Monday, September 22, 2008

The global context of America's financial crisis: The rise of 'Sovereign Wealth Funds'

For years now a popular catchword of America's changing economy has been 'globalization.' As in statements like: Today's domestic economy is increasingly subsumed within a broader worldwide economy of global trade and transnational markets. Or like: National economies are still relevant -- especially ones as rich and powerful as the US -- but increasingly they are linked together within a global system. What rhetoric like "linked together" is meant to convey is, within this global economy, one nation's problems shape another nation's experiences, and vice versa. Which leads to another catchword of the contemporary situation: 'interdependence.'

The thing is, 'globalization' and 'interdependence' are not superfluous words by those with too much time on their hands. They actually mean something in the current environment. We should proceed knowing that globalization is a contingent fact: it is shaping the lives we live and the news we read about, even as the future shape of globalization is far from settled.

This interdependence is even true in America. Take the country's current financial collapse. As soon as we take a global perspective, one striking real-world shift stands out: For some number of years now, the rest of the world has been gaining financial and economic power relative to the US. I sometimes can't believe it. Compared to the rest of the world, America is not as wealthy as it used to be. This is true for the first time in my life. And it is true in a number of categories: currencies (the dollar has lost substantial ground to other currencies this decade); oil (America's oil production peaked way back in 1970 and we are now facing increasingly prohibitive energy costs); and deficits (America faces a current-account deficit of more than $700 billion, well over 5% of the nation's GDP) to take three.

But lately I've been paying some attention to the rise of 'sovereign wealth funds' (SWFs). A few months ago I read a conversation between 'The Middle East' (an English-language magazine) and Ibrahim Dabdoub (the CEO of Kuwait's largest bank). The conversation -- really, an interview -- is not available on-line. So I'll type out and post an excerpt of the interview here.

My goal is to gain a better idea of the enormity of the wealth that SWFs are raising; the aggressiveness with which they are peering into US markets; and the capacity they are building, and to a certain extent now hold, to re-make the American economy.

The interview is from the May 2008 issue.

The Middle East Report: When you attended the annual World Economic Forum at Davos this year, you spoke at length about the rise of the new sovereign wealth funds (SWFs). How big are they, and how much of their wealth is in the Gulf states?

Ibrahim Dabdoub: The SWFs include the Abu Dhabi Investment Authority (ADIA), whose assets are estimated at $500bn, and the Kuwait Investment Authority (KIA) at $250bn. Together with those of Norway, Singapore, the Qatar Investment Authority, Saudi Arabia and Russia, they could add up altogether to $2 trillion at present.

Oil producing countries including Saudi Arabia, Kuwait, Qatar, the UAE and other members of the Gul Cooperation COuncil (GCC) account for two-thirds of the assets of the SWFs. These GCC pools of government-controlled funds are now so big, and growing bigger by the day, that their size would have allowed them to buy up every one of the $460bn worth of government bonds issued by the US and European governments in 2006 and still have around $700bn to invest in other assets.

As a matter of fact, it is estimated that ADIA alone could have paid for its recent investment in Citigroup with only 15-days worth of oil revenues, i.e. the time that it roughly took them to negotiate the deal!

Do you think that the SWFs are affecting the geopolitical distribution of wealth?

Their rise is seen as a structural shift in global financial markets that signals a shift in financial wealth and power away from the US and Europe. We have already seen some of the effects those players have had on the financial and capital markets in recent years.

The structural shift in economic wealth we see right now proves just how contingent the fact of globalization really is. Nobody knows exactly how this world economy is going to work out. The future is wide open and promises to be unprecedented.

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