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2012 03

David Murray Wrong on Sovereign Wealth Funds

Outgoing Future Fund Chairman David Murray wrote a defence of sovereign wealth funds for The Weekend Australian. I respond to Murray in today’s Business Spectator.

A curious feature of this debate is the way in which the defenders of sovereign wealth funds have raised the possibility of secular stagnation in defending inter-generational wealth transfers via a SWF (Malcolm Turnbull also suggested this in a tweet). As I note in my Business Spectator piece, a SWF could at best smooth the implications of secular stagnation over time. If secular stagnation really is upon us, then it is even less likely the Future Fund will realise its targeted real rate of return of 5%.

posted on 22 March 2012 by skirchner in Economics, Financial Markets, Fiscal Policy

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A Sub-‘Prime’ Sovereign Wealth Fund

Former Treasurer Peter Costello says that the Future Fund he created is a ‘prime sovereign wealth fund’ and ‘probably the most respected’ in the world. But that is not the conclusion of the Washington think-tank the Peterson Institute, which has compiled the most comprehensive international ranking of sovereign wealth funds (SWFs). The Peterson Institute gave the Future Fund a score of only 80 out of 100, which is below the average of 84 given to the other pension funds in its sample of 53 SWFs in 37 countries. Thirteen other sovereign wealth funds were given a higher overall score in the Peterson Institute rankings, including those in Timor-Leste and Trinidad and Tobago.

In terms of accountability and transparency, the Future Fund scored only 75 out of 100, below the 89 out of 100 given to the State Oil Fund of Azerbaijan. On governance, the Fund scored 86, a little below the average of 87 for other pension funds in the sample. By contrast, New Zealand’s Superannuation Fund ranks third overall with a score of 94 and a perfect score of 100 for governance as well as accountability and transparency.

The Future Fund’s fractious board and the controversy surrounding the process for appointing the new Future Fund chairman only serves to underscore the Peterson Institute’s finding that the Future Fund falls well short of world’s best practice.

For more on the Future Fund, see our Policy Monograph Future Funds or Future Eaters?

posted on 16 March 2012 by skirchner in Economics, Financial Markets

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Some Political Leadership on Foreign Direct Investment

Trade minister Craig Emerson has called for increased foreign direct investment in agriculture, in contrast to the federal Coalition’s calls for increased Foreign Investment Review Board scrutiny of foreign investment in the sector. It is one of the few acts of political leadership in this policy area since the late 1980s.

It is hard to believe now, but in the 1980s there was something of a bidding war between the federal Labor government and the opposition Coalition to liberalise the regulation of FDI. It culminated in then opposition leader John Howard’s undertaking to abolish the FIRB in his 1988 Future Directions manifesto. Both sides of politics recognised that restricting FDI increased foreign debt at the expense of foreign equity. The federal Coalition took a principled stand not to make a political issue of the Hawke-Keating government’s liberalisation measures.

Australia has often relied on external pressure rather than domestic political leadership in liberalising FDI. The 2005 Australia-US Free Trade Agreement resulted in a significant liberalisation of FDI screening thresholds in response to US concerns that would have been unlikely in the absence of the agreement.

The conventional wisdom holds that the existing discretionary regime for the regulation of FDI is as much liberalisation as the Australian political system can sustain. Yet the current system replaced an open-door regime that was in place until the early 1970s, at least if we ignore the statutory restrictions in certain sectors. The Australian political system has historically supported a more liberal FDI regime at times when economic nationalism and xenophobia were even more pronounced than they are today.

The shift to a discretionary regulatory regime from the early 1970s has normalised the idea that foreign direct investment should be regulated at the border rather than in-country on a national treatment basis. It is a legacy of the economic nationalism of Gough Whitlam and Rex Connor that continues to hold Australia back.

posted on 11 March 2012 by skirchner in Economics, Foreign Investment

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A Sovereign Wealth Fund is Not the Same as Fiscal Responsibility

Treasury Secretary Martin Parkinson addressed the issue of a sovereign wealth fund in a speech to the Australia-Israel Chamber of Commerce. Parkinson said that ‘Treasury is often characterised as being opposed to an SWF – yet our comments are neither supportive nor critical.’ In fact, Treasury and the RBA are just as often characterised as supportive of a SWF when they have been studiously equivocal. Whether Australia chooses to make greater use of a SWF is ultimately a decision for politicians. It is appropriate for Treasury and the RBA to discuss the implications of this policy choice, but we should not expect them to come down explicitly in favour of one side of the argument.

Parkinson’s speech makes clear that greater use of a SWF is not the same thing as more responsible fiscal policy:

the creation of an SWF per se does nothing to address either Australia’s net debt position or, more broadly, the level of government or national savings over time.

If the Australian Government had financial liabilities of $10 billion and runs a $1 billion surplus, it can reduce gross liabilities to $9 billion, or it can maintain them at $10 billion and buy $1 billion of financial assets to be held in an SWF – in both cases, net financial liabilities are $9 billion.

The only way the creation of a Sovereign Wealth Fund delivers a faster improvement in net debt is if it is used to justify a tightening of fiscal policy that would not otherwise be achieved.

As such, if we are to have a sensible discussion about the merits of an SWF, the proponents of such Funds, whether at the national or sub-national level, need to be clearer about precisely what they have in mind. Absent tough fiscal decisions, an SWF does not constitute a contribution to future fiscal sustainability.

Robert Carling and I make this point in our CIS Policy Monograph, Future Funds or Future Eaters?  If contributions to a SWF, like the budget surplus itself, are no more than a residual after the government is done spending and taxing, then there is no reason to believe that a SWF changes government behaviour. A SWF, like a budget surplus, is a consequence not a cause of fiscal policy decisions. The IMF found there was little impact on government spending in its study of countries making use of SWFs.

Unless a SWF is embedded in a broader framework of binding and enforceable fiscal policy rules, there is no reason to believe a SWF will induce greater fiscal responsibility. If a politician supports a SWF but does not support fiscal policy rules, you know they cannot be trusted with a SWF.

posted on 07 March 2012 by skirchner in Economics, Financial Markets, Fiscal Policy

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