Ladies and Gentlemen:
I am most grateful for the invitation to come and speak to you today. The presentations by the ministers of several of Africa’s key emerging sovereign wealth funds were most illuminating, as were the global context painted by representatives of public and private global financial institutions.
I will consider one of the more important emerging issues in global finance—the context and contradictions now faced by Africa’s emerging sovereign wealth funds, and the strategies I will offer as a means to resolve these contradictions in contextually relevant ways. I will start with briefly with context and contradiction, and then will devote the bulk of my time to the sketching out of nine strategies that African sovereign wealth funds might consider pursuing.
We have heard to day especially how key African states are turning increasingly to sovereign wealth funds as the next great instrument of macro-financial policy. This is a move that is supported, and managed in part by the great global international financial institutions, the World Bank and International Monetary Fund prominent among them.
This movement, the embrace of this form, reflects to not necessarily harmonious objectives. On the one hand, the move toward SWFs reflects African needs. Those needs—to manage wealth and the exploitation of indigenous natural resources in a manner compatible with development—are complicated by Africa’s unique history and relations with great powers. On the other hand, it also reflects a quite strong process of increased socialization of African finance within emerging global financial system norms.
International financial institutions play an important role in that socialization. Situated at the center of global finance socialization networks, IFIs manage this process through their loan work, technical assistance and monitoring reports. They operate by reference to soft law systems they helped develop, not the least of which are the Santiago Principles. As a consequence of this work, SWFs have come to be situated among the palette of financial tools available to states, with increasing relevance to Africa. This tool has two particular objectives in the African context. First it serves as a macro-financial instrument fro stabilization, development, and wealth management (futures fund) in any combination. Second, it serves as a means of government discipline (not fiscal discipline but institutional in the sense of its use as a good governance tool. This second purpose itself furthers socialization of government into global practices and indicates that in the absence of systems that separate financial policy from the ordinary processes of government, fiscal policy will fail.
Lots, then, it seems, is riding on SWFs in Africa. For all that, African SWFs are still new, many established in just the last five years. They are relatively small, especially in comparison with the East Asian, Norwegian and Middle Eastern funds and thus carry little clout. And the funds are relatively inexperienced in the business of operating as a tool of sovereign investing. Most tellingly, and without much thought or examination, each African SWF goes it alone, though within a network of “soft” connections made through their activities—like this one at Chatham House. And in the global discourse on finance and governance, African SWFs and their managers tend to be on the receiving end of the conversations generated through these networks.
The system I have described is both well known and well worn. And that is the source of its weakness—it has worn itself out of relevance to the realities of global finance today.
Thus to my mind, this system, one within which African SWFs are being molded, tries to recreate a pattern of thinking underlying pre-World War II notions of single-state based development—the state triumphant in splendid isolation—that is oblivious to the structural changes brought on by globalization.
This pattern of development, and of the governance structures that are its necessary consequence, appears as a vestige, perhaps the last vestige, of theories of national economic self-sufficiency through industrialization as a means to development, whose last great expression was perhaps best reflected in the New International Economic Order thinking from the 1970s.
There is a need now to reframe our thinking. If nothing else, the imperatives of the emerging realities of accepted behaviors now requires a focus on strategies that are firstly coherent with the ideology of globalization (free movements of goods, capital, and services, through non-state ordered private markets, based on open textured, borderless, states); and that secondly can leverage the structures of globalization (creating structures to tale advantage of opportunities coherent with porous border markets systems by states and private actors).
It is to the need to focus strategies that I will devote the balance of my remarks. I will suggest nine strategies that African SWFs might consider in structuring and operating their SWFs within a globalized economic order. These strategies are meant to avoid the circular characteristics of current discussions grounded on premises of finance instrument silos and state based systems that no longer accord with the realities of, and fail to take advantage of the possibilities now offered through, global finance.
