The brave new world of state capitalism
Saturday, 20 October 2007
Martin Wolf
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.
Where a country's natural resource wealth is large relative to the size of its population, the fund should be seen as a different way to hold that wealth, for the long term. In the case of Russia, however, the aim is stabilisation, which implies a shorter-term horizon. China's fund is a consequence of its massive reserve accumulations, which exceed the sums it can conceivably need for insurance. This has allowed the transfer of $200bn (maybe much more in future) to a new fund - the China Investment Corporation - with the goal of achieving a higher return than the miserably low one on the country's official reserves.
How large are these funds? They account for approximately 1.3 per cent of the world's stock of financial assets (stocks, bonds and bank deposits). But the total of $2,200bn is, notes the Standard Chartered report, bigger than the sums invested in hedge funds (at $1,000bn-$1,500bn) and private equity funds (at $700bn-$1,100bn). Nevertheless, it is dwarfed by the $53,000bn controlled by mature institutional investors (see chart).
The sovereign funds remain far smaller than official foreign currency reserves (approximately $5,600bn). But the expectation is that these funds will grow rapidly, possibly to exceed official currency reserves in a number of years. If recent growth were to continue, the total value would reach $13,000bn over the next decade. This might then be 5 per cent of total global financial wealth.
How is the money used? Here the report distinguishes funds by their transparency and by the active, or strategic, nature of their approach to investment (see chart). Norway's fund is conventionally invested (with widely distributed ownership) and transparent. Singapore's funds are defined as transparent, but look for large ownership positions. Qatar's fund is defined as non-transparent and strategic, as is China's. But Lou Jiwei, chairman of the China Investment Corporation, insists that the new fund will operate on commercial lines.
Is there any reason, then, to be concerned about the emergence and likely growth of such funds? As a general proposition, the answer is No. If a government operates a fund transparently and on normal commercial lines, with a wide range of investments and no dominant positions, as does Norway, one can only welcome its emergence as an investor. Questions should be raised only if a fund sought a controlling interest in a strategic company. Then two issues would arise, neither of them specific to sovereign funds: the first is whether the fund is a "fit and proper person" to control a company; the second is whether ownership might threaten a public interest.
Many sovereign wealth funds should raise no concerns whatsoever. The worrying ones are only those that do seek dominant positions or outright ownership of strategically important businesses. If the fund belonged to a government deemed potentially hostile, the concern must be bigger. It would be reasonable to keep control of companies operating in defence or high technology out of the ownership of funds belonging to any foreign government, let alone a potentially hostile one. But interesting questions arise elsewhere: what would people feel about Chinese government ownership of a big media operator?
In other respects, however, the concern with sovereign funds is too narrow. The big truth is that contemporary globalisation has brought players into the game that operate by different rules from those espoused by today's high-income countries: vast state-owned companies, such as Gazprom; billionaires who have gained fortunes by a mixture of force and fraud; and funds owned by governments. Of these, the last may well turn out to pose the smallest problems.
My broad recommendation, then, is to consider the emergence of these funds as part of the integration of countries that accept a bigger role of the state in markets than western countries do today. So be it. It is better for such countries to prosper inside the market system than glower outside it. It is absurd to take a country's exports of oil and refuse to allow it to buy assets, in return.
Yet not everything should be for sale. It is possible - indeed, necessary - to define a negative list of companies that are "off limits". It is also reasonable to monitor the suitability of owners of large public companies. It would be wrong to exclude state-owned companies from bidding for such public companies. But it is quite reasonable to investigate how these have operated elsewhere. It is not unreasonable, after all, to believe that a state-owned company might not work on normal commercial lines. But it may do so, in which case no problem need arise.
Meanwhile, the owners of the sovereign wealth funds need to understand their own best interests. They should manage their money professionally and transparently. This is also the way to minimise friction with host countries. If they refuse to abide by these principles, they must expect trouble. Yet trouble should not go out of its way to look for them: far, far worse things can happen than for China to come to the west bearing the chequebook it has earned by its people's remarkable efforts.
