Wealth of nations

There’s this new test to check if you are a true believer in liberal economics: would you feel uncomfortable if an investment entity funded and controlled by, say, a Chinese or Russian or a Middle Eastern Government buys a big stake in a big company in your country? These entities are called, in self-explanatory fashion, sovereign wealth funds (SWFs). Countries that sit on large piles of foreign exchange reserves — they can afford to spare a portion of reserves for purposes other than maintaining external economic security — set up SWFs. According to a widely quoted Morgan Stanley study, SWFs are likely to command around $12,000 billion by 2015. That’s a lot of money even by global financial standards.

SWFs rescued Wall Street investment banks when the credit crisis started in America. Merrill Lynch and Citigroup received SWF investment in January. Till now, SWF investment in global finance blue chips is nearly $70 billion. So Wall Street is rather happy about SWFs. The PMO isn’t. It recently asked the finance ministry to closely look at these funds. Governments in France and Germany aren’t happy either.

So that’s a no-brainer, right? Savings from savings-surplus countries have helped businesses in savings-deficient countries. Plus, if Wall Street is happy and governments that are not committed economic liberals are worried, SWFs must be good for the liberal economic order. Wrong.

If you are a liberal, you should admit to feeling uncomfortable about SWFs. Have no fear of being labelled an alarmist nationalist. You have nothing to lose but intellectual inconsistency if you argue that SWFs should be treated differently, indeed treated with a great deal of a priori suspicion. Because to argue that SWFs are just another investor in global capitalism is to attack the fundamental precept of capitalism.

The fundamental precept is that private investors are better than governments as investors. This was at the heart of the great intellectual post-War struggle that economic liberals won. This is equally at the heart of the current Indian economic policy discourse. Reforms are essentially about giving private capital the recognition and space it deserves. If liberals support privatisation and are appalled by nationalisation when it comes to domestic capital, why are they unable to see SWFs for what they are: across-the-border quasi-nationalisation?

To argue that government-controlled investment funds be treated at par with private investors simply because the governments happen to be foreign is being rank illogical. This is not about the phobia of things “phoren”. This is Liberal Economics 101.

... contd.

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