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Sovereign wealth funds
This issue will throw market-oriented economists into conniption fits. On one hand, it sounds like free trade. On the other hand, it sounds like nationalized industry. If we don't want the U.S. government owning a chunk of the S&P 500, why should we embrace Russian government ownership? Do you feel better at a 19 percent share in a local public utility? The $3 trillion and maybe someday $12 trillion in these funds will force us to define exactly where national security considerations start and end, never a fun job. On the bright side:
1. Having the other country's stock shares to nationalize gives the U.S. foreign policy leverage (wait: is that good?)
2. A falling dollar will to some extent limit this issue, though it won't reverse the current accumulation of liquid reserves.
3. Foreigners and foreign governments rarely buy Google at the ground floor level and I suspect they earn sub-normal returns, relative to the pool of American investors as a whole. They'll end up financing yet some more of our consumption, albeit through a new mechanism. What a racket!
4. As Dani Rodrik indicates, the existence of the California pension system hasn't exactly sent U.S. companies into chaos.
5. There is a genuine chance that China and other countries, as they want to invest more themselves, will feel additional pressure to open up to foreign investment. I'll recognize that free capital movements are not always a boon for development, but sooner or later China has to take this plunge, if only to move toward greater freedom and transparency.
Posted by Tyler Cowen on October 22, 2007 at 08:10 AM in Economics | Permalink
Comments
It's hard to describe the California pension system as a force for good for America's investors; I'm curious what Rodrik's argument to the contrary is. Perhaps if there were a way to ensure that such institutions were not the victims of regulatory capture by plaintiffs' law firms....
Posted by: Ted at Oct 22, 2007 8:33:47 AM
Don't you mean conniption fits?
Posted by: Carl at Oct 22, 2007 8:44:13 AM
Thanks for the spelling correction...
Posted by: Tyler Cowen at Oct 22, 2007 8:51:21 AM
This sounds like the sort of stuff that drives stock prices above their value based on the payouts and future payouts. The kind of stuff that precedes a crash.
Posted by: Floccina at Oct 22, 2007 9:06:10 AM
The government already owns a huge chunk of the S&P500, the DJI, and every other business in the US (public or not) along with a huge chunk of every worker's time through the different income taxes. In any case I don't want the US to use our tax money to buy stocks in the publics name (we can do that ourselves without the dead weight loss generated by taxes). If the Russian government wants to do it that is their people's problem. About the possible external effects (national security, etc) maybe they are not negative but positive... think about it... why would the Russians want to nuke the US if the own a huge chunk of it.
Posted by: at Oct 22, 2007 9:23:26 AM
There is one big difference between Russia owning some of the S&P500 and the US Government doing so: Russia can't pass laws in the United States.
Posted by: Yancey Ward at Oct 22, 2007 9:35:41 AM
I blogged on this last week at .
My points, echoed to some degree above, have to do with a specific commentary on national security and not economic efficiency. First, I'd rather have them invest where US law applies than, say, Iranian or Venezuelan law. Second, allow the free movement of capital and "buy" the national security with the additional welfare it generates.
Posted by: MW at Oct 22, 2007 10:39:56 AM
In the above post, the link didn't link. It should be:
blog.uta.edu/~mikeward/2007/10/17/protectionism-in-another-guise/
Posted by: MW at Oct 22, 2007 10:41:43 AM
I feel bad for the citizens of the country that owns the sovereign fund in question. This is an usurpation of money that rightfully belongs to them.
There is a huge difference between Norway owning 28% of GM and the US owning 28% of GM though, to cite a hypothetical scenario. Norway is investing to make money and will rightfully manage it to maximize societal efficiency, albeit via an invisible hand kind of way. The US (or insert domestic country owning chunk of domestic company here) owning a significant part of GM though means that societal efficiency is not foremost in their mind, although no doubt they'll try to spin it that way and maybe even believe it. When the US owns it it will most like wastefully try to manage it for the sake of the employees, and as such it becomes an inefficient welfare program in disguise.
Therefore for the sake of the US from an economic point of view we have every reason to hate domestic government entities owning shares in US companies, while foreigners owning it is no problem.
The possible exception of security hazards from nondemocracies, or even democracies that haven't been long time allies or neutral. Even in this case partial ownership seems irrelevant, with only 100% ownership being a possible bad for the US.
Finally, if worst comes to worst I see no reason why we can't simply declare that governmental (domestic or foreign) ownership of equities forfeits their voting proxies for the duration of their ownership.
Posted by: happyjuggler0 at Oct 22, 2007 11:14:53 AM
What if the state in question runs their sovereign wealth fund for non-economic gains? I think monarchies or dictatorships are better in this case, because it is likely that the people managing the fund are controlling their own wealth. But even in the case of democratic Norway, they divested from Wal-Mart because of their human rights "abuses".