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.
Where a country's natural resource wealth is large relative to the size of its population, the fund should be seen as a different way to hold that wealth, for the long term. In the case of Russia, however, the aim is stabilisation, which implies a shorter-term horizon. China's fund is a consequence of its massive reserve accumulations, which exceed the sums it can conceivably need for insurance. This has allowed the transfer of $200bn (maybe much more in future) to a new fund - the China Investment Corporation - with the goal of achieving a higher return than the miserably low one on the country's official reserves.
How large are these funds? They account for approximately 1.3 per cent of the world's stock of financial assets (stocks, bonds and bank deposits). But the total of $2,200bn is, notes the Standard Chartered report, bigger than the sums invested in hedge funds (at $1,000bn-$1,500bn) and private equity funds (at $700bn-$1,100bn). Nevertheless, it is dwarfed by the $53,000bn controlled by mature institutional investors (see chart).
The sovereign funds remain far smaller than official foreign currency reserves (approximately $5,600bn). But the expectation is that these funds will grow rapidly, possibly to exceed official currency reserves in a number of years. If recent growth were to continue, the total value would reach $13,000bn over the next decade. This might then be 5 per cent of total global financial wealth.
How is the money used? Here the report distinguishes funds by their transparency and by the active, or strategic, nature of their approach to investment (see chart). Norway's fund is conventionally invested (with widely distributed ownership) and transparent. Singapore's funds are defined as transparent, but look for large ownership positions. Qatar's fund is defined as non-transparent and strategic, as is China's. But Lou Jiwei, chairman of the China Investment Corporation, insists that the new fund will operate on commercial lines.
Is there any reason, then, to be concerned about the emergence and likely growth of such funds? As a general proposition, the answer is No. If a government operates a fund transparently and on normal commercial lines, with a wide range of investments and no dominant positions, as does Norway, one can only welcome its emergence as an investor. Questions should be raised only if a fund sought a controlling interest in a strategic company. Then two issues would arise, neither of them specific to sovereign funds: the first is whether the fund is a "fit and proper person" to control a company; the second is whether ownership might threaten a public interest.
Many sovereign wealth funds should raise no concerns whatsoever. The worrying ones are only those that do seek dominant positions or outright ownership of strategically important businesses. If the fund belonged to a government deemed potentially hostile, the concern must be bigger. It would be reasonable to keep control of companies operating in defence or high technology out of the ownership of funds belonging to any foreign government, let alone a potentially hostile one. But interesting questions arise elsewhere: what would people feel about Chinese government ownership of a big media operator?
In other respects, however, the concern with sovereign funds is too narrow. The big truth is that contemporary globalisation has brought players into the game that operate by different rules from those espoused by today's high-income countries: vast state-owned companies, such as Gazprom; billionaires who have gained fortunes by a mixture of force and fraud; and funds owned by governments. Of these, the last may well turn out to pose the smallest problems.
My broad recommendation, then, is to consider the emergence of these funds as part of the integration of countries that accept a bigger role of the state in markets than western countries do today. So be it. It is better for such countries to prosper inside the market system than glower outside it. It is absurd to take a country's exports of oil and refuse to allow it to buy assets, in return.
Yet not everything should be for sale. It is possible - indeed, necessary - to define a negative list of companies that are "off limits". It is also reasonable to monitor the suitability of owners of large public companies. It would be wrong to exclude state-owned companies from bidding for such public companies. But it is quite reasonable to investigate how these have operated elsewhere. It is not unreasonable, after all, to believe that a state-owned company might not work on normal commercial lines. But it may do so, in which case no problem need arise.
Meanwhile, the owners of the sovereign wealth funds need to understand their own best interests. They should manage their money professionally and transparently. This is also the way to minimise friction with host countries. If they refuse to abide by these principles, they must expect trouble. Yet trouble should not go out of its way to look for them: far, far worse things can happen than for China to come to the west bearing the chequebook it has earned by its people's remarkable efforts.