The following strategies can be broadly understood as falling into three categories. The first are regionalization strategies; the second are governance strategies; and the third are financial objectives strategies.
The regionalization strategies are perhaps the most important element in enhancing the effectiveness, power and viability of African SWFs as macro-financial and governance instruments:
1. Create a regional working group, a regional forum, of African SWFs. This regional forum can operate along the same lines and in parallel to the global forum established through the International Monetary Fund, the creator of the Santiago Principles, that now operates as the International Forum of Sovereign Wealth Funds. But it ought not to be part of the IFSWF. African SWFs could of course participate as members of both, but Africa needs its own regional forum as a space where Africans can focus on African issues while engaging in the global discussions about SWFs, macro-finance and governance.
This regional forum of African SWFs might be located within the architecture of the African Union, or exist independently. It might be sponsored solely from and out of the revenues of the African SWFs that choose to participate. And critically, it must use those funds to establish a permanent Secretariat, and an African Sovereign Wealth Fund Institute, to generate research, discussion among experts, and provide autonomous monitoring services and technical assistance.
Perhaps the most useful early objective might be to develop and African Santiago Principles—a set of standards for the ethical and appropriate operation of SWFs that incorporate African values and practices as both home and host states. The overall objective here is to get Africans speaking authoritatively about African issues and to break the usual pattern of global discourse where Africans voices are rarely heard authoritatively—talked to about themselves by well meaning foreigners and expected to listen. That requires an African think tank worthy of the name.
2. Insist that IFIs, and especially the World Bank and International Monetary Fund, develop facilities to provide technical assistance to African SWFs on a regional basis. IFIs should be prodded by African SWFs to develop deep capacity to cluster SWF strategies. That capacity should not be limited to technical assistance, but also include monitoring and assessment capacity. Perhaps loan work might be creatively reimagined within a regional as well as national context as well. The objective is to get IFIs to begin to think and act regionally, as well as within a national context.
3. Focus on regional intra-SWF investment/development projects. Multi-SWF projects, especially intra-Africa projects, may well serve as a better source of discipline through the aggregation of effort and the positive deployment of self interest in joint work. Infrastructure development that ends at national borders are far less useful for the development of robust private economic activity than regional projects. If nothing else the histories of the United States and Europe ought to have taught that lessen (as flawed as those lessons might be). Larger markets increase collective economic power. And that increase can translate into a more substantial political voice in the transnational sphere. On a more practical level, aggregation, with its larger capital base, can provide for more effective investing.
This strategy need not lead to consolidation of national SWFs as much as suggest the power of coordination on projects that may be valuable to shifting groups of such funds. Developing the flexibility to engage in joint efforts with different groups of funds, and to coordinate that activity regionally produces greater likelihood of social and developmental objectives than purely national efforts constrained as they are by borders developed in the capitals of Europe in the 19th century. The strategy looks to the creation of coordinated SWF cross border regional investment in partner states that deepen those webs of cross investment which in turn facilitate the growth of private economic activity.
4. Strengthen and increase participation in non-regional multi-SWF projects. It is becoming quite common for SWFs to develop coordinated strategies and engage in joint projects. Recent agreements of this kind among funds from China, Korea, Russia and the Middle East, among others, have begun to exploit the logic and power of aggregation of resources to meet common ends. African SWFs might also use these vehicles for a number of objectives. First, as part of deals with investor states seeking to exploit African natural resources, it might be useful to tie such deals to coordinated investment projects overseen through the SWFs of each of the participating states. Second, like intra-Africa SWF coordination and joint project work, these activities can be used to enhance governance and fiscal discipline. Third, these provide yet another method of leveraging financial power of small funds, especially with respect to projects or investments to which they would have been able to participate on their own.
If regionalization is essential to the enhancement of the success of African SWFs, macro-financial strategies build on regionalism, and expand them.