I can see the argument that the market is already inefficient, so national governments distorting the market is not causing much harm, but if the goal of the markets is the efficient allocation of capital, major investors with non-economic goals will distort the market.
Posted by: 8 at Oct 22, 2007 12:44:29 PM
My American friends,
It seems as if you have little choice but to allow this is one form or another. Your trade deficit, composed largely of Oil imports and stuff from China, means that foreign nations have amassed trillions of Yankee dollars. They are unlikely to continue to park it in low-yielding bonds forever, since they know they could earn a better return from other assets; and for the dollar to maintain its role as a reserve currency, those assets had better be dollar-assets. The only question is how this inflow is to be regulated. A laissez-faire approach is not the way to go when dealing with unfriendly governments.....although you seem have no trouble in letting the Chinese walk all over you in matters of international trade. God dammit, America.....stop being such a pussy!
Posted by: Emmet Moorehouse at Oct 22, 2007 2:05:59 PM
even in the case of democratic Norway, they divested from Wal-Mart because of their human rights "abuses".
I fail to see the problem here. Surely it is unfair to criticize any investor, whether an individual or a country, for selling shares of companies whose policies the investor dislikes. After all, if Norway had merely made loud noises about WalMart's policies, the repsonse from many quarters would have been, "If you don't like it, sell the stock."
More broadly, I think it will be difficult to distinguish legitimate interests of the sovereign funds from possibly illegitimate ones. Shareholders, after all, own the company (the SEC sometimes ignores this, but it's true nonetheless), and as such have a legitimate interest in its management and operations. The point at which a sovereign fund crosses the line will, I think, prove quite hard to define.
Posted by: Bernard Yomtov at Oct 22, 2007 3:47:41 PM
I fail to see the problem here. Surely it is unfair to criticize any investor, whether an individual or a country, for selling shares of companies whose policies the investor dislikes. After all, if Norway had merely made loud noises about WalMart's policies, the repsonse from many quarters would have been, "If you don't like it, sell the stock."
Size matters.
Posted by: 8 at Oct 22, 2007 4:32:12 PM
Size matters.
I don't understand your point.
Posted by: Bernard Yomtov at Oct 22, 2007 5:27:41 PM
Maybe he just means that they're big enough to actually make a difference. Its okay to express your opinion on corporate behaviour, but he doesn't want anyone to pay attention.
Posted by: mpowell at Oct 22, 2007 6:40:59 PM
Tyler:
On one hand, it sounds like free trade.
Tyler, presumably you misspoke? "Free trade" usually refers to flows of goods and services, not capital flows.
happyjuggler:
I feel bad for the citizens of the country that owns the sovereign fund in question. This is an usurpation of money that rightfully belongs to them.
Well, the money is gone in any case since the government already collected it. The question is whether, with that cost sunk, it's better to have the money invested in treasuries (or sitting in a vault) rather than invested in higher-return instruments.
Norway is investing to make money and will rightfully manage it to maximize societal efficiency, albeit via an invisible hand kind of way.
Norway may do so, but I would be skeptical when it comes to the funds of other countries. The temptations for rent-seeking will be immense, particularly for those funds run by non-democratic governments in an opaque manner.
For what it's worth, I'm glad to have the investment. Unless we see these funds severely undermining corporate governance, let them come.
Posted by: nobody at Oct 23, 2007 4:13:09 PM
This is good news. Remember how Japan was about to buy us out in the 80's? Never happened.
Some reasons:
We're just better at investing in US assets than foreigners are. Significant amounts of that money support entrepreneurs who help the economy grow (entrepreneurs replace the GM's with Googles.)
Their investments recycle the dollars we pay them for imports (we get stuff; they get pieces of paper.)
Ownership doesn't imply control.
Foreign ownership gives others a stake in our success. "That's a nice looking share of stock you've got there mister Putin. Shame if something were to happen to it."
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Posted by: 论文发表 at Oct 31, 2007 9:42:06 PM
Someone asked if size matters. Magnitude matters. SWFs are literally manifesting the paradigm shift that has occurred in the marketplace. They represent a new order of rule. Sovereign Funds can be interpreted as a move by the suzerain to change the descent line from the Merovingians to the Carolingians. If anyone follows the Matrix Logic here, the game has changed. The old liners no longer have the juice. Moreover, this is the time to stop pushing trash and start looking at the possibility of saving what is left of the planet's potential. Perhaps Dubai will buy football clubs but other SWF players may be looking at the next 100 years in a different way.Greed, as a motivating factor, must die if we are to evolve.
Posted by: caitlin addison-howard at Feb 23, 2008 4:36:06 AM
Posted by: 鑽石 at Apr 2, 2008 10:56:11 PM
