April 21, 2008

Sovereign Wealth Funds

In this recent press release from the World Bank and the Center for Global Development, World Bank President Robert Zoellick weighs in on the current state of global investment.

“Today, sovereign wealth funds hold an estimated $3 trillion in assets. If the World Bank Group can help create the platforms and benchmarks, the investment of even one percent of their assets would draw $30 billion to African growth, development, and opportunity,” he said.

“Zoellick said sovereign wealth funds offered opportunity, “not something to fear”, adding that “the sovereign funds need transparency and should be guided by best practice to avoid politicization. But I believe we should celebrate a possibility that government-sponsored funds will invest equity in development.”

Mr. Zoellick is undoubtedly correct in ascertaining the positive effect that the sovereign wealth funds could have in Africa’s growth and development, but it remains to be seen if it will occur so readily. Undoubtedly Africa’s cache of natural resources will make it an attractive option in some resource-starved circles.

Overall, the emergence of the idea of the Sovereign wealth fund is certainly one of the most interesting developments in the global economics of the 21st century. On the other hand, one might argue that this is not a really new idea in many respects, as much of the globe was developed with the blessing of sovereign funds of one form or another. For example, North America, India, and Australia were “developed” to greater or lesser degrees by British Corporation’s such as the Hudson’s Bay Co., and the East India Co., under the charter of the Royal family.

There’s also no doubt that modern finance and investment markets are markedly different than they were a few centuries ago, and therefore one cannot responsibly compare the modern sovereign wealth fund with it’s colonizing ancestors. However, this does not change the fact well-capitalized corporations representing sovereign nations have ventured to foreign shores looking for great investments before.

Perhaps the major distinction between the contemporary incarnation of the sovereign investment fund and that of its colonizing ancestors (other than the mode of investment itself) are the locations from which these new funds emanate. Singapore, UAE, China, Norway, Saudi Arabia, and Russia are a few of the nations who are using soaring petrodollars, and current account surpluses to invest in overseas equities. In and of themselves, these nascent funds represent a huge transfer of global wealth, principally from the heavily-indebted United States to resource-rich developing nations.

The fact that these funds are investing in brand-name US financial assets, in institutions such as Citigroup, Merrill-Lynch, and The Blackstone Group, should not be very surprising as with a declining USD, the best deals for these funds awash in greenbacks are found in USD denominated assets, and therefore world-class assets can be had on the cheap.

It will be interesting to see what happens when Japan “gets in the game” (http://search.japantimes.co.jp/cgi-bin/nb20080414a1.html) as it is currently the world’s second largest holder of Foreign currency reserves after China, and its resource needs are perhaps more dire.

Japan is on the record stating that it will pursue “Resource diplomacy” in the foreseeable future (http://www.meti.go.jp/english/), and China is already doing so through its Sovereign Wealth funds, by recently buying stakes in both British Petroleum and Rio Tinto Brasil.

Welcome to the brave new world of global capital and geopolitics.


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