For the highly motivated SWF wonks out there, I’ve got three solid papers for you this weekend. You’ll undoubtedly want to impress your friends by printing them out in their entirety and bringing them along to the beach for some casual reading. And, best of all, when they ask you why you brought a ridiculous stack of papers to the beach, you can show off some of your needlessly detailed knowledge of government-owned, special purpose investment vehicles. That sounds like, in the words of Frank Ricard, a pretty nice little Saturday. So, without further ado, here’s your weekend reading:
The first paper comes from Stephen Thomas and Ji Chen and is entitled “China’s Sovereign Wealth Funds: origins, development, and future roles.” It’s quite an interesting read, and I was, in particular, interested to see the authors’ predictions for the future of China’s SWFs:
“After investing for years in global markets, CIC will rely more on in-house expertise to invest. They have set up a 14-person international advisory board including former World Bank President James Wolfensohn, former Hong Kong Securities and Futures Commission chairman Andrew Sheng, and former World Bank chief economist, Lord Nicholas Stern. Finally, CIC is entering into more partnerships, such as with Intel Investment, placing funds with private equity ﬁrms such as JC ﬂowers (US$4 billion), and its most recent investment with private equity groups Goldman Sachs (US$500 million), Lexington Partners (US$500 million), and Pantheon Ventures (US$500 million).”
That fits with what I’ve been hearing and seeing from the CIC; it is rapidly moving assets in house and relying on internal teams for direct investments.
The second paper comes from Claudio Borio and Piti Disyatat at BIS and is entitled “Global imbalances and the financial crisis: Link or no link?” It’s only tangentially related to SWFs (via imbalances), but I found it quite interesting. Here’s the abstract:
“Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis, by putting significant downward pressure on world interest rates and/or by simply financing the booms in those countries (the “excess saving” view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) drawing inferences about a country’s cross-border financing activity based on observations of net capital flows; and (ii) explaining market interest rates through the saving-investment framework. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary economy. We conjecture that the main contributing factor to the financial crisis was not “excess saving” but the “excess elasticity” of the international monetary and financial system: the monetary and financial regimes in place failed to restrain the build-up of unsustainable credit and asset price booms (“financial imbalances”). Credit creation, a defining feature of a monetary economy, plays a key role in this story.”
And, finally, if you’re really searching around for things to read this weekend (i.e., you’re bored), you can read the paper I just completed with Gordon on the design and governance of contingent pension reserve funds, which is entitled “Partisan Politics and Bureaucratic Encroachment: The Principles and Policies of Pension Reserve Fund Design and Governance.” Actually, I think it’s one of the more awesome papers I’ve written. It has broad implications for designing and governing government-controlled institutional investors. Here’s the abstract:
“In an era of population aging and increasing fiscal pressures on nation-states, pension reserve funds have been mooted as effective investment vehicles for realizing future liabilities and achieving some balance between generations. Nonetheless, concerns have been raised that partisan political interests combined with bureaucratic encroachment are likely to adversely affect fund performance. In this paper, we consider the issue of design and governance beginning with broader issues of institutional legitimacy and autonomy before looking more closely at the management of these institutions with respect to holding partisan politics and bureaucratic encroachment at bay. We suggest a set of six core principles of design and another set of six policies of governance and management that we believe are essential to the functional performance of such institutions. These principles and policies are derived from previous research on pension fund governance and detailed analysis of four pension reserve funds that offer lessons for best practice. These principles and policies are not intended to provide funds with an absolute claim for independence; rather, the design and governance of these institutions should facilitate an effective and symmetrical relationship between the institution and its sovereign sponsor. These arguments are developed with reference to changing global financial markets, and the fact that the financial assets of these institutions are increasingly seen in the context of nation-states’ total balance sheets of assets and liabilities.”