October 17, 2007
The brave new world of state capitalism
Globalisation was supposed to mean the worldwide triumph of the market economy. Yet some of the most influential players are turning out to be states, not private actors. States play a dominant role in ownership and production of raw materials, notably oil and gas. Now states are also emerging as owners of wealth. This is creating widespread concern. Does that narrow focus make sense? The broad answer is No.
Fevered attention is currently focused on so-called "sovereign wealth funds". As Standard Chartered shows in an intriguing analysis, carried out with input from Oxford Analytica, these are not a new phenomenon: the oldest dates back to 1953. But today there are more funds, with far more money at their disposal than before. In all, they control some $2,200bn, with $2,100bn in the top 20 funds. The seven biggest belong (in order of estimated size) to Abu Dhabi ($625bn), Norway ($322bn), Singapore - GIC ($215bn), Kuwait ($213bn), China ($200bn), Russia ($128bn) and Singapore - Temasek ($108bn).
By definition, these funds exist because a country has a surplus of savings over investment that ends up in the hands of the government. In practice, this has happened for two reasons: ownership of commodity wealth (particularly oil and natural gas), and what amounts to forced savings from an export-oriented manufacturing economy, as in the cases of China and Singapore.
The remainder of the column can be read here . Comment from our expert panellists appears below.
Robert Wade: Martin takes a distinctly more positive — or less alarmed — view of sovereign wealth funds (better called government investment funds) than Jeffrey Garten (”We need rules for sovereign funds”, FT Aug
and Larry Summers (”Sovereign funds shake the logic of capitalism”, FT July 30). I side with Martin. When Larry warns that SWFs may help “their national companies compete effectively, or to extract technology or to achieve influence” I am inclined to translate his warning into the more positively-loaded proposition that SWFs might help make the playing field a little more level for companies from developing countries. And SWFs might help to strengthen the bargaining power of developing countries in bilateral and multilateral fora.
On the other hand, there are real dangers in letting “strategic” sectors come under foreign, or foreign-and-potentially-unfriendly ownership. It would be crazy beyond words for western European countries not to be very cautious about allowing Russian oil and gas companies to gain substantial control of European energy infrastructure. The great question is how a national (or supra-national) government defines “strategic” sectors and strategic control — defines what things are, in Martin’s phrase, “off limits”. On the basis of what calculations; by whom; and how organized within the state (surely not a “planning unit”?). Martin’s “high tech” and “defense” sectors, afterall, are rather broad (though they would certainly exclude yogurt).
Maybe one of the positive effects of the sudden panic about SWFs — and also of the current financial market turmoil — is that it will induce a bit more strategic thinking into economic policy in the countries which are the target of SWF acquisitions, in place of “let the market work, let us rely on self-regulation, and we [the government] don’t care about ownership because the customer doesn’t care about ownership — the customer cares only about efficiency and quality”. To exaggerate the British position only a little.
Posted by: Robert Wade | October 18th, 2007 at 4:59 pm | Report this commentMartin Wolf: I find myself in the unfamiliar position (unfamiliar to both of us, in fact) of agreeing with Robert Wade, at least to some extent. I do not believe that sovereign wealth funds should be used by developing countries for the strategic purposes Robert outlines in his first paragraph. On the contrary, I think that both developing countries and the rest of us will benefit most if these funds operate in a transparent and professional manner, by holding well-diversified portfolios that match their need for high long-term returns. I suspect they will prove largely unsuccessful strategic investors, let alone controllers of companies, since they bring no special skills to this particular table. But I do not think we need to become hysterical if they do go in this direction, provided essential controls are in place.
The question is what those controls should be. As Robert says, some strategic thinking is required. I would not accept that the British position is simply “let the market work”, or at least it should not be, since, by definition, a sovereign wealth fund is not subject to normal market disciplines. But, as I remarked in my column, the same is true of state-owned companies.
Essentially, we need to answer four questions. First, which industries do we not wish to fall under the control or strong influence of funds or companies owned by (more or less unfriendly) foreign governments? Second, what would be a trigger point for examination or even outright refusal of a proposed purchase, in terms of the proportion of shares purchased or the position on the board of the target company sought? Third, how should we decide whether a proposed purchaser of a substantial holding meets the ethical standards required of an entity controlling or influencing a domestic company and particularly a large or significant company (this raising questions not just about state-owned funds or companies but also of some potential private acquirers with dubious business histories, to say the least)? Finally, what procedures should be in place to examine particular transactions?
I do not yet know what my answers to these questions would be. But it seems clear that they need to be answered after careful examination of both the issues and past experience. I am inclined to agree with Robert on at least three points: the question of what makes a company strategic does need to be defined (whether a company is a defense-supplier, possesses advanced technologies capable of military use or provides essential infrastructure all come to mind); so, too, does what we think of as a suitable owner or controller of corporate assets; and so, finally, does what we consider to be a friendly or unfriendly state.
Let the debate begin, for the phenomenon seems certain to grow in importance.
Posted by: Martin Wolf | October 25th, 2007 at 11:35 am | Report this comment