Monthly articles (English and French) on the theme "Querying economic orthodoxy"

No. 23 - November 2007

Towards Renationalisation?


The German reaction: what is the good of privatising our enterprises so that they can be acquired by overseas public-sector enterprises?
Elie Cohen, director of research at the Centre national de recherche scientifique, Paris (see Le Monde Economie, 2 October 2007)

Because we hate having US bureaucrats pick winners and losers, we outsource the job to Chinese bureaucrats.
Clyde Prestowitz, founder of the Economic Strategy Institute and former US trade negotiator, quoted by Harold Meyerson in Not your father's Detroit (see The American Prospect online, 19 March 2006)

Thanks to economic libertarianism, countries that believe in it are being bought up by those that do not.

Expanding giants in the market

Hedge funds assets have apparently grown (1) to the huge and worrying total of more than $2,000 billion. But funds of another kind, little known to the general public, have become even more formidable. These are sovereign funds, that is to say, funds established by various governments for the purpose of investing in international financial markets.

These governments are seeking to invest some of their foreign currency reserves, or other savings, in shares and bonds, rather than simply in liquid assets. Since certain countries are running fat trade surpluses, their reserves are large and increasing. Keeping them in bank deposits or in short-term government securities, at low interest rates, is hardly an attractive strategy. Why not go for shares, which promise better returns...and the seductive possibility of exerting some influence, even control, over foreign enterprises?

Already the assets of sovereign funds are estimated (2) at more than $2,800 billion. That is more than 70% of the value of all the shares quoted on the London Stock Exchange, or nearly 16% of those on the New York Stock Exchange. What is more, the American investment bank Morgan Stanley has recently (3) published forecasts for the development of sovereign funds up till 2015; their total could reach $12,000 billion, that is 67% of the present value of the New York market.

Shadowy colossi

What are these funds with such huge potential? For the moment, the biggest is the Abu Dhabi Investment Authority (ADIA), a fund whose affairs are far from transparent. Its size is not published, but is estimated by Morgan Stanley at $875 billion. This is the accumulation since 1976 of the trade surpluses of the United Arab Emirates. Its annual growth is estimated at 10%.

The second biggest sovereign fund also belongs to a small oil-producing state, Norway. The Statenspensjonsfind - Utland (Government Pension Fund - Global) was established in 1996 with the object of investing part of the government's oil revenues, in order to finance future public spending on pensions after those revenues have declined. This fund, totalling $317 billion, now has the power (4) to invest up to 60% of its value in international share markets.

It is the second biggest pension fund in the world, far behind (5) the huge Japanese state pension fund, valued at $1,394 billion. Hitherto this fund has invested in loans to the Japanese government; it has not been a 'sovereign fund' active in international markets. However, it has recently (6) adopted a more diversified strategy; it now has the power to invest up to 14% of its assets, ie $195 billion, in foreign shares.

Other countries such as Saudi Arabia, Kuwait, and Singapore have major state-sponsored investment funds.

Then we have the real giant, China, whose China Investment Corporation (CIC) is currently worth $200 billion, though it was set up only this year. The Chinese trade surplus (7) reached $177 billion in 2006, and has just attained $186 billion over the nine months January/September 2007. Thus the CIC is expected to grow very rapidly in the coming years. Indeed, Morgan Stanley forecasts suggest that it could overtake ADIA by 2009.

Russia's foreign exchange reserves continue to grow and already exceed $400 billion. The Russian sovereign fund is small at present, but probably not for long....

Disquieting expansion

All this serves to justify Morgan Stanley's prediction of $12,000 billion in state-controlled funds active in the world's markets by 2015. Clearly we confront a global financial phenomenon which will soon be enormous. Though Anglo-Saxon countries and their imitators have rejected the idea of state-controlled enterprise, such control could well reappear; and this time it will be control of our enterprises by foreign states.

Already we hear worried reactions. But who are we to complain? Who created the conditions that have made all this possible? It is we, the Western (and not only Anglo-Saxon) countries that have espoused and put into practice free-market theory; those doctrines that exalt the virtues of untrammelled mobility in capital markets, while denouncing as obsolete all forms of enterprise that are not open to those markets, such as mutual or public-sector businesses. It is we also who consume more than we produce, with the consequence that our trade deficits are matched by the trade surpluses of other countries. These surpluses feed their sovereign funds.

The giants do things differently

One notes that several of the countries we have mentioned are by no means whole-hearted converts to the religion of free markets and the minimal state.

China, still theoretically communist, lives under an authoritarian government which, despite the requirements of the World Trade Organisation (of which China has been a member since 2001), scarcely hesitates to restrict imports when it sees fit. The Chinese ministry of commerce retains the right to block foreign acquisitions of Chinese businesses in certain industries, such as capital goods. In fact, its protectionist tendancies seem to be increasing.

In Japan, the economy is still more or less strictly regulated and foreign investment remains subject to government control in various sectors. The tendency in recent years to relax restraints seems to be fading. For example, according to a study (8) by the ruling Liberal Democrat Party, given the recent rise in mergers and acquisitions and the emergence of new players, there is a need to think about protecting what needs to be protected in order to secure national interests. Or as economics editor Eric Le Boucher observes in Le Monde (9): Japanese firms understand that it is in their interest to keep all strategic manufacture in Japan.

Saudi Arabia is reprimanded by the Heritage Foundation, that arrogant American think-tank that ranks the countries of the world according to their conformity with American notions of economic freedom. Heritage complains: as in many other Gulf oil states, high government spending is supported by a large state-owned energy sector. The monarchy has begun to liberalise aspects of foreign investment, but immense barriers remain in effect.

Other countries such as Kuwait, the United Arab Emirates, Singapore and Norway, may seem more attached to free-market principles. However, the very existence of sovereign funds testifies so a certain divergence from these principles. For example, Norway has a big sovereign fund because its retirement provision relies mainly on public-sector pay-as-you-go pensions, whose future the government is protecting by accumulating tax revenues levied on oil companies. All this differs sharply from the privatised pensions and minimal taxes called for by free-market zealots.

The self-destruction of laisser-faire

In general, one may say that thanks to libertarian economics, the countries that beleve in it are being bought up by those that do not. In other words, this philosophy is self-destructive. Which is very good news...provided the countries that are the targets of this process wake up in time. Either they will allow substantial parts of their economies to be nationalised by foreign states which have little belief in the libertarian philosophy; or they will do what is necessary to restrain foreign purchases. They will impose restrictions on the sale of their assets; but this policy will not work without determined efforts to bring their trade into better balance. In either case, the principle of the deregulated market will be gravely undermined. Thus we shall begin to escape from the capitalism of the jungle.

* * * * *


2 See Hedgefund Intelligence, press release, 29 March 2007. This publication is a subsidiary of Euromoney, London.

2 Report by Morgan Stanley, quoted in Le Monde Economie, 2 October 2007

3 Morgan Stanley, report dated 22 June 2007

4 See notice from the Norwegian ministry of finance on the fund's investment strategy.

5 See www.pensionfundsonline.co.uk

6 See document Government Pension Investment Fund (July 2006), page 9

7 See report (Agence France Presse) 12 October 2007

8 See report (Reuters) 29 June 2007

9 See article La martingale japonaise in Le Monde 26 février 2006