At the WSJ's Real Time Economics blog today, Bob Davis relays a new assessment from the Cambridge, Mass. consulting firm Monitor Group that the recession's drop in asset prices has seriously diminished the size of oil-rich countries' and Asian exporters' once-feared sovereign wealth funds (SWFs). SWFs -- i.e., state-owned investment funds -- were until now thought to hold around $3 trillion in assets and to threaten growing in short order to more than $10 trillion. With investments on those magnitudes, the funds stood to become powerful instruments of economic dominance for the governments that owned them. Or so many worried.
Now, according to Monitor, these SWFs have lost almost $60 billion
against the more-than $125 billion they're publicly disclosed to have
invested since 2006. Chastened, the funds have begun to retreat
geographically and focus on investment in their home regions, largely
well outside the U.S. and Europe. And it's meanwhile become apparent
that many of the big SWFs have never been as big as people thought they
were. Monitor itself, for example, figured last year that the Abu Dhabi
Investment Authority had assets of $875 billion, but now put them at
$282 billion. Altogether, the assets of SWFs are being revised to about
$1.8 trillion, likely growing to between $5 trillion and $6 trillion in
2012. Some of the colossal difference in these numbers has to do with
fallen asset values, but most, it turns out, was just severe
overestimation.
One of the basic reasons for the tendency to overvalue SWFs has to be that virtually none of these funds are meaningfully transparent (the major exception being Norway's Government Pension Fund, which is democratically beholden to fully disclose its assets). But a lack of transparency alone doesn't really explain why people would tend to imagine SWFs as having multiple times their actual value. So what does? Pending further analysis, let's consider the boogeyman factor -- the possibility that these overvaluations were plausible to us mainly because of our (not entirely unreasonable) discomfort with large, murky sums of money being invested in our economies by super-rich states that aren't what you'd call aligned with us geopolitically. I.e., we got carried away by the specter of the Sinister Other. (Confession: I, too, thought Saddam had WMDs.)
Sovereign Wealth Funds are inherently disconcerting, so we should certainly subject them to as much scrutiny as we can. Looking ahead, though, we might do well to remember that if we hadn't allowed Congress to freak out when a Chinese company bid on the U.S. energy company UNOCAL in 2005, or when a Dubai-based firm initially took over the management contracts for a number of U.S. ports in 2006, those companies, rather than Chevron and AIG shareholders, would have been the ones shouldering the subsequent losses.
One of the basic reasons for the tendency to overvalue SWFs has to be that virtually none of these funds are meaningfully transparent (the major exception being Norway's Government Pension Fund, which is democratically beholden to fully disclose its assets). But a lack of transparency alone doesn't really explain why people would tend to imagine SWFs as having multiple times their actual value. So what does? Pending further analysis, let's consider the boogeyman factor -- the possibility that these overvaluations were plausible to us mainly because of our (not entirely unreasonable) discomfort with large, murky sums of money being invested in our economies by super-rich states that aren't what you'd call aligned with us geopolitically. I.e., we got carried away by the specter of the Sinister Other. (Confession: I, too, thought Saddam had WMDs.)
Sovereign Wealth Funds are inherently disconcerting, so we should certainly subject them to as much scrutiny as we can. Looking ahead, though, we might do well to remember that if we hadn't allowed Congress to freak out when a Chinese company bid on the U.S. energy company UNOCAL in 2005, or when a Dubai-based firm initially took over the management contracts for a number of U.S. ports in 2006, those companies, rather than Chevron and AIG shareholders, would have been the ones shouldering the subsequent losses.
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