Not much is known about sovereign wealth funds (SWF) but there has been an explosion of work about them within academic circles. More attention needs to be paid to them by wider public as these funds are used to by key industries and services in the UK.
Are they creating more global imbalances and how can we best respond to the threats? For more detailed information, check out the International working group of Sovereign Wealth Funds (IWGSWF).
SWF’s can be used for many different purposes, some of the most common uses are as follows: stabilisation fund, savings fund, reserve investment corporations, development funds, and contingent pension reserve funds, which the IMF differentiates between all of the above.
In more simple language, it can be seen as an investment vehicle that controls a pool of finance.
The last verified figures estimated that five countries account for 75 percent of the total value of SWF assets. “The United Arab Emirates (UAE) has the largest funds, valued at $875 billion, followed by Singapore with $503 billion, Norway with $380 billion, China $377 billion and Saudi Arabia $314 billion.
1998 was when some of the major funds started to get established. Investments Bank’s go through the same public information arenas but most funds have no liabilities and are run by governments.
There are huge problems with financial data. Some provide no information; others are too old or only show part of their portfolio. They get away with this by being a private company. One well known bank provides ranges rather than values.
These non-transparent funds may pose a risk to the West’s economy. Again further reading can be found in the following reports: Standard Chartered by Dr Lyons, Truman from the Peterson Institute, and the McKinsey report on the New Power Brokers. Some of the funds have been a stabilising force but if not transparent there may be a protectionist backlash.
Some will argue that funds support a stable financial system as the main considerations are for return rather than geo-politics. Others will say that governments are using their money to purchase strategically in order to gain more influence within a country.
As the world economic power keeps rebalancing, the global imbalances will always create the need to have these funds. More attention needs to be focused on assessing the investment strategies of SWFs and collating databases about their investments. The assets will grow but the investments being held may not be as threatening as people are suggesting.
London is one of the most important business hubs for SWFs. Germany also has very strong links to EMEA and Asia through their engineering capabilities and technology transfer. The USA had the hegemonic position but will most likely to be lost in the next 100 years, if not earlier.
The case for SWF’s points to the role of state in development, avoiding the financial failures of the 1970s, the strong case for diversification, a source of stability; it levels the playing field, and provide technology transfer.
Economies can no longer be built on just consumer consumption. We should drastically adjust our consumption. We have high unsecured debt in the UK, and should balance domestic demands with the export economy. House prices will have to come down. Most of the jobs outside of London are in the public sector which is unsustainable with the current economic policy.
There should be a distinction between strategic or commercial principles. People think that capitalism is about maximisation of return whilst SWFs are not disciplined on maximum return, so can gain hold of important industries.
More work needs to be done to ensure that people become aware of SWFs and start to place limits on the strategic industries being bought in a country.
A report from the IWGSWF can be read here