Sovereign Wealth Funds

My position on Sovereign Wealth Funds (“i” before “e” except after “c” and in “sovereign” – very confusing) has hopefully-consistently been with regard to their potential for destabilisation. I don’t trust them any less – in fact, probably more – than hedge funds. Mostly because I would expect Sovereign Wealth Funds for most nations to (a) take very long and stable positions, and (b) take very solid and far-horizon’d positions specifically when, say, bailing out banks in tanking developed markets.

This was reinforced when I was discussing the matter with a colleague from Saudi Arabia, and who works within their finance ministry, and who worked within the setup for the Gulf Common Market. As far as he was aware, there was little more at work in the gulf funds than taking up cheap exposure in foreign financial markets. I still distrust, say, Chinese Sovereign Wealth Funds (because their government has stated publicly their willingness to do things like push economies around when beneficial).

At Davos, it seems, the issue looms large:

The funds are controversial in countries like the U.S. because they already have a lot of firepower, and it is growing fast thanks to high oil prices and U.S.trade imbalances. Richard Fuld, chairman and chief executive officer of Lehman Brothers (LEH) said the wealth funds, whose present value he pegged at as much as $3 trillion, could command as much as $20 trillion in five years. “The impact will be huge,” he said, though he noted pension funds command some $60 trillion.

While few U.S. and European politicians have raised objections to the large stakes various funds have taken (BusinessWeek.com, 12/7/07) in blue chip U.S. and European banks such as Citigroup (C), Morgan Stanley (MS), Merrill Lynch (MER), and UBS (UBS), greater tensions may well be brewing as the funds grow larger and more ambitious. The notion of foreign entities buying up blue chip assets goes against the grain in the U.S. and other Western countries. Perhaps the greatest danger arising from the huge growth of these funds isn’t that they will buy strategic assets in the U.S. and elsewhere, but rather that they will trigger a wave of protectionism that could gum up the international financial system.

One of the interesting things about them is that, while hedge funds and equity groups were ‘ours’, we have no money for a Sovereign Wealth Fund (or we did, but we blew it in Iraq). So we have at best a small seat in the room – probably not at the table. That frightens us. I like the idea, though, that non-US/EU Sovereign Wealth Funds are bad because of our protectionist reaction to them. Are we seriously suggesting that the Gulf, China and Russia have to save us from ourselves? Sit by while we continue in smugness with our business as usual.

We’ve been trying for a while now to make OPEC bend itself to our macroeconomic convenience. It’s probably time we just stopped trying.

Only briefly seen was this sort of response:

Muhammad al Jasser, the deputy governor of the Saudi Arabian Monetary Agency, the central bank, which manages most of Saudi Arabia’s overseas assets, was more relaxed. But he brushed off Summers’ suggestion that the funds would be wise to adopt a good-conduct code to ease worries, claiming there has been huge resistance in the U.S. to regulating hedge funds and rating agencies—even those “who created turmoil in the world economy.”

He might also have reminded us that the money controlled by Sovereign Wealth Funds currently is still a lot less than the amount that said turmoil is going to cost the world economy (how much, already, in central bank intervention money, has it cost? A few Sovereign Wealth Funds’ worth, certainly).

Should remittances count as foreign aid?

This is no small matter. The US, for example, has consistently (until recently) given the least (per GNI) amongst the OECD:

They recently moved off the bottom (while pipping Japan as the no. 1 in dollar terms). More generally, the fabled promise in the 1970s to double aid as a percentage of GNI has gone walkabout for everyone – it has about halved, as I understand it. The shortfall on this promise is some USD3.1tr, now (with USD2.6tr having been spent – 2005 dollars). Denmark, Norway, Sweden, Luxembourg and the Netherlands the generous exceptions to that rule.

Using the US as an examplar, again, the concept of Foreign Aid is also repeateadly muddied by Military Aid (accounting practices that called military assistance ‘foreign aid’ to make the money numbers look better after the Asian tsunami, an excellent example in international relations) and Food Aid (previously seen here, last Summer).

Across the world, aid aid is declining in proportion to our wealth – illustrated well, I think, by the Davos World Economic Forum consisting almost entirely, this year, of financial murmuring and jumping at the shadows of Sovereign Wealth Funds.

This is context and motive. If we send the army to help dig out a village, is that budgeting expense not Foreign Aid? If we give migrants jobs, and then those migrants send USD300bn of the money they earn back home (and with remittances growing substantially faster than Foreign Aid or Foreign Direct Investment), is that not Foreign Aid?

No way, says Ambassador Munir Akram of Pakistan, until recently chairman of the 130-member Group of 77 developing nations.

“We have to be very careful not to allow these remittances to be portrayed by the North as contributions on their part to development. They are trying to do this,” he told IPS.

Akram said Pakistan receives about 4.5 billion dollars annually as remittances from workers worldwide.

As a general rule, he pointed out, those who are poorest among the migrants send the most money to their families back home.

“These are our people, our workers. We invested in them, they studied in our countries, they got their education, and they are sending a small proportion of their earnings back home,” he said.

Akram said there is a move by Western donors to treat expatriate earnings as part of development assistance to developing nations.

He said these unnamed donors want to count remittances from North to South, but at the same time, they don’t want count repatriation of profits — from South to North.

“They will try and project expatriate remittances as an element of the contribution from the North to the South as a reason for not meeting other aid targets. We need to expose them,” said Akram, the permanent representative of Pakistan to the United Nations.

The answer is “no”, any more than my purchase of Oxfam coffee should be counted as Foreign Aid, for a couple of reasons. First, as above, it’s a scam. We can’t let our international aid accounting consist of shenanigans – that’s what we call a slippery slope (yes, before we know it, Rick Santorum will be given dogs to countries for their people to marry. Or something).

The second is more straight-forward for me, probably less straight-forward for some. Migrant workers are no different from any other worker (besides getting a rawer deal in just about every dimension, of course). They are hired according to the market supply of their labour, and paid according to demand for what they help produce, and the Marginal Revenue Product of Labour in what they produce. Less so, actually (refer to the part about them getting the raw deal).

There is no factor in the labour market for migrants that includes remittances. They do not demand higher wages because of the higher costs they incur as remitting migrants (trademark, I think, for that one), and firms most certainly do not factor in that need when they make a wage-offer. There is nothing deliberate about financing remittancing, from the perspective of the domestic OECD labour market.

The domestic economy involved loses income from remittances, yes – but (a) it allows, freely, the markets that service remittances to form, and make a profit, which means everything is working smoothly (in fact a lot of remittances are still made through unofficial channels, meaning the domestic economy is inefficiently benefitting from the practice, and should improve market-based services for remittances), and (b) the destruction of domestic income/money supply due to remittances pales in comparison to things like military expenditure.

If anything, remittances should be considered a better investment than expenditure by migrants: bullets are destroyed, yet their manufacture means a job. Given their income, a migrant’s spending of that money would be on consumption, which is the slow contributor to economic growth. Well, by sending money home, migrants are boosting the GDP in, and living standards of, underdeveloped countries, strengthening them as markets for exports – and future sources of skilled labour – for the OECD.

Making remittances not aid.

As the IPS article also details, the emigration of skilled labour – particularly health professionals – is a serious and growing public health and human capital development issue for under-developed nations.

So, a compromise. The OECD should start adding remittances by skilled migrants to our Foreign Aid, but we should subtract the balance of their wage or salary from Foreign Aid, since our having them means their own country is left behind. Seems only fair.