So as the Queen's Speech reminds us, governments make laws and run services – and they are judged by how well they do these jobs. Or rather, that is what most Western governments do, and we pay them taxes to enable them to do so. They do not deploy wealth around the world, for example buying foreign companies or securing access to mineral resources. To do so would be an almost frivolous extension of their remit.
That, however, is exactly what a number of governments in the so-called "emerging" world are doing; building up what are called sovereign wealth funds, and investing those funds around the world. This is not a new phenomenon, for the first such funds were established back in the 1970s, but it is one that has become vastly more important in recent months and will become even more so in the next few years. Indeed, there is a strange reversal of fortune taking place. Governments in the established rich world are strapped for cash: they struggle to raise enough taxes to fund their spending programmes. We have an example of that in the UK, for though the economy has grown strongly in recent years the budget deficit has failed to come down as planned. By contrast, governments in much of the newly-rich world, most notably in China, the Middle East and Russia, have money coming out of their ears.
There are two main reasons for this switch of fortune. One is the surge in the price of energy – oil in particular but also natural gas. This has given a huge boost to the revenues of the Middle Eastern states and to Russia. The first oil shock, back in the 1970s, propelled the foundation of the first generation of these wealth funds, such as the Abu Dhabi Investment Authority. The other is the rising importance of Asia in the world economy and some of the policies of Asian nations that have the side-effect of boosting foreign exchange reserves. For example, China has sought to hold its currency down by intervening on the markets and therefore piles up dollars that it has to place somewhere.
So, alongside the early funds (which aside from the Middle Eastern countries include those set up by Norway, the state of Alberta in Canada, Australia and Singapore) have come ones this year from both China and Russia. The taps are still running full on and the bath-tub is overflowing, as Merrill Lynch put it in a study of these funds last month. It reckons that at present there are between $1,600bn and $2,200bn in these funds now and that these could grow to some $8,000bn by 2011. Each year the stock of these funds rises by a bit under $1,000bn, about the same amount as the entire tax revenues of the British government.
Should we be concerned? Well, maybe not in the short-term, because there are responsible investors. But in the long-term there should be real worries.
In the short term, these funds are a source of stability in the world economy. Funds run by governments are not subject to the same swings of fashion as many private sector investment funds. They can take a very long-term view and because they are not hunting for the last half-per cent in annual growth, they can avoid the lures of the complicated debt instruments dreamt up by the investment banking community, the investments that are piling up losses for the large American banks right now. But in the medium term we have to recognise that there is a shift of power taking place, a shift that works against the present developed world. To see why, consider this.
Why, you might ask, did Britain not set up a sovereign wealth fund during the 1980s, when our oil revenues were at their height? Then some of the wealth could have been set aside to help pay the pensions of future generations, just as Singapore – without any oil – has done. Why, since late is better than never, don't we use the present spike in the oil price, to get a fund off the ground now?
The answer is, the Government needs the money. Or rather it has organised British tax and spending policies in such a way that it needs every bit of revenue it can get its hands on. It is not alone. Governments in most other developed countries, including the US, France, Germany, Italy and Japan, have all piled up substantial debts. But it is an extraordinary situation where a government fund in, say, China, could buy a large British company, whereas we have no such fund that might buy a Chinese one.
Actually, we would not be allowed to do so. And that leads to a serious difficulty, one that we are going to have to face more and more in the next few years. To what extent will we allow foreign government agencies to buy assets in Britain (or in France, the US or wherever) when our investors are excluded from similar opportunities in the country in question?
At the moment, there is a rough-and-ready understanding of which types of investment are acceptable and which are not. It was all right for Qatar to make a bid for Sainsbury, though ironically that bid collapsed this week as the Qatar authorities could not quite find enough readies to fund the bid. Sovereign wealth funds do not always sweep all before them.
So retail is all right; so too is property, at least in most developed markets. But defence would be out and energy interests are questionable, witness the resistance of the US Congress to a Chinese bid for one of its independent oil companies. Ports in the US are also out, witness the blocking of Dubai when it bought P&O, which controlled the port of New York. Moral: it is OK for a company in a friendly country such as Britain to own sensitive assets in the US, but not for Middle Eastern interests to do so. Had the buyer been French, I guess the decision, pre-Sarkozy, would have been no as well.
So, in principle, the problem is not new; and the objections are a mixture of concern about the nationality of the funds and the fact that these are government-controlled rather than private sector. But in practice up to now the problem is a marginal one – a few tricky cases that have been settled on an ad hoc basis. From now on, this will become a mainstream issue and a source of increasing friction between the old developed world and the newly emerging one. Get the reputation for discouraging foreign investment and your currency plunges, as is happening in the US right now.
At the moment, we still live in a world where inward investment is seen as A Good Thing, a sign of confidence in the country. I happen to think that is the right reaction. But do we really want to find more and more of our assets owned by foreign governments? Do we, in our comfortable developed world, really want to be owned by the governments of the new, driving, emerging economies? And why are these really big issues not in the Queen's Speech?Reuse content