The growing importance of government owned investment funds – hereafter Global Public Investors or GPIs – illustrates the seemingly inexorable rise of the corporate state, and underlines how much the world has changed since the era of privatisation and the rolling back of the public sector seen initially in the US and UK in the 1980s and copied by many countries since. The previously widely-held Anglo-American view that economic activity is best conducted by and owned by the private sector is certainly not prevalent in the world as a whole any more.
State corporations are powerful in many jurisdictions, not just in Asia, the Middle East, Africa and many other emerging market economies. Many developed countries also still have a large role for state owned utilities, and even in the UK, for example, where basic utilities are mostly no longer run by the British state, they are often owned by organs of other EU states. Across the world, China is only the most obvious example of the rise of state capitalism.
Some important questions arise from this. One centres on the functioning of the world economy when so much of the capital stock is in public hands. The total of more than $28tn of assets in GPI hands represents xx% of world GDP and yy% of world market capitalisation. There must be a point at which this percentage starts to change the dynamics of shareholder capitalism.
Many GPIs, for example, make a point of not exercising their votes at shareholder meetings, and most forego taking up any directorships their holdings may entitle them to. This is usually justified on the grounds that GPIs ‘do not wish to interfere’ – but a silent investor is a friend of weak or poor management. Too high a proportion of such shareholders reduces the ability of the owners to hold management to account.
There is a dividing line between ‘involvement’, which most people see as a positive if not essential element of ownership, and ‘interference’, which is frowned on in general and particularly if the actor in question is a state body. The problem is this dividing line is very thin and ill-defined. Indeed the same action by a shareholder could be interpreted either way, depending on whether management agree (in which case it will probably be seen as involvement) or disagree (in which case it is more likely to be seen as interference).
A second question is why the world appears to need so much more public sector capital than it used to. The amount of public capital needed to support a given amount of global GDP has risen sharply since the end of the last century. Whereas 14 years ago $30tn of nominal GDP required perhaps $5tn of GPI capital – a ratio of 6 to 1 – now global GDP of about $70tn requires by these figures nearly $30tn, which is only just over 2 to 1.
Why is the world so much less efficient at using capital, and given that capital is a scarce resource, how much does it matter? One easy answer is that, as the developing world makes up a higher proportion of total global economic activity, we should not be unduly surprised that the world overall starts to look less developed. After all, if the developing world were to reach say 75% of global economic activity, the dominant characteristic of the resulting world would be that it was developing. And just as it is well recognised that it takes more oil to produce a dollar of GDP in China than it does in the West, it would not be surprising if it also took more public capital. But the consequences of running a more capital-intensive global economy, and the restrictions that this might imply for economic activity and financial stability, are not clear.
At the extreme, the risk is of a world of ever larger accumulations of public sector capital which their owners struggle to use efficiently, and which hang over markets as both a distortion and a threat to stability. We may then see these large and similar-minded investors showing herd-like behaviour, searching for the same illusive return, for example in the current ‘search for yield’. This can only create fresh volatility.
This certainly complicates the task of those seeking to preserve financial order. The same authorities that are responsible for maintaining financial stability are often the owners of the large funds that have the potential to cause problems – a fascinating but not particularly attractive thought.
A version of this article also appeared in OMFIF’s publication “Global Public Investors”