Sovereign Wealth Funds: Scary Monsters Hit by Shrink Ray

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 the media and the public generally hadn't enabled 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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J.J. Gould is the editor of More

Gould has written for The Washington Monthly, The American Prospect, The Moscow Times, The Chronicle Herald, and The European Journal of Political Theory. He was previously an editor at the Journal of Democracy and a lecturer in history and politics at Yale University. He has also worked with McKinsey & Company's New York-based Knowledge Group on global public- and social-sector development and on the economics of carbon-emissions reduction. Gould has a B.A. in history from McGill University in Montreal, an M.Sc. from the London School of Economics, and a Ph.D. in politics from Yale. He is from Nova Scotia.

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