the
ability to use government status to increase returns – are also most suspect
from the viewpoint of the global system.
None of this is to propose policy. That can come only after the investment
policies of SWFs have been much more extensively debated and many details have
been clarified. But it is to register a cautionary note about the debates over
SWFs so far.
Governments are very different from other economic actors. Their investments
should be governed by rules designed with that reality very clearly in mind.
The writer is Charles W. Eliot university professor at Harvard
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