Holman W. Jenkins, Jr, Member of the editorial board of The Wall Street Journal
Citigroup and Morgan Stanley were feeling lonely around the holidays and found love in the arms of a sovereign wealth fund (SWF), and so can you.
We refer, of course, to SWFs, those large accumulations of dollars in the hands of oil-producing nations and Asian export powerhouses (partly as a result of the way the latter run their currency systems). It was a poke in the eye to some Americans recently when Abu Dhabi came to the rescue of Citigroup with a $7.5 billion investment. China’s government soon thereafter coughed up $5 billion for a piece of Morgan Stanley, followed by Singapore’s tentative $4.4 billion investment in Merrill Lynch.
More than $1.2 trillion is said to be burning a hole in China’s pockets. Abu Dhabi, the West Asian oil sheikdom, has an estimated $875 billion. Even Russia has $300 billion. Many say these government dollars necessarily come with a political agenda. Should we worry?
Maybe, but the problem is not as new as it sounds, and SWFs are not an especially worrisome form of it. Having assayed the risk of nationalist blowback, sovereign investors already have been restricting themselves to passive, non-controlling stakes in companies, behaving more like mutual funds than private equity funds.
More troubling in principle are foreign governments taking direct controlling stakes in individual businesses. We’ve seen our share of that too.
Dubai was forced last year to divest a company it bought that operates some US ports. A Chinese government-controlled company was thwarted in its effort to buy Unocal. Whether these investments should have been blocked is a harder question. Hugo Chavez’s Venezuelan regime owns Citgo. So far, the consequences have been innocuous, and the reason is not just luck. Such investments typically require more trust on the part of the investing government than the receiving one. Citgo’s assets are in the US, after all, within easy reach of US law enforcement.
Some deals are rightly worrisome, however. BP was recently reported to have offered Russia’s Gazprom a stake in its Trinidad LNG facility, the source of 70% of America’s LNG imports. Vladimir Putin has not been averse to using energy as a weapon. Gazprom deputy chief Alexander Medvedev spoke openly last year of creating “an alliance of gas suppliers that will be more influential than Opec (Organization of the Petroleum Exporting Countries).” We might want to think twice before letting such a transaction go through.
As a rule, though, governments do a poor job of owning and running businesses directly, and their efforts tend to be self-liquidating in the long run. Political goals, such as maintaining employment and avoiding acknowledgment of errors, seldom are compatible with business efficiency and profits. That’s why privatization has been a recourse of flailing governments in the past, and likely will be again.
But any non-panicky policy response to the sovereign wealth phenomenon must distinguish between this and portfolio-type investing. The latter is likely here to stay. Such investing is a nearly inevitable by-product of the growing size and scope of government financial operations.
Recall it was just a few years ago that Alan Greenspan worried that the US was about to become the world’s biggest SWF as its budget deficits were turning to surpluses, with nowhere to go after the national debt was paid off but into the stock market. Only a few percentage points’ swing in federal revenue could quickly return this problem to the agenda.
Recall, too, that “pension-fund socialism” already prevails in America, thanks to the large share of US business owned by state and local government retirement programmes.
Beyond that, the great hope of entitlement reformers consists of replacing pay-as-you-go government pension systems with personal accounts that invest in the stock market. Then, in a sense, citizens and their governments would be partners in private-sector investment. Had President George W. Bush succeeded in establishing social security personal accounts three years ago, these accounts might already hold $1 trillion in stocks.
The sovereign wealth megatrend has a brighter side. When governments are investors across national borders, they’d have every reason to become more sensitive to antigrowth and predatory policies that harm business generally. In effect, you’d have a form of massive, passive international hostage exchange to help cement a common interest in sound economic policies.
Ditto the conversion of pay-as-you-go pensions into personal accounts invested in global stocks, which would help to cure the voting public’s appetite for free-lunchism, protectionism and class-warfare politics.
Alignment of interests and incentives, after all, is one of the hoped-for benefits of global interdependence. Nobody said the adventure would be entirely comfortable, however. SWFs are likely to remain controversial until experience has shown that most of our current fears are overblown or misplaced.
The Wall Street Journal
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