To help the global economy recover from the devastation wrought by the coronavirus pandemic, governments around the globe have pledged over $9tn of spending and lending to prevent another Great Depression.
Finance ministries the world over are having to be creative to continue to support industry and employment and to build back better from the biggest disruption to trade and commerce since the 1930s.
The result is the largest economic policy experiment outside of a world war.
Here in the UK, our own chancellor has announced a package of measures worth £30bn, including a VAT holiday for the hospitality sector, a £1,000 bonus for staff members kept on after the furlough scheme ends in October and the now-infamous “eat out to help out” half-price meals plan.
One idea for the long-term not yet receiving major traction here is a sovereign wealth fund (SWF).
From Alaska to Hong Kong, from Abu Dhabi to Chile, there are over 90 such SWFs in the world – some with assets in the trillions and recent annual returns as high as 13 per cent. Emerging economies like Indonesia and nations on the African continent are also exploring this avenue.
The definitions for SWFs vary so widely that the most acceptable is necessarily vague. SWFs are “purpose investment funds or arrangements that are owned by the general government.”
In general terms, it is a pot of money that can be used to cushion an economy during a recession or to help a commodity-rich country invest for the future by financing other promising industries. In other words, investing to preserve, diversify and increase the nation’s wealth.
Unlike other institutional investors, SWFs take a much longer-term outlook – aiming to secure their countries’ economies for decades, rather than months.
Saudi Arabia’s sovereign wealth has flowed through Silicon Valley to fund companies like Uber and WeWork. The Chinese Investment Corporation has already bought, and sold, a large stake in the American private equity giant Blackstone.
Norway’s fund – which boasts $1tn of investments in shares, bonds and property – announced last year that it was pulling its money out of 134 fossil-fuel companies focusing on oil and gas exploration.
Because SWFs tend to be set up by countries running budget surpluses with low public debt and large natural resource reserves like oil, some here are not convinced of that such a project would be feasible in the UK.
The architect of the Northern Powerhouse and former chief economist at Goldman Sachs, Jim O’Neill is not one of these, however.
Tipped for a comeback as Boris Johnson prepares to reignite his “levelling up” agenda, O’Neill favours a £25bn fund which invests into promising British start-ups in areas of high unemployment and low opportunity outside London.
He suggests two potential models, Singapore’s Temasek fund – with its arms-length body of professionals making the investment decisions – and the department for international development’s CDC investment arm for financing low-income countries.
The Centre for Policy Studies have also highlighted Ireland’s Strategic Investment Fund (ISIF) as a template given it is not led by civil servants, but a board of investment experts from a wide range of sectoral and geographic backgrounds. Its statutory mandate to support domestic economic activity and employment means it is designed to provide long-term capital in areas where investment is lacking, rather than simply crowding out private investors in search of fund growth.
Think tank Reform argues that the £500m national fund should be used to seed any UK SWF. The vehicle would be an antidote to a trio of major economic problems – a lack of investment in economically vital growth-promoting infrastructure, Britain’s ingenuity in investing new technologies but failing to translate this into profitable companies, and an ageing population carrying growing costs by fewer working-age people.
Without action, we face higher taxes and even more borrowing for future generations. The government’s debts will also flood private sector projects and drive up interest rates – strangling growth and sabotaging our wealth creators for years.
Internationally, the purposes of SWFs vary considerably.
You can invest for stability in very safe bonds and public equities to avoid volatility. For maximisation, invest in the fastest growing industries globally to grow the wealth of the nation for decades to come. Or for development reasons, investing domestically in weak areas to achieve a balanced economy and attract foreign investment.
Putting money into top foreign companies operating in the sectors the government wishes to build up at home – in renewable energy and clean jobs for example.
Here in the UK advanced manufacturing, life sciences and alternative energy assets provide world-class opportunities.
The fund could be used to support goals like reducing carbon emissions, and as an “anchor investor” to keep the UK’s most promising businesses and entrepreneurs local, and having them acquired by US or other foreign companies due to a lack of other financing options. The benefits of funding new innovative technologies so they can scale up domestically mean we will avoid “founder flight” and keep jobs and wealth in the UK.
It would also create savings to pay for state pensions and benefits – and, over time, provide an intergenerationally fairer solution, saving many from having to shoulder the costs of others.
It would also create a vast source of funding for patient, long-term investment capital for a suite of options from transport infrastructure projects to full-fibre broadband. This will wean us off our rock-and-roll addiction to consumer spending and equip us to grow much faster in future.
The rise of SWFs in this period comes as governments become more active players in the markets. China’s state-capitalist economy has been ascendant for most of the previous decade, protectionism will likely remain unchanged by November’s elections in the United States, and centre-right governments in Germany and here in the UK, Europe’s major economies, will pursue greater state involvement in the economy.
Before advising President Obama’s administration on economic policy, Larry Summers noted the potential of SWFs in 2007, writing that, as state actors, the question of how they invest “is profound and goes to the nature of global capitalism.” Back then, the worry was that SWFs would be used to advance political agendas and would give birth to a new form of state capitalism.
In the summer of 2020, the future of global capitalism now looks vastly different from the era of pre-crisis neoliberalism during which Summers made his observation. For the time being, sovereign wealth funds are set to play a more influential role in whatever global environment follows the Covid-19 crisis.
After Brexit and after Covid, an independent Britain will need to retain its seat of influence at the table. To do so, it should have a meaningful stake in its own financial future.