5. Refocus SWF objectives to enhance the value of specialization and to target coherence with the portfolios of finance and development ministries. Among the more important cluster of issues to consider in this regard are the mixed objective SWFs that are sometimes deployed either as single or multiple vehicles. Mixed objective SWFs do not seem to do well. They cannot be all things to all people. They encourage abuse by reducing the clarity of objectives and serving to justify more easily than appropriate decisions that may have more importance to the decision maker than to the SWF itself.
Adoption a strategy of significant separation by objective—stabilization, development, futures funds, and the like—may better rationalize approaches to operation and enhance monitoring and accountability. Specialization of SWFs, especially in Africa, combined with regional organization of these specialized entities, would target objectives and leverage power more effectively, especially in global markets in which individually each of these funds may be quite insignificant. These strategies, of course, build on the regionalization that I have suggested as essential to the success of African SWFs.
While coherence requires specialization within SWFs, it requires coordination with other actors that shape the macro-finance behaviors of states. I will mention three. First, competition with development banks results in waste, confusion and duplication. SWFs, whatever their investment objectives must work with and not against development banks (much less the central banks). Second, failures of coordination with state owned resource extractive enterprises produce a weak link in the production of wealth. The passive relationship between SWFs and state owned enterprises ought to be reshaped to enhance coordinated efforts. Third, coordination with government ministries responsible for selling rights to extractives resources ought to be better coordinated as well. The system of wealth production ought to be seamless from the operation of enterprises, to the public policies that operationalize those enterprises, to the investment strategies that augment and manage the wealth production made possible through those enterprises.
6. Reconsider the approach to stabilization and development models for SWFs, especially were governance controls are weaker than they could be or in resource rich states. One of the oddest aspects of stabilization and development SWFs is their quite instrumental approach toward intervention in domestic markets in the context of a global order that increasingly emphasizes organic and markets driven development. In a sense, SWFs can be misapplied as a vehicle for the kind of public central planning of the national economy that is both inimical to the logic of globalization and which has been discredited in virtually every state in which it has been applied aggressively, irrespective of the political ideology on which the state is organized. The use of SWF as a means of governmental direction of economic planning or operation is perhaps a substantial misuse of the SWF form in an endeavor that fights against rather than complements the logic of the global financial and economic rules of play that are now dominant—and to the detriment, ironically enough, of the development that such planning vainly seeks to enhance.
In a sense such approaches to development or stabilization objectives echoes Ancien Regime sectorial protection or enhancement efforts in an effort to approach the industrial revolution in France more instrumentally than that of the United Kingdom. That was a dismal failure though it did produce one of two industries that have been quite well celebrated—hardly enough though to justify the effort. Closer to our own time it suggests the central planning taken to more extreme lengths by those states practicing Soviet economic practices and which lingers on in an attenuated way in perhaps only one state.
Rather than spending instrumentally to subsidize targeted activities, something we have heard spoken of here today, SWF stabilization/development spending might be better used to fund and develop the foundations on which private markets can grow of their own accord and consonant with economic conditions in context. SWF development spending ought to enhance but allow the market to determine which sectors should develop, and in what way. Reducing barriers to private economic activity rather than supporting a favored few is a more effective way of building economic strength with a broader base. SWFs that protect bottom up economic development, which manages but does not oversee this development, will likely serve their people better in the long run.
To that end, building market capacity rather than industry capacity better leverages spending. Infrastructure development, well planned, is also essential and good work for the instrumentalities of the state, as are institutional structures protective of private economic activity. To this end, ownership of external operations or supply flows in industries critical to national economic activity and that affect internal markets might be the best way to spend development funds. Even resource rich states require productive capacity along supply and value chains, access to which might be enhanced through SWF ownership or control. Thus the paradox—development SWFs might be most effective when investing outside of the home state and in industries critical to internal development—that is at development choke points in globalized economic activity. The Chinese model of sovereign investing has certainly demonstrated the value of this approach, and its viability.
