Soverign Wealth Funds: Some Thoughts

Nouriel Roubini’s excellent blog touched upon a subject that is sure to become more prominent as time goes by: Soverign Wealth Funds.

While we may think that SWF’s are merely big piggy banks out to buy foreign assets (think China-Blackstone), they can also be national companies themselves. Implicit in Nouriel’s definition of SWF’s are publically owned companies such as CNOC and Dubai Ports. These are nationally owned companies, created, financed, and protected by governments.

Nourel states that SWF’s need to allow their currencies to float so that do not need to buy (or create?) such assets. Focusing merely on the currency issue may preclude us from seeing a deeper rationale for the need to purchase or create such as assets. Following are some possibilities:

1. SWF’s are national responses to privately own multinationals. For weak or small or developing countries, they provide the capital focus to accomplish what their own privately owned firms cannot. With such focus they can compete with the multinationals.
2. Some countries view capitalistic endeavors as an extension of national and political interests. China certainly fits this description, as does Russia. Just as all countries view their armies as a means of extending power, so these countries view their national companies as an extension of economic power.

   (As an aside, not all these countries have fixed currencies. Brazil’s Vale do Rio Doce, for example, just bought Inco in Sudbury, Ontario—a huge nickel mine. Vale do Rio is a publically own company; Brazil has a floating exchange rate.)

3. As the battle for resources intensifies, these companies will become pivotal in protecting national interests and needs, not private ones. Markets at that point may not function as western economists have been taught to expect. Some customers or buyers may be “more equal” than others.

I see the growth of SWF’s as a natural response to America’s economic domination. Size and financial muscle are necessary.

Furthermore, not all countries share our vision of “private” ownership. And, yes, in the case of a number of public companies, CVRD, for example, foreign interests are allowed to own a share, a modest share. But, these companies are not for sale or takeover. They will remain national companies—unless they fail miserably.

Of course, pegged currencies are a means of subsidizing such companies. Laws limiting foreign ownership of more than a fractional share are a means of ensuring these companies serve national, not private, interests.

As they become larger and more influential players on the global stage, I see them as possible inheritors of our version of capitalism. Unlike our companies, these companies will directly serve national interests and goals.