Secondly, Sovereign Wealth Funds (SWF). These vehicles have captured a lot of attention lately. Unjustly so, in my view. The operational question is: What is the difference between SWF and regular institutional investors of the same size? Allegedly, the SWF is sovereign, i.e. it is controlled by (typically foreign) politicians who cannot be trusted to have commercial interests only. This argument is moot for two reasons: 1) regular institutional investors (especially, but not exclusively of foreign origin) may not only be motivated by strictly commercial reasons either, and - 2) if a controlling investor in a country's strategic asset abuses her property rights, the country of residence can, as a rule, limit that investor's property right, which is a function of the country's legal framework. Such ad hoc interventions are much preferable to introducing permanent limits on the free flow of capital, which invariably will create costly distortions.
Wednesday, January 30, 2008
The McKinsey Quarterly has a great piece on The new role of oil wealth in the world economy. For me, this raises two broad issues. The first one is a continuation of the closing concern of the piece, namely the question whether higher oil prices can be good for the world economy. I think on a macro-level, this is possible. As long as the majority of the oil revenue is re-funnelled into the financial markets (i.e. is not being spent for consumption), it is tantamount to (forced) higher savings by net oil consumers with - admittedly - an ownership transfer of those savings to oil producers. So, oil producing countries build capital in lieu of the US citizen.