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  Global Economic Viewpoint



Larry Summers is a former U.S. treasury secretary and president of Harvard University. His comment is adapted from remarks this week at a session of the World Economic Forum, in Davos, Switzerland.

By Larry Summers

DAVOS, Switzerland -- Along with the prominent emergence of sovereign wealth funds on the global scene, some key questions arise.

The first question revolves around the issue of “multiple motives.” What is the primus of capitalism? It is that people invest and own companies in order to maximize their value. If you think about national ownership of a stake in a business or a whole company, or even a direct investment made by a public pension fund in the United States, the same issue arises: There can be motives other than highest rate of return.

For example, perhaps a state-owned fund wants an airline to fly to its country. Perhaps it wants a bank to do extensive business in its country. Perhaps it wants suppliers from its country to be sourced.

Perhaps it wants to disable an industry that competes with its nation's national champion. These other motives distort the whole notion of capitalism that value maximization is the chief objective.

Another concern is general politicization. Suppose a country ran an active trading operation and found itself in an investment much like George Soros' short position in the British pound in 1992. Would we be comfortable with the concept that nation X found that the fixed exchange rate of nation Y was untenable and wanted to launch a speculative attack against it. That is not conducive to successful relations between nations. There should be some kind of understanding that this is not going to happen.

Suppose the sovereign wealth fund in one country makes an investment in a major bank in another country. Then the bank gets in big trouble. There is no question as to whether investors are going to be bailed out. But is there any country in the world that can assert confidently that, with billions of dollars on the line, their head of state and foreign minister are not going to become involved in the negotiation of that transaction? Do we think that kind of thing is healthy for modern markets?

The question is not whether we should have sovereign wealth funds. They are terrific. Should we be against them simply because they are foreign? No. That's terrible. The question is: If we believe in market economies, and we work very hard to create open markets and expand private enterprise, shouldn't we establish some set of standards that address the kinds of concerns I've noted that arise because of the element, no matter how small, of cross-border nationalization?

One suggestion is that the sovereign wealth funds themselves should get together and put an end to all this worry and discussion by agreeing to a number of principles to which they will abide -- for example that under no circumstances are they going to speculate in currencies, they are always going to be long term investors and they are never going to use sovereign wealth funds to pursue any national political objective.

If sovereign wealth funds were to say they agree to these rules, that they have never done otherwise and never intend to, it would allay all the fears out there. It is the unwillingness to agree to such standards openly that is not wholly reassuring.