The next globalisation battle

Source: http://dawn.com/2008/04/07/ebr14.htm


By Ashfak Bokhari

At last, the International Monetary Fund has been engaged by the United States to tame the Sovereign Wealth Funds (SWFs) whose share-buying spree in the advanced capitalist world has earned them hostility in recent years and their investments are being looked at with suspicion by both the officials and businessmen although these proved to be timely blessings for the sinking enterprises of repute.

The IMF staff paper released on March 22 says the Fund will draw up a blueprint of voluntary best practices for the SWFs to allay corporate America’s fears of political motivations on the former’s part. It also talks, to pretend fairness, about the SWFs’ concerns and their fears that protectionist barriers might be erected by western governments to hamper their investments as they did earlier in case of Unocal and DP World.

The working paper was released a day after the US Treasury said it has reached a series of agreements with the Abu Dhabi Investment Authority (ADIA) and Singapore’s Government Investment Corporation (GIC) covering investments in the US markets.

Creating funds to manage and invest surplus government funds is not a new phenomenon. In 1953, eight years before its independence from Britain, Kuwait established the Kuwait Investment Board to invest its surplus oil revenue. That was perhaps the first-ever “sovereign wealth fund” (SWF), although the term would not exist for another 50 years. Today’s SWFs are large pools of capital controlled by a government and invested in private markets abroad.

The funds are growing rapidly in both number and size. The largest ones were recently described as the Super Seven by the Time magazine. They are China, Russia, Abu Dhabi, Kuwait, Norway and two Singapore funds. The IMF estimated in September 2007 that SWFs control as much as $3 trillion, a figure variously estimated but growing by one trillion dollars a year. This tally could jump to $12 trillion by 2012.

Eyebrows have been raised by neo-liberal ideologues, anti-Arab lobbies, conservative economists and political analysts at the size and growth of these funds as they find the corporate-led globalisation being hijacked by a new state-led combine of financial powers.

At a time when the United States is undergoing a severe financial crisis in the wake of the collapse of several sub-prime mortgage firms and there are laud fears of depression similar to 1929, the SWFs have emerged as a stabilising factor. Their investment in the US and European banks in the first two months of this year nearly equalled half of their investments in 2007 –– a record $48.5 billion in 2007, and $24.4 billion in 2008 (two months). Singapore led the investment spree in the past 14 months: $41.7 billion or 57 per cent of the total invested since 2007, far exceeding the $10.7 billion spent by the United Arab Emirates and $8 billion by China.

The Financial Times of London has, it is interesting to note, accused the SWFs and Singapore, in particular, of taking advantage of the credit crunch in the US and the growing financial instability in the West by buying stakes in some of the world’s biggest banks. Singapore, the FT report alleged, has an ambition to become a leading financial centre. Temasek, the Singapore fund, had clinched a $4.4 billion investment in Merrill Lynch in December to save it from going bankrupt.

What is amazing in the chain of this extraordinary event, still unfolding itself, is public sector’s growing role of a saviour in the private markets of the western world, thus, turning Thatcherism and Reaganomics, the ideology of free market economy, into laughing stock after two decades.

The United States has for years preached the gospel of privatisation, calling on other countries to sell their government-owned industries to private entities. Here, it is the opposite of this gospel that is taking place. Many are asking whether cross-border investment is evolving into something new that could be called cross-border nationalisation, raising the possibility of government interference in free markets –– this time, America’s free market being interfered and their private enterprises being taken over or nationalised by the state sector of the non-West countries.

For years, says the International Herald Tribune, the Bush administration had shrugged off concerns about the trillions of dollars that the United States owes to China, Japan and oil-producing countries in the Middle East, arguing that these debts give no undue leverage to their governments. But now when these governments have started converting their debt holdings into “sovereign investment funds” and are acquiring assets in the United States and elsewhere, Americans have stated worrying without fully understanding the new phenomenon.

In a sense, the SWFs are the product of decades of the United States importing more than what it exports which built up dollar reserves of China, Japan and East Asian giants and ultimately gave birth to Sovereign Funds. Similarly, high energy prices have added trillions of dollars to profits of oil and natural gas producers, from Norway and Russia to the Middle East in recent years.

According to The Washington Post, soaring oil prices are these days facilitating one of the biggest transfers of wealth in history. Oil consumers are paying $4 billion to $5 billion more for crude oil every day than they did just five years ago and they deposited more than $2 trillion into the coffers of oil companies and oil-producing nations in 2007 alone.

With crude oil prices exceeding $100 a barrel, in fact, more than one per cent of the world’s gross domestic product is being re-distributed. Earlier oil shocks generated giant shifts in wealth but they eventually faded and economies readjusted. Current rise in petroleum prices has arrived over four years ago, and many believe it will represent a new plateau even if prices drop back somewhat in coming months. This phenomenon has helped Russia increase its federal budget ten-fold since 1999 while paying off its foreign debt and building the third-largest gold and hard-currency reserves in the world, about $425 billion.

Meanwhile, Warren Buffett, the American billionaire, has joined the debate by taking side of the Sovereign Funds. He blames the US economic policies for making way for this phenomenon and that SWFs’ recent buying spree was America’s doing, not “some nefarious plot by foreign governments”. These investments, he says, are a direct result of the US trade deficit, national debt and weak currency.

“This is our doing,” he says, the sovereign funds are only recycling debt issued by the US. Mr Buffett said. “When we force-feed $2 billion daily to the rest of the world they must invest in something here. Why should we complain when they choose stocks over bonds?”

However, two American economists, Sebastian Mallaby and Paul A. Volcker, have in a recent op-ed piece, made a surprise observation about the SWFs. They said that the next globalisation battle lurks over the horizon but one can already guess its contours. It will be shaped by two revolutions in finance and business: the growth of vast government-controlled investment funds abroad and the muddled progress toward shareholder democracy in the United States. Taken together, these changes will give foreign governments a say in how corporate America is run.