Beware the spoilt sovereign brats - Emirates24|7

Beware the spoilt sovereign brats

Senator Charles E Schumer, chairman of the congressional Joint Economic Committee in the US, is perhaps not quite well enough read as he should be. I don’t mean that to sound as rude as it does.

The senator, no doubt, is a busy man, and his researchers may well be overstretched at a time of rapid economic change.But his lack of broad world view has been clear for some time – as evidence see his tub-thumping rhetoric on the need for sovereign wealth funds (SWFs) to agree a code of transparency if they are to continue buying in to US companies.

Earlier this year, Sen Schumer was busy warning the IMF that if it didn’t devise a voluntary code soon then congressional legislation would follow.

"The question of the day is whether these huge pools of investment dollars, known as sovereign wealth funds, make the US economy stronger or pose serious national security risks,” he said at the time.

Now, in what looked like a shrewd feather-smoothing exercise, both Singapore and Abu Dhabi promised last month to disavow geo-political goals in their investment strategies – and the whole SWF controversy has been pretty quiet in Western financial and political capitals ever since.

But last week one of the targets of Sen Schumer’s wrath, the IMF, came out with a document the Senator really should now have at the top of his reading list. For the latest Global Financial Stability Report explains with some clarity why SWFs are so high on the Western agenda and why Sen Schumer’s threats amount to nothing more than clap-trap – words aimed at pleasing his audience rather than tackling the underlying reality of the matter.

Now, the GFSR, at 200 closely packed pages, is not an easy read. But the senator’s researchers could take a short cut and zip to page 131. Here they would find two pie charts, reproduced above.

The top chart shows countries that were net exporters of capital last year – led by China, Japan, Germany and Saudi Arabia. The one below shows countries that were net importers of capital – led by the US, with an overwhelming share of 48.4 per cent, followed by Spain and the UK.

That’s the hard reality of global capital flows. With raw materials – from rice to jet fuel – at or near record highs, there is no indication that these two pie charts might somehow reverse. In fact they have barely changed this decade.

More crushingly for Sen Schumer, the weakening dollar and continuing chaos in Western financial markets means, quite simply, that when it comes to capital in almost all forms, it’s a suppliers’ market.
US treasuries were once the automatic asset of choice for liquid long-term investors – such as other national governments. But at a time when financial analysts are actively examining the Federal Reserve’s own balance sheet to see whether it actually has the firepower to bail out Wall Street, those familiar old T-bills tend to loose their shine.

If congressional leaders in the US were really smart they would look at those tables and develop a wholly different rhetoric – one based on the best allocation of resources, both monetary and human.

The model of the traditional Anglo-American joint stock company rests on a pretty clear distinction between the providers of capital (the shareholders and/or bankers) and the management (those charged with running the business.)

The US has taught the world much in terms of capitalist innovation and enterprise. US business stewards tend to be “best of breed” – graduating from the world’s leading business academies and honing their skills in the most competitive, challenging markets.

Being a great steward is the best you can hope for when you don’t have the capital to invest yourself – the position that America Inc finds itself now.
Much smarter then to treat, and genuinely think of, SWFs as patient backers of American enterprise – long term investors who back quality management.

Over time, in joint stock companies, there is a transfer of wealth from the providers of capital to the managers of capital, as the skill of management improves the value of the underlying business.

So there is a long-term upside here for the US. When, as a country, you are a net consumer of almost half the world’s available capital the best you can do is present yourself as a growth opportunity – one that is worth backing.

Act as if the supply of new money is your birthright and you run the risk that you will be slapped down like a spoilt sovereign brat – and told to grow up and earn the money yourself.

- Paul Murphy is associate editor of the Financial Times.