A line in the FT’s recent leader on sovereign wealth funds jumped out at me. The rise of sovereign funds, the FT opined, was an irony in a era of market-led globalization.
The irony, then, is that an era of market-led globalisation is making government-controlled funds more important than ever before.
That argument didn’t ring quite true to me.
The part about the rising importance of government-controlled funds is hard to dispute, especially given their role in the recapitalization of the US financial system. But I would argue that the rise of sovereign wealth funds — and more generally, the rise of what Martin Wolf called "state capitalism" — is the almost inevitable result of the state’s leading role in the current process of globalization, not a irony in a market-led era.
That isn’t the conventional wisdom, I know. But I have a hard time reconciling the enormous role governments now play in the global flow of capital with the idea that the current era is marked by "market" as opposed to "state" led financial globalization. Consider the following graph*, which tries to show the annual increase is government’s cross-border assets. Total government asset growth is now nearly two times the size of the US external deficit.
A set of developments (the rise of China, higher energy prices) and policies (exchange rate management in Asia, fiscal surpluses in the commodity exporters) has concentrated the world’s financial firepower in the hands of states in emerging economies.
State flows, after all, now dominate global capital flows.The IMF’s data makes this crystal clear. The IMF’s WEO data tables suggest that $500b in (net) private capital inflows to the emerging and developing world won’t fund a current account deficit, but rather will combine with a a roughly $700b current account surplus to finance $1200b in official capital outflows. My own work suggests the IMF underestimated official outflows by about $200b.