The governance strategies as well are a necessary element to creating institutionally strong African SWFs well capable of attaining the regional and macro-financial strategies suggested.
7. Effect greater transparency. Transparency has become a standard rhetorical gesture when speaking to SWFs. It has become fairly meaningless in soft law efforts like the Santiago Principles. Yet beyond its utility as rhetoric, robust transparency can be effectively used to strengthen SWF in the delivery of financial and governance enhancing products. Yet transparency is not very useful when understood in its conventional sense as a one-size-fits-all disclosure strategy.
Instead one can start by rethinking transparency as a more nuanced and complex set of vehicles for engagement and communication. One ought to consider transparency in two aspects. Internal transparency is necessary to ensure engagement with national stakeholders (including the political and business establishment) and to reduce an unhealthy detachment from elected officials. External transparency is necessary to ensure adequate communication with investors and investor markets, including IFIs.
Internal transparency focuses more on engagement strategies within states and among the appropriate sectors of the government apparatus. Its purpose is to broaden consultation in the formation of policy (an ex ante function) and to ensure broad bases of accountability (ex post function). External transparency might be better used shorn of any pretense to engagement. Its objective might be better understood as focused on communication of performance and operations in the manner of financial performance reports of enterprises whose securities are traded in securities markets.
8. Detach SWF operations from governmental discretionary decision-making. The engagement potential of transparency must be constrained to avoid abuse. While deep participation may be useful for developing policy, it is far less useful for the decision making required to operate a SWF with respect to specific investment decisions and internal operations. It is therefore necessary to adopt a strategy that would institutionalize deep constraints on engagement by officials (including elected officials) and the political community generally, especially respecting investment decisions. The only exception would touch on Norwegian type SWFs established specifically as a public instrument for leveraging national policy through targeted interventions in private markets.
Beyond that quite specific sort of SWF, constraint strategies would require a strong functionally effective routinization of contributions and withdrawals and of investment decisions by formula and related methodologies. These ought to target conduct well beyond the usually elegantly drawn formal division of authority posted to virtually every SWF’s web site. In particular, the discretionary power to deviate from formula, or to vest a high ranking official with authority to direct specific investment, powers usually embedded in the fine print of SWF operational rules, requires sustained attention and substantial tightening.
Along with these measures SWFs might consider strategies that strengthen internal management controls and oversight, and which make these appropriately transparent. These internal controls ought to be coherent with whatever external controls are developed.
9. Insist on changes to the way in which states with SWFs engage with IFIs to enhance rather than to continue obstacles to better state performance. IFI conditionality, technical assistance approaches and monitoring regimes should better target rewards for good SWF performance in attaining fiscal results, improvement in governance, and incorporation of technical assistance in which states have enjoyed effective consultation. While a broad and politically charged topic, I can think of three fairly direct methods that might be useful measures of success for this strategy. First, IFIs might incorporate investor loan cost reductions (interest, fees and the like) that are triggered on attaining certain performance markers. Second, IFIs might incorporate principal reduction terms for meeting goals alone similar lines. Third, and perhaps most important, IFIs might more aggressively, with the cooperation of African SWFs and their governments, more effectively incorporate international norms on business and human rights as a measure of the effectiveness of SWF investing decisions. This would include the incorporation of the methodologies of human rights due diligence in investment decisions and oversight that are central to the U.N. Guiding Principles on Business and Human Rights. There is a great disciplinary mechanism that is transnational in scope and helpful to the people who are the ultimate beneficiaries of the work of African SWFs.
Taken together I have sought to present a fairly broad and aggressive set of strategies to enhance the success of Africa’s SWFs. Many of these strategies are no doubt controversial. Some are aspirational. All are based on the assumption that the application of 20th century political models in an environment of 21st century globalization, in which borders are more porous and permeable, in which public power is fractured, and in which investment operates under the complex logic of polycentric governance systems, will neither serve Africa, nor the global community of which Africa is an important part.