Keep politics out of SWF debate



It is good the IMF and the world's sovereign wealth funds are sitting down to thrash out the issues between them, and if left unchecked threaten to disrupt the free flow of capital round the world. At times such as these, when the world economy seems to be pulling away the possibility of a catastrophic financial crash but still faces the fallout from the US-generated recession that will be felt throughout the world (yes, even in the energy-revenue rich countries of the Middle East), it is essential to have some plain talking on the contentious areas surrounding SWF investment and its counterpart, Western hunger for capital.

The SWFs, some 25 of them, are represented by Hamad Al Suwaidi, Director of the Abu Dhabi Investment Authority (Adia) and junior minister for finance in the emirate.

That is a sound choice. As the biggest of the world's SWFs, approaching one trillion dollars of funds, Adia carries the necessary authority to ensure the working group charged with hammering out some guidelines produces appropriate recommendations by the October deadline.

But this is an emotive and complex issue, and there is a danger the IMF group will be distracted by issues outside their remit. In particular, it must not succumb to the temptation to get involved in the politics of the Western countries that have raised objections to SWF investment. The US, some European states (led by Germany and Scandinavia), Australia and New Zealand all seem to regard the SWF issue as an extension of their own domestic problems. Vague worries about interference in their economies, protectionist and sometime xenophobic attitudes to foreign capital, and alarmist reactions to their own financial weakness have all created a tense and potentially damaging mindset in the West. The IMF must ignore these factors, and look through them to the real practicalities of a workable code of governance.

I would suggest two considerations should be paramount. The first is that the IMF recognises that there is no such thing as a typical SWF. Adia is the biggest and has been particularly active in recent months, especially buying those sensitive parts of the creaking Wall Street infrastructure weakened by the credit crunch. Other Gulf states, from Qatar to Kuwait through to Saudi Arabia, also have funds that fit, more or less, the SWF stereotype (though Dubai's various investing agencies do not fit so neatly into this template).

But outside the Gulf there is a vast array of other state-owned investing institutions that are represented in the IMF talks, but which cannot, for geopolitical strategic reasons, be usefully categorised alongside the Middle East groups, and the IMF must not try to impose a "one size fits all" formula on them.

Russia and China are the two that instill greatest fears in the West, and there is some justification for this. Both are big, expansionist political entities with a recent history of outright hostility to Western capitalism. Both have been prepared to use trade as an extension of their geo-strategic ambitions in the past (Russia with its energy stranglehold on eastern Europe and China with its trade-based interference in Africa).

These considerations are no reason to exclude either from the IMF deliberations. Both China and Russia have to be educated into the acceptable ways of doing business in the broader world.

The IMF should bear this in mind when it frames its proposals.

The second working assumption the IMF/SWF leaders should take under consideration is this: Western capitalism, for all its faults, already has sophisticated and proven systems for dealing with investors. The guiding principle here must be the verification and approval by existing shareholders of Western corporations, which are the watchwords for the free capitalist structures of America and Europe.

In other words, the West must subject SWF investors to the same degree of scrutiny and transparency that it would another Western investor. It is inconceivable that Citigroup, for example, did not carry out the most thorough of due diligence procedures on Adia, when it made its $7 billion (Dh25.6bn) investment in the American bank last year. And quite rightly so. But that should be the end of the matter – if Adia can satisfy the demanding and intelligent shareholders of Citi, then it has done enough, and should not be subjected to a further round of inspection by the US Government, acting through the Committee of Foreign Investments, or any other body.

It is when governments get involved in the process of regulating the free-flow of capital that politically-inspired problems occur. The West should let the IMF and the SWFs get on with it, and avoid the temptation to interfere in this all-important consultation.

 

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